First Microeconomics Exam

Instructor: James Sondgeroth

The questions below and succeeding ones will function as learning objectives for the essay exams and will also constitute a lecture outline for the course.

Depending on how quickly we move this semester, the class will cover between 45 to 54 of these questions.

For the essay exam, students will be allowed to use one sheet of paper (8.5 X 11) with handwritten notes on both sides. These notes must be turned in with the exam, and you can earn up to 10 extra credit points for them depending on how complete they are.

Answers to the essay questions must be written in a Blue Book

Three of the following questions will be randomly drawn on the day of the exam; you will have to answer those two questions for the exam. The notes mentioned above must be on your cleared desk with your Blue Book before the questions are drawn.

Students will have 80 minutes to answer the three questions that have been drawn as fully and with the greatest detail as they are able to.

This exam covers chapters 1, 2, part of 19, and 3 plus various handouts.

  1. Definition of Microeconomics (Chapter 1.1, 1.2, and 1.3 in text; Chapter 1.1 and 1.2 in Knewton; and lecture notes)
    1. What is the definition of economics given in the textbook and by the instructor?
    2. Discuss in detail the major terms used in these definitions--such as scarce, resource, and allocate.
    3. Distinguish between Microeconomics and Macroeconomics.

  2. The Scientific Method (handout: Chapter 1.3 text; Chapter 1.2 Knewton; and lecture notes)
    1. Explain the two things scientific theories try to achieve and describe how the scientific method works.
    2. Discuss whether or not scientific theories ever proven?
    3. Explain how the scientific method is similar to democracy, evolution, and the market system? Explain each.
    4. Discuss some of the problems Economics faces as a science.
    5. List and discuss two basic models used in both Micro and Macro economics.

  3. Scarcity (Chapter 2 text; Chapter 2 Knewton; and lecture notes)
    1. What is scarcity and why does it exist?
      1. classical (capitalist-in the textbook),
      2. graphical illustration of (i),
      3. Marxist.
    2. Explain the link between scarcity and each of the following:
      1. choice,
      2. opportunity cost,
      3. the need for a rationing device,
      4. competition.

  4. Scarcity as faced by an individual (Chapter 2.1 text; and Chapter 2.1 Knewton)
    1. Explain how individuals are constrained by their income and the prices they face?
    2. Illustrate these concepts with the use of a budget line in a two good universe while mentioning diminshing marginal utility.

  5. Scarcity as faced by society in general. (Chapter 2.2 Text & Knewton; lecture)
    1. Sketch the simple input/output model with two outputs shown in lectue.
    2. Draw a two dimensional constant cost Production Possibilities Frontier.
    3. Draw a two dimensional increasing cost PPF.
    4. Explain why the increasing cost PPF bows out from the origin. (Or stated differently: What causes opportunity costs to increase as more of a good is produced?)
    5. How is the Law of Increasing Costs related to the Law of Diminishing Returns?
    6. Show how seven major economic concepts can be illustrated with a Production Possibilties Frontier. Explain how the PPF illustrates each concept.

  6. The Production Possibilities Frontier, Economic Growth, and Technological Improvements (lecture)
    1. Economic Growth
      1. Show how economic growth can be illustrated with a production possibilities frontier.
      2. List and discuss the different sources of economic growth.
    2. Discuss (and illustrate with another production possibilities frontier) how a technological advancement in one line of production (say in growing cotton) might result in greater output in production of an unrelated good (say maize) which did not experience any technological advancement in our ability to produce it.

  7. Given the level of technology, resource availability, and labor productivity for each country, the United States and Germany can produce the following amounts of steel and coal in thousands of tons per week with one unit of their respective resources (land, labor, and capital).

    (From Chapter 2.2 Knewton, Chapter 19.1 and 19.2 Text, and lecture & class handout)

      Coal Steel
    Germany 72 18
    United States 108 36

      Explain your answers in detail. Also give numbers and calculations if needed.
    1. Which country has an absolute advantage in the production of coal?
    2. Which country has an absolute advantage in the production of steel?
    3. Which country has a comparative advantage in the production of coal?
    4. What is the opportunity cost of producing one ton of steel in the United States?
    5. What country will specialize in the production of coal if international trade takes place?
    6. What mutually beneficial settle price (exchange rate) might result with international trade and specialization?
    7. From your answer to 'f' above, use PPFs (or tables showing consumption combinations) before and after trade to illustrace that both countries are better off after trade than they were before trade.
    8. Discuss the problem of the Fallacy of Composition inherent in the conclusion reached in answer to 'g.'

  8. Diversity of Economic Societies (Chapter 1.3 Knewton, Chapter 1.4 Text, lecture, handout)
    1. Because of scarcity, what three basic questions must every society answer?
    2. List and describe the three achetypal societies that answer these three questions and explain how they answer them?
    3. Draw a triangle with each archetype at a vertice and indicate where you think the United States is positioned in it. Explain why.

  9. Socialism (Command) vs. Capitalism (Market) (class handout and lecture)
    1. Socialism: What does the socialist thinker say about the following in a capitalistic market system:
      1. prices,
      2. competition,
      3. private property,
      4. exchange,
      5. government ,
      6. income distribution
      7. power,
      8. and human nature?
    2. Capitalism: What does the capitalist thinker say about the following in a capitlaistic market system:
      1. prices,
      2. competition,
      3. private property,
      4. exchange,
      5. government,
      6. income distribution,
      7. power,
      8. and human nature?

  10. The Circular Flow of Economic Activity (class handout)
    1. Draw the circular flow of economic activity, labeling all actors, markets, and flows.
    2. Point out where capitalism answers the questions of 'what,' 'how,' and 'to whom,' and explain how it does so at the places indicated on your drawing.

  11. Money (lecture and PPT)
    1. Define what money is.
    2. Explain what the price of money is.
    3. Outline the evolution of money from earliest times to the present commenting on the reasons that led from one level development to the next.

  12. Demand (Chapter 3.1 & 3.4 Knewton; Chapter 3.1 & 3.2 Text; lecture)
    1. Define the law of demand and draw a Demand Curve labeling all the axes correctly.
    2. List the "Ceteris Paribus" variables that affect demand and illustrate a shift in a Demand Curve. Now discuss how a change in each of these varialbes would lead to the shift you have illustrated in your drawing.

  13. Supply (Chapter 3.2 & 3.5 Knewton; Chapter 3.1 & 3.2 Text; lecture)
    1. Define the law of supply and draw a Supply Curve labeling all the axes correctly.
    2. List the "Ceteris Paribus" variables that affect supply and illustrate a shift in a Supply Curve. Now discuss how a change in each of these varialbes would lead to the shift you have illustrated in your drawing.

  14. Equilibrium (Chapter 3.3 & 3.6 Knewton; Chapter 3.1 & 3.3 Text; lecture)
    1. Draw a supply and demand curve. Label all axes and curves appropriately. Label the equilibrium point, the equilibrium quantity, and the equilibrium price.
    2. Explain what equilibrium in the market is and why there is a tendency toward it. (In other words, if the price of something is higher or lower than the equilibrium price, what forces (i.e., human behavior) push the price and quantity to equilibrium.)
    3. Illustrate and explain how equillibrium price and quantity change when either the supply or demand curve shifts: 1) an increase in Demand; 2) an increase in Supply; 3) a decrease in Demand; 4) a decrease in Supply.

  15. Disequilibrium (Chapter 3.7 Knewton; Chapter 3.4 Text; lecture)
    1. Graphs
      1. With the use of a graph illustrate what a shortage (excess demand) is.
      2. With the use of a graph illustrate what a surplus (excess supply) is.
    2. Explain how surpluses/shortages might become permanent. (In other words, explain what forces might keep the market from establishing an equilibrium.)

  16. Market Efficiency (Chapters 3.8 and 8.3 Knewton: Chapters 3.5, 4.3, and 8.4 Text; and lecture)
    1. Explain the relationship between Diminishing Marginal Utility and the Demand Curve.
    2. Explain the relationship between Diminshing Returns (or increasing Marginal Cost) and the Supply Curve.
    3. Explain what happens to the Supply Curve when Economic Profits are above normal. Below normal.
    4. If there are no externalities or market power and all markets are in equilibrium, what conclusions can we draw from this in economic theory?
    5. Describe the relationship between Allocative and Productive Efficiency

  17. Market Failure/Inefficiency (Chapters 9 & 10 briefly, Chapter 12.1, 12.2, and 12.3, and Chapter 16.1 in Knewton; and Text)
    1. How does Imperfect Information impact the working of markets with reference to:
      1. Assymetric Information?
      2. Moral Hazard?
    2. How does less than Perfect Competition impact the working of markets with reference to Monopolies, Oligopolies, and Monopolisticly Competitive industries?
    3. What do economists mean by the term "Externalities" with reference to the following:
      1. Negative Externalities?
      2. Positive Externalities?
    4. What can result from the Lack of Property Rights? (The Tragedy of the Commons)

  18. Elasticity (Chapter 5)
    1. Define the price elasticity of demand in words and with the use of a formula.
    2. Illustrate the five different types of demand elasticity with the use of graphs and the formula.
    3. Give an example of a good or service that might have a demand elasticity like each one you illustrated.

  19. The Determinants of Elasticity, and Elasticity and Total Revenue (Chapter 5)
    1. List and discuss the determinants of the elasticity of demand.
    2. Illustrate with the use of graphs and then explain the relationship between Total Revenue and
      1. elastic demand curves;
      2. inelastic demand curves.

  20. Cross Price and Income Elasticity of Demand (Chapter 5)
    1. Cross Price Elasticity
      1. Define cross price elasticity of demand.
      2. Using the formula for it, explain how it differs when a complement changes price versus a substitute changing price.
    2. Income Elasticity
      1. Define income elasticity of demand.
      2. Discuss, using the formula for the income elasticity of demand, the different income elasticities of inferior goods, necessities, and luxuries.