Applied Microeconomics
Exam Materials
Course Introduction
Applied Microeconomics explores how individuals, firms, and governments make decisions regarding the allocation of limited resources, with an emphasis on real-world applications. The course covers core concepts such as consumer and producer behavior, market structures, price formation, and the impact of government interventions. Students analyze case studies and current issues, applying economic models and data to understand outcomes in various industries and policy settings. The course aims to develop analytical and critical thinking skills essential for understanding and addressing practical economic problems.
Recommended Textbook
Modern Principles Microeconomics 3rd Edition by Tyler Cowen
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5793 Flashcards
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Page 2
Chapter 1: The Big Ideas
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Sample Questions
Q1) Understanding economic growth is one of the most important tasks of economics.
A)True
B)False
Answer: True
Q2) Suppose a customer at a restaurant is deciding whether or not to order dessert. Marginal thinking means that the customer should compare:
A) the total benefit from the entire meal and dessert with the additional cost of the dessert.
B) the total benefit from the entire meal and dessert with the total cost of the meal and dessert.
C) the additional benefit from the dessert with the additional cost of the dessert.
D) the marginal benefit from the meal with the marginal cost of the dessert.
Answer: C
Q3) Most economists believe the Federal Reserve does more good for than harm to the United States economy.
A)True
B)False
Answer: True
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3
Chapter 2: The Power of Trade and Comparative
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Sample Questions
Q1) The production possibility frontier shows:
A) how society can produce more of one good without giving up the production of another good.
B) what people can consume given different combinations of goods produced.
C) the combinations of output that an economy can produce given its productivity and supply of inputs.
D) the types of goods and services that society should produce to satisfy social interest.
Answer: C
Q2) Absolute advantage derives from which of the following?
A) the lowest cost of production
B) the most suitable climate
C) the least expensive labor force
D) the best educated labor force
Answer: A
Q3) The human brain has no limits, so the division of knowledge decreases the total knowledge in society.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Supply and Demand
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Sample Questions
Q1) Which of the following would cause the demand for hot dog buns to increase?
A) a fall in the price of hot dog buns
B) a fall in the price of hot dogs
C) a rise in the price of hot dogs
D) a rise in the price of hot dog buns
Answer: B
Q2) The market price of a good is $5 and 40 units of the good sell at this price. Its demand curve intersects the vertical axis at a price of $10 and has a constant slope. What is the approximate value of consumer surplus in this market?
A) $100
B) $50
C) $200
D) $75
Answer: A
Q3) The law of demand states that:
A) the lower the price, the greater the quantity demanded.
B) the higher the price, the higher the quantity demanded.
C) the demand curve is upward sloping.
D) an increase in income increases the quantity demanded.
Answer: A
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Chapter 4: Equilibrium
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Sample Questions
Q1) Before his pioneering experiments on market equilibrium, Vernon Smith believed that the market equilibrium concept:
A) described reality.
B) might describe reality.
C) did not describe reality.
D) may have described reality.
Q2) War in the Middle East tends to cause a decrease in the world supply of oil.
A)True
B)False
Q3) Imagine a free market in which at a price of $10, quantity supplied is 50 units and quantity demanded is 40 units. Equilibrium price in this market:
A) is equal to $10.
B) is less than $10.
C) is greater than $10.
D) differs from $10 in an indeterminate direction.
Q4) A decrease in the supply of milk will lead to a decrease in the QUANTITY DEMANDED of milk.
A)True B)False
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Chapter 5: Elasticity and Its Applications
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Sample Questions
Q1) A new per unit subsidy for almond production in the United States increases the world supply of almonds. If almonds are inelastically demanded, what will happen to total revenues from almond production?
A) They will rise.
B) They will fall.
C) They will remain the same.
D) They will change in an indeterminate direction.
Q2) The midpoint method of calculating elasticity yields the same results as other methods.
A)True
B)False
Q3) If the price of music CDs increases by 10 percent and the quantity supplied increases by 20 percent, the elasticity of supply is equal to 2.0, perhaps indicating the ease of increased production at a relatively constant unit cost.
A)True
B)False
Q4) Summarize the factors that cause goods to have a more inelastic supply.
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7
Chapter 6: Taxes and Subsidies
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Sample Questions
Q1) A given tax will impose a greater deadweight loss when:
A) both supply and demand are inelastic.
B) supply is inelastic and demand is elastic.
C) supply is elastic and demand is inelastic.
D) both supply and demand are elastic.
Q2) If the goal is to reduce cigarette consumption per smoker through taxation, a federal tax is ______ effective than a state tax.
A) more
B) equally
C) less
D) more or less (depending upon the state)
Q3) Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers?
A) $0.60
B) $0.40
C) $0.75
D) $0.67
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Chapter 7: The Price System
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Sample Questions
Q1) Prices are incentives, prices are signals, and prices are predictions.
A)True
B)False
Q2) Speculators:
A) serve no important economic function, except buying low and selling high.
B) move resources from periods of low-value use to periods of high-value use.
C) move resources from poor countries to rich counties.
D) are a key source of inflation.
Q3) Both ethanol and sugar are made from sugar cane and ethanol can be used as a substitute for oil. As the price of oil increases, Brazilians shift sugar cane from sugar production to ethanol production, thereby:
A) increasing the price of ethanol.
B) increasing the price of sugar.
C) increasing the price of both ethanol and sugar.
D) decreasing the price of both ethanol and sugar.
Q4) The true cost of a good is its money price rather than its opportunity cost.
A)True
B)False
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Chapter 8: Price Ceilings and Floors
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Sample Questions
Q1) (Figure: Costs of Price Ceilings 2) Refer to the figure. What is the dollar amount of lost producer surplus after the price ceiling of $4 has been implemented?
A) $90
B) $10
C) $160
D) $80
Q2) Illustrate on a supply and demand diagram how price ceilings may distort the market outcome and specify what secondary effects price ceilings can create.
Q3) (Figure: Effects of Price Ceilings) Refer to the figure. At a price ceiling of $2 per unit, consumers are willing to pay a maximum of:
A) $2.00.
B) $2.50.
C) $3.00.
D) $4.00.
Q4) Price floors and price ceilings both result in lost gains from trade and decreases in the quality of the product.
A)True
B)False
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Chapter 9: International Trade
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Sample Questions
Q1) (Figure: International Trade 4) Refer to the figure. If, in this figure, the government allowed free trade, consumer surplus would:
A) increase by $118.
B) increase by $31.50.
C) decrease by $81.
D) increase by $66.50.
Q2) (Figure: Foreign Trade with a Tariff) Refer to the figure. A $1 tariff generates government revenue of:
A) $100 million.
B) $140 million.
C) $180 million.
D) $200 million.
Q3) The real cause of child labor is:
A) free trade agreements.
B) impoverished circumstances in the child's life.
C) multinational corporations that are only concerned about profit maximization.
D) poor enforcement of existing international child labor treaties.
Q4) What are the gains and losses of a trade restriction versus free trade? Explain carefully.
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Chapter 10: Externalities- When the Price Is Not Right
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Sample Questions
Q1) When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.
A) too low; too high
B) equal to the efficient price; too low
C) too high; too low
D) equal to the efficient price; too high
Q2) Suppose there will be global catastrophe unless we hold total carbon dioxide emissions at or below 35 million tons per year. As a result, each person on Earth is allocated 10 pounds of untradable emissions permits per year. Why would this be an inefficient solution?
A) Flexibility is not desirable.
B) Transaction costs are very high.
C) Everybody has the same cost of emissions abatement.
D) Different people have different costs of emissions abatement.
Q3) If the production of a good causes a negative externality, the efficient level of output of that good is zero.
A)True
B)False
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Chapter 11: Costs and Profit Maximization Under Competition
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Sample Questions
Q1) Describe the supply curve of a constant cost industry.
A) upward sloping
B) flat
C) downward sloping
D) downward sloping, then upward sloping
Q2) Firms have less pricing power if their firm-level product is more unique.
A)True
B)False
Q3) (Figure: Industry Firms) Refer to the figures. This industry is a(n):
A) increasing cost industry.
B) decreasing cost industry.
C) constant cost industry.
D) quadratic cost industry.
Q4) The marginal cost curve may intersect the average cost curve anywhere on the curve that is less than the minimum point.
A)True
B)False
Q5) Industry clusters always cause part of the supply curve to be downward sloping.
A)True
B)False
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Chapter 12: Competition and the Invisible Hand
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Sample Questions
Q1) Since all competitive firms produce wherever marginal cost equals the market price for the product, we can conclude that:
I. all competitive firms produce at the same marginal cost level.
II. all competitive firms produce the same quantity.
III. all competitive firms make normal profit.
A) I only
B) I and II only
C) II and III only
D) All of the answers are correct.
Q2) Which of the following factors cause markets to be dynamic?
I. changes in tastes
II. changes in technology
III. new idea development
A) I and II only
B) II only
C) I, II, and III
D) I only
Q3) High profits mean that inputs of high value produce outputs of low value.
A)True
B)False
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Chapter 13: Monopoly
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Sample Questions
Q1) (Figure: Regulated versus Unregulated Monopolist) Refer to the figure. Calculate the change in consumer surplus from an unregulated monopoly to a regulated monopoly.
A) $6,400
B) $2,800
C) $400
D) $3,600
Q2) Monopolies are bad because they convert deadweight losses into additional sales and profit.
A)True
B)False
Q3) Monopoly is the most common form of market organization.
A)True
B)False
Q4) (Figure: Monopolist 3) In this figure, the monopolist's maximum profit is:
A) $99.
B) $45.
C) $36.
D) $54.
Q5) Graphically depict a monopolist enjoying abnormal profits.
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Chapter 14: Price Discrimination
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Sample
Questions
Q1) Insurance companies charge men a higher price for automobile insurance than women. The costs of insuring men are higher because they get into more accidents than do women. Which of the following statements is TRUE?
A) The insurance companies are practicing price discrimination.
B) The insurance companies are not practicing price discrimination.
C) The insurance companies are practicing inter-temporal price discrimination.
D) The insurance companies are using a bundling/tying strategy.
Q2) Karl values Word at $100 and Excel at $40, and Adam values Word at $20 and Excel at $90. If the programs are sold separately, what are the profit-maximizing prices?
A) $20 for Word; $40 for Excel
B) $20 for Word; $90 for Excel
C) $100 for Word; $40 for Excel
D) $100 for Word; $90 for Excel
Q3) Which of the following is NOT an example of bundling?
A) cell phones and phone calls
B) computer software
C) automobiles and engines
D) McDonald's value meals
Q4) Explain the two basic principles of successful price discrimination.
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Chapter 15: Oligopoly and Game Theory
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Sample Questions
Q1) When OPEC raises prices, it encourages new firms to enter the industry and new technologies to be developed that help to conserve oil.
A)True
B)False
Q2) Overfishing in oceans is a prisoner's ______ outcome.
A) release
B) call
C) cooperation
D) dilemma
Q3) It is easy for a cartel to behave monopolistically.
A)True
B)False
Q4) The prisoner's dilemma refers to a situation in which:
A) the pursuit of individual interests leads to illegal actions.
B) the pursuit of individual interests leads to an outcome that is in the best interest of no one.
C) firms are forced into illegal activities for the good of the group.
D) cheating is the only profitable strategy.
Q5) What are some reasons why cartels could fail?
Q6) What are three reasons that cartels collapse? Provide an example of each.
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Chapter 16: Competing for Monopoly
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Sample Questions
Q1) Which goods represent network goods?
A) Pepsi, toilet paper, headphones
B) calculator, oven, couch
C) Twitter, Microsoft Excel, Facebook
D) fireworks, lighthouse, swimming pool
Q2) Describe the features of markets for network goods.
Q3) Competition for the market rather than in the market:
A) is the reason why Friendster is no longer the leading social network.
B) explains why Microsoft Word is the leading word processing network.
C) means that Facebook may one day no longer be one of the leading social networks.
D) All of the answers are correct.
Q4) Multiple products can thrive in a network industry when:
A) the government decides to allow multiple products.
B) consumers don't care about coordination at all.
C) there are multiple niches to fill; each product can dominate one niche.
D) competitors all go after the same niche.
Q5) Most contestable markets have high fixed costs.
A)True
B)False
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Chapter 17: Monopolistic Competition and Advertising
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Sample Questions
Q1) In the long run, a monopolistically competitive firm will operate where P = AC and will no longer have economic profits.
A)True
B)False
Q2) Firms in monopolistic competitive industries:
I. sell their products at a higher price than if their industry were strictly competitive. II. sell their products at the same price as if they were in a monopoly market. III. have a high incentive to innovate with new products and better quality.
A) I and II only
B) II and III only
C) I and III only
D) I, II, and III
Q3) Products can be differentiated along any dimension that people care about, such as taste, style, features, or location.
A)True
B)False
Q4) In what ways is the market for books competitive?
Q5) Is persuasion through advertising always a good or a bad thing?
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Chapter 18: Labor Markets
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Sample Questions
Q1) The labor supply curve for an individual is always upward sloping.
A)True
B)False
Q2) Why do similar jobs have similar compensation packages?
I. The law of demand and supply will ensure that the salaries will be similar over time.
II. Wages and "fun" adjust between jobs until compensation packages are similar.
III. Because exactly the same skills are being applied.
A) I only
B) I and II only
C) II and III only
D) I, II, and III
Q3) A firm will continue to hire workers as long as:
A) the marginal product of labor is greater than the wage.
B) the marginal product of labor is less than the wage.
C) the value of labor exceeds the firm's production costs.
D) the value of labor exceeds the firm's fixed costs of labor.
Q4) Explain why tractor-trailer truck drivers earn almost twice that of limousine drivers. What would happen if the government mandated that limousine drivers earn the same hourly wage as truck drivers?
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Chapter 19: Public Goods and the Tragedy of the Commons
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Sample Questions
Q1) Advertising is an efficient solution to the problem of nonexcludability and nonrivalry.
A)True
B)False
Q2) A person ________ be cheaply prevented from using national defense, a(n) ________ good.
A) can; excludable
B) cannot; nonexcludable
C) cannot; excludable
D) can; nonexcludable
Q3) Street lights are an example of a good that is:
A) nonexcludable and nonrival.
B) nonexcludable and rival.
C) excludable and nonrival.
D) excludable and rival.
Q4) Which of the following would NOT be considered an example of a public good?
A) asteroid deflection
B) national defense
C) mosquito control
D) public roads
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Chapter 20: Political Economy and Public Choice
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Sample Questions
Q1) Which of the following statements is TRUE?
I. Rationally ignorant people may favor price controls because they receive biased information.
II. Rational ignorance may lead voters to have mistaken beliefs about the state of the economy.
III. Rationally informed people can take advantage of the rationally ignorant by supporting policies that transfer wealth from the ignorant to the informed.
A) I, II, and III
B) I and II only
C) II and III only
D) I only
Q2) Which of the following explains why the sugar quota is a winning policy for politicians?
A) The people who are harmed by the quota are rationally informed.
B) The people who are harmed by the quota have strong incentive to oppose the policy.
C) The people who benefit from the quota are rationally ignorant.
D) The people who benefit from the quota have strong incentive to support the policy.
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Chapter 21: Economics, Ethics, and Public Policy
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Sample Questions
Q1) Consider the market for human kidneys. Using supply and demand, graphically illustrate how the price of $0 is affecting the legal market for kidneys. Assume that a small number of kidneys are donated for free each year.
Q2) Utilitarians are not concerned that transferring wealth to the poor reduces an economy's output.
A)True
B)False
Q3) Positive economics is about:
A) verifying and confirming economic policy.
B) describing, explaining, or predicting economic events.
C) prescribing and making a claim on the economy.
D) making recommendations about what economic policy should be.
Q4) The practical limit of income redistribution is incentives that affect how much the wealthy earn.
A)True B)False
Q5) Economics can safely ignore questions of fairness when examining trade-offs. A)True
B)False
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Chapter 22: Managing Incentives
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Sample Questions
Q1) Paying sales workers based on a tournament reduces environmental risk.
A)True
B)False
Q2) Suppose the economy is in a recession. Which of the following is the best incentive scheme for the manager of a large auto sales center?
A) Threat of termination if one sale is not made each day.
B) Equal salary for all sales agents regardless of sales.
C) Bonuses for the sales agents who meet a fixed sales target.
D) Bonuses for the sales agents with the highest sales relative to other sales agents.
Q3) Pirate captains during the 1600s compensated crewmembers with a form of health insurance. If a member lost a hand or leg or other appendage during a fight, he would get a free prosthetic (e.g., a wooden leg, which were quite expensive even then). What kind of incentive structure does this most closely resemble? (Hint: Those who lost a limb generally did so because they were doing a larger share of the fighting.)
A) hourly rates
B) tournaments
C) piece rates
D) corporate culture
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Chapter 23: Stock Markets and Personal Finance
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Sample Questions
Q1) If a person follows a buy-and-hold strategy, she will initially hold stocks:
A) until the stock prices rise.
B) until the stock prices fall.
C) until the stock prices stabilize.
D) whether or not stock prices rise or fall.
Q2) The NASDAQ:
A) weights individual stocks equally.
B) gives greater weight to low-tech stocks than does the Dow.
C) gives greater weight to small stocks than does the Dow.
D) has 500 stocks.
Q3) Mutual funds can let you invest in hundreds of stocks with just one purchase.
A)True
B)False
Q4) Technical analysis:
A) looks for patterns in stock prices.
B) can systematically beat market averages, according to research economists.
C) is useful for predicting when stocks will stay above certain price thresholds.
D) All of the answers are correct.
Q5) Discuss the different ways that a person can diversify.
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Chapter 24: Price Discrimination
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Sample Questions
Q1) Which is NOT an example of moral hazard?
A) A hair dresser colors poorly a client's hair.
B) A cab driver takes a longer route to the destination to collect a higher fare.
C) A dentist recommends an unnecessary dental procedure.
D) A car salesman recommends a car that has been wrecked.
Q2) Many forms of information are considered to be a public good, subject to the free rider problem.
A)True
B)False
Q3) A signal:
A) is an offer that conveys negative information about the product.
B) is an agent trying to exploit an information advantage in a dishonest way.
C) occurs when one party to a transaction has more information than the other party.
D) is an expensive action that is taken to reveal information.
Q4) Reviews and ratings systems will always accurately reflect product quality.
A)True
B)False
Q5) What signal does an engagement ring send? Why does it have to be expensive?
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Chapter 25: Consumer Choice
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Sample Questions
Q1) (Figure: Water vs. Soda 2) Refer to the figure. These figures show the marginal utility Janet receives when she consumes bottled water and soda. Both water and soda cost $1 each. If Janet has $5 in income, what mix of bottled water and soda will maximize Janet's utility?
A) five bottles of water
B) four bottles of water and three sodas
C) three bottles of water and two sodas
D) 2.5 bottles of water and 2.5 sodas.
Q2) (Figure: Leisure 3) Refer to the figure. In this diagram, the presence of the welfare program causes this person to:
A) reduce hours of work from 12 to 0.
B) increase hours of work from 0 to 12.
C) reduce hours of work from 12 to 9.
D) reduce hours of work from 8 to 3.
Q3) Which statement is TRUE?
A) The income effect of a wage increase is to consume less leisure.
B) The substitution effect of a wage decrease is to consume less leisure.
C) The price of leisure decreases with a decrease in wages.
D) The price of leisure increases with an increase in income.
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