Exercises for Microeconomics

17876 Words Mar 8th, 2012 72 Pages
EXERCISES FOR MICROECONOMICS

TOPIC 1

Economics: An Introduction

(Chapters 1 & 2 in the Textbook)

EXPLAIN THE FOLLOWINGTERMS ◎ Average benefit ◎ Average cost ◎ Economic surplus ◎ Economics ◎ Microeconomics ◎ Macroeconomics ◎ Marginal benefit ◎ Marginal cost ◎ Normative economics ◎ Positive economics ◎ Rational person ◎ Sunk cost ◎ Opportunity cost ◎ Absolute advantage ◎ Comparative advantage ◎ Attainable point ◎ Unattainable point ◎ Efficient point ◎ Inefficient point ◎ Production possibilities curve

REVIEW QUESTIONS
1. The most you would be willing to pay for having a freshly washed car before going out on a date is $6. The smallest amount for which you would be willing to wash someone else’s
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How will a new law mandating an increase in required levels of automobile insurance affect the equilibrium price and quantity in the market for new automobiles?
In an attempt to induce citizens to conserve energy, the government enacted regulations requiring that all air conditioners be more efficient in their use of electricity. After this regulation was implemented, government officials were then surprised to discover that people used more electricity than before. Using the concept of price elasticity, explain how this increase might have occurred.

TOPIC 3

Theory Of Consumer Behavior

(Chapter 5 in the Textbook)

EXPLAIN THE FOLLOWINGTERMS ◎ Law of demand ◎ Law of diminishing marginal utility ◎ Marginal utility ◎ Budget constraint line ◎ Optimal combination of goods ◎ Rational spending rule ◎ Marginal rate of substitution ◎ Indifference curve ◎ Giffen goods ◎ Engel’s Law ◎ Engel’s coefficient

REVIEW QUESTIONS
1. Martha’s current marginal utility from consuming orange juice is 75 utils per ounce and her marginal utility from consuming coffee is 50 utils per ounce. If orange juice costs 25 cents per ounce and coffee costs 20 cents per ounce, is Martha maximizing her total utility from the two beverages? If so, explain how you know. If not, how should she rearrange her spending?
2. Ann lives in Princeton and commutes by train each day to her hob in New York City (20 round trips per month). When the price of a round

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