Course Introduction
Applied Microeconomics
Final Exam Questions
Applied Microeconomics focuses on the practical application of microeconomic theories and principles to real-world situations and contemporary issues. The course explores how individuals, firms, and governments make decisions regarding the allocation of scarce resources, analyzing topics such as market structures, pricing, consumer behavior, production costs, and the impact of public policies. Students will develop skills in data analysis and economic modeling to address issues like competition, regulation, labor markets, and market failures, preparing them to critically examine and solve economic problems in various sectors.
Recommended Textbook
Modern Principles Microeconomics 3rd Edition by Tyler Cowen
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Page 2
Chapter 1: The Big Ideas
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Sample Questions
Q1) Adam Smith sought to explain the concept of aligning self-interest with the promotion of society's overall interest by:
A) using an analysis of wealth as productivity.
B) suggesting markets are led by an invisible hand.
C) arguing that markets were ineffective institutions.
D) suggesting that government increase regulations.
Answer: B
Q2) The opportunity cost of a choice is:
A) the value of the opportunities lost.
B) the net value of the opportunities gained.
C) the difference between the benefits and costs of the choice.
D) sometimes positive or negative.
Answer: A
Q3) Among other things, an understanding of economics can help you better manage your finances.
A)True
B)False
Answer: True
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Chapter 2: The Power of Trade and Comparative
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Sample Questions
Q1) (Figure: PPF Nickel & Textiles) Refer to the figure. What is the maximum amount of nickel China can produce?
A) 10 tons
B) 8 tons
C) 6 tons
D) 4 tons
Answer: B
Q2) One of the ways trade increases wealth is by taking advantage of differences in preferences.
A)True
B)False
Answer: True
Q3) Absolute advantage is the ability to produce a:
A) good at a lower opportunity cost than others.
B) good with fewer inputs than others.
C) good when demand is high.
D) variety of goods.
Answer: B
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Chapter 3: Supply and Demand
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Sample Questions
Q1) Throughout 2005, average home prices in the United States soared to record highs. Clearly those individuals who were purchasing homes were paying more for them. But what about the people who were not buying homes? In particular, were people who did NOT own homes affected by this housing bubble? Explain. (Hint: What impact did this substantial increase in the price of owner-occupied housing have on the price of rental housing?)
Answer: This substantial increase in the price of owner-occupied housing also had a big impact on the market for rental housing. Given that owner-occupied and rental housing are substitute goods, an increase in the price of owner-occupied housing also led to an increase in the demand (and hence the price) of rental housing. It seems that those who were NOT buying homes were still paying more in rent as a result of this owner-occupied housing bubble.
Q2) A good is considered normal if demand for it ______ when income ______. A) increases; increases B) decreases; increases
C) stays the same; decreases
D) increases; decreases
Answer: A
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Page 5
Chapter 4: Equilibrium
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Sample Questions
Q1) In 1980 when Iraq attacked Iran, the price of oil _______ because of a(n) ______.
A) increased; disruption in the supply of oil
B) increased; decrease in the demand for oil
C) fell; increased demand for oil
D) fell; increased quantity of oil supplied
Q2) In a free market equilibrium, the gains from trade are always greater for consumers than for producers.
A)True
B)False
Q3) The government must subsidize firms to ensure that there are no unexploited gains from trade.
A)True
B)False
Q4) If the equilibrium price is achieved, all willing demanders become buyers.
A)True
B)False
Q5) In the long run, will the market price for a good/service always equals the equilibrium price? Explain why or why not.
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Chapter 5: Elasticity and Its Applications
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Sample Questions
Q1) The most important determinant of the elasticity of demand is the:
A) number of consumers.
B) number of substitutes.
C) size of the population.
D) level of income in the economy.
Q2) The demand for oil would become less elastic if the price of oil increases by a significant amount for a long period of time.
A)True
B)False
Q3) In which situation would you expect supply to be less elastic?
A) when looking at the long run
B) when looking at the global supply
C) when there are constant unit costs as the quantity produced increases
D) when looking at local supply
Q4) If the income elasticity of demand of a good is positive, we can conclude that the good is:
A) a normal good.
B) an inferior good.
C) a substitute.
D) a complement.
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Chapter 6: Taxes and Subsidies
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Sample Questions
Q1) (Figure: Tax on Sellers of Gadgets) According to the figure, what is the amount of the tax that has been imposed on the sale of gadgets?
A) $0.50
B) $1.00
C) $1.50
D) $5.50
Q2) 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.
Q3) Most labor economists believe that the supply of labor is ______ elastic than firms' demand for labor, and therefore ______ bear most of the burden of a payroll tax.
A) more; workers
B) less; workers
C) less; firms
D) more; firms
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8
Chapter 7: The Price System
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Sample Questions
Q1) An increase in the price of oil is also a signal to oil suppliers to invest more in exploration, to search for alternatives, and to increase recycling.
A)True
B)False
Q2) A forward market allows for the exchange of commodities in the ______ at prices that are settled upon in the ______.
A) past; present
B) present; present
C) future; present
D) present; future
Q3) Goods with uses valued higher than the market price represent satisfied wants.
A)True
B)False
Q4) Markets are linked in unpredictable and creative ways by:
A) treaties that govern trade.
B) entrepreneurs who look for methods of cutting costs.
C) careful planning by bureaucrats.
D) treaties, entrepreneurs, and bureaucratic planning.
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Chapter 8: Price Ceilings and Floors
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Sample Questions
Q1) If affordable housing is a concern, then a better policy than rent controls may be for the government to provide:
A) subsidized housing.
B) additional jobs.
C) housing vouchers.
D) mortgage discounts.
Q2) A market with price ceilings fails to maximize all of the following EXCEPT:
A) the gains from trade.
B) consumer surplus.
C) excess supply.
D) producer surplus.
Q3) We commonly associate ______ with agricultural products.
A) price ceilings
B) price floors
C) unregulated markets
D) rent control
Q4) The minimum wage causes unemployment mainly among poor, unskilled workers.
A)True
B)False
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Chapter 9: International Trade
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Sample Questions
Q1) (Figure: Trade 2) Refer to the figure. In this figure representing the market for oil, by how much will domestic oil consumption increase or decrease following a tariff on imported oil?
A) increase by 250 units
B) increase by 300 units
C) decrease by 500 units
D) decrease by 150 units
Q2) A tariff on a good when the world price is lower than the domestic price leads to:
A) tariff revenues that will be lower than under free trade.
B) domestic imports that will be higher than under free trade.
C) lower domestic consumption of the good than under free trade.
D) lower domestic production of the good than under free trade.
Q3) Which of the following is NOT an argument against international trade?
A) It is wrong to trade with nations that use child labor.
B) International trade reduces the number of jobs in the United States.
C) International trade leads to lower prices for domestic consumers.
D) Certain key industries should remain at "home" for the interest of national security.
Q4) What are the three major benefits of trade? Explain briefly.
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Page 11
Chapter 10: Externalities- When the Price Is Not Right
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Sample Questions
Q1) Two parties fail to solve an externality problem because reaching an agreement requires high-priced lawyers to negotiate and write up contracts. This illustrates the problem of:
A) Pigouvian legal fees.
B) transaction costs.
C) legal inefficiency.
D) punitive-cost agreements.
Q2) The EPA's system of tradable allowances is a successful application of the Coase theorem.
A)True
B)False
Q3) Conditions for the Coase theorem are typically met, and thus markets alone can solve most externality problems.
A)True
B)False
Q4) A free market with externalities ______ social surplus. A) maximizes
B) does not maximize
C) sometimes maximizes
D) precludes
Page 12
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Chapter 11: Costs and Profit Maximization Under Competition
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Sample Questions
Q1) Economic profit differs from accounting profits because of its inclusion of:
A) explicit costs.
B) incidental costs.
C) potential costs.
D) implicit costs.
Q2) As the price of a good fluctuates, a profit-maximizing firm will expand or contract production along its:
A) average cost curve.
B) average product curve.
C) marginal cost curve.
D) marginal product curve.
Q3) A firm should exit an industry if:
A) P < MC.
B) P - AC > 0.
C) P- AC < 0.
D) P - AC = 0.
Q4) The more and better substitutes a good has, the more elastic the demand for that good will be.
A)True
B)False
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Chapter 12: Competition and the Invisible Hand
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Sample Questions
Q1) If firms do not coordinate with each other, it is hard for free markets to equalize marginal costs of production across firms.
A)True
B)False
Q2) A central planner can never allocate output across firms in such a way as to minimize the total costs of production.
A)True
B)False
Q3) Which of the following best illustrates a market in which the invisible hand works well?
A) designer jeans
B) automobiles
C) computers
D) eggs
Q4) Outcomes that people neither intend nor design:
A) are always undesirable.
B) can be desirable with the right institutions.
C) are always desirable.
D) are impossible.
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Chapter 13: Monopoly
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Sample Questions
Q1) Which of the following is NOT a source of monopoly power?
A) laws preventing entry of competitors
B) economies of scale
C) innovation
D) inelastic demand for the product
Q2) Suppose that the government decided to reduce pharmaceutical patent protection by requiring companies to sell their drugs at marginal cost. What are the likely consequences of such a policy?
A) There would be an increase in consumer surplus.
B) The deadweight loss in the market would decline.
C) The future supply of new drugs would decrease.
D) All of these statements are correct.
Q3) Other things being equal, the markup above marginal cost that a monopolist charges will be:
A) higher when there are more substitutes for the monopolist's product.
B) lower when there are more substitutes for the monopolist's product.
C) the same, no matter the number of substitutes for the monopolist's product.
D) zero if there are any substitutes for the monopolist's product.
Q4) Explain how a firm can use its monopoly power to earn above-normal profits.
Q5) Graphically depict a monopolist enjoying abnormal profits.
Page 15
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Chapter 14: Price Discrimination
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Sample Questions
Q1) A museum in Russia has two entrances: one for locals (written in Russian) and one for tourists (written in English). People who enter through the entrance written in Russian will end up paying 81.93 Rubles ($3.00). English-speaking tourists will use the entrance written in English, but they will end up paying 409.67 Rubles ($15.00). This practice is an example of:
A) price manipulation.
B) price exploitation.
C) international price mediation.
D) price discrimination.
Q2) Price discriminators will set a higher price in a more elastic market.
A)True
B)False
Q3) Monopolists that are able to perfectly price discriminate will produce a level of output equal to the efficient level of output produced in a competitive market.
A)True
B)False
Q4) Under perfect price discrimination, there is never any deadweight loss.
A)True
B)False
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Chapter 15: Oligopoly and Game Theory
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Sample Questions
Q1) The prisoner's dilemma is the negative counterpart to the invisible hand.
A)True
B)False
Q2) Which of the following is NOT a feature of the prisoner's dilemma?
A) It explains why cartels fail.
B) It describes how producers can lock themselves into a suboptimal outcome by pursuing their own self-interest.
C) It shows a dominant strategy for each of the players.
D) It explains why there is so much recidivism.
Q3) Cartels are not always successful because:
A) their members have profit incentives to cheat on the agreement.
B) nowhere in the world are cartel agreements considered legal.
C) cartels face a lot of competition from monopolies.
D) All of the answers are correct.
Q4) In a cartel, the most profitable outcome is achieved by:
A) cheating when others cooperate.
B) cheating when others cheat.
C) cooperating when others cooperate.
D) cooperating when others cheat.
Q5) What are some reasons why cartels could fail?
Page 17
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Chapter 16: Competing for Monopoly
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Sample Questions
Q1) A fax machine is a network good because it becomes more useful when greater numbers of people have them.
A)True
B)False
Q2) An outcome where both players have played their dominant strategy is a Nash equilibrium.
A)True
B)False
Q3) Network goods are usually produced by:
A) competitive firms.
B) monopolies and oligopolies.
C) monopolistically competitive firms.
D) state and local governments.
Q4) Which firm's market is the most contestable?
A) the only cable TV provider in town
B) the only sewer-and-water company in town
C) the only hospital in town
D) the only Chinese restaurant in town
Q5) Why are network goods usually sold by monopolies or oligopolies?
Q6) Describe the features of markets for network goods.
Page 18
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Chapter 17: Monopolistic Competition and Advertising
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Sample Questions
Q1) In the 1990s, fast food restaurants refused to make special orders-there was no way to "hold the tomatoes." When Burger King branded itself as the place where you could "have it your way" and allowed special orders, it enjoyed an advantage over other fast food restaurants. Until other firms copied it, what was Burger King's position?
A) monopolistic competitive
B) cartelized
C) perfectly competitive
D) monopoly
Q2) (Figure: Monopolistic Competition) Refer to the figure. Suppose the figure represents a firm that operates in a monopolistic competitive market. In this market, in the long run you would expect:
A) both demand and price to stay the same.
B) both demand and price to increase as unprofitable firms leave the industry.
C) demand to decrease and price to fall to the point that P = AC.
D) demand to shift left and decrease price to the point that P = MC.
Q3) Owning a small oil well is a good example of a monopolistically competitive market.
A)True
B)False
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19
Chapter 18: Labor Markets
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Sample Questions
Q1) Statistical discrimination is:
A) statistical data of discrimination.
B) applying statistical analysis in discrimination.
C) collecting information to justify hiring individuals.
D) using information about group averages to make conclusions about individuals.
Q2) 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.
Q3) Explain how market shifts in demand and/or supply can lead to higher wages for workers.
Q4) In a world of perfect information:
A) statistical discrimination would not exist.
B) employers, but not employees, would practice statistical discrimination.
C) employees, but not employers, would practice statistical discrimination
D) statistical discrimination would be even more important.
Q5) 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?
Page 20
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Chapter
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Sample Questions
Q1) A free rider enjoys the benefits of a private good without paying a share of the costs.
A)True
B)False
Q2) Small tribes may be able to solve the tragedy of the commons by:
A) subsidizing the activity that creates the tragedy.
B) using social norms to punish and ostracize those that overuse a common resource.
C) setting price controls below the equilibrium price to clear the market.
D) All of the answers are correct.
Q3) Free riders are people who:
A) enjoy public goods without paying for them.
B) pay for public goods but do not end up enjoying them.
C) pay for both private and public goods.
D) ride public transportation without paying.
Q4) Which of the following is a list of nonrival private goods only?
A) cable Internet service, toll highways, public roads, soup kitchen meals
B) a public beach, soup kitchen meals, public roads, smog reduction
C) online video games, a private beach, toll highways, cable Internet service
D) national defense, a lighthouse, smog reduction, cable Internet service
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Page 21
Chapter 20: Political Economy and Public Choice
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Sample Questions
Q1) An incumbent is more likely to win reelection if average unemployment during his first four-year term is less than unemployment in the last year of that term.
A)True
B)False
Q2) Which of the following statements is FALSE?
A) The root cause of mass starvation is a lack of food.
B) Most mass starvations have been intentional.
C) Mass starvation is less likely in democracies.
D) Greater political competition is associated with higher levels of food distribution.
Q3) Let's check on whether you are rationally ignorant. Which of the following four items is the biggest in terms of government expenditure?
A) defense
B) welfare
C) foreign aid
D) health care
Q4) Why are incentives so important in the decision to remain rationally ignorant about something?
Q5) Explain why economists say that voters are rationally ignorant about politics.
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Chapter 21: Economics, Ethics, and Public Policy
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Sample Questions
Q1) Which is an example of a positive economic statement?
A) The minimum wage should be higher.
B) It would be more efficient, and therefore preferable, to legalize drugs.
C) The government should restrict deficit spending and balance the budget.
D) Higher interest rates will lead to lower rates of inflation.
Q2) In a society where the income distribution is skewed, and rich people have a very large chunk of the total income in the country, will utilitarians advocate reallocation of resources if the rich get more utility, that is, more value from the amount of the transfer than the poor people do?
Q3) An infertile person who lobbies against abortion is said to have ______ preferences.
A) exploitative
B) aggravated
C) transported
D) meddlesome
Q4) Explain why economists and politicians tend to evaluate a public policy like trade or immigration differently?
Q5) Provide at least three normative economic statements that politicians often make about immigration?
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Chapter 22: Managing Incentives
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Q1) Suppose an average student gets mistakenly enrolled in an honors class. In the context of a tournament, which of the following risks is most likely to occur?
A) environment risk
B) registrar risk
C) school board risk
D) ability risk
Q2) (Figure: Weekly Pay) Firms A and B are radio stations that hire salespeople to sell advertising slots. The firms' compensation schemes appear in the figure. Assuming that all workers put in the same amount of hours, firm A pays its salespeople using a(n) ______ and firm B pays its workers using a(n) ______.
A) hourly wage; hourly wage
B) hourly wage; piece rate system
C) premium plus fee; flat rate
D) piece rate system; hourly wage
Q3) The closer "what you pay for" is to "what you want," then the more you can rely on weak incentives.
A)True
B)False
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Chapter 23: Stock Markets and Personal Finance
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Q1) Which of the following investment instruments would a risk-averse individual choose?
A) stocks that are negatively correlated with the rest of one's portfolio
B) agricultural stocks in a foreign agricultural economy
C) oil stocks
D) technology stocks
Q2) The S&P 500 Index fund performs ______ active funds.
A) worse than most
B) worse than all
C) better than most
D) better than all
Q3) The main objective of diversification is to maximize the return of an investment portfolio.
A)True
B)False
Q4) Since for every buyer of a stock there is a seller of that stock, someone can likely become very rich acting on public information.
A)True
B)False
Q5) Discuss the different ways that a person can diversify.
Page 25
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Chapter 24: Price Discrimination
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Q1) Information asymmetry is the problem of:
A) an agent trying to exploit an information advantage in a dishonest way.
B) incentivizing an employee to work in the interest of the owner.
C) one party to an exchange having more information than the other party.
D) an offer conveying negative information about the product being offered.
Q2) What are the arguments supporting the Affordable Care Act?
Q3) Supporters of the Affordable Care Act argue that:
A) even if the purchase of health insurance is voluntary, the subsidies will prevent the adverse selection death spiral.
B) the individual mandate will prevent the adverse selection death spiral.
C) pushing sick people into purchasing health insurance will cause the adverse selection death spiral.
D) subsidizing the purchase of health insurance for poorer individuals and families will reduce the adverse selection death spiral.
Q4) An example of a credible promise is a used car that:
A) is sold with a CARFAX report.
B) is sold to a family member.
C) is certified and carries a warranty.
D) has been inspected by a mechanic.
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Chapter 25: Consumer Choice
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Sample Questions
Q1) Indifference curves can never cross.
A)True
B)False
Q2) (Figure: Optimal Choice) Refer to the figure. Suppose the figure represents indifference curves of a consumer who purchases flip-flops and sneakers. If the dotted line represents this consumer's budget constraint, then Bundle D on the graph: A) results in a lower level of overall utility than Bundle E. B) is preferred to point E but unattainable.
C) has a higher marginal rate of substitution than Bundle E. D) maximizes total utility.
Q3) The consumption bundle that maximizes utility for a consumer is the bundle that maximizes marginal utility across all goods.
A)True
B)False
Q4) The slope of the indifference curve is equal to the marginal rate of substitution. A)True
B)False
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