Applied Microeconomics
Pre-Test Questions
Course Introduction
Applied Microeconomics explores how individual consumers, firms, and markets make decisions and interact within the broader economy. This course emphasizes the practical application of microeconomic theories to real-world problems, including market efficiency, pricing strategies, government interventions, and contemporary policy issues. Through case studies, empirical analysis, and problem-solving exercises, students learn to critically evaluate and apply concepts such as supply and demand, game theory, market structure, and externalities in diverse economic contexts.
Recommended Textbook Principles of Microeconomics 9th Edition by John Sayre Alan Morris
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Page 2
Chapter 1: The Economic Problem
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Sample Questions
Q1) Which of the following best describe the economies of a capitalist society?
A)Competition.
B)Command.
C)Mix of competition and command.
D)Mix of competition and custom.
Answer: C
Q2) What is the distinction between a positive and a normative statement?
A)Positive statements are assertions that can be tested with data,whereas normative statements are based on a value system of beliefs.
B)Normative statements are assertions that can be tested with data,whereas positive statements are based on a value system of beliefs.
C)The distinction depends on the context in which each statement is used.
D)Positive statements are correct statements of fact,whereas normative statements are incorrect.
Answer: A
Q3) Explain why voluntary trade is mutual beneficial.
Answer: Voluntary trade always benefits both parties because if one party does not benefit,that party will not trade.
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3
Chapter 2: Demand and Supply: An Introduction
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Sample Questions
Q1) Assume the market for coffee is initially in equilibrium.
a)Draw a demand and supply diagram to illustrate the initial equilibrium.
b)Explain the impact on the coffee market if there is an increase in the price of coffee beans.
c)Graphically illustrate the impact on the diagram you prepared for part (a).
Answer: a) 11ea7cab_97da_9dfe_8d24_2d022a9a7537_TB5692_00
b)An increase in the price of coffee beans will decrease the supply of coffee.Coffee beans are an input for coffee.The price will increase and quantity traded will decrease.
c) 11ea7cab_97da_9dff_8d24_27ee6e1e10ad_TB5692_00
Q2) What is the effect of an increase in the price of a resource?
A)It will cause a decrease in the supply of the product.
B)It will cause an increase in the supply of the product.
C)It will cause a decrease in the demand for the product.
D)It will cause an increase in the demand for the product.
Answer: A
Q3) Surpluses drive prices up;shortages drive prices down.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Demand and Supply: An Elaboration
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Sample Questions
Q1) What can we conclude if consumers are forced to wait in long line-ups in order to purchase products such as food and fuel?
A)That the price of these items is at equilibrium.
B)That price is operating effectively as a rationing mechanism.
C)That producers are producing more than people want.
D)Producers would be willing to produce more if price were allowed to rise.
Answer: D
Q2) Assume the market for wheat is in equilibrium.Now suppose,the government imposes a price floor that is below the original equilibrium price.Explain the economic effects of the price floor?
Answer: If the government imposes a price floor that is below the original equilibrium price,there will be no economic impact.When the price is below equilibrium,the quantity demanded will be greater than quantity supplied;there will a shortage.To eliminate the shortage,prices will have to rise.Since a price floor is the lowest price the market can charge,there is no restriction on price increases.The shortage will be eliminated and the market reverts back to its original equilibrium.
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Chapter 4: Elasticity
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Sample Questions
Q1) Which of the following statements is true about the price elasticity of demand?
A)It is higher in the short run than in the long run because people's habits change slowly.
B)It is higher in the long run than the short run because people have more time to find substitute products.
C)It is the same in the short run and the long run.
D)It is higher in the short run because markets adjust slowly to changes.
Q2) What is unitary elasticity?
A)An elasticity coefficient which is negative.
B)An elasticity coefficient which is equal to zero.
C)An elasticity coefficient which is equal to one.
D)A percentage change in quantity which is exactly equal to the percentage change in demand.
E)Where elasticity and inelasticity are balanced.
Q3) A firm's total revenue is equal to price times demand.
A)True
B)False
Q4) Define the term income elasticity.What does it mean if the calculation of income elasticity turns out to be positive and greater than one?
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Page 6
Chapter 5: Consumer Choice
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Sample Questions
Q1) Refer to the above table to answer this question.Suppose that Mia has a budget of $7 and the price of a litre of soya milk is $1,how much consumer surplus will Mia receive as a result of her purchases?
A)0.
B)$1.
C)$15.
D)$35.
E)Cannot be determined.
Q2) In order for price discrimination to work,three conditions must be fulfilled.Which of the following is not one of those conditions?
A)The seller must be able to identify and separate different groups of buyers.
B)The different groups of buyers must have different elasticities of demand.
C)The product must be a necessity.
D)It must be impossible to resell the product.
Q3) What is the significance of the marginal utility being equal to zero?
Q4) The consumer surplus derived from products that have an inelastic demand is greater than that from products with an elastic demand.
A)True
B)False
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Chapter 6: A Firms Production Decisions and Costs in the
Short Run
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Sample Questions
Q1) Refer to the graph above to answer this question.How many units of labour does the firm need to employ to achieve economic capacity?
A)3.
B)6.
C)9.
D)12.
E)Cannot be determined.
Q2) Refer to the graph above to answer this question.Which of the following statements is correct?
A)Curve 1 illustrates average product while curve 3 illustrates average variable cost.
B)Curve 1 illustrates average variable cost while curve 3 illustrates marginal product.
C)Curve 1 illustrates average product while curve 4 illustrates average variable cost.
D)Curve 2 illustrates marginal product while curve 3 illustrates average variable cost.
E)Curves 1 and 2 are cost curves while curves 3 and 4 are product curves.
Q3) Draw and correctly label a typical set of AFC,ATC,AVC,and MC cost curves.
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8
Chapter 7: Costs in the Long Run
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Sample Questions
Q1) Refer to the graph above to answer this question.Between what output levels do increasing returns to scale exist?
A)Q<sub>1</sub> and Q<sub>2</sub> only.
B)Q<sub>1</sub> and Q<sub>3</sub> only.
C)Q<sub>1</sub> and Q<sub>4</sub>.
D)Q<sub>1</sub> and Q<sub>5</sub>.
E)Q<sub>4</sub> and Q<sub>5</sub>.
Q2) Define minimum efficient scale.
Q3) Technical economies of scale are closely related to which of the following?
A)The law of diminishing returns.
B)Decreasing returns to scale.
C)Rising short-run average total cost.
D)Falling short-run marginal cost.
E)Increasing returns to scale.
Q4) A market can be too small if its limits the size of the firm to an output level that is below economic capacity in the long-run
A)True
B)False
Q5) What is the shape of the LRAC curve for a firm enjoying economies of scale?
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Chapter 8: Perfect Competition
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Sample Questions
Q1) Explain why a firm will continue to operate as long as its loss is no greater than its total fixed costs.
Q2) Refer to the information above to answer this question.What is the manufacturer's break-even price?
A)0.
B)$64.
C)$80.
D)$82.
E)$90.
Q3) Refer to the above information to answer this question.If the price of the product is $160,how many will the manufacturer produce and what will be its profit or loss?
A)0 and a loss of $500.
B)5 and a loss of $190.
C)5 and a profit of $310.
D)6 and a loss of $240.
E)8 and a profit of $140.
Q4) Suppose that at an output of 10,a firm's MC = AVC,and at an output of 30 its MR = AVC.This means that its profit-maximizing output must be between 10 and 30 units.Evaluate this statement.
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Chapter 9: An Evaluation of Competitive Markets
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Sample Questions
Q1) Economic surplus is
A)the ratio of consumer surplus to producer surplus.
B)the difference between consumer surplus and producer surplus.
C)the difference between tax revenue and government expenditure.
D)the sum of consumer surplus and producer surplus.
E)minimized at the point of market equilibrium.
Q2) What are the two ways in which a public good is distinguished from a private good? Briefly explain each.
Q3) Refer to the above graph to answer this question.If the price of the product is P1,what does the graph suggest?
A)The firm is operating from the optimal size plant but is not necessarily producing the optimal output.
B)The firm is producing the optimal output but is not necessarily operating from the optimal size plant.
C)The firm is neither operating from the optimal size plant nor necessarily producing the optimal output.
D)The firm is producing the optimal output and is also operating from the optimal size plant.
Q4) What is an externality? Why do they exist?
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Chapter 10: Monopoly
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Sample Questions
Q1) Refer to the above information to answer this question.What is the average revenue of the 5<sup>th</sup> unit?
A)$5.
B)$30.
C)$50.
D)$52.50.
E)$250.
Q2) Refer to the graph above.Area B represents:
A)the loss of surplus by consumers resulting from a monopoly.
B)the cost to society of increasing output from Qm to Qc.
C)consumer surplus redistributed to the monopolist.
D)the loss of surplus by producers resulting from a monopoly.
Q3) Which of the following is true?
A)A monopolist cannot make economic losses in the short run.
B)A monopolist cannot make economic losses in the long run.
C)A monopolist always makes economic profits.
D)A monopolist never makes economic profits.
Q4) What is meant by barriers to entry? What are the three types of barriers? Give an example of each.
Q5) Describe why marginal revenue is always less than price for a monopolist.
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Chapter 11: Imperfect Competition
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Sample Questions
Q1) Refer to the graph above to answer this question.Which of the following statements is correct?
A)This graph illustrates a short-run situation and some firms will soon exit from the industry.
B)This graph illustrates a short-run situation and new firms will soon enter the industry.
C)This graph illustrates a long-run situation and some firms will soon exit from the industry.
D)This graph illustrates a long-run situation and new firms will soon enter the industry.
E)This graph illustrates what could be either a short-run or a long-run situation.
Q2) What is meant by the term "allocative efficiency"?
A)When a firm is producing an output that equals minimum AC.
B)When a firm is producing an output and charging a price that equals minimum AC.
C)When a firm is charging a price equal to MC.
D)When a firm has achieved its MES.
Q3) Explain why monopolistically competitive firms do not earn economic profits in the long-run.
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Chapter 12: The Factors of Production
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Sample Questions
Q1) Through the use of a graph,illustrate the relationship between common property resources and deadweight loss
Q2) Refer to the above information to answer this question.Suppose that the market wage rate is $8,how much more labour will Nearly Done Inc.employ if the marginal product of labour doubles?
A)0.
B)1.
C)2.
D)3.
E)7.
Q3) Refer to the above information to answer this question.What quantities of labour will Nearly Done Inc.definitely not employ regardless of the market wage rate?
A)8,9 or 10.
B)9 or 10.
C)1 or 2.
D)1,2 or 3.
E)Cannot be determined.
Q4) How is MRP different for a monopolist than for a perfectly competitive firm?
Q5) Differentiate between a monopoly and a monopsony.
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Chapter 13: International Trade
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Sample Questions
Q1) What are voluntary export restrictions?
A)A restriction placed on the importation of foreign products.
B)An agreement by an exporting country to restrict the amount of exports to another country.
C)Government restrictions limiting the amount of foreign currency which can be obtained.
D)A limit imposed on the production or sale of a product.
Q2) What is the term for an agreement by an exporting country to restrict the amount of exports to another country?
A)Tariff.
B)Trade agreement.
C)Voluntary export restrictions.
D)Quota.
Q3) What is meant by the infant-industry argument?
A)A country should be self-sufficient in children's products.
B)It is to a country's benefit to buy infant products as cheaply as possible.
C)A country should protect its strategic industries from foreign competition.
D)A country should assist newer industries which are not yet mature enough to compete with foreign industries.
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Page 15