Applied Microeconomics Practice Questions
Course Introduction
Applied Microeconomics explores the practical application of microeconomic theories and methodologies to real-world problems and decision-making. The course covers topics such as consumer and producer behavior, market structures, game theory, and the role of government in addressing market failures. Students will analyze case studies and current issues to understand how economic incentives and constraints affect the choices of individuals, firms, and institutions. Emphasis is placed on using quantitative tools and data analysis to inform policy recommendations and business strategies in diverse contexts, including labor, healthcare, environment, and public policy sectors.
Recommended Textbook
Modern Labor Economics Theory and Public Policy 12th Edition by Ronald G. Ehrenberg
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Chapter 1: Introduction
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Q1) Pareto efficiency implies that
A) all legal transactions have taken place.
B) the distribution of income is equitable.
C) all mutually beneficial transactions have taken place.
D) only people facing price distortions still wish to undertake transactions.
Answer: C
Q2) Economists generally assume that
A) people both pursue their objectives in a consistent fashion and are forced to make choices due to scarcity.
B) people pursue their objectives in a consistent fashion.
C) people are forced to make choices due to scarcity.
D) habit-bound people are irrational.
Answer: A
Q3) Public goods are
A) goods donated by their owner for public use.
B) goods that are available to an additional consumer at no cost.
C) goods that are not scarce.
D) goods that can only be produced by the government.
Answer: B
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Page 3
Chapter 2: Overview of the Labor Market
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Q1) A worker's income is equal to his A) earnings.
B) wage rate multiplied by hours worked.
C) wages plus benefits.
D) earnings plus employee benefits plus unearned income.
Answer: D
Q2) If unions raise wages above their market clearing level,then
A) more workers will be able to get better jobs, increasing employment.
B) there will be a shortage of workers.
C) persistently high rates of unemployment will result.
D) this will be Pareto efficient.
Answer: C
Q3) What are the two basic types of employee benefit that workers receive? Give examples of each.
Answer: One type of employee benefit is a payment in-kind.Payments in-kind include medical insurance,dental insurance,unemployment insurance taxes,and paid vacations or personal time.The other major type of employee benefit is deferred payment.Deferred payments include various forms of retirement income (pension income,contributions into pension plans,and Social Security taxes).
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Page 4
Chapter 3: The Demand for Labor
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Q1) A profit-maximizing firm decides to produce 100 units of output.This implies that the firm will
A) produce on its lowest isoexpenditure line.
B) produce at a point where its isoexpenditure line is everywhere below the isoquant curve for 100 units of output.
C) produce at a point where its isoexpenditure line is tangent to the isoquant curve for 100 units of output.
D) produce where the marginal rate of technical substitution equals the wage rate. Answer: C
Q2) When deciding the salary of a sports star,
A) the team must consider how much money the sports star should earn.
B) the team must consider how much the sports star will cause revenues to increase.
C) the team estimates the sports star's marginal product; because this is a guess, sports stars are generally underpaid.
D) the team will hire the sports star if doing so will increase the team's revenues.
Answer: B
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Chapter 4: Labor Demand Elasticities
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Q1) If the absolute elasticity of labor demand is 2.0,then an eight percent increase in the wage will
A) increase employment by 16%.
B) increase employment by 4%.
C) decrease employment by 16%.
D) decrease employment by 4%.
Q2) If labor is a small percentage of the total costs of an industry,this will tend to make the own-wage elasticity of labor demand
A) high.
B) low.
C) positive.
D) zero.
Q3) An increase in the minimum wage will decrease employment more when
A) the supply of labor is more elastic.
B) the uncovered sector is small.
C) the demand for labor is inelastic.
D) All of the above will cause the minimum wage to decrease employment more.
Q4) The minimum wage is a relatively ineffective means by which to reduce poverty.Agree or disagree.Explain your reasoning.
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Chapter 5: Frictions in the Labor Market
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Q1) If a firm offers specific training to its workers,when the training is over,
A) workers will most likely be paid a wage that is equal to their marginal product.
B) workers will most likely be paid a wage that is greater than their marginal product, to compensate for the training.
C) workers will most likely be paid a wage that is less than their marginal product.
D) workers will most likely be paid a wage that is less than their wage before training.
Q2) A firm employs 10 workers at a weekly wage of $500.If it employs an eleventh worker,it has to raise all of its workers wage to $520.The eleventh worker adds $750 a week to revenues.If the firm hires the eleventh worker,its weekly profits will
A) go up by $230.
B) go up by $30.
C) go up by $23.
D) go down by $270.
Q3) What is the overtime pay premium? Discuss its origin and who it covers.
Q4) Under what conditions would an employer invest in training its employees? Explain.
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Page 7
Chapter 6: Supply of Labor to the Economy: The Decision to Work
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Q1) A professor declared "with the recent drop in the value of my stock portfolio,I will have to put off retirement by another two years." This decision reflects A) the substitution effect.
B) the income effect.
C) the portfolio effect.
D) the effect of a budget constraint with a spike.
Q2) A decrease in the implicit tax rate on welfare benefits serves as
A) an incentive to work fewer hours.
B) an incentive to work more hours.
C) a way to decrease the incomes of welfare recipients.
D) a way to decrease spending on benefits.
Q3) The Earned Income Tax Credit will probably ________ the labor force participation of low-wage workers and ________ the labor market hours of those with earning in the range that the tax credit is being phased out.
A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease
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Chapter
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Q1) What is a "collective" model of household decision-making? How does a collective model of household decision-making account for wives spending more time in household production than husbands?
Q2) A child-support assurance program that guarantees support payments to a mother regardless of her income but which doesn't increase the amount she will receive when not working will tend to ________ labor force participation rates while ________ desired hours of work among those with jobs.
A) increase; reducing B) increase; increasing
C) reduce; reducing
D) reduce; increasing
Q3) Which of the following events will likely make indifference curves (between income on the vertical axis and household time on the horizontal axis)flatter?
A) new inventions that make it easier to substitute market goods for household time
B) increased valued of time spent at home with children
C) an increase in income
D) smaller future wage penalties for staying at home
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Page 9
Chapter 8: Compensating Wage Differentials and Labor
Markets
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Q1) A compensating wage differential is
A) an extra wage that compensates workers for undesirable working conditions.
B) an extra wage that is above the equilibrium wage.
C) an extra wage that will make all workers willing to accept undesirable working conditions.
D) an extra wage that implies firms are no longer maximizing profits.
Q2) What are the major insights of the hedonic model of compensating wage differentials?
Q3) When talking about compensating wage differentials,we relax our earlier assumption of
A) utility maximization by workers.
B) profit maximization by firms.
C) income maximization by workers.
D) identical non-pecuniary benefits.
Q4) If a firm reduces the risk in its workplace,then
A) the firm will be able to pay higher wages.
B) the firm will be able to increase profits.
C) the firm will likely pay lower wages to make up for the cost of increased safety.
D) the firm will see a decrease in total costs.
Page 10
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Chapter 9: Investments in Human Capital: Education and Training
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Q1) In the signaling model,assume high school graduates are paid a stream of income whose present value is $200,000.College graduates are paid a stream of income whose present value is X.College education costs higher-productivity workers $50,000 and lower-productivity workers $150,000.What value of X will cause higher-productivity workers to go to college and lower-productivity workers to not go to college?
A) $225,000
B) $475,000
C) $700,000
D) $275,000
Q2) Age/earnings profiles fan out by educational attainment level.According to human capital theory,this phenomenon occurs because
A) males earn more than females on average.
B) workers "signal" their interest in working to employers.
C) workers invest less in post-school job training as they age.
D) workers who invest more in schooling will also invest more in post-school job training.
Q3) Plot an age/earnings profile for a "typical" college graduate.How does human capital theory explain the shape of the age/earnings profile?
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Page 11
Chapter 10: Worker Mobility: Migration, Immigration, and Turnover
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Q1) When compared to the earnings of political migrants,the earnings of economic migrants
A) start out lower, and increase more slowly.
B) start out lower, but increase more quickly.
C) start out higher, but increase more slowly.
D) start out higher, and increase more quickly.
Q2) An economist assumes while educated persons have lower informational costs to moving,younger adults have lower psychic costs of moving.Which of the following observations (if true)would support this assumption?
A) Among people with the same education, we observe younger persons moving only if there is a large wage gain from moving.
B) Among people of the same age, we observe less educated persons moving only if there is a large wage gain from moving.
C) Both A and B support the assumption.
D) Neither A nor B support the assumption.
Q3) How does earnings distribution help predict which skill groups within a sending country are most likely to emigrate from the country?
Q4) How does the quit rate behave over the business cycle?
Page 12
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Chapter 11: Pay and Productivity: Wage Determination
within the Firm
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Q1) How does the payment of an efficiency wage affect worker productivity?
Q2) Free rider problems tend to be largest when
A) workers are paid by a piece-rate system.
B) workers are paid by group incentives.
C) workers are paid on commission.
D) firms are very small.
Q3) A researcher finds that earnings are directly related to the length of time with current employer (tenure)in a randomly selected sample of 35-year old male workers.How would you explain this finding?
Q4) Discuss the concept of an implicit contract in the context of employment.
Q5) A "signal" will not work to sort good from bad workers if A) the signal is as costly to good workers as to bad workers. B) bad workers are more risk-averse than good workers. C) the signal is excessively expensive to bad workers.
D) good workers are more productive than bad workers.
Q6) Identify and discuss the two general problems that output-based pay schemes suffer from.
Page 13
Q7) Joe is paid a wage of $12 per hour.What are the advantages and disadvantages to the employer of paying Joe on the basis of time worked?
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Chapter 12: Gender,Race,and Ethnicity in the Labor Market
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Q1) What does the employment-to-population ratio measure? What has happened to the employment-to-population ratio of African American males over time? Of white males over time?
Q2) Women over the age of 24 who worked full-time earned an average of 62 percent of what males earned in 2011.What factors account for this stunning difference in rate of pay of the two groups?
Q3) Federal antidiscrimination programs appear to
A) have made no difference in raising relative earnings of black workers.
B) have made little difference raising relative earnings of black workers, probably because individual programs have had only small effects.
C) have helped to raise relative earnings of black workers.
D) have hurt the relative earnings of black workers.
Q4) The index of occupational dissimilarity for women and men
A) would be 100 if all occupations were completely segregated.
B) would be 100 if men and women were randomly assigned to jobs.
C) has risen since 1970.
D) shows the percentage of workers who face occupational discrimination.
Q5) What are the dimensions of gender discrimination in the labor market?
Q6) What is affirmative action?
Page 14
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Chapter 13: Unions and the Labor Market
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Q1) Do unions increase worker productivity?
Q2) Suppose the firm's demand for labor is L<sup>D</sup>= 100 - W.The supply of labor is perfectly elastic at a wage of $20.If a monopoly union's goal is to maximize total rents (= [W<sub>U</sub> - $20] × L),what wage will it seek?
A) $20
B) $40
C) $60
D) $80
Q3) Any point on the contract curve will
A) make the union better off than they would be in monopoly union negotiations. B) make the firm better off than they would be in monopoly union negotiations.
C) make both the union and the firm at least as well off as they would be in monopoly union negotiations.
D) make both parties worse off than they would be in monopoly union negotiations.
Q4) What is a right-to-work law?
Q5) What is the union relative wage advantage? What is the estimated value of the union relative wage advantage?
Q6) What is interest arbitration?
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Chapter 14: Unemployment
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Q1) Unemployment tends to go up when aggregate demand falls mainly because
A) when wages fall, workers seek alternative employment.
B) unions renegotiate for lower wages, making it difficult for job searchers to find suitable jobs.
C) wage rates tend to be downward rigid.
D) most human capital is general and not firm-specific.
Q2) A worker who has quit one job to have time to search for a similar position is counted as what type of unemployment?
A) frictional
B) occupational
C) regional
D) cyclical
Q3) In reemployment bonus experiments,bonuses to workers who found new jobs quickly
A) increased the average duration of unemployment.
B) decreased the average duration of unemployment.
C) did not change the average duration of unemployment.
D) decreased the number of spells of unemployment.
Q4) How does demand-deficient unemployment arise? Use a demand/supply diagram to illustrate your answer.
Q5) Does the unemployment insurance payroll tax encourage layoffs? Why or why not?
Page 16
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Chapter 15: Inequality in Earnings
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Q1) The widget industry is competitive.Widgets (W)are produced with skilled labor (S)such that each skilled worker produces c widgets such that W = aC.If technological progress makes skilled labor more productive,then more skilled workers will be employed
A) only when the demand for widgets is price inelastic.
B) only when the demand for widgets is price elastic.
C) no matter what the price elasticity of demand is.
D) Fewer skilled workers will be employed no matter what else happens.
Q2) An increase in inequality will always be accompanied by
A) a reduction of earnings of those in the lowest percentiles.
B) an increase of earnings of those in the highest percentiles.
C) an increase in the dispersion of incomes.
D) all of the above.
Q3) If all incomes were to fall by ten percent (due to deflation,for example)then the variance of income will
A) increase.
B) decrease.
C) remain unchanged.
D) either increase or decrease.
Q4) Identify the major changes in earnings inequality in the U.S.since 1980.
Page 17
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Chapter 16: The Labor-Market Effects of International Trade and
Production Sharing
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Q1) Mr.X works in the warehouse of a large textile firm located in the United States.The firm outsources the production of its textiles to another nation.Which of the following is an example of the possible scale effect of this event on Mr.X?
A) The outsourcing of production causes the firm to reduce the company's demand for warehouse workers in the United States and increase its demand for warehouse workers in the other nation.
B) The lower price of the textiles causes his firm to sell more textiles, increasing its demand for warehouse workers.
C) Both of the above.
D) Neither of the above.
Q2) Studies have shown that government retraining programs
A) usually cost more than the benefit they create or, at best, have benefits modestly above costs.
B) have been cost effective methods of retraining workers.
C) are cost effective methods of retraining younger workers, but not workers over age 45.
D) work best when training workers in firm-specific skills .
Q3) What is production sharing?
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