Use these CLEP Principles of Microeconomics sample questions to review scarcity, comparative advantage, supply and demand, elasticity, consumer choice, production costs, competitive firms, oligopoly, factor markets, and market failure. The questions emphasize applying economic models to hypothetical situations and interpreting numerical information.
Topics Covered
- Opportunity cost and comparative advantage
- Supply, demand, and market equilibrium
- Price ceilings and shortages
- Elasticity and total revenue
- Utility maximization
- Production costs and profit maximization
- Perfect competition and shutdown decisions
- Oligopoly and game theory
- Labor demand and marginal revenue product
- Negative externalities and corrective policy
Sample Questions
- A. Country A has a comparative advantage in shirts, and Country B has a comparative advantage in hats.
- B. Country A has a comparative advantage in both goods.
- C. Country B has a comparative advantage in both goods.
- D. Country A has a comparative advantage in hats, and Country B has a comparative advantage in shirts.
- E. Neither country can benefit from specialization and trade.
Show Answer
In Country A, the opportunity cost of one shirt is one-half of a hat. In Country B, the opportunity cost of one shirt is one hat.
Country A therefore has the lower opportunity cost for shirts. Country B has the lower opportunity cost for hats, so specialization and trade can benefit both countries.
- A. The supply of coffee will decrease.
- B. The demand for coffee will increase, raising its equilibrium price and quantity.
- C. The demand for coffee will decrease, lowering its equilibrium price and quantity.
- D. The quantity demanded of coffee will decrease because of movement along the demand curve.
- E. The equilibrium quantity of coffee will decrease while its equilibrium price increases.
Show Answer
When the price of tea rises, some consumers switch from tea to coffee.
Because the change concerns the price of a substitute rather than the price of coffee itself, the coffee demand curve shifts to the right. Equilibrium price and quantity both rise.
- A. A surplus of 40 units
- B. A shortage of 40 units
- C. A shortage of 20 units
- D. An equilibrium quantity of 80 units
- E. No change because price ceilings are never binding
Show Answer
At the controlled price, quantity demanded is 80 units and quantity supplied is 40 units.
The shortage equals quantity demanded minus quantity supplied: 80 − 40 = 40 units. The ceiling is binding because it is below the equilibrium price.
- A. Demand is perfectly inelastic.
- B. Demand is inelastic.
- C. Demand is unit elastic.
- D. Demand is elastic.
- E. Demand has shifted to the right.
Show Answer
When a price increase causes total revenue to decrease, the percentage decrease in quantity demanded is larger than the percentage increase in price.
That relationship indicates elastic demand over the relevant range.
- A. Good X, because its marginal utility per dollar is 6
- B. Good Y, because its marginal utility per dollar is 5
- C. Good Y, because it has the lower price
- D. Either good, because their marginal utilities are equal
- E. Neither good, because marginal utility must be zero
Show Answer
For Good X, marginal utility per dollar is 24 ÷ $4 = 6. For Good Y, it is 15 ÷ $3 = 5.
A utility-maximizing consumer reallocates spending toward the good with the greater marginal utility per dollar until the ratios are equal, subject to the budget constraint.
| Quantity | Total Cost |
|---|---|
| 0 | $20 |
| 1 | $28 |
| 2 | $38 |
| 3 | $50 |
| 4 | $65 |
| 5 | $83 |
- A. 1 unit
- B. 2 units
- C. 3 units
- D. 4 units
- E. 5 units
Show Answer
Marginal cost for the first four units is $8, $10, $12, and $15. A competitive firm expands output while marginal cost is less than or equal to price.
The third unit adds $12 to cost and $14 to revenue, but the fourth unit adds $15 to cost and only $14 to revenue. Therefore, the profit-maximizing quantity is 3 units.
- A. Price is below average variable cost at every possible positive output.
- B. Price is below average total cost but above average variable cost.
- C. Marginal revenue equals marginal cost.
- D. The firm earns only a normal profit.
- E. Fixed cost is greater than variable cost.
Show Answer
In the short run, fixed costs must be paid whether the firm produces or shuts down.
The firm should continue producing when revenue covers variable cost and contributes something toward fixed cost. It shuts down when price is below minimum average variable cost.
| Firm A’s Choice | Firm B Advertises | Firm B Does Not Advertise |
|---|---|---|
| Advertise | ($30, $30) | ($50, $10) |
| Do Not Advertise | ($10, $50) | ($40, $40) |
- A. Neither firm advertises, producing profits of ($40, $40).
- B. Firm A advertises and Firm B does not, producing profits of ($50, $10).
- C. Firm A does not advertise and Firm B advertises, producing profits of ($10, $50).
- D. Both firms advertise, producing profits of ($30, $30).
- E. There is no Nash equilibrium.
Show Answer
Advertising is the dominant strategy for each firm. Firm A earns more by advertising regardless of Firm B’s choice, and the same is true for Firm B.
The Nash equilibrium is therefore the lower-right strategic outcome in which both advertise, even though both would earn more if neither advertised.
| Worker Hired | Marginal Revenue Product |
|---|---|
| First | $160 |
| Second | $120 |
| Third | $90 |
| Fourth | $70 |
| Fifth | $40 |
- A. 1 worker
- B. 2 workers
- C. 3 workers
- D. 4 workers
- E. 5 workers
Show Answer
A profit-maximizing firm hires labor as long as the worker’s marginal revenue product is at least as large as the wage.
The third worker adds $90 in revenue and costs $80. The fourth adds only $70 but still costs $80, so the firm should hire three workers.
- A. The market produces less than the socially efficient quantity because marginal private cost exceeds marginal social cost.
- B. The market produces the socially efficient quantity because price equals marginal private cost.
- C. The market produces more than the socially efficient quantity because marginal social cost exceeds marginal private cost.
- D. The external cost shifts the demand curve to the right.
- E. A subsidy equal to the marginal external cost would directly correct the overproduction.
Show Answer
Pollution is a negative production externality. The firm considers its private costs but not the external harm imposed on others.
Because marginal social cost exceeds marginal private cost, the unregulated market produces too much. A corrective tax equal to the marginal external cost can move output toward the socially efficient level.
How to Use These Questions
Before calculating, identify the model involved: opportunity cost, supply and demand, elasticity, marginal analysis, profit maximization, strategic behavior, factor demand, or externalities. Then determine which variables are changing and which are held constant.
For table questions, calculate changes between output levels rather than comparing totals alone. For policy questions, distinguish private costs and benefits from social costs and benefits.
These practice questions are not official CLEP questions and are not endorsed by the College Board.
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