Applied Microeconomics Review
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Course Introduction
Applied Microeconomics focuses on the practical application of microeconomic theories and concepts to real-world issues and business decision-making. The course examines how individuals, firms, and governments make choices regarding the allocation of scarce resources, explores market structures, pricing strategies, and consumer behavior, and analyzes the effects of policy interventions on market outcomes. Through case studies and empirical methods, students learn to apply economic reasoning to issues such as labor markets, regulation, public goods, and industrial organization, developing skills to interpret and solve complex economic problems in various professional fields.
Recommended Textbook
Managerial Economics Theory Applications and Cases 8th Edition by W. Bruce Allen
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19 Chapters
693 Verified Questions
693 Flashcards
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Chapter 1: Introduction
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Sample Questions
Q1) Owner-supplied labor is a cost that is usually:
A) included in both accounting costs and economic costs.
B) included in accounting costs but not in economic costs.
C) included in economic costs but not in accounting costs.
D) not included in either accounting costs or economic costs.
E) ignored because it is impossible to place a value on it.
Answer: C
Q2) What is the relationship between economic and accounting profit?
A) Economic profit is equal to accounting profit.
B) Economic profit is greater than accounting profit.
C) Economic profit is less than accounting profit.
D) Economic profit may be equal to or less than accounting profit.
E) Economic profit may be equal to or greater than accounting profit.
Answer: D
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3
Chapter 2: Demand Theory
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Sample Questions
Q1) El Niño wind patterns affected the weather across the United States during the winter of 1997-1998.Suppose the demand for home heating oil in Connecticut is given by Q = 20 - 2P<sub>hho</sub> + 0.5P<sub>ng</sub> - TEMP,where Q is the quantity of home heating oil demanded,P<sub>hho</sub> is the price of home heating oil per unit,P<sub>ng</sub> is the price of natural gas per unit,and TEMP is the absolute difference between the average winter temperature over the past 10 years and the current average winter temperature.If the current price of home heating oil is $1.20,the current price of natural gas is $2.00,and the average winter temperature this year is 40 degrees compared to 28 degrees over the past 10 years,the quantity of home heating oil demanded is:
A) 6.6 gallons.
B) 16.6 gallons.
C) 35.4 gallons.
D) 20 gallons.
E) none of the above.
Answer: A
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Chapter 3: Consumer Behavior and Rational Choice
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Sample Questions
Q1) John spends his budget on food and clothing each month.His utility function is given by TU = 100C<sup>0.25</sup>F <sup>0.75</sup>.The marginal rate of substitution of clothing for food is:
A) 0.33F/C.
B) 0.25FC.
C) 0.33F<sup>2</sup>C.
D) 25F/C.
E) 0.66C/F.
Answer: A
Q2) Betty is investing in the stock market.She is choosing among a variety of stocks; each stock has an expected return and a level of risk attached.Betty likes higher returns and she likes risk.If we were to draw indifference curves for Betty over risk and expected return,they would be:
A) L-shaped.
B) linear.
C) upward-sloping.
D) downward-sloping.
E) vertical lines.
Answer: D
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Page 5
Chapter 4: Estimating Demand Functions
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Sample Questions
Q1) If the Durbin-Watson statistic is 2,we can conclude that:
A) there is no serial correlation.
B) the error terms have constant variances.
C) there is negative serial correlation.
D) there is positive serial correlation.
E) there is multicollinearity.
Q2) The most frequently used method for estimating demand functions is:
A) market experiments.
B) consumer interviews.
C) regression analysis.
D) focus groups.
E) casual introspection.
Q3) If the Durbin-Watson statistic is near 4,we can conclude that there is:
A) positive serial correlation.
B) negative serial correlation.
C) no serial correlation.
D) a multicollinearity problem.
E) not enough data to estimate the regression.
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6
Chapter 5: Production Theory
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Sample Questions
Q1) Hedge Fun is a landscaping firm that specializes in topiary.Last year,the firm had 30 employees and served 120 customers.This year,it had 35 employees and served 135 customers.What is the marginal product of labor?
A) 2.
B) 3.
C) 4.
D) 5.
E) None of the above.
Q2) Output elasticity can be defined as the:
A) percentage change in output divided by the (equal) percentage change in all inputs.
B) change in output divided by the change in all inputs.
C) change in inputs divided by the change in output.
D) change in output divided by the change in one input.
E) percentage change in output divided by the (average) percentage change in all inputs.
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Chapter 6: The Analysis of Costs
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Sample Questions
Q1) If total cost is given by TC = a + bQ - cQ<sup>2</sup> + dQ<sup>3</sup>,then marginal cost is minimized at units of output.
A) Q<sup>*</sup> = a/2d
B) Q<sup>*</sup> = b/2d
C) Q<sup>*</sup> = c/2d
D) Q<sup>*</sup> = b/3d
E) Q<sup>*</sup> = c/3d
Q2) The opportunity cost doctrine says that opportunity costs:
A) and economic costs differ by the amount of implicit costs.
B) should always be greater than explicit costs.
C) should usually be greater than explicit costs.
D) and the firm's production costs determine the firm's economic cost of production.
E) can never be properly figured by accountants.
Q3) Economies of scale are said to exist whenever:
A) the learning curve is upward-sloping.
B) increases in output bring about higher output.
C) increases in output bring about higher input prices.
D) the elasticity of total cost with respect to output is greater than 1.
E) the long-run average cost curve is downward-sloping.
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Page 8
Chapter 7: Perfect Competition
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Sample Questions
Q1) In the model of perfect competition,firms produce a:
A) standardized product with considerable control over price.
B) differentiated product with considerable control over price.
C) standardized product with no control over price.
D) differentiated product with no control over price.
E) standardized or differentiated product with some control over price.
Q2) The long-run supply curve for a product is horizontal with ATC = 200.Market demand is defined as P = 1,000 - 5Q.The market is competitive and is in long-run equilibrium with 40 firms in the industry.If a $50 tax is imposed on sellers,how many firms will be in the industry at the new long-run equilibrium?
A) 44.
B) 37.
C) 32.
D) 29.
E) 28.
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Chapter 8: Monopoly and Monopolistic Competition
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Sample Questions
Q1) To maximize profit,the firm must:
A) mark up average variable costs.
B) mark up marginal costs.
C) mark up average fixed costs.
D) set the markup equal to -1/(\(\eta\) + 1).
E) b and d
Q2) Bathworks has exclusive rights to sell its perfumes.The demand for its perfumes faced by Bathworks is given by Q = 250 - 0.5P.Bathworks's costs are given by TC = 50Q + 5.5Q<sup>2</sup>.Its maximum monopoly profit is:
A) $6,750.
B) $7,050.
C) $7,500.
D) $7,750.
E) $8,750.
Q3) At the profit-maximizing level of output for the monopolist:
A) total revenue is equal to total cost.
B) total costs are minimized.
C) total revenue is maximized.
D) marginal revenue is equal to marginal cost.
E) average revenue is equal to average cost.
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Chapter 9: Managerial Use of Price Discrimination
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Sample Questions
Q1) The per-week demand for use of the Golden Gate Bridge in San Francisco is P = 130.15Q during peak traffic periods and P = 10 - 0.1Q during off-peak hours,where Q is the number of cars crossing the bridge in thousands and P is the toll in dollars.If the marginal congestion cost of using the bridge is MC = 5 + 0.2Q,what is the optimal peak load toll for crossing the bridge?
A) 6.5.
B) 8.0.
C) 8.7.
D) 9.9.
E) 10.5.
Q2) When a movie theater charges a higher price during the evening than during the day,it is practicing:
A) peak load pricing.
B) first-degree price discrimination.
C) second-degree price discrimination.
D) third-degree price discrimination
E) fourth-degree price discrimination.
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11
Chapter 10: Bundling and Intrafirm Pricing
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Sample Questions
Q1) The XYZ Steel Company produces its own coal for use in its production facility.The demand for steel is given by P<sub>s</sub> = 500 - 2Q<sub>s</sub> and the total cost of producing steel is given by TC<sub>s</sub> = 175Q<sub>s</sub>,where Q<sub>s</sub> is tons of steel per week.The price of coal in a perfectly competitive market outside the firm is $250 per ton,and the total cost of producing coal is given by TC<sub>c</sub> = 40 + 5Q<sub>c</sub><sup>2</sup>,where Q<sub>c</sub> is tons of coal per week.How much coal will XYZ sell outside the firm?
A) 6.25 tons.
B) 18.75 tons.
C) 25 tons.
D) 43.75 tons.
E) 75 tons.
Q2) When consumers can purchase a set of goods as a bundle or separately,then the seller is engaging in:
A) simple bundling.
B) complex bundling.
C) performance bundling.
D) mixed bundling.
E) engaged bundling.
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Page 12
Chapter 11: Oligopoly
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Sample Questions
Q1) What is the advantage to a particular firm of cheating on an otherwise effective cartel?
A) The industry can then act like a monopoly.
B) It decreases risk.
C) It enhances credibility.
D) It always pays in the short run and may pay in the long run.
E) It always pays in the long run and may pay in the short run.
Q2) Suppose duopolists in the market for spring water share a market demand curve given by P = 50 - 0.02Q,where P is the price per gallon and Q is thousands of gallons of water per day.The marginal cost of producing water is near zero for both firms.If one firm acts as a first mover,the second firm will produce:
A) 0 gallons of water per day per firm.
B) 625 gallons of water per day.
C) 833 gallons of water per day.
D) 1,250 gallons of water per day.
E) 2,500 gallons of water per day.
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Chapter 12: Game Theory
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Sample Questions
Q1) If a firm has a dominant strategy:
A) its optimal strategy depends on the play of rivals.
B) its optimal strategy is always the same, even if payoffs change.
C) it is determined by the behavior of only one key rival.
D) it receives the same profits regardless of the strategy of rivals.
E) its optimal strategy is independent of the play of rivals.
Q2) Useful strategies to deter entry include:
A) increasing advertising.
B) increasing prices.
C) decreasing capacity.
D) increasing capacity.
E) a and d
Q3) A most-favored-customer clause:
A) is a commitment but not a threat.
B) is a threat but not a commitment.
C) is both a threat and a commitment.
D) is neither a threat nor a commitment.
E) could be either a threat or a commitment depending on the terms.
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14
Chapter 13: Auctions
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Sample Questions
Q1) Second-price,sealed-bid auctions have rules that are incentive-compatible because:
A) they encourage buyers and sellers to maximize profits.
B) they encourage buyers and sellers to collude to fix the results of the auction.
C) they encourage individuals to reveal their true preferences.
D) individual bidders are encouraged to work with rivals to submit bids that maximize joint profits.
E) each buyer is encouraged to submit the same bid.
Q2) What is the optimal bid for a descending-price auction if the bidder's reservation price is 8,the lowest possible bid is 3,and there are five bidders?
A) 3.
B) 6.
C) 7.
D) 8.
E) None of the above.
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Chapter 14: Risk Analysis
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Sample Questions
Q1) A subjective definition of probability is:
A) a weighted average of different peoples' degrees of certainty of an event's occurring.
B) a theoretical probability distribution.
C) a person's degree of certainty of an event's occurring.
D) an expected value of a particular outcome.
E) the number of occurrences of an event in a large number of repetitions of an experiment.
Q2) A chance fork with payoffs given for each branch is assigned a value based on:
A) the highest-payoff branch.
B) the lowest-payoff branch.
C) an average of the highest- and lowest-payoff branches.
D) an evenly weighted average of all payoff branches.
E) a probability weighted average of all payoff branches.
Q3) The range of values the standard deviation(s)can take is:
A) - \(\infty\) < \(\sigma\) < \(\infty\) .
B) 0 < \(\sigma\) < \(\infty\) .
C) 0 < \(\sigma\) < 1.
D) 0 < \(\sigma\)< 100.
E) 0 < \(\sigma\) < 1,000.
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Page 16
Chapter 15: Principalagent Issues and Managerial Compensation
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Sample Questions
Q1) Principal-agent problems can exist between:
A) workers and managers.
B) workers and owners.
C) workers and customers.
D) owners and customers.
E) all the above.
Q2) Incentive-compatible employment contracts exist when:
A) the firm and workers have the same objective.
B) owners and managers have the same level of income.
C) incentives of owners and managers are compatible with, though not necessarily the same as, one another.
D) owners and managers have the same objectives as consumers of the products they produce.
E) base pay for managers is equal to the profit share they realize.
Q3) Firms can avoid or limit the asset substitution problem by:
A) funding with equity.
B) establishing a reputation for protecting creditors.
C) insuring bondholders against risk.
D) applying to the government for insurance for bondholders.
E) a, b, and c.
Page 17
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Chapter 16: Adverse Selection
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Sample Questions
Q1) Adverse selection implies that:
A) the market for used cars is perfectly competitive.
B) the market for used cars will contain more cars of higher than average quality.
C) the market for used cars will contain more cars of lower than average quality.
D) all used cars will be of equal quality.
E) the government overinsures the market for used cars.
Q2) Good drivers have a 20% chance,and bad drivers have a 50% chance,of getting into an accident.A car is worth $900,and an accident would reduce its value to $400.Both types of drivers have utility U = (car value)<sup>0.5</sup>.What is a good driver's expected utility without insurance?
A) 20.
B) 25.
C) 28.
D) 30.
E) None of the above.
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18
Chapter 17: Government and Business
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Sample Questions
Q1) The antitrust law that made certain specified practices that tend to reduce competition or create monopoly illegal was the:
A) Sherman Act.
B) Clayton Act.
C) Federal Trade Commission Act.
D) Robinson-Patman Act.
E) Celler-Kefauver Act.
Q2) When economies of scale persist to such high levels of output that it is efficient to have only one firm produce,the resulting firm is known as a(n):
A) patent holder.
B) regulated monopolist.
C) reluctant monopolist.
D) natural monopolist.
E) acceptable monopolist.
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Chapter 18: Optimization Techniques
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Sample Questions
Q1) Sally sells sandals.She can advertise on radio,A<sub>1</sub>,or on television,A<sub>2</sub>.Profits depend on advertising according to p = 100 + 10A<sub>1</sub> + 20A<sub>2</sub> - A<sup>2</sup><sub>1</sub>A<sup>2</sup><sub>2</sub> + 0.5A<sub>1</sub>A<sub>2</sub>.The profit-maximizing levels of radio and television advertising are:
A) A<sub>1</sub> = $8 and A<sub>2</sub> = $12.
B) A<sub>1</sub> = $12 and A<sub>2</sub> = $12.
C) A<sub>1</sub> = $8 and A<sub>2</sub> = $8.
D) A<sub>1</sub> = $12 and A<sub>2</sub> = $8.
E) A<sub>1</sub> = $10 and A<sub>2</sub> = $10.
Q2) Wilma's Car Repair can repair cars using kryptonite bolts,K,or lithium bolts,L,as long as it uses 10 bolts in toto.The cost of repairing a car is TC = K<sup>2</sup> + L<sup>2</sup> - KL.The cost-minimizing combination of kryptonite and lithium bolts is:
A) K = 6 and L = 4.
B) K = 4 and L = 6.
C) K = 7 and L = 3.
D) K = 3 and L = 7.
E) K = 5 and L = 5.
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Page 20
Chapter 19: Appendix Problems
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Sample Questions
Q1) You've just won the $25 million lottery.You are going to receive a check for $1 million today and at the end of every year for the next 24 years.If the interest rate is 10%,the present value of your prize is:
A) $8,984,744.
B) $9,984,744.
C) $12,984,744.
D) $20,000,000.
E) $25,000,000.
Q2) You buy your child a $100 savings bond that matures in 10 years and pays an annual interest rate of 10%.At maturity the bond will be worth:
A) $228.17.
B) $200.
C) $259.37.
D) $271.17.
E) $217.71.
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