Applied Microeconomics
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Course Introduction
Applied Microeconomics focuses on the practical application of microeconomic theories and concepts to real-world situations and policy issues. This course examines how individuals, firms, and governments make decisions about the allocation of scarce resources, pricing, market structure, and competition. Students will analyze case studies and empirical data to understand consumer behavior, production and costs, labor markets, and welfare economics. Emphasis is placed on using economic models to assess current events, evaluate policy options, and solve practical problems in various industries and sectors.
Recommended Textbook Microeconomics 5th Edition by Glenn Hubbard
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Page 2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) Mr.Peabody chooses to invest in companies that produce goods and services at the lowest possible cost.Mr.Peabody is investing in companies that are
A) allocatively efficient.
B) productively efficient.
C) guaranteed to make a profit.
D) all of the above.
Answer: B
Q2) In economics,the term ________ means "additional" or "extra."
A) allocative
B) marginal
C) equity
D) optimal
Answer: B
Q3) When production reflects consumer preferences,________ occurs.
A) allocative efficiency
B) productive efficiency
C) equity
D) efficient central planning
Answer: A
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Page 3
Chapter
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Sample Questions
Q1) Refer to Figure 2-4.Consider the following events:
a.a reduction in the patent protection period to no more than 2 years
b.a war that destroys a substantial portion of a nation's capital stock
c.the lack of secure and enforceable property rights system
Which of the events listed above could cause a movement from W to V?
A) a only
B) a and b only
C) a and c only
D) b and c only
E) a, b, and c
Answer: C
Q2) Refer to Table 2-6.What is Haley's opportunity cost of making a necklace?
A) 3/4 of a bracelet
B) 3 bracelets
C) 1 1/3 necklaces
D) 2 necklaces
Answer: A
Q3) What is meant by the term opportunity cost?
Answer: Opportunity cost is the highest-valued alternative that must be given up to engage in an activity.
Page 4
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) Refer to Figure 3-1.A decrease in taste or preference would be represented by a movement from
A) A to B.
B) B to A.
C) D<sub>1</sub> to D<sub>2</sub>.
D) D<sub>2 </sub>to D<sub>1</sub>.
Answer: D
Q2) If the price of refillable butane lighters was to decrease,then
A) the demand for butane would decrease.
B) the demand for butane would increase.
C) the quantity of butane demanded would increase.
D) the quantity of butane demanded would decrease.
Answer: B
Q3) Which of the following is the correct way to describe equilibrium in a market?
A) At equilibrium, demand equals supply.
B) At equilibrium, quantity demanded equals quantity supplied.
C) At equilibrium, market forces no longer apply.
D) At equilibrium, scarcity is eliminated.
Answer: B
Page 5
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Chapter 4: Economic Efficiency, government Price Setting, and Taxes
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Sample Questions
Q1) Suppose a price floor on sparkling wine is proposed by the Health Minister of the country of Vinyardia.What will be the likely effect on the market for sparkling wine in Vinyardia?
A) Quantity demanded will decrease, quantity supplied will increase, and a surplus will result.
B) Quantity demanded will increase, quantity supplied will decrease, and a surplus will result.
C) Quantity demanded will decrease, quantity supplied will increase, and a shortage will result.
D) Quantity demanded will increase, quantity supplied will decrease, and a shortage will result.
Q2) The sum of consumer surplus and producer surplus is called economic surplus. A)True
B)False
Q3) Refer to Figure 4-8.How much of the tax is paid by producers?
A) $2
B) $5
C) $7
D) $12
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Chapter 5: Externalities, environmental Policy, and Public Goods
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Sample Questions
Q1) An externality refers to economic events outside a market.
A)True
B)False
Q2) It is difficult for a private market to provide the economically efficient quantity of a public good because
A) by law governments cannot use cost-benefit analysis to determine this quantity.
B) public goods produce positive and negative externalities.
C) individual preferences are not revealed in the market for the good.
D) it is too expensive to produce the necessary amount of the good.
Q3) The free rider problem refers to a situation in which
A) people consume a pure public good without payment, even though the good may not be produced if no one chooses to pay.
B) the marginal cost of allowing additional consumers to consume a public good is zero.
C) high income individuals subsidize the production of goods, such as education, that make society better off.
D) markets fail to allocate resources efficiently when benefits outweigh costs.
Q4) State the Coase theorem.
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Chapter 6: Elasticity: The Responsiveness of Demand and Supply
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Sample Questions
Q1) Which of the following goods would have the most inelastic demand?
A) ski vacations
B) bread
C) luxury cars
D) big screen TVs
Q2) The value of the price elasticity of supply depends primarily on how quickly firms can acquire inputs to increase quantity supplied when price increases.
A)True
B)False
Q3) Refer to Table 6-6.
a.Using the information in the table,calculate the income elasticity of demand for good X and characterize the good.Use the midpoint formula.
b.Can you calculate the income elasticity of demand for good Y? If you can,show your calculation and characterize the good.If you cannot,explain why.
Q4) Briefly explain the economic concept of elasticity.
Q5) Most food products have low income and price elasticities of demand.
A)True
B)False
8
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Chapter 7: The Economics of Health Care
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Sample
Questions
Q1) Most employees ________ pay taxes on the value of health insurance provided by employers,and most people ________ get a tax break when buying individual health insurance policies.
A) do; do
B) do; do not
C) do not; do
D) do not; do not
Q2) Refer to Figure 7-2.If consumers paid the full price of medical services,the price they would pay is
A) $25.
B) $40.
C) $55.
D) >$55.
Q3) Briefly explain 4 of the difficulties in making cross-country comparisons in health care outcomes.
Q4) A doctor pursuing his own interests rather than the interests of his patients is an example of the principal-agent problem.
A)True
B)False
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Chapter 8: Firms, the Stock Market, and Corporate Governance
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Sample Questions
Q1) Securities dealers that trade stocks and bonds outside exchanges comprise the A) foreign exchange market.
B) over-the-counter market.
C) NASDAQ market.
D) outlet market.
Q2) Mortgages issued to borrowers whose credit histories include failures to make payments on bills are known as ________ mortgages.
A) catastrophic
B) variable rate
C) subprime
D) Alt-A
Q3) Jake sells Star Wars memorabilia on eBay.His annual revenue is $42,000 per year,the explicit costs of his business are $10,000,and the opportunity costs of his business are $18,000 per year.What are the implicit costs of his business?
A) $8,000
B) $18,000
C) $24,000
D) $32,000
Q4) In a corporation,what are "inside directors" and "outside directors"?
Page 10
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Chapter 9: Comparative Advantage and the Gains From International Trade
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Sample Questions
Q1) The United States has developed a comparative advantage in film production due to the film industry being long-established in southern California,and lower costs result from the size of the industry in the area.This source of comparative advantage is referred to as
A) the abundance of natural resources.
B) superior process technology.
C) external economies.
D) best practices of unskilled labor.
Q2) Protectionism refers to the use of trade barriers to shield domestic firms from foreign competition.
A)True
B)False
Q3) Refer to Table 9-6.Which country has a comparative advantage in producing hats?
A) Denmark
B) Belize
C) both countries
D) neither country
Q4) What are the four main sources of comparative advantage? Briefly explain each source and provide examples.
Q5) What is dumping? Who benefits and who loses from dumping?
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Chapter 10: Consumer Choice and Behavioral Economics
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Sample Questions
Q1) Refer to Figure 10-5.Suppose the price of pizza increases while the price of hamburger remains constant.Then,the consumer's
A) indifference curve becomes more concave away from the origin.
B) indifference curve becomes straighter.
C) budget constraint moves inward toward the origin on the pizza axis while the hamburger intercept remains the same.
D) budget constraint moves outward away from the origin on the pizza axis while the hamburger intercept remains the same.
Q2) The substitution effect of an increase in the price of Raisin Bran refers to
A) the decrease in the demand for Raisin Bran when its price rises.
B) the result that consumers will now switch to a substitute good such as Cheerios, and the demand curve for Raisin Bran shifts to the left.
C) the fact that the higher price of Raisin Bran lowers consumer's purchasing power, holding money income constant.
D) the fact that the higher price of Raisin Bran relative to its substitutes, such as Cheerios, cause consumers to buy less Raisin Bran.
Q3) What is a Giffen good?
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Page 12
Chapter 11: Technology, production, and Costs
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Sample Questions
Q1) The financial success of the movies The Lion King and Toy Story led to
A) a decrease in the salaries of animators and an increase in the number of animators used to produce films.
B) an increase in demand for actors to play roles in animated films.
C) the Disney studio's attempt to buy Pixar Animation Studios.
D) a reduction in the price of computers and software relative to the price of labor (animators) used to produce animated films.
Q2) Refer to Figure 11-18.Starting from point e,a movement along the isocost to point f
A) decreases the total cost of production but not output.
B) increases the total cost of production and decreases output.
C) decreases both the total cost of production and output.
D) decreases output but not the total cost of production.
Q3) What are economies of scale? What are diseconomies of scale?
Q4) If fixed costs do not change,then marginal cost
A) also remains constant.
B) equals the change in variable cost divided by the change in output.
C) equals the change in average variable cost divided by the change in output.
D) equals the change in average fixed cost divided by the change in output.
Q5) What is the difference between total cost and variable cost in the long run?
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Chapter 12: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) To maximize profit,a firm will produce the level of output where MR = MC.If a firm actually makes a profit depends on the relationship of price to average total cost.What are the three possible relationships between price and average total cost that determine if a firm will make a profit,experience a loss,or break even?
Q2) Refer to the Article Summary.All else equal,the increase in demand for chicken and milk exports will ________ the market prices for these exports and ________ economic profit in these markets.
A) increase; decrease
B) decrease; increase
C) increase; increase
D) decrease; decrease
Q3) What characteristic of a competitive market has made the "long run pretty short" in the market for iPhone applications?
A) few firms in the market
B) identical products
C) ease of entry
D) blocked entry
Q4) Why are individual buyers and sellers in perfect competition called price takers?
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Page 14
Chapter 13: Monopolistic Competition: the Competitive
Model in a More Realistic Setting
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Sample Questions
Q1) The economic analysis of monopolistic competition shows that market forces eliminate profits in the long run.However,it is possible for a firm to continue to earn economic profits if the firm
A) expands its marketing budget.
B) adopts new technologies that enable it to lower its cost of production.
C) expands its product offerings to appeal to a wider range of consumers.
D) reduces its price to expand its market.
Q2) A monopolistically competitive firm faces a downward-sloping demand curve because
A) it is able to control price and quantity demanded.
B) there are few substitutes for its product.
C) of product differentiation.
D) its market decisions are affected by the decisions of its rivals.
Q3) Which of the following characteristics is not common to monopolistic competition and perfect competition?
A) Firms act to maximize profit.
B) Entry barriers into the industry are low.
C) The market demand curve is downward -sloping.
D) Firms take market prices as given.
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Q4) What is the difference between zero accounting profit and zero economic profit?
Chapter 14: Oligopoly: Firms in Less Competitive Markets
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Sample Questions
Q1) A prisoner's dilemma leads to a noncooperative equilibrium.
A)True
B)False
Q2) Refer to Figure 14-5.Does it make sense for Netflix to lower its price in order to deter Blockbuster's entry into the online DVD rental market?
A) Yes, because Netflix stands to make a profit of $7 million by lowering its price and keeping Blockbuster out of the market.
B) No, because Netflix will make a higher profit by keeping its subscription price unchanged, whether Blockbuster enters the market or not.
C) Yes, because it is always profitable to remain a monopoly.
D) No, because Blockbuster will enter the market regardless of Netflix's decision about its subscription price.
Q3) A supplier of an input is unlikely to have bargaining power if
A) the input supplied is specialized.
B) many firms can supply the input.
C) it is the sole supplier of the input.
D) it has a patent on the input.
Q4) Explain why OPEC is caught in a prisoner's dilemma?
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Page 16
Chapter 15: Monopoly and Antitrust Policy
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Sample Questions
Q1) Network externalities
A) can only exist when there are economies of scale.
B) prevent the dominance of a market by one firm.
C) exist when the usefulness of a product increases with the number of consumers who use it.
D) are created when celebrity endorsements of products lead to a surge in the demand for those products.
Q2) Consider an industry that is made up of six firms with the following market shares: Firm A - 50%,Firm B - 20%,Firms C and D - 10% each,and Firms E and F - 5% each.What is the value of the Herfindahl-Hirschman Index and how will the industry be categorized?
A) 2,500; mildly concentrated
B) 3,150; highly concentrated
C) 8,100; highly concentrated
D) 10,000; effectively competitive
Q3) A narrow definition of monopoly is that a firm is a monopoly if it can ignore A) government antitrust laws.
B) the pricing decisions of its suppliers.
C) the pricing decisions of firms that produce complementary products.
D) the actions of all other firms.
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Page 17
Chapter 16: Pricing Strategy
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Sample Questions
Q1) Arnold Marion,a first-year economics student at Fazer College,was given an assignment to find an example of price discrimination and present it to his class.When asked for his example Arnold said "I went to a Milwaukee Brewers baseball game with my cousin last week.We paid $25 each for our seats in left field.My aunt and uncle paid $50 each for their tickets; they sat five rows behind the first base dugout.This is an example of price discrimination since we paid different prices for the same product,and the differences were not due to differences in costs." How would Arnold's economics instructor assess Arnold's example?
A) He would agree with Arnold that he had found an example of price discrimination, but would add that arbitrage would occur if ticket scalpers sold Brewers tickets for more than the prices Arnold and his uncle paid.
B) He would disagree with Arnold's example because the $25 seats and the $50 seats were not the same products.
C) He would agree with Arnold that he had found an example of price discrimination and would explain that the elasticity of demand for Brewers tickets is different for Arnold and his uncle.
D) He would disagree with Arnold's example because there were differences in transactions costs for the $50 tickets and the $25 tickets.
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Page 18
Chapter 17: The Markets for Labor and Other Factors of Production
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Sample Questions
Q1) In order for a labor supply curve to be backward bending at high wages
A) leisure must be an inferior good.
B) the substitution effect of a wage increase must be greater than the income effect.
C) workers must have an irrational response to wage increases.
D) the income effect of a wage increase must be greater than the substitution effect.
Q2) According to the marginal productivity theory of income
A) the greater the quantity of resources owned by an individual, the greater his incentive to increase productivity and his income.
B) the average income received by an individual who supplies resources is influenced by the resources owner's marginal productivity.
C) the income received by an individual who supplies labor services equals the incremental benefit generated to the firm by that individual's labor.
D) the income received by an individual who supplies labor services equals the profit generated to the firm by that individual's labor.
Q3) What is the marginal productivity theory of income distribution?
Q4) What is personnel economics?
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Page 19
Chapter 18: Public Choice,taxes,and the Distribution of Income
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Sample Questions
Q1) Which of the following groups had the highest poverty rate in 2011 in the United States?
A) Asians
B) blacks
C) Hispanics
D) female heads of families
Q2) If you pay $2,000 in taxes on an income of $20,000,and a tax of $2,700 on an income of $30,000,then over this range of income the tax is
A) regressive.
B) proportional.
C) progressive.
D) There is insufficient information to answer the question.
Q3) Describe the main factors economists believe cause inequality of income.
Q4) Which of the following summarizes the information provided by a Lorenz curve?
A) the Lorenz coefficient
B) the income distribution ratio
C) the Gini coefficient
D) the slope (the rise divided by the run) of the Lorenz curve at a particular point on the curve
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