Applied Microeconomics
Test Questions
Course Introduction
Applied Microeconomics explores how individuals, firms, and governments make decisions regarding the allocation of scarce resources and the interactions that shape markets and economic outcomes. This course emphasizes real-world applications of microeconomic theory, covering topics such as consumer behavior, production and cost analysis, pricing strategies, market structures, labor markets, and policy interventions. Students will learn to use analytical tools and empirical methods to evaluate economic policies, interpret data, and solve practical problems across various industries and public policy contexts.
Recommended Textbook
Modern Labor Economics Theory and Public Policy 11th Edition by Ronald G. Ehrenberg
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Page 2
Chapter 1: Introduction
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Q1) If the slope of a regression line is negative, then an increase in the independent variable will cause
A) an increase in the dependent variable.
B) an increase in the error term.
C) a decrease in the dependent variable.
D) a decrease in the error term.
Answer: C
Q2) Which of the following will NOT prevent a mutually beneficial transaction from occurring?
A) the fact that one party's utility will be decreased by the transaction
B) ignorance about availability of a service or product
C) a law against overtime work
D) a tax on labor services
Answer: A
Q3) Economists generally assume that workers maximize
A) their income.
B) their leisure time.
C) their utility.
D) their nonpecuniary benefits.
Answer: C
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Chapter 2: Overview of the Labor Market
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Q1) Because workers choose between various employers offering the same type of job based primarily on wages,
A) the market demand curve for chefs is downward sloping.
B) the market supply curve for chefs is upward sloping.
C) the firm supply curve for chefs is vertical.
D) the firm supply curve for chefs is horizontal.
Answer: D
Q2) Which of the following occurs if a firm pays workers more than the market wage?
A) Its application rate will be higher than usual.
B) Its quit rate will be lower than usual.
C) It will have a surplus of labor.
D) All of above occur.
Answer: D
Q3) During the twentieth century, the unemployment rate in the United States
A) has remained roughly constant.
B) has consistently been higher than in other industrialized countries.
C) has generally decreased.
D) has become more stable.
Answer: D
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Page 4
Chapter 3: The Demand for Labor
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Q1) Studies show that most of a payroll tax is paid by workers in the form of lowered wages. If true, these studies imply
A) the supply of labor curve is very steep.
B) the supply of labor curve is very flat.
C) it would be better if employers were made to pay all of the tax.
D) the demand for labor curve is very steep.
Answer: A
Q2) A worker's hourly wage is $25 and output sells for $5 a unit. What is the minimum marginal product a worker must produce in order for a competitive employer to break even when hiring the worker?
A) 1/5
B) 5
C) 25
D) 125
Answer: B
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Chapter 4: Labor Demand Elasticities
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Q1) Other things equal, an elastic demand for an industry's output will tend to make the industry's own wage elasticity of demand
A) high.
B) low.
C) positive.
D) zero.
Q2) If teenagers and adults are substitutes in production, and the wage of teenagers falls, then
A) they must be gross substitutes and the employment of adults will fall.
B) they must be gross complements and the employment of adults will fall.
C) they could be either gross substitutes or gross complements and the employment of adults could rise or fall.
D) they must be gross substitutes and the employment of adults will rise.
Q3) In an industry, when the price of electricity goes up, the company employs more low-skilled workers. This implies
A) The substitution effect dominated in scale effect
B) The scale effect dominated the substitution effect
C) The substitution effect worked in the same direction as the scale effect
D) The scale effect was positive
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Page 6
Chapter 5: Frictions in the Labor Market
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Q1) It costs an employer $20,000 to train a worker. The worker, after training, is paid $50,000. During a recession, the worker's productivity falls, but then, one year later is expected to return to its original level such that the present value of future profits is $30,000. What is the lowest the worker's productivity during the year can fall to before the firm will consider firing the worker (assuming they continue to pay $50,000 a year)?
A) $20,000
B) $30,000
C) $40,000
D) $0
Q2) A monopsony can hire one worker at a wage of $5, two workers at a wage of $6 each, three workers at $7 each, and so on (each added worker adding one dollar to the wage rate). If the marginal revenue product for all workers is $16, what wage will it pay?
A) $10
B) $11
C) $16
D) $17
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Chapter 6: Supply of Labor to the Economy: the Decision to Work
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Q1) If Gene receives a raise in his hourly wage and decides he would like to increase his hours of work, we know that
A) his income effect is greater than his substitution effect.
B) his substitution effect is greater than his income effect.
C) his income and substitution effects are equal.
D) his income and substitution effects reinforce each other.
Q2) An increase in the wage rate when the substitution effect dominates will ________ labor force participation and ________ hours of work (of those working before and after the wage increase).
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Q3) If Alice's wage increases from $6.00 per hour to $6.50 per hour, then
A) she will want to work more hours than before her raise.
B) she will want to work fewer hours than before her raise.
C) she will want to work the same number of hours as before her raise.
D) she may want to work more, fewer, or the same number of hours as before her raise.
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Chapter 7: Labor Supply: Household Production, the Family, and
the Life Cycle
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Q1) In the labor supply model that emphasizes household production time, restaurant meals will be more in demand, other things the same, in single households with
A) high wages and high income.
B) high wages and low income.
C) low wages and high income.
D) low wages and low income.
Q2) Empirically, the "added-worker" effect is ________ in magnitude than the "discouraged-worker" effect.
A) larger
B) roughly equal
C) smaller
D) roughly double
Q3) Most people travel more and enjoy more leisure when they are elderly than when they are middle-aged. This can be explained by
A) income effects due to decreasing wages.
B) substitution effects due to increasing wages.
C) life-cycle considerations.
D) the fact that their time is relatively expensive.
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Chapter 8: Compensating Wage Differentials and Labor Markets
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Q1) The offer curve describes
A) different wage offers a firm will make to workers of different education levels.
B) different wage-and-risk level offers made by different firms.
C) different wage-and-risk levels available to one firm.
D) different risk levels associated with the same wage level.
Q2) There are 100 jobs in a town and 100 workers. Forty of the jobs are dangerous, 60 are safe. Workers have the following preferences: worker one dislikes danger by $1, worker two dislikes danger by $2, worker three dislikes danger by $3, and so forth (such that worker hundred dislikes danger by $100). Assume workers are mobile and well-informed and the labor market is mobile. Also assume that safe jobs pay $500 a week. Which of the following statements will be true?
A) Dangerous jobs will pay $540 a week.
B) Worker one will earn rents of $39.
C) Worker hundred will earn rents of $60.
D) All of the above are true.
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Page 10
Chapter 9: Investments in Human Capital: Education and Training
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Q1) John is trying to decide whether to go to college or to start working right out of high school. College as an investment is most likely justified when ________ is greater than the cost of going to college.
A) the present value of the difference between what John would earn as a college graduate and what he would earn as a high school graduate
B) the present value of what John would earn as a college graduate
C) the sum of lifetime earnings as a college graduate
D) the difference between the sum of lifetime earnings as a college graduate and the sum of lifetime earnings as a high school graduate.
Q2) For educational investment to be explained using hedonic theory, the costs of education
A) must be the same for present- and future-oriented people.
B) must decrease with age.
C) must be identical for all workers.
D) must vary between workers.
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Chapter 10: Worker Mobility: Migration, Immigration, and Turnover
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Q1) Which of the following can NOT explain why wages in Miami did not fall and unemployment rates did not increase after the Mariel boatlift?
A) The labor demand curve shifted to the right.
B) Some people moved out of Miami in response to the influx.
C) Miami's economy went through a rapid "boom" right after the immigrants arrived.
D) A high percentage of the immigrants were unskilled workers.
Q2) The Immigration Reform and Control Act of 1986 was
A) the first act to increase the number of immigrants allowed to enter the United States each year.
B) the first act to punish employers of illegal immigrants.
C) the first act to place quotas on immigrants by skill level.
D) the first act to limit immigration to America.
Q3) Suppose that by moving, one could increase one's income by 20%. Which of these events will reduce the likelihood a person will move
A) wages in the person's profession, nationwide, fall dramatically.
B) the person becomes better educated.
C) markets for the person's skill become less localized.
D) the person has no children, making a good fit less important.
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Chapter 11: Pay and Productivity: Wage Determination
Within the Firm
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Q1) In a competitive labor market, Firm X pays a higher wage than other firms. The only reason it pays a higher wage is to attract a larger labor pool and get the better workers. Which of the following would we expect to observe about Firm X (as compared to the other firms in the industry)?
A) Firm X makes about the same rate of profit (as other firms).
B) Firm X will have a higher quit rate.
C) Firm X will set up its retirement package so workers retire early.
D) Firm X's wage will continually rise with seniority.
Q2) In a perfectly competitive economy, workers are well-informed and firms can monitor workers. Suppose the government then passes a "Worker Privacy Act" that makes it very expensive to monitor workers. Which of the following is most likely to occur?
A) Employment and wages will fall.
B) Employment will fall but the effect on wages is uncertain.
C) Employment and wages will rise.
D) Wages will rise but the effect on employment is uncertain.
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Chapter 12: Gender, Race, and Ethnicity in the Labor Market
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Q1) Studies including cognitive achievement among the measures of productive have generally found
A) differences in cognitive achievement alone explain most of the overall black/white earnings gap.
B) differences in cognitive achievement alone explain most of the overall male/female earnings gap.
C) differences in cognitive achievement do not explain most of the overall black/white earnings gap.
D) differences in cognitive achievement explain most of the variation in earnings among people.
Q2) Suppose that the labor force participation of married males is 70% and their unemployment rate is 20%, then their employment rate
A) is 50%.
B) is 56%.
C) is 80%.
D) cannot be calculated without more information.
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Chapter 13: Unions and the Labor Market
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Q1) The potential gains to a union in terms of wages and employment will be greatest if the firm's demand for labor is
A) elastic.
B) inelastic.
C) of unit elasticity.
D) horizontal.
Q2) If attitudes change and unions are perceived as dangerous to American companies' ability to compete in the world market, then
A) the demand curve for union services will shift to the left.
B) the demand curve for union services will shift to the right.
C) we will move to the left along the demand curve for union services.
D) we will move to the right along the demand curve for union services.
Q3) Which of the following best describes the economic nature of a union?
A) a monopoly
B) a monopsonist
C) a producer of public goods
D) an agency assuring workers get wage reflecting their supply price of labor.
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15
Chapter 14: Unemployment
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Q1) Unemployment insurance in the United States is structured so that
A) replacement rates are constant.
B) almost all unemployed workers can collect UI benefits.
C) UI benefits are partially linked to previous pay.
D) UI benefits may be collected for one year after the job loss.
Q2) If workers for a firm have mainly general human capital, then when the demand for its output falls, the firm will mainly
A) lower wages.
B) cut back on employment.
C) cut work hours of all workers.
D) increase its specific investment in workers as the opportunity cost of training is low.
Q3) If unemployment insurance were perfectly experience rated then
A) unemployment would probably rise.
B) unemployment would probably fall.
C) unemployment could either rise or fall.
D) unemployment would be unchanged.
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Chapter 15: Inequality in Earnings
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Q1) If all incomes were to double (due to inflation, for example) then the coefficient of variation of income will
A) increase.
B) decrease.
C) remain unchanged.
D) either increase or decrease.
Q2) Data on the ratio of wages of full-time workers at the 90th percentile to those at the 10th percentile show all the following EXCEPT
A) the ratio is generally higher among men than among women.
B) the ratio has climbed in almost all industrialized countries.
C) the ratios are higher in the United States and Canada than elsewhere.
D) the ratios in industrialized countries generally range between 3 and 5.
Q3) The Lorenz curve will ________ whenever the distribution of family income becomes less equal.
A) move closer to the diagonal line
B) become straighter
C) move farther from the diagonal line
D) cross the previous Lorenz Curve
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17
Chapter 16: The Labor Market Effects of International Trade and
Production Sharing
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Q1) Nation X produces and consumes only one good. This good is produced only with labor and all workers are exactly alike. One worker produces one unit of this good every day. One worker in Nation Y can produce two units of the goods a day (and this is the only good they consume). What will happen if there is open trade between the countries?
A) Nation X will import from Nation Y.
B) Nation X will outsource the production of the good to Nation Y.
C) Nation Y will import the good from Nation X.
D) No trade or outsourcing will take place.
Q2) Suppose Santa Claus actually existed and caused all toy-making workers in America to lose their job. The Pareto optimal social policy would be to A) even the playing field by making Santa charge the same price for toys as American toy firms.
B) require Americans to buy an equivalent amount of toys from American workers.
C) require Santa to buy an equivalent amount of American-made goods.
D) do nothing if displaced workers can quickly find jobs paying the same or more
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Page 18