Free Principles of Microeconomics Practice Questions

Sample Practice Questions

Try these 10 sample questions from the Principles of Microeconomics practice bank. Each includes the answer and explanation. Continue with the interactive practice above to review the full question set.

1. 1In the study of economics, what does the term scarcity mean?

   1. A.Available resources cannot satisfy all human wants.Correct answer: A
   2. B.Goods are available only when their prices rise.
   3. C.All resources are physically depleted over time.
   4. D.A market has more supply than demand at every price.

   Explanation: OpenStax states: "Scarcity means that human wants for goods, services and resources exceed what is available." Limited availability relative to wants makes choices necessary.

   Reference: Principles of Microeconomics 3e — Section 1.1, What Is Economics and Why Is It Important?

2. 2Holding other demand determinants constant, what does the law of demand predict when the price of a good rises?

   1. A.Quantity demanded decreases.Correct answer: A
   2. B.Demand increases at every price.
   3. C.Quantity demanded increases.
   4. D.Supply decreases at every price.

   Explanation: OpenStax states: "Economists call this inverse relationship between price and quantity demanded the law of demand." The price change produces movement along the demand curve.

   Reference: Principles of Microeconomics 3e — Section 3.1, Demand for Goods and Services

3. 3Why is a firm's demand for labor called derived demand?

   1. A.It depends on demand for the output the labor helps produce.Correct answer: A
   2. B.It depends only on the workers' demand for leisure.
   3. C.It is determined solely by the supply of other inputs.
   4. D.It is identical to the demand for the finished product.

   Explanation: OpenStax states: "we derive the demand for labor from the demand for the firm’s output." Labor is valuable to the firm because it helps produce goods or services.

   Reference: Principles of Microeconomics 3e — Derived Demand

4. 4A factory emits pollution that harms nearby residents, and it does not pay for that harm. How does marginal social cost compare with the factory's marginal private cost?

   1. A.Marginal social cost is higher by the marginal external damage.Correct answer: A
   2. B.Marginal social cost is lower by the marginal external damage.
   3. C.The two costs are equal because the factory pays its own costs.
   4. D.Neither cost changes when the external damage changes.

   Explanation: OpenStax states: "The social costs include the private costs of production that a company incurs and the external costs of pollution that pass on to society." The added external damage raises the social cost above the firm's private cost.

   Reference: Principles of Microeconomics 3e — Section 12.1, Pollution as a Negative Externality

5. 5A student can attend either a free concert or a free lecture at the same time, but not both. Neither event has other costs. If the lecture is the student's next best alternative, what is the opportunity cost of attending the concert?

   1. A.The value of all enjoyable activities added together
   2. B.The value of the lecture the student gives upCorrect answer: B
   3. C.The value of the concert the student chooses
   4. D.The value of attending both events together

   Explanation: OpenStax explains: "opportunity cost is the value of the next best alternative." The next best alternative to the concert is the forgone lecture.

   Reference: Principles of Microeconomics 3e — The Concept of Opportunity Cost

6. 6In a competitive market, quantity demanded is 20 − 2P and quantity supplied is 4 + 2P, where P is price in dollars. What is the equilibrium price?

   1. A.$2
   2. B.$4Correct answer: B
   3. C.$6
   4. D.$8

   Explanation: OpenStax states: "The equilibrium price is the only price where quantity demanded is equal to quantity supplied." Setting 20 − 2P equal to 4 + 2P gives P = $4.

   Reference: Principles of Microeconomics 3e — Equilibrium—Where Demand and Supply Intersect

7. 7For a competitive producer, market demand for its product rises and raises the product price. With labor productivity unchanged, what happens to the firm's demand for labor?

   1. A.It decreases because each worker's output is worth less.
   2. B.It increases because each worker's output is worth more.Correct answer: B
   3. C.It stays fixed because product demand does not affect labor demand.
   4. D.It moves along an unchanged labor demand curve because the wage changes.

   Explanation: OpenStax states: "An increase in demand for the firm’s product drives up the product’s price, which increases the firm’s demand for labor." A higher output price raises the value of a given marginal product.

   Reference: Principles of Microeconomics 3e — Derived Demand

8. 8In an otherwise competitive market with uncompensated pollution from production, how does the private-market output compare with the socially efficient output?

   1. A.It is too low because private costs exceed social costs.
   2. B.It is too high because external costs are not reflected in private decisions.Correct answer: B
   3. C.It is efficient because market participants bear every cost.
   4. D.It is unchanged because external costs affect only income distribution.

   Explanation: OpenStax states: "social costs of production exceed social benefits to consumers, and the market produces too much of the product." Unpriced external damage leaves the private market producing beyond the efficient quantity.

   Reference: Principles of Microeconomics 3e — Pollution as a Negative Externality

9. 9An economy operates strictly inside its production possibilities frontier. What does this indicate about productive efficiency?

   1. A.Some feasible increase in output is available without reducing another output.Correct answer: A
   2. B.Every available input is used as efficiently as current technology permits.
   3. C.The economy has reached an unattainable combination of outputs.
   4. D.More of either good requires giving up some of the other good.

   Explanation: OpenStax states: "any choice inside the production possibilities frontier is productively inefficient and wasteful because it is possible to produce more of one good, the other good, or some combination of both goods." An interior combination is feasible but productively inefficient.

   Reference: Principles of Microeconomics 3e — Productive Efficiency and Allocative Efficiency

10. 10In the basic competitive market model, what pressure arises when the current price is above equilibrium?

    1. A.A shortage puts upward pressure on price.
    2. B.A shortage puts downward pressure on price.
    3. C.A surplus puts downward pressure on price.Correct answer: C
    4. D.A surplus puts upward pressure on price.

    Explanation: OpenStax states: "if the price is above the equilibrium level, incentives built into the structure of demand and supply will create pressures for the price to fall toward the equilibrium." At the higher price sellers wish to supply more than buyers wish to purchase.

    Reference: Principles of Microeconomics 3e — Equilibrium—Where Demand and Supply Intersect