Applied Microeconomics
Exam Solutions
Course Introduction
Applied Microeconomics explores the practical application of microeconomic theories and principles to real-world problems and decision-making processes faced by individuals, firms, and governments. The course covers topics such as consumer behavior, producer theory, market structures, pricing strategies, and the impact of public policies on market outcomes. Emphasizing empirical analysis and case studies, students learn to use economic models and data to critically analyze issues such as market efficiency, externalities, labor markets, and regulation, preparing them to apply microeconomic reasoning to diverse fields including business, policy, and everyday life.
Recommended Textbook
Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson
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17 Chapters
558 Verified Questions
558 Flashcards
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Chapter 1: Economic Models
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Sample Questions
Q1) Let \(\mathrm { Q } _ { \mathrm { D } } = - 5 \mathrm { P } + 54\) and \(\mathrm { Q } _ { \mathrm { S } } = \mathrm { P } - 6\) .Here equilibrium price and quantity are
A) \(Q = 4\) , \(P = 10\) .
B) \(Q = 6\) , \(P = 10\) .
C) \(\mathrm { P } = 6\) , \(Q = 0\) .
D) \(Q = \frac { 54 } { 5 }\) , \(\mathrm { P } = 2\) .
Answer: A
Q2) If society is producing a combination of goods on its production possibilities frontier
A)it must be employing all available resources.
B)it must be growing.
C)it is using all the available natural resources but may not be using all available labor resources.
D)Both a and b
Answer: A
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3
Chapter 2: Utility and Choice
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Sample Questions
Q1) Suppose a cup of coffee at the campus coffee shop is $2.50 and a cup of hot tea is $1.25 and that a student's beverage budget is $20 per week.If you were going to write an algebraic expression of this budget line of the form \(\text { Coffee } = A + B T e a\) .B would be
A)16
B)2
C)-2
D)-1/2
Answer: D
Q2) The X-intercept of the budget constraint represents A)how much of good Y can be purchased if no good X is purchased and all income is spent.
B)how much of good X can be purchased if no good Y is purchased and all income is spent.
C)total income divided by the price of X.
D)b and c.
Answer: D
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Chapter 3: Demand Curves
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Sample Questions
Q1) If a good is Giffen and its price increases,
A)the income effect will be positive and the substitution effect will be positive.
B)the income effect will be negative and the substitution effect will be negative.
C)the income effect will be positive and the substitution effect will be negative.
D)the income effect will be negative and the substitution effect will be positive.
Answer: C
Q2) If demand is elastic,a decrease in quantity will cause the total spending \(( P \times Q )\) to
A)rise.
B)fall.
C)remain unchanged.
D)change in a way that cannot be determined.
Answer: B
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Chapter 4: Uncertainty
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Sample Questions
Q1) Continuing with the same vacation-insurance company from the preceding question,is there any vacation-day price that would both strictly increase the family's expected utility (compared to no insurance)and strictly increase the profits of the risk-neutral insurance company?
A)Yes,two days.
B)Yes,three days.
C)Yes,four days.
D)No.
Q2) A gamble can be described as "fair" if the expected value of the gamble (including any costs of play)is
A)positive.
B)zero.
C)negative.
D)one.
Q3) People who choose not to participate in fair gambles are called
A)risk takers.
B)risk averse.
C)risk neutral.
D)broke.
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Page 6
Chapter 5: Game Theory
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Sample Questions
Q1) The Prisoners' Dilemma is so named because
A)the Nash equilibrium is one of the worst outcomes for the players.
B)the game has no Nash equilibrium.
C)the game is zero-sum.
D)players end up earning a lighter sentence than the prosecutor would like.
Q2) Return to the version of the game between the fishermen in which they fish independently. If the marginal cost for just fisherman A went up,what would be the likely effect on the Nash equilibrium?
A)A would catch more fish,and B would catch fewer.
B)A would catch fewer fish,and B would catch more.
C)A would catch more fish,but B's catch would not change.
D)A would catch fewer fish,but B's catch would not change.
Q3) Consider the game between the teens from the previous question.The pure-strategy Nash equilibrium is (equilibria are)
A)Both Declare.
B)Both Ignore/Rebuff.
C)There are two: in one,both Declare,and in the other,both Rebuff/Ignore.
D)There are two: in both,the teens do the opposite of each other.
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7
Chapter 6: Production
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Sample Questions
Q1) In a two-input model you can tell that a non-optimal short-run production decision is being made if
A)all decisions in the short run are nonoptimal
B)the rate of technical substitution is equal to the ratio of the input prices
C)the rate of technical substitution is not equal to the ratio of the input prices
Q2) A technical innovation in the production of automobiles by Ford Motor Company's for 1 million cars per year would necessarily
A)shift the "1 million car" isoquant away from the origin.
B)shift the "1 million car" isoquant toward the origin.
C)cause 1 million cars to be produced with more capital and less labor.
D)cause 1 million cars to be produced with more labor and less capital.
Q3) If Q = K<sup>2</sup>L<sup>2</sup> the MP<sub>K</sub> is
A)constant
B)diminishing
C)increasing
Q4) If Q = K<sup>1/2</sup>L<sup>1/2</sup> the MP<sub>K</sub> is
A)constant
B)diminishing
C)increasing
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Chapter 7: Costs
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Sample Questions
Q1) The accountant's cost of producing a bicycle refers to
A)the out-of-pocket payments made to produce the bicycle.
B)the value of the goods that were given up to produce the bicycle.
C)the bicycle's retail price.
D)the marginal cost of the last bicycle produced.
Q2) An increase in the wage rate will have a greater effect on average costs
A)the larger the proportion labor costs are of total costs and the easier it is to substitute capital for labor.
B)the larger the proportion labor costs are of total costs and the harder it is to substitute capital for labor.
C)the greater is the diminishing marginal product of labor.
D)the greater are returns to scale.
Q3) In the short run,
A)all inputs are fixed.
B)all inputs are variable.
C)some inputs are fixed.
D)no production occurs.
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Chapter 8: Profit Maximization and Supply
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Sample Questions
Q1) A firm's total revenue is equal to
A)total quantity produced times marginal cost.
B)total quantity produced times market price.
C)marginal revenue times total quantity produced.
D)market price divided by total quantity produced.
Q2) If an unregulated electric company is a monopolist and faces demand of Q = 5010P,its marginal revenue function is given by
A)\(5 - \frac { 1 } { 10 } Q\)
B) \(1 - \frac { 1 } { 10 } Q\)
C) \(5 - \frac { 1 } { 20 } Q\)
D) \(5 - \frac { 1 } { 5 } Q\)
Q3) A firm that sought to "maximize market share" would choose to produce an output level for which marginal revenue was equal to
A)marginal cost
B)average cost.
C)price.
D)zero.
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Chapter 9: Perfect Competition in a Single Market
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Sample Questions
Q1) If quantity supplied is either greater or less than the equilibrium quantity,then all of the following are true except:
A)total loss of surplus will depend on the shape of the demand and supply curves.
B)the resulting loss of consumer surplus will depend on the price of the good.
C)total loss of surplus will depend on the price of the good.
D)there will be an inefficient allocation of resources.
Q2) Suppose demand for a good is Q<sub>D</sub>= 100 - P and supply is Q<sub>S</sub> = -20 + P.What is the value consumers place on the amount of the good they consume?
A)60
B)2400
C)2800
D)3200
Q3) For an increasing cost industry,the long-run supply curve has a(n)elasticity of supply
A)infinite.
B)negative.
C)positive.
D)zero.
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Chapter 10: General Equilibrium and Welfare
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Sample Questions
Q1) Suppose two coffee snobs who must have their coffee and cream in exact proportions (each cup is 10 coffee per 1 unit cream)are invited to a weekend long event (during which they can easily consume 8 cups of coffee).Suppose Snob A is given 8 units of cream and Snob B is given 80 units of coffee.The contract curve in the Edgeworth box would be
A)a right angle connecting the lower left corner with the upper right corner.
B)a curve (not a line) connecting the lower left corner with the upper right corner.
C)a line connecting the lower left corner with the upper right corner.
D)a right angle connecting the upper left corner with the lower right corner.
Q2) The slope of the production possibility frontier shows
A)the marginal rate of substitution between the two goods.
B)the relative marginal costs of the two goods.
C)the efficient combination of outputs possible using fixed amounts of input.
D)the relative marginal productivities of the two goods.
Q3) Markets can fail to achieve efficiency when
A)there are prices consumers do not think are fair.
B)there are wages workers do not think are fair.
C)trade puts people out of work.
D)there are public goods.
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Page 12
Chapter 11: Monopoly
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Sample Questions
Q1) If the government requires a natural monopoly to price at marginal cost,
A)monopoly firms will earn zero economic profits because the price of the good equals the cost of producing that good.
B)monopoly firms will operate at a loss because P < AC.
C)more firms will be able to enter the market.
D)producer surplus will increase because quantity supplied is greater.
Q2) For the practice of price discrimination to be successful,the monopoly must
A)face an imperfect resale market for its product.
B)face similar demand curves for various markets.
C)have similar costs among markets.
D)have a downward sloping marginal cost curve.
Q3) A profit-maximizing monopoly will produce that output for which
A)marginal revenue equals price.
B)average cost is minimized.
C)marginal cost is minimized.
D)marginal cost equals marginal revenue.
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13
Chapter 12: Imperfect Competition
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Sample Questions
Q1) Consider the same market for nonalcoholic beer as in the previous question. Cudweiser's response function is
A)QB = 2,000 - .5QC
B)QB = 1,500 - .5QC
C)QC = 2,000 - .5QB
D)QC = 1,500 - .5QB
Q2) Suppose there are two firms,Boors and Cudweiser,each selling nonalcoholic beer.Suppose Boors and Cudweiser are not viewed as perfect substitutes but rather demand for Boors is QB = 5000 - 1000PB + 100PC and demand for Cudweiser is QC = 3000 - 1500PC + 100PB.For simplicity,assume zero marginal costs.Which is the more preferred beer?
A)Boor's
B)Cudweiser
C)they are equally preferred
D)neither are preferred
Q3) Which factor would facilitate tacit collusion among firms in a market?
A)an increase in the number of firms.
B)a decrease in the probability the market will continue into future periods.
C)a decrease in the interest rate.
D)none of these.
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Chapter 13: Pricing in Input Markets
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Sample Questions
Q1) A firm will hire additional units of any input up to the point where
A)the marginal productivity of the input is maximized.
B)the marginal cost of employing the input is minimized.
C)the expense of employing the last unit is equal to the revenue brought in by the last unit.
D)the revenue brought in by the input is maximized.
Q2) If the price of an input falls,a firm would increase the use of that input for two reasons:
A)The input is now more productive,and the firm can substitute this input for other relatively more expensive inputs.
B)The input is now more productive,and overall production costs are now lower,meaning a firm may choose to increase production.
C)Overall production costs are now lower and the firm can substitute this input for other relatively more expensive inputs.
D)Overall production costs are now lower and the firm will have more of other inputs to use with the one in question.
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Chapter 14: Capital and Time
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Sample Questions
Q1) The annual rental rate for a machine is
A)the yearly depreciation and maintenance costs for the machine.
B)the yearly interest costs associated with owning the machine.
C)the initial purchase price of the machine divided by the number of years the machine is expected to last.
D)the sum of the yearly depreciation,maintenance,and interest costs associated with owning the machine.
Q2) If real extraction costs do not change,the relative price of a finite resource would be expected to
A)fall over time.
B)remain constant over time.
C)rise at a rate given by the nominal rate of interest.
D)rise at a rate given by the real rate of interest.
Q3) Suppose a person's preferences are to "consumption smooth",which means they wish to get \(C _ { 1 } = C _ { 2 }\) for all incomes and interest rates.For any interest rate and \(Y _ { 1 } > Y _ { 2 }\) ,the person will ____ in the first period.
A)borrow
B)save
C)neither borrow nor save
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Page 16
Chapter 15: Asymmetric Information
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Sample Questions
Q1) The principal is distinct from the agent in the principal-agent model because
A)the principal offers the contract to the agent.
B)the principal is fully informed.
C)both a and b.
D)neither a nor b.
Q2) Which of the following is an application of the adverse-selection problem?
A)a customer driving more recklessly after buying car insurance.
B)a teenager "hanging out" with friends his or her parents do not approve of.
C)shareholders offering a high-powered incentive contract to a manager.
D)an auto repairman claiming that the repairs are more extensive than they actually are.
Q3) The "lemons model" predicts quality deterioration in the used-car market because
A)used cars require increasing maintenance.
B)suppliers and demanders have different information about cars' quality.
C)used cars are generally of a lower quality than new cars.
D)people will usually buy new cars if they are available.
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Chapter 16: Externalities and Public Goods
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Sample Questions
Q1) Suppose the market for oranges is perfectly competitive and unregulated.Suppose also that the chemicals used to keep the oranges insect-free damage the environment by an estimated $1 per bushel of oranges.Suppose Q<sub>D</sub> = 1000 - 100P and Q<sub>S</sub> = -100 + 100P.If regulators limited production to 200 bushels,the deadweight loss relative to the option of setting the optimal tax would be would be
A)$0
B)$200
C)$500
D)$1000
Q2) In the case of a negative externality,the social marginal cost will
A)exceed the private marginal cost.
B)be equal to private marginal cost.
C)fall short of private marginal cost.
D)bear no significant relation to private marginal cost.
Q3) Special interest groups often
A)represent broad questions of public interest.
B)pursue rent-seeking behavior.
C)do not use lobbying techniques.
D)have no effect on the political process.
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Page 18
Chapter 17: Behavioral Economics
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Sample Questions
Q1) An individual has preferences consistent with standard expected utility theory. They have utility function U(x)over wealth x. Starting with initial wealth of $10,000,the person is then faced with two choice problems. The first involves a choice between (A)no gamble and (B)a gamble with an equal chance of winning $1,800 and losing $1,000. The second choice problem,the person first has $1,000 taken away (resulting in the adjustment of the reference point). The choice is then between (C)being given back $1,000 for sure and (D)an equal chance of winning $2,800 or nothing. What can be said about the choices the person would make?
A)The person would never choose both A and D.
B)The person would never choose both A and C.
C)The person would choose A and D.
D)The person would choose A and C.
Q2) What are the main differences between neoclassical economics and behavioral economics?
A)Neoclassical economics is mainly theoretical.
B)Behavioral economics does not take as given that decision makers are rational.
C)Neoclassical economics assumes that decision makers are fully informed.
D)All of the above.
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