Applied Microeconomic Theory
Pre-Test Questions
Course Introduction
Applied Microeconomic Theory explores how microeconomic concepts and models are used to analyze real-world problems and inform decision-making in various sectors, such as business, government, and policy. The course covers core topics including consumer and producer behavior, market structures, game theory, and information economics, with an emphasis on applications to issues like pricing, regulation, market failures, and strategic interactions. Students engage with both theoretical frameworks and empirical methods, learning to formulate and solve microeconomic problems to gain practical insights into economic behavior and outcomes.
Recommended Textbook Microeconomics 2nd Edition by
Daron Acemoglu
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18 Chapters
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Page 2
Chapter 1: The Principles and Practice of Economics
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Sample Questions
Q1) Suppose that Jinelle,an engineer,has to choose between two jobs.Which of the following statements is true?
A) When deciding between jobs, she should consider both the wage and the non-wage attributes of each job.
B) When deciding between jobs, she should focus only on the costs of each job and ignore the benefits.
C) When deciding between jobs, she should only focus on the benefits of each job and ignore the costs.
D) When deciding between jobs, she should consider the wage attributes and ignore the non-wage attributes of each job.
Answer: A
Q2) A student has two options: she can either surf the web or work part-time.Working part-time pays her $20 per hour.What is the student's opportunity cost of surfing the web for 5 hours?
A) $4
B) $20
C) $50
D) $100
Answer: D
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3
Chapter 2: Economic Methods and Economic Questions
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Sample Questions
Q1) A correlation between two variables implies that ________.
A) there is a cause-effect relationship between the two variables
B) it is impossible to measure one variable without measuring the other
C) there is a mutual relationship between both the variables
D) when one variable changes, the other variable always changes by exactly the same amount
Answer: C
Q2) Which of the following graphical representations is ideal for comparing a single variable across different groups?
A) A histogram
B) A bar chart
C) A scatter plot
D) A time series graph
Answer: B
Q3) In research,what is the importance of experiments? What is meant by randomization in experiments?
Answer: An experiment is a controlled method of investigating causal relationships among variables.Randomization in experiments refers to the assignment of participants by chance,rather than by choice,to a treatment group or a control group.
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Page 4
Chapter 3: Optimization: Doing the Best You Can
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Sample Questions
Q1) If the opportunity cost of time is ________ and an individual spends ________ commuting every month,the opportunity cost of her commute is $100 every month.
A) $5 per hour; 10 hours
B) $8 per hour; 20 hours
C) 10 per hour; 10 hours
D) $12 per hour; 5 hours
Answer: C
Q2) To calculate the ________ of an alternative,an individual needs to estimate ________ of the alternative.
A) marginal benefit; the total cost
B) marginal cost; the total benefit
C) opportunity cost; the total benefit
D) net benefit; both the cost and the benefit
Answer: D
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Chapter 4: Demand, supply, and Equilibrium
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Sample Questions
Q1) Which of the following does NOT have a market in the real world?
A) First-class mail delivery in the United States, where the U.S. Postal Service is the only legal carrier of such mail
B) Kidneys for transplant, for which you cannot legally receive or pay money
C) Illegal narcotic substances
D) None of the above
Q2) Refer to the scenario above.Suppose Charlotte's NBA franchise,the Charlotte Hornets,decides to relocate to Seattle,Washington.How will the city's loss of this professional sports franchise affect demand for MLB game attendance in Charlotte?
A) Cause an increase in only quantity demanded
B) Cause an increase in demand
C) Cause a decrease in only quantity demanded
D) Cause a decrease in demand
Q3) Differentiate between a change in demand and a change in quantity demanded.
Q4) A seller's willingness to accept is the same as his ________ cost of production.
A) total
B) fixed
C) average
D) marginal
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Chapter 5: Consumers and Incentives
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Sample Questions
Q1) Willingness to pay is the ________ for a unit of good.For a trade to take place,the willingness
To pay must be ________.
A) lowest price that a buyer is willing to pay; lower than the price of the good.
B) lowest price that a buyer is willing to pay; higher than the price of the good.
C) highest price that a buyer is willing to pay; lower than the price of the good.
D) highest price that a buyer is willing to pay; higher than the price of the good.
Q2) Sofia is selling homemade cakes.The demand for homemade cakes is elastic.If Sofia reduces the price of her cakes,________.
A) her revenue will increase
B) her revenue will decrease
C) her revenue will not change
D) she will not make any revenue
Q3) Differentiate between the income effect and the substitution effect of a fall in the price of a good.
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Chapter 6: Sellers and Incentives
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Sample Questions
Q1) If firms in a perfectly competitive market are realizing economic losses in the short run,________.
A) entry will occur, the market supply curve will shift out, and the market price will rise B) entry will occur, the market supply curve will shift out, and the market price will fall
C) exit will occur, the market supply will shift in, and the market price will rise
D) exit will occur, the market supply will shift in, and the market price will fall
Q2) In a competitive market,there are a ________ number of buyers and a ________ number of sellers.
A) large; small
B) small; large
C) small; small
D) large; large
Q3) Define the terms "production" and "production function." Differentiate between the short run and the long run based on the usage of inputs by a firm.
Q4) Is it possible for an input to have a negative marginal product?
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Chapter 7: Perfect Competition and the Invisible Hand
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Sample Questions
Q1) If exit occurs from the U.S.coal industry and entry occurs into the U.S.solar panel industry,we would expect ________.
A) wages to fall in both the U.S. coal and steel industries
B) wages to fall in the U.S. coal industry but remain constant in the solar panel industry
C) wages to fall in the U.S. coal industry and to rise in the solar panel industry
D) wages to fall in the U.S. coal industry and to rise in the solar panel industry only if the government imposes a wage ceiling in the solar panel industry
Q2) Refer to the scenario above.Nick complains to the town council of price gouging by the fuel sellers.In response,an anti-price-gouging law is immediately passed that puts the price ceiling at $1.75 per liter.What will likely happen next?
A) Neither Lisa nor Nick will be able to obtain the fuel.
B) Both Lisa and Nick will be able to obtain the fuel.
C) Lisa can, but Nick still would not be able to obtain the fuel.
D) Nick can obtain the fuel, but Lisa will be priced out.
Q3) Differentiate between double oral auctions and bilateral negotiations.
Q4) Differentiate between the coordination problem and the incentive problem.
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Page 9
Chapter 8: Trade
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Sample Questions
Q1) Which of the following arguments is not an explanation of why it is difficult to compensate losers for the effects of opening an economy to international trade?
A) Identifying the losers is difficult, as they are spread throughout the economy.
B) Free trade gain is made over a wide array of goods and services and is hard to identify.
C) It is difficult for governments to carry out such redistribution policies.
D) The government wants to keep the gains from trade to finance its own expenses.
Q2) Refer to the scenario above.What is the consumer surplus when Barylia engages in trade and the government imposes a $1 tariff on chairs?
A) $100
B) $120
C) $180
D) $200
Q3) How are the domestic sellers and buyers of a good affected if a country starts exporting the good?
Q4) What are the infant industry arguments against free trade?
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Chapter 9: Externalities and Public Goods
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Sample Questions
Q1) A steel-producing factory in North Palladia generates large amounts of carbon dioxide during its production process.A per-unit tax on the production of steel that equals the marginal ________ of steel production will entirely internalize the externality.
A) private cost
B) social cost
C) external cost
D) external benefit
Q2) An economic agent ________ when he accounts for the full costs and benefits of his actions.
A) is called a free rider
B) internalizes an externality
C) maximizes his profit
D) is called a rent seeker
Q3) Refer to the figure above.The total cost of this externality to the society is equal to
A) $2
B) $10
C) $20
D) $40
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Chapter 10: The Government in the Economy: Taxation and Regulation
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Sample Questions
Q1) The government of Putania spent $67,000,000 in a particular year,and the total tax receipts of the government in that year were $120,000.Calculate the budget deficit.
A) $600,000
B) $680,000
C) $67,120,000
D) $66,880,000
Q2) Which of the following taxes is collected only by the federal government?
A) Corporate income tax
B) Social insurance tax
C) Property tax
D) Excise tax
Q3) ________ taxes are paid by a buyer as a percentage of the market price of an item.
A) Sales
B) Wealth
C) Payroll
D) Property
Q4) Differentiate between a progressive tax system and a regressive tax system.
Q5) Mention some of the problems incurred by black markets.
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Chapter 11: Markets for Factors of Production
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Sample Questions
Q1) Which of the following is likely to cause a decrease in both the wage rate and the level of employment in an industry?
A) A rightward shift in the supply curve of labor, without any change in the demand curve for labor
B) A leftward shift in the supply curve of labor, without any change in the demand curve for labor
C) A rightward shift in the demand curve for labor, without any change in the supply curve of labor
D) A leftward shift in the demand curve for labor, without any change in the supply curve of labor
Q2) Refer to the table above.If the price of a chair increases to $20 and the rental price of machines is $200 per day,how many machines should the firm rent to maximize profits?
A) 2
B) 3
C) 4
D) 5
Q3) How does the price of a final good that is produced using labor affect the demand for labor?
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13
Chapter 12: Monopoly
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Sample Questions
Q1) Refer to the scenario above.When the quantity sold goes up from 100 million to 150 million packs of cigarettes,the price effect on the firm's revenue is ________ and the quantity effect is ________.
A) -$200 million; $100 million
B) -$100 million; $200 million
C) $200 million; -$100 million
D) $100 million; -$200 million
Q2) ________ is a market structure where only one firm provides a good or service that has no close substitutes.
A) An oligopoly
B) A monopoly
C) Perfect competition
D) Monopolistic competition
Q3) Refer to the scenario above.If the marginal cost of a magic wand is $10,how many wands should Mr.Olivander sell to maximize his profit?
A) 5
B) 9
C) 12
D) 1
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Page 14
Chapter 13: Game Theory and Strategic Play
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Sample Questions
Q1) In a zero-sum game,________.
A) each player earns a zero payoff irrespective of the strategy he or she chooses
B) each player has a dominant strategy
C) each player chooses a pure strategy
D) one player's loss is another player's gain
Q2) Refer to the figure above.In which one of these simultaneous-play games are there two Nash equilibria?
A) (1)
B) (2)
C) (3)
D) (4)
Q3) Refer to the scenario above.This game is ________.
A) a zero-sum game for Row Inc. and for Colm Inc.
B) not a zero-sum game for Row Inc. and Colm Inc.
C) a zero-sum game for Row Inc. but not a zero-sum game for Colm Inc.
D) not a zero-sum game for Row Inc. but is a zero-sum game for Colm Inc.
Q4) Why do some people tip generously at restaurants to which they never plan to return?
Q5) Differentiate between a payoff matrix and a game tree.
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Chapter 14: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) Which of the following firms is likely to have the highest market power?
A) A perfectly competitive firm
B) A monopolistic competitor
C) A monopolistic firm
D) An oligopolistic firm with homogeneous products
Q2) Differentiate between oligopoly and monopolistic competition on the basis of the number of firms and the degree of product differentiation.
Q3) Differentiated products can be found in ________.
A) perfect competition and monopoly market structures
B) perfect competition only
C) oligopoly and monopolistic competition market structures
D) monopoly only
Q4) A monopolistically competitive firm always faces a(n)________.
A) horizontal demand curve
B) vertical demand curve
C) upward-sloping demand curve
D) downward-sloping demand curve
Q5) Why do some firms in an oligopoly refrain from colluding?
Q6) What determines the success of a cartel?
Q7) Under what situations will a colluding firm cheat?
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Chapter 15: Trade-Offs Involving Time and Risk
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Sample Questions
Q1) Refer to the scenario above.The total value in your account at the end of a year is equal to ________.
A) $520
B) $525
C) $550.50
D) $572
Q2) If an individual receives $10,000 after 2 years by investing $10,000 today,we can conclude that ________.
A) the rate of inflation is zero
B) the market rate of interest is zero
C) the rate of inflation is negative
D) the market rate of interest is negative
Q3) Refer to the scenario above.What is the probability of getting heads?
A) 25 percent
B) 50 percent
C) 75 percent
D) 100 percent
Q4) What are the different categories of risk preferences? Explain.
Q5) How does the idea of independent events help explain the gambler's fallacy in a roulette game?
17
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Chapter 16: The Economics of Information
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Sample Questions
Q1) You went to a craft show and paid an exorbitant price for an embroidered shawl that the seller said was hand embroidered and had been imported from India.Several months later,you found a similar shawl in another showroom at a much lower price and realized that the one you bought was not imported.This is an example of a market with
A) asymmetric information
B) a positive externality
C) a negative externality
D) the free-rider problem
Q2) Mr.Smith put his laptop up for sale.He was aware of the fact that the laptop malfunctioned frequently.However,none of the potential customers who came to buy the laptop were able to discover the problem.One of them actually bought it at a remunerative price.This occurred because of the presence of ________.
A) asymmetric information
B) positive externalities
C) negative externalities
D) the moral hazard problem
Q3) Distinguish between two kinds of asymmetric information.
Q4) Why do workers exert more effort when they are paid higher salaries?
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Chapter 17: Auctions and Bargaining
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Sample Questions
Q1) Elly needs to get her leaking faucet repaired as soon as possible.She gets in touch with a plumber,who asks for an unreasonably high fee.If no other plumber is available for work,who has a higher bargaining power? Explain your answer.
Q2) In a second-price auction,________.
A) bidders submit their bids privately
B) bidders place their bids one after another
C) bidders know one another's bids
D) bidders bid above their willingness to pay
Q3) Refer to the scenario above.If these four friends are the only bidders and each bidder uses his optimal strategy,the owner of the good will earn an expected revenue of
A) $210
B) $350
C) $500
D) $625
Q4) What does the revenue equivalence theorem state?
Q5) Robert is participating in a Dutch auction.If he values the item being auctioned at $5,500 and there are five bidders in total,what should Robert's optimal bidding strategy be?
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Chapter 18: Social Economics
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Sample Questions
Q1) Neil and Derek are brothers who are very fond of watching television.They share a television but watch different shows.Every evening,after coming home from school,they argue over who will watch television and for how long.Irritated by their fighting,their parents asked Neil to decide how long each of them would watch television.They also told him that if the brothers failed to reach an agreement,they would not let either of them watch television.
a)How should Neil make his decision?
b)What will be the outcome if Derek prefers fairness over watching television?
Q2) William was asked to contribute money for a retirement home.He agreed to contribute only if his name appeared on the list of donors in the newsletter published by the home every year.This is an example of ________.
A) rationalism
B) liberalism
C) impure altruism
D) pure altruism
Q3) Under what circumstances will the equilibrium in a trust game be efficient?
Q4) Differentiate between the two types of altruism.
Q5) Why do individuals decide to herd?
Q6) What are the two ways by which people can help charitable causes?
Page 20
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