Applied Microeconomics Exam Preparation Guide
Course Introduction
Applied Microeconomics explores the practical applications of microeconomic theories to real-world situations, focusing on individual and firm behavior, market structures, and the allocation of resources. The course covers essential concepts such as consumer choice, production and cost analysis, pricing strategies, and market efficiency. Students learn how to use economic tools to analyze policy issues, business decisions, and social phenomena, gaining insights into topics like market failures, regulation, and welfare economics. Through case studies and empirical examples, the course emphasizes data-driven decision-making and problem-solving within a microeconomic context.
Recommended Textbook Microeconomics 5th Edition by David Besanko
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1033 Verified Questions
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Chapter 1: Analyzing Economic Problems
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Sample Questions
Q1) Microeconomics examines
A) the economic behavior of an entire nation.
B) the economic behavior of individual economic decision units.
C) topics such as national income and inflation.
D) monetary policy.
Answer: B
Q2) Constrained optimization occurs when:
A) An individual makes choices that are influenced by his/her parents and family.
B) An individual makes choices that best suit his/her preferences.
C) Firms choose the best products to meet their client's needs.
D) An individual is forced to choose between competing alternatives subject to some limitation such as budgetary considerations.
Answer: D
Q3) An example of constrained optimization would be
A) a firm trying to maximize its profits subject to its budget constraint.
B) a ball coming to rest at the bottom of a cup.
C) an analysis of how market prices change when supply conditions change.
D) An analysis of the effect of facilitating internet trading on market price.
Answer: A
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Page 3
Chapter 2: Demand and Supply Analysis
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Sample Questions
Q1) Suppose demand is given by Q<sup>d</sup> = 400 - 15P + I, where Q<sup>d</sup> is quantity demanded, P is price and I is income. Supply is given by Q<sup>s</sup> = 5P, where Q<sup>s</sup> is quantity supplied. When I = 200, equilibrium price is A) 15
B) 20
C) 25
D) 30
Answer: D
Q2) What is the quantity of televisions demanded per year when the average price of a television is $100 per unit and the demand curve for televisions is represented by Q<sup>d</sup> = 3.5million - 5000P?
A) 2.5 million televisions
B) 3.0 million televisions
C) 3.2 million televisions
D) 4.0 million televisions
Answer: B
Q3) What is the elasticity of the following demand curve? QP<sup>2</sup> = 100 Answer: \(\varepsilon\)<sub>Q,P</sub> = -2.
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Page 4
Chapter 3: Consumer Preferences and the Concept of Utility
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Q1) Suppose the marginal rate of substitution of x for y is constant for all levels of x and y . Goods x and y are
A) perfect substitutes.
B) perfect complements.
C) normal goods.
D) inferior goods.
Answer: A
Q2) If indifference curves are upward sloping, this violates the assumption that preferences
A) are complete
B) are transitive.
C) violates the assumption that more is better
D) Upward sloping indifference curves do not violate any of the assumptions about preferences.
Answer: C
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Page 5
Chapter 4: Consumer Choice
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Q1) Suppose a consumer buys two goods, \(x\) and \(y\) and has income of $30. Initially P<sub>x</sub> = 3 and P<sub>y</sub> and the consumer chooses basket A with x=2 and y=8 . The prices change to P<sub>x</sub> = 4 and P<sub>y</sub> = 2 and the consumer chooses basket B with x = 7 and y = 1.
A) These choices are consistent with utility maximization.
B) These choices are not consistent with utility maximization.
C) With this information it is not possible to determine if these choices are consistent with utility maximization.
D) Basket B must be strictly preferred to basket A .
Q2) Evaluate the truthfulness of the following statements.
I. All points to the interior of the budget constraint are affordable.
II) All points that lie on the budget constraint cost the same amount of money.
A) Both I and II are true.
B) Both I and II are false.
C) I is true; II is false.
D) I is false; II is true.
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Chapter 5: The Theory of Demand
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Sample Questions
Q1) A graph that plots the consumer's level of consumption of a good against the consumer's income is called a(n)
A) price-consumption curve.
B) Engel curve.
C) demand curve.
D) good-consumption curve.
Q2) Suppose the consumer's utility function is given by U(x,y) = x<sup>1/4</sup>y<sup>3/4</sup> where \(M U _ { x } =
x ^ { \frac { 3 } { 4 } } }\) \(M U _ { y } = \frac { 3 x ^ { \frac {
{ 4 } } }\) The equation for this consumer's demand curve for \(x\) is
A) \(x = \frac { I } { 2 P _ { x } }\)
B) \(x = \frac { I } { 4 P _ { x } }\)
C) \(x = \frac { I } { P _ { x } }\)
D) \(x = \frac { 3 I } { 4 P _ { x } }\)
Q3) A negatively-sloped Engel curve implies a(n)
A) inferior good.
B) normal good.
C) Giffen good.
D) marginal good.
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Page 7
Chapter 6: Inputs and Production Functions
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Q1) When a production function has the form Q = aL + bK, we can say that
A) the production function is linear and the inputs are perfect substitutes.
B) the production function is linear and the inputs are perfect complements.
C) the production function is linear and the inputs are used in fixed factor proportions only.
D) the production function is non-linear and the inputs are perfect substitutes.
Q2) When labor equals 100
A) average product is less than marginal product
B) average product is greater than marginal product.
C) average product is equal to marginal product.
D) the relationship between average product and marginal product cannot be determined from a total product graph.
Q3) Consider the CES production function \(Q
15 }\) . The elasticity of substitution is
A) 0.3
B) 1.5
C) 0.67
D) 3.00
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8
Chapter 7: Costs and Cost Minimization
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Sample Questions
Q1) Isocost lines represent
A) the same value for every firm in the industry.
B) are the same as implicit costs.
C) the same total expenditure on the inputs to the production process.
D) the sum of all past explicit costs
Q2) Suppose for a particular production function that \(M P _ { L } = 36 \left( \frac { K } { L } \right) M P _ { X } = 36 \left( \frac { L } { K } \right)\) If the price of capital is $5 per unit and the price of labor is $125 per unit, at the cost-minimizing combination of capital and labor the firm should employ
A) five times as much labor as capital.
B) five times as much capital as labor.
C) 125/36 units of capital and 5/36 units of labor.
D) 36/125 units of capital and 36/5 units of labor.
Q3) A high elasticity of substitution between capital and labor implies that labor demand will be
A) price elastic.
B) unitary price elastic.
C) price inelastic.
D) more inelastic than capital demand.
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Page 9
Chapter 8: Cost Curves
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Sample Questions
Q1) Let a firm's long run total cost be described by the constant elasticity total cost function. The coefficients of the log of the wage and the log of capital in this function should
A) add up to one.
B) be negative.
C) be of opposite sign.
D) of indeterminate sign.
Q2) Identify the truthfulness of the following statements.
I. When marginal cost is rising, average total cost is rising.
II. When marginal cost is below average total cost, average total cost is falling.
A) Both I and II are true.
B) Both I and II are false.
C) I is true; II is false.
D) I is false; II is true.
Q3) An indivisible input is
A) an input that cannot be seen by the naked eye.
B) an important input that the firm cannot identify.
C) an input that can only be obtained in a certain minimum size.
D) an input the firm cannot stop using.
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Page 10
Chapter 9: Perfectly Competitive Markets
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Sample Questions
Q1) Which of the following is not a characteristic of perfect competition?
A) The industry is fragmented.
B) Firms produce undifferentiated products.
C) Consumers have imperfect information.
D) Firms have equal access to resources.
Q2) The market for sweet potatoes consists of 1,000 identical firms. The market demand curve is given by Q<sup>d</sup> = 1000 - 5P. Each firm has a short-run total cost curve of STC = 100 + 100 q + 100q<sup>2</sup>, and a short-run marginal cost curve of SMC=100+200q, where q is output. All fixed costs are sunk. In short-run market equilibrium, each individual firm will
A) earn a short-run profit.
B) earn a short-run loss.
C) earn zero economic profit.
D) produce an output of q = 4.
Q3) Producer surplus is
A) always equal to zero for a competitive firm in long run equilibrium.
B) always greater than zero for a competitive firm in long run equilibrium.
C) defined as the area below the supply curve and above the price.
D) defined as the area above the supply curve and above the price.
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Page 11
Chapter 10: Competitive Markets: Applications
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Sample Questions
Q1) Consider a perfectly competitive market with market supply \(Q ^ { 5 } = - 2 + P\) and market demand \(Q ^ { d } = 30 - P\) . Suppose the government imposes an excise tax of $4 per unit on this market. What is total surplus (consumer surplus plus producer surplus) after the government imposes the tax?
A) 72
B) 98
C) 144
D) 196
Q2) Which of the following statements is false?
A) With a price floor, the market will not clear.
B) With a price floor, consumers will buy less of the good than they would in a free market.
C) With a price floor, producer surplus will always increase.
D) With a price floor there will be excess supply.
Q3) In a perfectly competitive market, an import quota
A) sets a minimum level of production that domestic firms must produce.
B) sets a minimum level of imports for a country.
C) sets a maximum level of production that domestic firms may produce.
D) sets a maximum level of imports into a country.
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Page 12
Chapter 11: Monopoly and Monopsony
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Sample Questions
Q1) Suppose that the perfectly competitive soybean industry in the United States is monopolized. Under perfect competition, the equilibrium price was $2 and quantity was 100,000. The monopolist raises price to $5 and restricts quantity to 70,000. Assume that the monopolist is maximizing profits and that the monopolist faces a linear, upward-sloping marginal cost curve that begins at the origin. Also assume that this marginal cost curve is the industry supply curve under perfect competition. What is the loss in consumer surplus that the monopolist captures in the form of profit?
A) $500,000
B) $350,000
C) $300,000
D) $210,000
Q2) Identify the truthfulness of the following statements.
I. A monopoly market consists of a single seller facing many buyers.
II. Because the monopolist is the only seller of her product, she may sell any quantity that she chooses for any given price.
A) Both I and II are true.
B) Both I and II are false.
C) I is true; II is false.
D) I is false; II is true.
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Page 13
Chapter 12: Capturing Surplus
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Q1) Which of the following is not necessary for a firm to be able to engage in price discrimination?
A) A firm must have some market power.
B) A firm must have some information about its consumers' willingness to pay.
C) A firm must be a price-taker.
D) A firm must be able to prevent arbitrage.
Q2) The conditions for capturing more surplus from price discrimination include
A) an ability to determine which groups of people have the greatest wealth.
B) an ability to differentiate different market segments meaning that some groups of people are willing to pay more for a product than others.
C) an ability to prevent presales of products.
D) A perfectly competitive industry structure.
Q3) A block tariff is a form of
A) first-degree price discrimination
B) second-degree price discrimination
C) third-degree price discrimination
D) tying
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Chapter 13: Market Structure and Competition
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Sample Questions
Q1) Let firm A face demand curve Q<sub>A</sub> = 100 - P<sub>A</sub> + .5P<sub>B </sub>and firm B face demand curve Q<sub>B</sub> = 100 - P<sub>B</sub> + .5P<sub>A</sub>. Products A and B both have constant marginal cost of production of 10 per unit (and no fixed cost). Each firm acts as a Bertrand competitor. What is firm B's profit-maximizing price when firm A sets a price of $70 for its good?
A) $70
B) $72.5
C) $74
D) $76.5
Q2) Perfect competition
A) in its purest form is probably difficult to observe in the real world because even such factors as location can lead to some market power.
B) is only observed where there are some barriers to entry in the industry. C) requires each of the few firms in the industry to behave in the same profit-maximizing fashion.
D) only exists in differentiated product markets
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Page 15
Chapter 14: Game Theory and Strategic Behavior
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Sample Questions
Q1) In Game 1 above,
A) Player A choosing A1 and Player B choosing B1 is a Nash equilibrium.
B) Player A choosing A2 and Player B choosing B2 is a Nash equilibrium.
C) there is no Nash equilibrium.
D) there are multiple Nash equilibria in pure strategies.
Q2) In Game 4 above,
A) There is one Nash equilibrium.
B) There are two Nash equilibria.
C) There are three Nash equilibria.
D) There are four Nash equilibria.
Q3) Consider a repeated prisoner's dilemma game. The likelihood of a cooperative outcome rises when
A) they value payoffs in future periods much less than they value payoffs in the current period.
B) Interactions between the players are frequent.
C) Cheating is difficult to detect.
D) The one-time gain from cheating is large in comparison to the eventual cost of cheating.
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16
Chapter 15: Risk and Information
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Q1) A person who gets increasing marginal utility as income increases is described as A) risk-averse.
B) risk-neutral.
C) risk-loving.
D) risk-gaining.
Q2) If the decision maker chooses Decision B, which decision alternative should the decision maker choose at node C?
A) Decision 1
B) Decision 2
C) Either decision; they both have the same expected value.
D) Neither decision; more information is needed.
Q3) Suppose a decision maker has a utility function \(U = \sqrt { I }\) and is faced with a lottery where there is a 30% chance of earning $30 and a 70% chance of earning $80. What is the expected utility of this lottery?
A) 7.6
B) 7.9
C) 8.2
D) 8.5
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17
Chapter 16: General Equilibrium Theory
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Q1) Partial equilibrium analysis differs from general equilibrium analysis in that A) a partial equilibrium analysis studies the determination of price and output determination, whereas general equilibrium includes a greater number of variables. B) prices are not held constant in all other markets in partial equilibrium, but in general equilibrium they are.
C) a partial equilibrium analysis studies the determination of price and output in a single market, whereas general equilibrium looks at more than one market simultaneously.
D) a general equilibrium holds prices constant in multiple markets, whereas partial equilibrium does not.
Q2) When a fixed stock of consumption goods cannot be reallocated among consumers in an economy without making at least some consumers worse off, the allocation satisfies
A) exchange efficiency.
B) input efficiency.
C) substitution efficiency.
D) Walras' Law.
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18
Chapter 17: Externalities and Public Goods
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Q1) An environmental economic consulting firm is hired to measure the negative externalities associated with the pollution from an industry. The marginal social cost production can be expressed as MSC = 2Q + 30. The consultants calculate the marginal private cost production to be MPC = Q+30. The market demand curve can be expressed as \(P = 60 - Q\) . If the consultants have accurately measured the impact of the pollution externality, the \(\underline{\text{change}}\) in social surplus from moving to the social optimum (rather than at the private optimum) is
A) $30
B) $37.5.
C) $55.
D) $67.5.
Q2) An example of a positive externality is
A) a rear-end spoiler feature on the back of sports cars that helps to stabilize and improve handling for the vehicle.
B) legislation reducing air pollution.
C) a chemical plant that emits thermal pollution.
D) a chocolate factory whose aroma draws people to an area of the city that has a large quantity of tourist activities and shopping.
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