Applied Microeconomics Exam Review
Course Introduction
Applied Microeconomics explores the practical application of microeconomic theories and principles to real-world situations and decision-making processes. The course covers topics such as consumer and producer behavior, market structures, game theory, pricing strategies, and the effects of government policies on markets. Through empirical case studies and data analysis, students learn how microeconomic tools are used to address issues related to market efficiency, market failures, public goods, externalities, and asymmetric information. The course emphasizes problem-solving skills and the use of economic reasoning to analyze and interpret contemporary economic phenomena, providing a solid foundation for professional and policy-oriented decision making.
Recommended Textbook
Microeconomics 1st Canadian Edition by B. Douglas Bernheim
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Chapter 1: Introduction
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Q1) The real test of a good model is
A) Its degree of mathematical rigor
B) The degree to which it conforms to the "real world."
C) Its usefulness in predicting outcomes
D) How detailed it is
Answer: C
Q2) In a natural experiment,
A) Similar people face very different circumstances
B) The circumstances of otherwise identical people differ entirely by chance
C) The circumstances of one group of people is compared to a "control" group of people
D) Similar people face very similar circumstances
Answer: B
Q3) In conducting positive economic analysis,economists apply
A) Subjective value judgments
B) The principle of individual sovereignty
C) Moral values
D) The scientific method
Answer: D
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Chapter 2: Supply and Demand3
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Q1) Which of the following is the formula for the elasticity of Y with respect to X?
A) E = (% Change in Y)/(% Change in X)
B) E = (% Change in X)/(% Change in Y)
C) E = (Change in Y)/(Change in X)
D) E = (Change in X)/(Change in Y)
Answer: A
Q2) Refer to Figure 2.4.The elasticity of demand at point a is given by
A) The slope of line ab
B) The slope of line cd
C) The slope of line cd times (P1/Q1)
D) The slope of line ab times (Q1/P1)
Answer: C
Q3) What is the difference between a change in demand and a change in the quantity demanded of a good? Illustrate you answer using carefully labeled graphs.
Answer: 11ea8a01_e3bb_3ac4_8b44_670bea601b80_TB1639_00 A change in demand is caused by a change in any factor other than price that affects demand.A change in demand is shown by a shift in a demand curve.A change in quantity demanded results from a change in price and is represented by a movement along the demand curve.
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Chapter 3: Balancing Benefits and Costs
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Q1) If H represents the number of hours spent on an activity,then which of the following represents a marginal cost function?
A) 100 - 20H
B) 100 + 20H
C) -100 - 20H
D) -100 + 20H
Answer: B
Q2) If B(X)represents the total benefit of activity X,then which of the following expressions best represents the marginal benefit of activity X?
A) B(X) - B(X - X)
B) (B(X) - B(X - X))/ X
C) (B(X) - B(X - X))/X
D) B(X - X))/ X
Answer: B
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Chapter 4: Principles and Preferences
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Q1) Netflix.ca asks its customers to rate the videos they have watched.This information is then used to rank videos for other Netflix.ca subscribers.These subscribers can then use the video rankings to help them decide on a video to rent.Through this process,Netflix.ca is applying the
A) Ranking principle
B) Choice principle
C) More-is-better principle
D) The indifference principle
Q2) Which of the following is NOT a property of indifference curves?
A) Indifference curves are thin
B) Indifference curves may slope upward or downward
C) Indifference curves from the same family never cross
D) A consumer prefers to be on the indifference curve that is farthest from the origin
Q3) Refer to Figure 4.4.Which diagram most likely represents the indifference map for a good and a "bad"?
A) A
B) B
C) C D) D
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Chapter 5: Constraints, Choices, and Demand
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Q1) A consumer's budget constraint is determined by A) The consumer's income
B) The consumer's income and preferences
C) The consumer's income and the prices of the goods they buy
D) The consumer's preferences and the prices of the goods they buy
Q2) When indifference curves have ________ marginal rates of substitution,any interior choice that satisfies the tangency condition is the best affordable choice.
A) Constant
B) Increasing
C) Declining
D) Positive
Q3) Refer to Figure 5.1.Which graph represents an increase in the consumer's income?
A) A
B) B
C) C
D) D
Q4) Using carefully-labeled graphs,explain how an individual demand curve is derived from the utility-maximizing behavior of a consumer.
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Chapter 6: Rom Demand to Welfare
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Q1) Which of the following statements about the income effect of a price change is NOT true?
A) It affects consumption by removing compensation
B) It always involves a parallel shift in the budget line
C) It isolates the influence of a change in relative prices
D) It reflects the fact that a price change affects a consumer's purchasing power
Q2) When the price of a good decreases,
A) The good becomes less expensive relative to other goods and the consumer's purchasing power increases
B) The good becomes less expensive relative to other goods and the consumer's purchasing power decreases
C) The good becomes more expensive relative to other goods and the consumer's purchasing power increases
D) The good becomes more expensive relative to other goods and the consumer's purchasing power decreases
Q3) Define consumer surplus.Using a graph,explain the change in consumer surplus that would result from a decrease in the price of a gasoline.
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Chapter 7: Technology and Production
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Q1) For the Cobb-Douglas production function F(L,K)= AL<sup>a</sup>K<sup>b</sup>,a factor-neutral technical change would be represented by
A) An increase in the value of a
B) An increase in the value of b
C) Values of a and b for which a + b > 1
D) An increase in the value of A
Q2) Consider the production function Q = F(L,K)= 5L<sup>2</sup>K<sup>2</sup>.Does this technology have increasing,decreasing or constant returns to scale? Explain your answer in two different ways.
Q3) Refer to Table 7.1.What is the average product of the 4<sup>th</sup> worker?
A) 4 units of output
B) 3 units of output
C) 16 units of output
D) 6 units of output
Q4) Which of the following is NOT a property of isoquants?
A) Isoquants curves are thin
B) Isoquants may slope upward or downward
C) Isoquants for the same technology never cross
D) Higher-level isoquants lie farther from the origin
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Chapter 8: Cost
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Q1) Whenever a firm uses input X but not input Y,then
A) MRTS<sub>XY</sub> >= P<sub>X</sub>/P<sub>Y</sub> at the chosen input combination
B) MRTS<sub>XY</sub> <= P<sub>X</sub>/P<sub>Y</sub> at the chosen input combination
C) MRTS<sub>XY</sub> = P<sub>X</sub>/P<sub>Y</sub> at the chosen input combination
D) MRTS<sub>XY</sub> = -P<sub>X</sub>/P<sub>Y</sub> at the input combination
Q2) A firm that is experiencing economies of scale has ______ returns to scale technology and a ______ average cost curve.
A) Increasing; positively-sloped
B) Increasing; negatively-sloped
C) Decreasing; positively-sloped
D) Decreasing; negatively-sloped
Q3) Refer to Figure 8.3.What is the average cost of producing 290 units of output?
A) $9
B) $2500
C) $8.62
D) $7.77
Q4) Using a graph,explain the relationship between average cost and marginal cost.
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Chapter 9: Rofit Maximization
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Q1) Using a graph,explain why the law of supply holds for a competitive firm.
Q2) Jessica owns a company that makes pre-packaged sandwiches for convenience stores.The market price for a sandwich is $5 and Jessica is a price-taker.Her daily cost for making sandwiches is C(Q)= 2.5Q + (Q<sup>2</sup>/40)and her marginal cost is MC = 2.5 + (Q/20).What should Jessica do if she has an unavoidable fixed cost of $150 a day?
A) She should keep producing sandwiches because she has a positive sales quantity
B) She should keep producing sandwiches because she is maximizing profit at the current quantity
C) She should shut down production because his profit less the unavoidable cost is negative
D) She should shut down production because his profit less the unavoidable cost is positive
Q3) When a firm is a price taker,changes in its sales quantity have ______ effect on the price it can charge.
A) A positive
B) A negative
C) No
D) Little
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Chapter 10: Choices Involving Time
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Q1) Suppose you make a $5,000 investment that will return $3,000 in year 2 and another $3,500 in year 4.With an interest rate of 4.5%,what is the NPV of this project?
A) $247.34
B) $682.15
C) $1,500.00
D) $2,162.50
Q2) If a project has an initial investment of $20,000 and consecutive yearly cash inflows of $5,000,$8000,$10,000 and $7,000,respectively,what is its payback period?
A) 2 years
B) 2.5 years
C) 2.7 years
D) 3 years
Q3) You have made an investment of $250 that will yield a profit of $30 in one year.If the interest rate is 11.5% is this a good investment.
A) Yes, because the internal rate of return is greater than the interest rate
B) Yes, because the internal rate of return is less than the interest rate
C) No, because the internal rate of return is greater than the interest rate
D) No, because the internal rate of return is less than the interest rate
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Chapter 11: Choices Involving Risk
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Q1) Explain why a risk averse individual will purchase full insure if a policy is actually fair,but only partially insure or not insure at all,if it is not.
Q2) What is the risk premium for the bundle described in problem 15?
A) 52
B) 24
C) 49
D) 3
Q3) What is the certainty equivalent of the bundle described in problem 15?
A) 49
B) 52
C) 7
D) 25
Q4) Refer to Figure f.A benefit function is plotted in Figure f.Point D represents the
A) Risk premium of the consumption bundle
B) Expected utility of the consumption bundle
C) Certainty equivalent of the consumption bundle
D) Expected consumption
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Chapter 12: Choices Involving Strategy
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Q1) Cooperation
A) Is sustained by the threat of punishment for bad behavior
B) Is sustained by the promise of reward for good behavior
C) Will fail to be established if threats/promises are not credible
D) All of these
Q2) Refer to Figure e.Brandon and Allie want to go on a date one summer evening.Allie is a Red Sox fan,while Brandon is a Mets fan.Both teams are playing that evening,but not against each other.Each would rather watch their team,neither can force the other to watch a particular game and each is willing to suffer through the other's game if it means time together.Figure e illustrates both Allie and Brandon's payoffs for each choice,with Allie's payoff in the southwest corner of each cell and Brandon's in the northwest corner.If Brandon watch the Mets,what is Allie's best response?
A) Watch the Red Sox
B) Watch the Mets
C) Neither; she is indifferent between the Red Sox and the Mets
D) To not consider Brandon's choice
Q3) Use the concepts of reputation and asymmetric information to explain why some faculty members become less productive after gaining tenure.
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Chapter 13: Behavioral Economics
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Q1) Projection bias
A) Is the tendency to evaluate future consequences based on tastes and needs at the moment of the decision making
B) Is the tendency to project current states of mind into the future
C) Can lead people to underestimate their adaptability
D) All of these
Q2) Prospect theory was proposed by
A) John Nash
B) Milton Friedman and George Stigler
C) Amos Tversky and Daniel Kahneman
D) Gary Becker
Q3) Identified departures from perfect rationality include
A) Incoherent choices
B) Bias towards the status quo
C) Anchoring
D) All of these
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Chapter 14: Equilibrium and Efficiency
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Q1) Characteristics of a perfectly competitive market include
A) The presence of transaction costs
B) Differentiated products
C) Many sellers, each with a small market share
D) All of these
Q2) Discuss some of the changes in the organization of the economic systems of countries transitioning from communism to capitalism.How does this type of market reform increase economic efficiency?
Q3) Aggregate surplus
A) Is maximized under perfect competition
B) Is minimized under perfect competition
C) Is the sum of consumer and producer surpluses
D) A and C
Q4) With free entry
A) The long run market supply curve is horizontal at the market price
B) The long run market supply curve is vertical at the market price
C) The short and long run market supply curves are the same
D) The short run market supply curve is horizontal at the market price
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Chapter 15: Market Intervention
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Q1) If the import supply curve is horizontal at the world price
A) A tariff will lower domestic aggregate surplus
B) A tariff will increase domestic aggregate surplus
C) A tariff will not change domestic aggregate surplus
D) A quota will increase domestic aggregate surplus
Q2) Subsidies
A) Are like taxes in that they create deadweight loss
B) Are like taxes in that they reduce sales of the subsidized good
C) Are likw taxes in that they increase sales of the subsidized good
D) Are like taxes in that they do not create deadweight loss
Q3) With a price floor
A) Producer surplus will fall if profits fall
B) Producer surplus will fall if profits rise
C) Producer surplus will increases if profits fall
D) Producer surplus always increases
Q4) Suppose the government wants to increase the price of a specific agricultural product.Discuss the welfare effects of four possible policies: price floor,price support,production quota and voluntary production reduction.Which policy is least efficient? Discuss the differences in the benefits to farmers and the cost to the government.
Page 17
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Chapter 16: General Equilibrium, Efficiency, and Equity
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Q1) The marginal rate of transformation from good X to good Y
A) Is the additional amount of X that can be produced by sacrificing one unit of Y
B) Is the ratio of a firm's marginal products
C) Is the additional amount of Y that can be consumed by sacrificing one unit of X
D) Is the ratio of a firm's marginal costs
Q2) Compare and contrast the principles of utilitarianism,Rawlsianism and egalitarianism.Discuss the assumptions of each and the difficulties societies might face while trying to conform to them.
Q3) An allocation of resources is Pareto efficient if it is
A) Possible to make at least one consumer better off without making someone else worse off
B) Possible to make all consumers better off
C) Impossible to make any consumer better off without making someone else worse off
D) Impossible to make any consumer better off without making everyone worse off
Q4) Discuss the second welfare theorem.How can societies use competitive markets to achieve both efficiency and equity?
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Chapter 17: Monopoly
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Q1) A market is a natural monopoly when
A) A good is produced most economically by several firms
B) A good is produced most economically by one firm
C) The government grants a firm a patent on a good
D) The firm's average cost function is everywhere upward sloping
Q2) A loss leader
A) Is a product that is sold at a price above its direct marginal cost to encourage sales of a complementary product
B) Is a product that is sold at a price below its direct marginal cost to encourage sales of a substitutable good
C) Is a product that is sold at a price below its direct marginal cost to encourage sales of a complementary good
D) Is a product that is sold at a price below its variable cost to encourage sales of a complementary good
Q3) A monopolist's profit maximizing price depends upon
A) The elasticity of demand
B) Level of demand
C) The elasticity of supply
D) The level of supply
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Chapter 18: Pricing Policies
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Q1) Discuss the differences between perfect and imperfect price discrimination and the benefits of each to a monopolist.
Q2) Explain bundling and mixed bundling and the benefits to a multi product monopolist of such packaging schemes.
Q3) A firm engages in price discrimination when it
A) Charges different prices for different units of different goods
B) Charges same prices for different units of the same good
C) Charges a lower price for units for which the willingness to pay is high than for those units for which the willingness to pay is low
D) Charges different prices for different units of the same good
Q4) Firms bundle their products because
A) It is technologically efficient to do so
B) It can increase a firm's ability to extract consumer surplus
C) It can increase a firm's profits
D) All of these
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Chapter 19: Oligopoly
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Q1) When consumers do not view similar products as perfect substitutes,those products are called
A) Homogenous
B) Complements
C) Differentiated
D) Normal
Q2) Firms engage in explicit collusion when
A) They predict what the other will do and attempt to undercut them
B) They collude without communicating, sustaining a price above the noncooperative price that would arise in a single competitive interaction
C) They communicate to reach an agreement about the prices they will charge
D) They communicate what type of good they will produce
Q3) Business stealing arises when
A) Some of a new entrant's sales are due to new buyers in the market
B) Some of a new entrant's sales are due to stolen ideas
C) Some a new entrant's sales come at the expense of existing firms, whose sales contract after the new firm enters the market
D) A and B
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Chapter 20: Externalities and Public Goods
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Q1) Pigouvian subsidization
A) Involves the use of taxes or fees to remedy negative externalities
B) Involves the use of subsidies to remedy negative externalities
C) Is a legal principles requiring a party who takes an action that harms others to compensate the affected parties for some or all of their losses
D) Requires that victims of an externality pay a tax to the producers of the externality
Q2) A private good
A) Is a good for which consumption involves perfect rivalry
B) Is nonexcludable
C) Is often provided by the government
D) Is often not provided by the government
Q3) A good is nonexcludable if
A) There is no way to prevent a person from consuming or using it
B) More than one person can consume it at the same time without affecting its value to others
C) Consumption of it involves perfect rivalry
D) Consumption is completely excludable
Q4) Explain ways in which the government can remedy an externality.
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