Source: Practice MCQs for Exam 1, Texas A&M University
Tags: microeconomics, positive statement, normative statement, markets, industries, CPI, consumer price index, aggregate price level, inflation
Microeconomics studies the decisions of individual consumers, firms, and investors, as distinct from macroeconomics (unemployment, interest rates, aggregate output). A core distinction early in the course is positive versus normative statements: positive statements describe what is, normative statements argue what ought to be. You also need to know the difference between a market and an industry, and what the CPI measures.
Microeconomics
The branch of economics that studies the behaviour of individual consumers, firms, and investors. It does not cover macroeconomic aggregates such as unemployment or interest rates.
Positive statement
A statement about what is. It describes or predicts facts about the world and can, in principle, be tested or verified with data. Example: "A tax increase will reduce consumption."
Normative statement
A statement about what ought to be. It expresses a value judgement or policy recommendation and cannot be tested purely with data. Any sentence containing "should" or "ought to" is a strong signal. Example: "Taxes paid by the poor should be reduced."
Market
A collection of both buyers and sellers who interact to determine the price and quantity of a good or service.
Industry
A grouping of sellers (firms) only. An industry does not include buyers.
Consumer Price Index (CPI)
A measure of the aggregate price level. The CPI records the prices of a large market basket of goods purchased by a "typical" consumer over time. Percentage changes in the CPI measure the rate of inflation.
Microeconomics covers individual consumers, individual firms, and investors.
Macroeconomics covers unemployment, interest rates, national output, and other economy-wide aggregates.
If a question mentions "individual" behaviour, it belongs to microeconomics.
Positive statements are factual claims. They can be right or wrong, but their truth can be checked against evidence.
Normative statements involve value judgements. Words like "should," "ought to," or "it would be better if" are dead giveaways.
On the exam, every answer choice containing "should" in the context of policy is normative, regardless of whether it also contains factual elements.
A market includes both buyers and sellers.
An industry includes sellers but not buyers.
This is a definitional distinction. If a question asks "which is TRUE about markets and industries," the correct framing is that an industry is the seller side only.
CPI is a measure of the aggregate price level.
It tracks prices of a fixed basket of goods bought by a typical consumer.
The percentage change in CPI over a period is the inflation rate for that period.
All three of these properties hold simultaneously.
⚠️ The positive vs. normative distinction appears frequently. If any answer choice contains "should" and a policy recommendation, it is normative.
⚠️ "An industry includes sellers but not buyers" is the only correct pairing. Markets include both sides.
⚠️ CPI questions often give you three true statements and ask if "all of the above" applies. Read each sub-statement carefully before selecting D.
Q: Microeconomics deals with which of the following? (a) Individual consumers, (b) Unemployment and interest rates, (c) Individual firms and investors, (d) B and C, (e) A and C
A: (e) A and C. Microeconomics studies individual consumers, firms, and investors. Unemployment and interest rates are macroeconomic topics.
Q: A positive statement is about what ___?
A: About what is. Positive statements describe factual claims about the world, not value judgements.
Q: Which is true: a market includes buyers only, sellers only, or both?
A: Both. A market includes buyers and sellers. An industry includes sellers only.
Q: "The sea otter should not be allowed to spread into Southern California coastal waters because it will reduce the value of fisheries." Is this positive or normative?
A: Normative. The word "should" signals a value judgement, even though the clause about fishery value sounds factual. The overall statement prescribes a course of action.
Q: What does the percentage change in CPI measure?
A: The rate of inflation.
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