Applied Microeconomics
Midterm Exam
Course Introduction
Applied Microeconomics explores the practical application of microeconomic theories to real-world issues and decision-making processes. The course examines how individuals, firms, and governments allocate scarce resources and respond to incentives within various market structures. Topics include consumer and producer behavior, market equilibrium, policy analysis, pricing strategies, and the role of institutions in shaping economic outcomes. Using case studies and empirical data, students will learn to analyze contemporary economic problems and develop skills necessary for quantitatively evaluating the impacts of economic policies and business strategies.
Recommended Textbook Microeconomics 8th Edition by Jeffrey M. Perloff
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) Economists make simplifying assumptions to A) understand extremely complex phenomenon.
B) build a model that is as close to the real world as possible.
C) focus on the variables that are important to an economic theory.
D) A and C
Answer: D
Q2) Economic modeling requires A) mathematics.
B) logic.
C) calculus.
D) trigonometry.
Answer: B
Q3) A country produces cars and books.All of its resources are currently being employed in the production of these two goods.If this country increases the production of cars,what will happen with the quantity produced of books?
A) The quantity of books produced will not change.
B) The quantity of books produced will decrease.
C) The quantity of books produced will slightly increase.
D) The quantity of books produced will substantially increase .
Answer: B
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Chapter 2: Supply and Demand
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Sample Questions
Q1) Suppose the market for potatoes can be expressed as follows:
Supply: Q<sup>S</sup> = -20 + 10p
Demand: Q<sup>D</sup> = 400 - 20p
Solve for the equilibrium price and quantity.
Answer: Equate the RHS of the supply equation to the RHS of the demand equation: -20 + 10p = 400 - 20p.
Rearrange: 30p = 420 or p = 14.Plug this into either S or D to get Q: Q = 400 - 20(14)= 120.
Q2) Consumer groups tend to lobby for A) price floors.
B) price ceilings.
C) quantity quotas.
D) taxes.
Answer: B
Q3) The fact that many people drive faster than the posted speed limit suggests that A) not all price floors are enforceable.
B) not all price and quantity regulations are enforceable.
C) individual drivers act irrationally.
D) government regulation is utterly useless.
Answer: B
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Page 4
Chapter 3: Applying the Supply-And-Demand Model
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Sample Questions
Q1) The number of vehicle types available in the United States has increased dramatically over the past thirty years.Everything else equal,this would make
A) the demand for individual vehicle types to become less elastic.
B) the demand for individual vehicle types to become more elastic.
C) the demand for all vehicle types to become unitary elastic.
D) the demand for low quality vehicle types to become less elastic.
Answer: B
Q2) The percentage change in the quantity supplied in response to a percentage change in the price is known as the A) slope of the supply curve.
B) excess supply.
C) price elasticity of supply.
D) All of the above.
Answer: C
Q3) If a linear supply curve has a zero intercept,the elasticity of supply is always unitary.
A)True
B)False
Answer: True
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Chapter 4: Consumer Choice
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Sample Questions
Q1) One reason more sport utility vehicles (SUVs)are driven in the United States than in Europe is
A) different marginal rates of substitution.
B) different marginal rates of transformation.
C) the United States hasn't had a recession since 2000-2001.
D) Either A or B
Q2) People view alcohol and marijuana as perfect substitutes.This means that
A) individuals will consume either alcohol or marijuana, but not both, regardless of price.
B) as the price of alcohol decreases, marijuana use decreases.
C) the marginal utility for alcohol and marijuana is constant.
D) Both B and C.
Q3) Adrian's total utilities of two consumption bundles are 50 and 100.This implies that A) the consumer prefers the first bundle.
B) the consumer prefers the second bundle.
C) the consumer likes the second bundle twice as much.
D) the consumer likes the first bundle twice as much.
Q4) Explain the difference between the marginal rate of substitution and the marginal rate of transformation.
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Page 6
Chapter 5: Applying Consumer Theory
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Q1) Suppose a person's utility for leisure (L)and consumption (Y)can be expressed as U = Y L and this person has no non-labor income.Assuming a wage rate of $10 per hour,show what happens to the person's labor supply when the person wins a lottery prize of $100 per day.
Q2) Suppose a person's utility for leisure (L)and consumption (Y)can be expressed as U = Y + L<sup>0.5</sup>.Show what happens to the person's labor supply curve when the income tax is cut from 70 percent to 30 percent.Denote hours worked as H and wage per hour as w.
Q3) Median household income is $50,000 per year.The typical household spends about $125 per year on milk,which has an income elasticity of about 0.07.From this information,we can conclude that
A) milk is a luxury.
B) milk is a Giffen good.
C) the income effect from a change in the price of milk is very large.
D) the income effect from a change in the price of milk is very small.
Q4) In the case of a normal good, A) demand curves always slope downward.
B) the income effect and substitution effect are in the same direction.
C) the Engel curve slopes upward.
D) All of the above.
Page 7
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Chapter 6: Firms and Production
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Sample Questions
Q1) One way to explain the convexity of isoquants is to say that
A) as labor increases and capital decreases, MP<sub>L</sub> rises while MP<sub>K</sub> falls.
B) as labor increases and capital decreases, MP<sub>L</sub> falls while MP<sub>K</sub> rises.
C) as labor increases and capital decreases, MP<sub>L</sub> and MP<sub>K</sub> both fall.
D) as labor increases and capital decreases, MP<sub>L</sub> and MP<sub>K</sub> both rise.
Q2) The above figure shows the isoquants for producing steel.When producing between 10,000 and 20,000 tons there are
A) increasing returns to scale.
B) decreasing returns to scale.
C) constant returns to scale.
D) economies of scale.
Q3) Suppose the production function for T-shirts can be represented as q = L<sup>0.25</sup>K<sup>0.75</sup>.Show that the marginal productivity of labor diminishes in the short run.
Q4) Explain why labor might not always be a variable input.
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Chapter 7: Costs
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Sample Questions
Q1) In the short run,a firm 's output level is 10 units.Its total cost is $4000 and its average fixed cost is $100.What is this firm's average variable cost (AVC)of producing 10 units?
A) AVC = $250
B) AVC = $275
C) AVC = $300
D) AVC = $400
Q2) A specific tax of $1 per unit of output will affect a firm's
A) average total cost, average variable cost, average fixed cost, and marginal cost.
B) average total cost, average variable cost, and average fixed cost.
C) average total cost, average variable cost, and marginal cost.
D) marginal cost only.
Q3) In the short run,marginal cost is increasing when
A) MP<sub>L</sub> is decreasing.
B) MP<sub>L</sub> is increasing.
C) AP<sub>L</sub> is increasing.
D) AP<sub>L</sub> is decreasing.
Q4) Explain why in the case of economies of scope the production possibility frontier is bowed outward.
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Page 9
Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) The competitive firm's supply curve is equal to A) its marginal cost curve.
B) the portion of its marginal cost curve that lies above AC.
C) the portion of its marginal cost curve that lies above AVC.
D) the portion of its marginal cost curve that lies above AFC.
Q2) If the market price in a competitive market is below the minimum of average variable cost,the firm will shut down.
A)True
B)False
Q3) There are currently N identical firms in a market.If it is a perfectly competitive market,the short-run market supply curve at any given price is
A) N times the supply of an individual firm.
B) N - 1 times the supply of an individual firm.
C) N plus the supply of an individual firm.
D) It cannot be determined from the information provided.
Q4) Suppose a firm has the following total cost function TC = 100 + 2q<sup>2</sup>.If price equals $20,what is the firm's output decision? What are its short-run profits?
Q5) Explain why shutting down and going out-of-business are different concepts.
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Chapter 9: Applying the Competitive Model
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Sample Questions
Q1) The above figure shows supply and demand curves for milk.In an effort to help farmers,the government passes a law that establishes a $3 per gallon price support.To maintain the price support,government must purchase
A) Q<sub>1</sub> gallons.
B) Q<sub>2</sub> gallons.
C) Q<sub>1</sub> - Q<sub>2</sub> gallons.
D) Q<sub>2</sub> - Q<sub>1</sub> gallons.
Q2) The services of real estate brokers are provided in a competitive market.If the state Board of Realtors enacts several requirements that limit the number of real estate brokers,then social welfare will most likely
A) not change, but there will be a transfer from consumer to producer.
B) not change, but there will be a transfer from producer to consumer.
C) decrease, although producers are made better off.
D) decrease, although consumers are made better off.
Q3) The difference between producer surplus and profit is always the associated with A) opportunity costs.
B) total costs.
C) variable costs.
D) fixed costs.
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Page 11
Chapter 10: General Equilibrium and Economic Welfare
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Sample Questions
Q1) The above figure depicts the Edgeworth box for two individuals,Al and Bruce.Point a is NOT Pareto efficient because
A) Al's MRS exceeds Bruce's MRS.
B) the point is not near the center of the box.
C) Al's indifference curve is not far enough away from the origin.
D) All of the above.
Q2) The general equilibrium analysis of a minimum wage applied to only some sectors of the economy suggests that
A) workers in all sectors will face increased wages.
B) some workers in the covered sectors will lose their jobs and remain unemployed.
C) some workers originally employed in the covered sectors will move to the uncovered sectors, driving down wages in the uncovered sectors.
D) all workers will be worse off.
Q3) Economic growth can be depicted as a
A) shift in the contract curve.
B) a change in the dimensions of the Edgeworth box.
C) a change in the preference curves of individuals.
D) a change in the number of people in the Edgeworth box.
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Page 12
Chapter 11: Monopoly
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Sample Questions
Q1) Suppose a patent is granted for a product that has the linear demand curve P = ab Q.The constant marginal cost of producing this product is $50 per unit,a unit sells for $150,and consumers purchase 100 units of the good at that price.If the monopoly is maximizing profit,the deadweight loss is
A) $5000.
B) $2500.
C) $7500.
D) $10000.
Q2) The introduction of satellite television systems would cause the demand curve for cable television to be
A) more elastic.
B) less elastic.
C) perfectly inelastic.
D) unchanged.
Q3) The less elastic is the demand for a firm's product,the greater is that firm's market power.
A)True
B)False
Q4) Why is the monopoly total welfare lower than the competitive total welfare?
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Chapter 12: Pricing and Advertising
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Sample Questions
Q1) Under what conditions would firms be likely to support an industry-wide advertising ban?
Q2) Explain why a monopoly that knows the demand curve of identical consumers can set a two-part tariff with the lump sum tariff equal to the total amount of potential consumer surplus.
Q3) If identical firms sell an undifferentiated product,advertising is likely to be
A) used to attack the rivals' products.
B) collectively undertaken by the industry group.
C) strategically aimed at deterring entry.
D) focused on secret ingredients.
Q4) A perfect-price-discriminating monopoly's marginal revenue curve
A) lies below the demand curve.
B) is the demand curve.
C) varies for each consumer.
D) is the same as the monopolist's marginal revenue curve.
Q5) A hotel with market power charges customers who check in before 5:00 pm more than those who check in after 5:00 pm.Those who check in early are much more likely to use the hotel's pool.Explain why this price difference may not be price discrimination.
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Page 14
Chapter 13: Oligopoly and Monopolistic Competition
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Q1) Suppose duopolists face the market inverse demand curve P = 100 - Q,Q = q<sub>1</sub> + q<sub>2</sub>,and both firms have a constant marginal cost of 10.If firm 1 is a Stackelberg leader and firm 2's best response function is q<sub>2</sub> = (100 - q<sub>1</sub>)/2,at the Nash-Stackelberg equilibrium firm 1's output is
A) 30.
B) 40.
C) 60.
D) 70.
Q2) What strategic advantage compared to a Cournot Oligopoly results in the Stackelberg outcome?
A) the ability to move first
B) the ability to set price
C) the ability to set quantity
D) the ability to make independent decisions by the Stackelberg leader
Q3) Oligopoly differs from monopolistic competition in that an oligopoly includes A) product differentiation.
B) barriers to entry.
C) no barriers to entry.
D) downward-sloping demand curves facing the firm.
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Page 15
Chapter 14: Game Theory
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Sample Questions
Q1) A player can choose among three strategies: L,C,and R.Strategy C is never a best response to the other player strategies.This means that
A) strategy C is always played.
B) strategy C is never played.
C) strategy C will be part of a Nash equilibrium.
D) strategies L and R are never played.
Q2) Collusion is more likely to occur when
A) there is fear of punishment for not colluding.
B) there is a known finite time horizon.
C) there are large gains to be made by cheating on an agreement.
D) the game lasts only one period.
Q3) In a two-player simultaneous game where neither player has a dominant strategy, A) there is never a Nash equilibrium.
B) there is only one Nash equilibrium.
C) the actual outcome is unpredictable.
D) the actual outcome will not be a Nash equilibrium.
Q4) The above figure shows the payoffs to two airlines,A and B,of serving a particular route.Is there a Nash equilibrium? What is it? Explain.
Q5) How can a firm be made better off by limiting its options?
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Chapter 15: Factor Markets
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Sample Questions
Q1) A minimum wage set at the competitive market wage level affects the monopsonist by
A) altering its marginal expenditure curve and raising its employment level.
B) reducing its output.
C) altering the market supply curve.
D) altering its marginal expenditure curve and lowering its employment level.
Q2) A monopoly's demand curve for labor
A) is below that of a competitive market.
B) is the same as that of a competitive market.
C) is above that of a competitive market.
D) equals p MPL.
Q3) In comparison to a competitive market,a monopsony generates
A) deadweight loss.
B) larger low-wage employment.
C) more high-wages jobs.
D) more output.
Q4) Explain why consumers benefit from a merger between a monopoly producer and its monopoly supplier of labor.
Q5) How does a competitive firm's demand for labor react to a specific tax on each unit of output it sells?
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Chapter 16: Interest Rates, Investments, and Capital Markets
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Q1) A major corporation hires high school students on a part-time basis.It offers a reward of $5,000 to any of its high school seniors who graduate college in four years.What is the present value of that reward to a student who just finished her junior year of high school,assuming a nominal rate of interest of 8%?
Q2) If an exhaustible resource is priced at marginal cost that remains constant over time,then
A) all owners of that resource earn rent.
B) the price will stay constant over time.
C) the percent price increase each year equals the rate of interest.
D) the good is relatively scarce.
Q3) In reality,prices of non-renewable resources have not increased continually according to the model developed in Section 16.3 because of A) abundance of the resource.
B) technological progress changing marginal cost.
C) changing market power of producers.
D) All of the above.
Q4) In an economy with no inflation,explain why interest rates are positive.
Q5) Why do economists predict that investment increases when the real rate of interest falls?
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Chapter 17: Uncertainty
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Q1) Why would a usury law result in banks making less credit available to low-income households?
Q2) Searching the Internet for information to help select a product that is more reliable is most likely to be done by a
A) risk-averse person.
B) risk-neutral person.
C) risk-preferring person.
D) This cannot be determined with the information provided.
Q3) A stock mutual fund is generally
A) less risky than buying individual stocks.
B) more risky than buying individual stocks.
C) just as risky as buying individual stocks.
D) a way for the rich to avoid taxes.
Q4) If global warming began to cause random world-wide damage to crops,insurance companies
A) would insure against specific crop failures.
B) would not insure against specific crop failures.
C) would be indifferent between insuring or not.
D) would find themselves facing prosecution for ignoring the problem for so long.
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Chapter 18: Externalities, Open-Access, and Public Goods
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Q1) Markets tend to produce too little of an excludable public good because
A) transaction costs are high.
B) of the lack of rivalry.
C) these goods are depletable.
D) All of the above.
Q2) Which of the following is an example of internalizing an externality?
A) a paper mill that spends money removing the pollution it generated
B) a neighbor leaving lots of trash in his front yard
C) a student receives $15 for each bright question asked during lecture
D) Both A and C.
Q3) The above figure shows the market for steel ingots.An externality can be seen because
A) the social marginal cost exceeds the private marginal cost.
B) the private marginal cost exceeds the social marginal cost.
C) the optimal quantity of steel is zero.
D) not enough steel gets produced by the competitive market.
Q4) Explain why the social demand curve for a public good is the vertical sum of the demand curves of each individual.
Q5) In terms of cost-benefit analysis,explain why a competitive market with an externality produces too much pollution.
Page 20
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Chapter 19: Asymmetric Information
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Q1) If there is zero search cost,then in the presence of asymmetric information,competitive firms will
A) charge the monopoly price.
B) charge the competitive price.
C) charge zero price.
D) shut down.
Q2) In a competitive market with large search costs,many firms,and asymmetric information,why is the monopoly price the only possible single-price equilibrium?
Q3) What is one reason the eBay seller reputation system is important?
A) eBay transactions tend to be isolated, one-off transactions.
B) eBay transactions tend to be repeat sales between the same seller and buyers.
C) eBay transactions often involve stolen products.
D) eBay transactions require a larger percentage than, say, Amazon transactions.
Q4) If reckless drivers are more likely to buy automobile insurance than safe drivers are,
A) a moral hazard has occurred.
B) adverse selection has occurred.
C) the market for insurance is efficient.
D) then automobile insurance will be fairly priced.
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Page 21
Chapter 20: Contracts and Moral Hazards
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Q1) Suppose the principal offers to share a percentage of the profit with the agent.Such a contract
A) will yield the same income for the agent as a hire contract would.
B) is incentive compatible.
C) creates a production inefficiency.
D) would not be acceptable to any agent.
Q2) In the presence of asymmetric information,a contingent contract
A) achieves production efficiency.
B) can lead to opportunistic behavior on the part of the agent.
C) is impossible to write.
D) will result in the principal earning all of the profit.
Q3) In which of the following contracts is the agent's payment unaffected by his performance?
A) fixed-fee contract
B) hire contract
C) contingent contract
D) sharing contract
Q4) If information is asymmetric,explain why the hire contract is not efficient in production and a moral hazard exists,but the fixed fee to the principal contract is efficient and does not pose a moral hazard problem.
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