Applied Microeconomics Exam Preparation Guide
Course Introduction
Applied Microeconomics focuses on the practical application of microeconomic theory to real-world issues and decision-making processes. The course examines how individuals, firms, and governments allocate resources and respond to incentives within various market structures. Topics include consumer and producer behavior, market equilibrium, price determination, policy analysis, and the impact of regulation and market failures. Through case studies and problem-solving exercises, students learn to analyze economic data, evaluate public policies, and understand the economic forces shaping business strategies and societal outcomes.
Recommended Textbook Microeconomics 4th Edition by David Besanko
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1037 Verified Questions
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Page 2
Chapter 1: Analyzing Economic Problems
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Sample Questions
Q1) Suppose the price of X is $15 per unit,the price of Y is $12 per unit,the consumer's income is $100,and the consumer's level of satisfaction is measured by XY + Y.The consumer's constraint is
A) X + Y 100
B) max XY
C) 15X + 12Y 100
D) Max XY + Y
Answer: C
Q2) Which of the following is the best example of a consumer's objective function?
A) profits.
B) consumption.
C) satisfaction
D) budget constraint.
Answer: C
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Chapter 2: Demand and Supply Analysis
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Sample Questions
Q1) The linear demand curve is represented by the equation
A) P=Q-aP
B) Q=a-bP
C) Q=a-bP<sup>2</sup>
D) Q = AP<sup>-b</sup>
Answer: B
Q2) Suppose demand is given by Q<sup>d</sup> = 500 - 15P and supply is given by Q<sup>s</sup> = 5P.If the government imposes a $15 price ceiling the excess demand will be
A) 200
B) 225
C) 250
D) 275
Answer: A
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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4
Chapter 3: Consumer Preferences and the Concept of Utility
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Sample Questions
Q1) If I prefer steak to burritos,burritos to pasta and pasta to steak:
A) My preferences are irrational.
B) My preferences violate the transitivity assumption.
C) My preferences violate the "more is better assumption.
D) I must have been exhibiting diminishing marginal utility.
Answer: B
Q2) 38.Which of the following statements is true?
A) Because total utility is constant along an indifference curve,the marginal rate of substitution is also constant.
B) If an indifference curve is convex,the marginal rate of substitution varies along the curve.
C) The slope of an indifference curve measures the consumer's marginal rate of substitution.
D) Both b) and c) are true.
Answer: D
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Chapter 4: Consumer Choice
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Sample Questions
Q1) Suppose the price of is $20,the price of is $10,and that the consumer is currently spending all available income.At the consumer's current consumption basket the marginal utility of is 6 and the marginal utility of is 4.
A) The consumer is currently maximizing utility.
B) The consumer could increase utility by consuming more of good and less of good
C) The consumer could increase utility by consuming more of good and less of good .
D) Nothing can be said about the consumer's utility because we do not know the consumer's income or utility function.
Q2) An agent consumes goods x and y,with prices P<sub>x</sub> = $5 per unit and P<sub>y</sub> = $8 per unit.The consumer's income is I = $48.The government imposes a tax of $1 per unit on good x.What is the new equation for the budget constraint?
A) y = 6 - (5/8)x
B) y = 6 - .75x
C) y = 8 - (6/8)x
D) y = 48 - 8x
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Chapter 5: The Theory of Demand
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Sample Questions
Q1) Leisure can be
A) either a normal good or an inferior good.
B) only a normal good.
C) considered to be an inferior good when a parallel outward shift of the budget line leads to an increase in leisure .
D) considered to be a normal good when a parallel outward shift of the budget line leads to a decrease in leisure.
Q2) A network externality can be said to exist when
A) a recording artist appears on a popular TV show leading to an increase in popularity and record sales; this is called the "snob effect".
B) a recording artist appears on a popular TV show leading to an increase in popularity and record sales; this is called the "bandwagon effect".
C) many people try to access the internet at the same time leading to a system crash.
D) two television networks decide to merge.
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Chapter 6: Inputs and Production Functions
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Sample Questions
Q1) Assuming a firm uses capital and labor to produce output,which of the following is not always a true statement?
A) Assuming the marginal products of labor and capital are greater than zero, doubling the inputs of capital and labor will lead to greater output.
B) Assuming the marginal products of labor and capital are less than zero, doubling the inputs of capital and labor will lead to less output.
C) Assuming the marginal products of labor and capital are greater than zero, doubling the inputs of capital and labor will lead to double the output.
D) Assuming the marginal products of labor and capital are greater than zero, doubling the input of capital and keeping the input of labor constant will lead to greater output.
Q2) *Marginal product reaches a maximum when labor equals
A) 100
B) 200
C) 300
D) 400
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8
Chapter 7: Costs and Cost Minimization
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Sample Questions
Q1) Economic costs are synonymous with
A) Accounting costs
B) Sunk costs
C) Opportunity costs
D) Implicit costs
Q2) A firm uses capital and labor to produce an output.The slope of the isocost line equals:
A) the ratio of the marginal productivities of the inputs.
B) the ratio of the output prices.
C) the ratio of the input prices.
D) the ratio of capital to labor.
Q3) When a firm uses inputs in a fixed proportion,the cost minimizing combination of capital and labor
A) occurs when the firm uses either all workers or all machines.
B) occurs when the firm uses equal amounts of workers and machines.
C) occurs where the ratio of the marginal productivities equals the ratio of the input prices.
D) occurs at the corner point on the isoquant.
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9
Chapter 8: Cost Curves
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Sample Questions
Q1) Economies of scope
A) are related to the average cost of producing a good when you double the scale of output.
B) are higher the more specialized a firm is in production.
C) means the rotation of the long-run total cost curve in a downward direction.
D) are a production characteristic in which the total cost of producing given quantities of two goods in the same firm is less than the total cost of producing those quantities in two single-product firm.
Q2) When the price of all inputs increase by the same percentage,
A) the firm's total cost curve will rotate upward by a higher percentage if the firm's production technology exhibits decreasing returns to scale.
B) the firm's total cost curve will rotate upward by the same percentage.
C) the firm's total cost curve will rotate upward by a higher percentage if the firm's production technology exhibits increasing returns to scale.
D) the firm's total cost curve will remain unchanged since the cost-minimizing combination of inputs is unchanged.
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Chapter 9: Perfectly Competitive Markets
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Sample Questions
Q1) A fixed cost that the firm cannot avoid if it shuts down and produces zero output must be:
A) An accounting cost
B) A marginal cost
C) An equilibrium cost
D) A sunk cost
Q2) For an entire perfectly competitive industry,which of the following statements is incorrect in the long run?
A) Economic profit for the industry equals zero.
B) Producer surplus equals economic rent.
C) Economic profit equals total revenues less total costs.
D) Producer surplus for the industry equals economic profit for the industry.
Q3) Which of the following is an example of a fixed cost that is also a sunk cost for a bakery as of January 15?
A) The electric bill for the coming calendar year.
B) An accountant's fees for tax preparation in April.
C) The cost of a one-year lease on a building, signed January 1.
D) The salary of the baker for the month of February.
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Chapter 10: Competitive Markets
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Sample Questions
Q1) In a perfectly competitive market,which of the following will not occur as a result of an excise tax?
A) The market will under-produce relative to the efficient level.
B) Consumer surplus will be higher than with no tax since the tax is imposed on suppliers.
C) Producer surplus will be lower than with no tax.
D) The tax causes a deadweight loss.
Q2) The domestic market for calculators is perfectly competitive and is in equilibrium.Domestic demand is given by Q<sup>d</sup> = 100 - P and domestic supply is given by Q<sup>s</sup> = 4P.The world price for calculators is $10.Now,a tariff of $10 is imposed on all imports.How much revenue does this policy generate for the government?
A) 0
B) 10
C) 30
D) 50
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12
Chapter 11: Monopoly and Monopsony
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Sample Questions
Q1) Identify the truthfulness of the following statements. I.A monopolist faces a downward-sloping demand curve,whereas a perfectly competitive firm faces a horizontal demand curve.
II.A monopolist maximizes profit,whereas a perfectly competitive firm cannot.
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.
Q2) A monopolist owns two plants in which to produce a product which has inverse demand P = (770/3) - 3Q.The monopolist has marginal cost curves of MC<sub>1</sub> = 20+3Q<sub>1</sub> and MC<sub>2</sub> = 10+6Q<sub>2</sub> in the two plants,respectively.Which of the following represents the optimal outputs in the two plants,Q<sub>1</sub> and Q<sub>2</sub> and the market price?
A) Q<sub>1</sub> = 170/9; Q<sub>2</sub> = 100/9; P = 500/3.
B) Q<sub>1</sub> = 100/9; Q<sub>2</sub> = 170/9; P = 500/3.
C) Q<sub>1</sub> = 500/3; Q<sub>2</sub> = 170/9; P = 100/9.
D) Q<sub>1</sub> = 500/3; Q<sub>2</sub> = 100/9; P = 170/9.
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Page 13
Chapter 12: Capturing Surplus
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Sample Questions
Q1) *If the firm does not bundle the products,what single price should the firm charge for product B to maximize profit?
A) 100
B) 200
C) 300
D) 400
Q2) With ________ degree price discrimination,the firm identifies different consumer groups or segments in a market and charges each group a different price.
A) first
B) second
C) third
D) fourth
Q3) With block pricing the monopolist
A) charges each consumer her reservation price.
B) charges each consumer the same price.
C) sells the first number of units at one price and additional units at a second price. D) requires the consumer to purchase minimum quantities.
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Chapter 13: Market Structure and Competition
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Sample Questions
Q1) Under monopolistic competition,the firm optimizes
A) by setting MC = MR = P.
B) by setting MC = MR, but P > MC.
C) by setting MC greater than MR.
D) by setting MC = MR, but P < MC.
Q2) *In equilibrium,how many units will the dominant firm supply?
A) 45 units
B) 60 units
C) 90 units
D) 135 units
Q3) In the Cournot model,the firm chooses
A) its optimal price, holding the price of its competitors constant.
B) its best response to the price changes of the competitor firm.
C) its optimal level of output, holding the output of the other firm constant.
D) the level of output that would optimize profits for all firms.
Q4) Which of the following is not a characteristic of monopolistic competition?
A) The market is fragmented.
B) There is free entry and exit.
C) In the long-run equilibrium, firms earn positive profits.
D) Firms produce horizontally differentiated products.
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Chapter 14: Game Theory and Strategic Behavior
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Sample Questions
Q1) *For Game 4 above,which of the following statements is incorrect?
A) Player A choosing A1 and Player B choosing B1 is a Nash equilibrium.
B) Player A choosing A3 and Player B choosing B3 is a Nash equilibrium.
C) Player A choosing A1 and Player B choosing B3 is a Nash equilibrium.
D) Both players in Game 4 have a dominated strategy.
Q2) Game theory refers to
A) a plan for the actions that a player in a game will take under every conceivable circumstance that the player might face.
B) a situation in which each player chooses the strategy that yields the highest payoff, given the strategy chosen by the other players.
C) optimal decision making by microeconomic agents.
D) the branch of microeconomics concerned with the analysis of optimal decision making in competitive situations.
Q3) *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.
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Chapter 15: Risk and Information
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Sample Questions
Q1) Asymmetric information refers to
A) bad information.
B) incomplete information.
C) misleading information.
D) differences in the amount of information the parties have.
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 you purchase a collectible baseball card from an acquaintance for $50.You think it could be worth $1,000 with a 10% probability and $0 with a 90% probability.What is your expected value for the baseball card?
A) $150
B) $100
C) $1000
D) $50
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Chapter 16: General Equilibrium Theory
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Sample Questions
Q1) The significance of the First Fundamental Theorem of Welfare Economics is that:
A) even if the economy is in competitive general equilibrium, significant intervention will be required to bring about economic efficiency.
B) there is a possibility that an economy could simultaneously attain an efficient allocation and one in which the resulting distribution of utility is in some sense equitable.
C) Even though households and firms behave independently and each pursues its own self-interest, the resulting equilibrium is efficient in the sense that it exploits all possible mutually beneficial gains from trade or from reallocation of inputs.
D) resources are scarce in the economy and so must be managed for the long term.
Q2) The marginal rate of transformation where goods X and Y are produced by an economy using capital and labor as inputs equals A) X/Y.
B) w/r, where w is the wage and r is the rental rate of capital.
C) MP<sub>L</sub>/MP<sub>K</sub>, where L stands for labor and K stands for capital.
D) MC<sub>X</sub>/MC<sub>Y</sub>
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Chapter 17: Externalities and Public Goods
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Sample Questions
Q1) Which of the following is a key feature of a public good?
A) The good is rival in its consumption, but a consumer cannot be excluded from the good.
B) The good is non-rival in its consumption and a consumer cannot be excluded from the good.
C) The good is non-rival in its consumption, but a consumer can be excluded from the good.
D) The good is rival in its consumption and a consumer can be excluded from the good.
Q2) The reason why we sum the demand curves of individual consumers vertically rather than horizontally in a public goods market is that
A) the willingness to pay in a public good market is smaller than that in a standard market.
B) individual consumers are unlikely to be willing to pay enough to cover the marginal cost of production of a public good.
C) the marginal social benefit of the X<sup>th</sup> unit includes all consumers' marginal social benefits because the public good is non-exclusive and non-rival.
D) the concept of quantities is meaningless in the case of public goods.
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