Applied Microeconomic Analysis
Practice Questions
Course Introduction
Applied Microeconomic Analysis focuses on the use of microeconomic theory to understand and solve real-world problems faced by consumers, firms, and policymakers. The course covers key topics such as demand and supply analysis, consumer behavior, production and cost theory, market structures, pricing strategies, and the impact of government interventions. Through case studies, data analysis, and problem-solving exercises, students learn to apply microeconomic concepts to issues like market efficiency, regulation, externalities, and public goods, preparing them to make informed decisions and policy recommendations in various professional contexts.
Recommended Textbook
Microeconomics Theory and Applications with Calculus 3rd Edition by Jeffrey M. Perloff
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Chapter 1: Introduction
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Sample Questions
Q1) One million automobiles have a defect that could cause the car to explode; however,only one of those cars will actually explode.Nobody knows which one car it is.When the car does explode,the victim's family will sue the automaker for $1 million and win.The defect costs $2 per car to repair.What does economics predict about the automaker's decision to repair the defect?
Answer: Correcting the defect will cost $2 million.Not correcting the defect will only cost $1 million.Economics predicts that the automaker will not correct the defect.
Q2) An automobile manufacturer is trying to make decisions about using more workers or more equipment.This belongs to the trade-off
A) Which goods and services to produce
B) How to produce
C) Who gets the goods and services
D) Who produces the goods and services
Answer: B
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3
Chapter 2: Supply and Demand
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Sample Questions
Q1) If a linear supply curve has a zero intercept,the elasticity of supply is always unitary.
A)True
B)False
Answer: True
Q2) A vertical demand curve results in
A) no change in quantity when the supply curve shifts.
B) no change in price when the supply curve shifts.
C) no change in the supply curve being possible.
D) no change in quantity when the demand curve shifts.
Answer: A
Q3) The above figure shows four different markets with changes in either the supply curve or the demand curve.Which graph best illustrates the market for tea after severe weather destroys a large portion of the coffee crop?
A) Graph A
B) Graph B
C) Graph C
D) Graph D
Answer: A
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4
Chapter 3: A Consumers Constrained Choice
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Sample Questions
Q1) Max has allocated $100 toward meats for his barbecue.His budget line and indifference map are shown in the above figure.If Max's current MRS = -0.8,then Max is at point
A) b
B) d
C) e
D) None of above.
Answer: A
Q2) Max has allocated $100 toward meats for his barbecue.His budget line and an indifference map are shown in the above figure.Which of the following best describes Max's preferences?
A) d > b > e
B) d = b = e
C) a = b > c
D) a = b > e
Answer: D
Q3) Indifference curves cannot intersect.
A)True
B)False
Answer: True
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Chapter 4: Demand
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Sample Questions
Q1) Suppose Joe earns $1,000 in year 1 and $0 in year 2.Any amount he saves will earn interest at a rate of 0%.Draw Joe's budget line.(Hint: He can either consume all $1000 this year or consume nothing this year and have $1,100 next year.)Assuming convex indifference curves,show that an increase in the rate of interest can cause Joe's savings to either increase or decrease.Explain in terms of income and substitution effect.
Q2) Suppose the only two goods you consume are wine and roses.On Tuesday,the price of wine goes up and at the same time your income increases by just enough so that you are equally happy as you were on Monday.What happens to the amount of wine you consume? Are you able to afford the same bundle as you did on Monday? Use a graph of budget constraints and indifference curves to illustrate your answer.
Q3) Use the Slutsky equation to show that a Giffen good must be an inferior good,BUT an inferior good need not be a Giffen good.
Q4) Many manufacturers sell products labeled as having imperfections at a discount at their factory outlets but do not ship these imperfect goods to regular retail outlets.Why?
Q5) Jon spends all of his income on energy drinks (E)regardless of the price and his income.Derive Jon's demand equation for energy drinks,E*(p,Y).
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Chapter 5: Consumer Welfare and Policy Analysis
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Sample Questions
Q1) The Equivalent Variation for an increase in the price of a good is
A) the reduction in a consumer's income necessary to harm the consumer by as much as the price increase.
B) the increase in a consumer's income necessary to eliminate the consumer's harm from a price increase.
C) the change in consumer surplus resulting from a price increase.
D) the amount of money a consumer would accept to be subject to a price increase.
Q2) Suppose you work for a government agency that is considering removing certain agricultural subsidies.The removal of these subsidies will increase the price,thus lowering consumers' welfare.Because only aggregate market data is available,you are unable to measure the exact values for the compensated and equivalent variation by consumer.However,you are able to estimate the change in market consumer surplus.Assuming agricultural products are normal goods,how does your estimate of consumer surplus compare to the unknown EV and CV? Explain.Under what conditions will the three measures of welfare be close to one another?
Q3) Ralf's uncompensated demand function for shoes is given by Q = 100/p.What is the change in consumer surplus when the price of shoes rises from p=20 to p=25?
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Chapter 6: Firms and Production
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Sample Questions
Q1) Suppose the production of VCRs can be represented by the following production function:
q = L . K . .The firm currently produces q units.If all inputs doubled,the new level of output will equal
A) 2 . q .
B) 2 . q .
C) 0.8 q .
D) 1.6 q .
Q2) Isoquants that are downward-sloping straight lines imply that the inputs
A) are perfect substitutes.
B) are imperfect substitutes.
C) cannot be used together.
D) must be used together in a certain proportion.
Q3) The above figure shows the isoquants for the production of steel.In which regions of production are there increasing,decreasing,and constant returns to scale?
Q4) Cobb-Douglas production functions can never possess varying returns to scale.
A)True
B)False
Q5) Explain why labor might not always be a variable input.
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Chapter 7: Costs
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Sample Questions
Q1) Explain why the marginal cost curve intersects a U-shaped average cost curve at its minimum point.
Q2) Determine the output expansion path (equation)for a cobb-douglas production function f(L,K)= 10L K¹ .How does the shape of the output expansion path change as "a" changes?
Q3) If average cost is positive,
A) marginal cost equals average cost. B) marginal cost exceeds average cost. C) marginal cost is less average cost. D) Not enough information is provided.
Q4) Economies of scale and Increasing Returns to Scale are the same thing looked at from either the production or cost perspective.
A)True
B)False
Q5) If increasing returns to scale are present,the long-run average cost increases as more output is produced.
A)True
B)False
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Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) Assuming a horizontal long-run market supply curve,which of the following statements is (are)TRUE about competitive firms in the long run?
A) p = MC
B) p = AC
C) profit = 0
D) All of the above.
Q2) Suppose TC = 10 + (0.1 q²).If there are 100 identical firms in the market,the market supply curve is
A) Q = 1000 p.
B) Q = 500 p.
C) Q = 100 p.
D) Q = 10.
Q3) Even though fixed costs do not affect the output decision,an increase in fixed costs results in a wider range of prices for which the firm operates at a loss.
A)True
B)False
Q4) Explain why individual firms in competitive markets face more elastic demand curves than the market as a whole.
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Chapter 9: Properties and Applications of the Competitive Model
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Sample Questions
Q1) The above figure shows the market for rice in Japan.SD m st c represents the domestic supply curve,and Sw ld represents the world supply curve.An import quota of 35 units would
A) cause consumer surplus to fall by "g."
B) cause social welfare to fall by $35.
C) increase domestic producer surplus by "g."
D) have no effect.
Q2) If a city decides to lift restrictions on how many taxi cabs can operate,social welfare will increase.
A)True B)False
Q3) Producer surplus is equal to
A) the area under the supply curve.
B) the difference between price and average cost for all units sold.
C) the difference between price and marginal cost for all units sold.
D) the firm's profit when fixed costs exist.
Q4) The tax revenue that is generated by a government tax is counted towards total welfare.
A)True B)False
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Chapter 10: General Equilibrium and Economic Welfare
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Sample Questions
Q1) Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Measuring food on the horizontal axis,the joint production possibility frontier will have a slope of -1
A) only when 20-30 units of food are produced.
B) only when 10-20 units of food are produced.
C) only when 10-20 units of clothing are produced.
D) throughout the entire PPF.
Q2) In a competitive market,prices adjust until all consumers find themselves
A) maximizing utility.
B) on the contract curve.
C) happy with their original endowment.
D) with many opportunities to gain from additional exchange.
Q3) Equity and efficiency can be achieved simultaneously through competition.
A)True
B)False
Q4) Consider a society consisting of just a farmer and a tailor.The farmer has 10 units of food but no clothing.The tailor has 20 units of clothing but no food.Suppose each has the utility function U = F C.Derive the contract curve.
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Chapter 11: Monopoly and Monopsony
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Sample Questions
Q1) A specific tax imposed on a monopolist may increase the price by more than the tax. A)True B)False
Q2) If the demand for a firm's output is perfectly elastic,then the firm's Lerner Index equals A) zero.
B) one.
C) infinity.
D) one-half.
Q3) The situation where one person's demand for a good depends on the consumption of the good by others is called a A) network externality. B) network internality. C) consumption externality. D) production externality.
Q4) In a recent court case,an expert witness defined a monopoly as a firm that can "raise price without reducing its total revenue." What does this imply about the elasticity of demand? Would this definition hold for a profit-maximizing monopoly? Explain.
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Chapter 12: Pricing and Advertising
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Sample Questions
Q1) The sales of shoes that include shoelaces is a tie-in sale that most likely A) greatly increases the shoe producer's profit.
B) increases transactions costs.
C) increases efficiency.
D) None of the above.
Q2) If a market is controlled by a perfect-price-discriminating monopoly,then A) a deadweight loss is generated.
B) there is no consumer surplus.
C) consumer surplus is the same as under perfect competition.
D) output is less than that of a single-price monopoly.
Q3) Coupons represent a form of price discrimination because they offer a low-cost way for firms to
A) identify customers with apparently more elastic demand and offer them a lower price.
B) retain loyal customers who are not price sensitive.
C) offer discounts to consumers who buy larger quantities.
D) perfectly price discriminate.
Q4) If a firm sells to two distinct identifiable markets and resale is impossible,why is price discrimination more profitable than setting a single price?
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Chapter 13: Game Theory
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Sample Questions
Q1) The above figure shows the payoffs to two airlines,A and B,of serving a particular route.Is there a Nash equilibrium? What is it? Explain.
Q2) The result that different auction styles in which the good goes to the winner with the highest valuation of the good generate the same amount of revenue is called
A) Revenue Equivalence Theorem.
B) Marginal Revenue Theory.
C) Auction Revenue Theory.
D) First Bid Revenue Theorem.
Q3) Explain why it is unwise to bid more than your valuation of the good in a sealed bid second-price auction.
Q4) An incumbent announces it will significantly increase output in the next period,but only has contracts for the amount produced this period.The announcement is a A) credible threat.
B) non-credible threat.
C) commitment.
D) mixed strategy.
Q5) Why is collusion more likely in a repeated game?
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Chapter 14: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) The outcome of the Stackelberg model is
A) a Nash equilibrium.
B) the same as the Cournot outcome.
C) that the follower earns zero profit.
D) that the follower cannot be on its best-response curve.
Q2) Which of the following models results in the greatest total profit,assuming a fixed number of firms with identical costs and a given demand curve?
A) Cournot
B) Stackelberg
C) Monopoly
D) Perfect competition
Q3) The market power for a firm in the Cournot model will be greater
A) if the market demand is more elastic.
B) if there are fewer firms in the industry.
C) if market demand is higher.
D) the more output this firm produces.
Q4) Explain why a monopoly or a perfectly competitive firm does not consider a rival firm's behavior,but an oligopoly and a monopolistically competitive firm do.
Q5) What happens in a duopoly if both firms try to act as the Stackelberg leader?
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Chapter 15: Factor Markets
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Sample Questions
Q1) In a perfectly competitive resource market,the Marginal Revenue Product Curve is A) vertical.
B) horizontal.
C) downward-sloping.
D) upward sloping.
Q2) If the interest rate is 10%,then $1 received one year from now is worth how much today?
A) $1.10
B) $1
C) 91¢
D) 90¢
Q3) If the labor market is competitive,a monopoly output market will result in A) a lower wage than that of a competitive output market.
B) a higher wage than that of a competitive output market.
C) less labor hired than in a competitive output market.
D) more labor hired than in a competitive output market.
Q4) You grow poplar trees.The lumber yard purchases cut trees from you.The trees grow 1 foot per year.Assuming a constant real price per foot for poplar and a real interest rate of 3%,would you sell a 20-foot tree today?
Q5) Why is the short-run demand curve for labor downward sloping?
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Chapter 16: Uncertainty
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Sample Questions
Q1) Which of the following helps to reduce risk?
A) abstain from risk taking
B) obtain more information
C) diversify
D) All of the above.
Q2) Explain why insurance companies usually do not offer earthquake insurance.
Q3) Suppose an individual has $100 to invest.Two assets are available.One asset will yield a return of 10%,while the other risky asset will yield 0% with probability .5 and 21% with probability .5.Suppose the investor's utility function is given by U(x)= ln(x)where x is the wealth after investing (assume she is investing for just one period).How much will she invest in the risky asset?
Q4) Expected value represents the average of all outcomes if one were to undertake the risky event many times over and over again.
A)True
B)False
Q5) For the utility function U = W ,what values of "a" correspond to being risk averse,risk neutral,and risk loving?
Q6) Explain why the rate of return from investing in stocks is higher than from investing in bonds.
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Chapter 17: Property Rights, externalities, rivalry, and Exclusion
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Sample Questions
Q1) Suppose three neighbors must vote on the installation of a traffic light that costs $210.The cost of the light will be shared by all three.Voter A values the light at $50; voter B values the light at $50; and voter C (who drives the most)values the light at $200.If the voting rule is that the majority wins,does the light get purchased? Is it efficient to purchase the light?
Q2) Which of the following statements about externality is INCORRECT?
A) Pollution of a chemical plant will create negative externalities to the residents living in the neighborhood.
B) Trees planted in the backyard of a house could create positive externalities to the pedestrians passing under.
C) Extra output sold by a firm that lowers the market price creates negative externalities to its rivals.
D) A single action may confer positive externalities on some people, but negative externalities on others.
Q3) Firms that are most likely to buy marketable pollution rights are those that produce the most pollution per unit of output produced.
A)True
B)False
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Chapter 18: Asymmetric Information
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Sample Questions
Q1) The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.The percent of all cars that are lemons is .What value of is necessary for all cars to be sold?
Q2) Empirical studies conclude that advertising
A) raises prices in all markets.
B) can reduce the prices of many goods.
C) reduces the prices on all goods.
D) has no impact on prices.
Q3) With asymmetric information among consumers and positive search costs,a firm may
A) raise its price above the monopoly price.
B) price at the monopoly level.
C) price at the competitive level.
D) None of the above.
Q4) How can a warranty at the seller's expense signal that a product is of high quality?
Q5) Opportunism may occur when
A) both parties have limited information.
B) both parties have full information.
C) one party has information the other does not.
D) All of the above.
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Chapter 19: Contracts and Moral Hazards
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Q1) When shirking at the workplace occurs,increased monitoring of workers is the only effective way to reduce this behavior.
A)True
B)False
Q2) Production inefficiency is more likely to occur when the principal has more information about work performance than the agent does.
A)True
B)False
Q3) Suppose a plaintiff hires a lawyer to represent her in a court case.The lawyer will be paid a fixed fee.Under this contract,
A) production efficiency is achieved.
B) the client bears all of the risk.
C) the lawyer has an incentive to lie about his hours worked.
D) All of the above.
Q4) Explain why a firm may hire managers to operate outlets near the firm's headquarters,but may sell franchise rights for the outlets located greater distances from the headquarters.(With a franchise,the firm sells a brand name and a method of doing business to someone who then owns and operates the outlet.)
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