Applied Microeconomics Study Guide Questions
Course Introduction
Applied Microeconomics explores the practical application of microeconomic theories and concepts to real-world issues and decision-making in households, firms, and public policy. This course examines how individuals and organizations allocate resources, respond to incentives, and interact within various market structures. Key topics include consumer and producer behavior, market equilibrium, pricing strategies, market failures, and the role of government intervention. Through case studies and empirical analysis, students will develop the skills to critically analyze economic phenomena and apply microeconomic tools to solve contemporary economic problems.
Recommended Textbook
Managerial Economics and Strategy 1st Edition by Jeffrey M. Perloff
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1600 Verified Questions
1600 Flashcards
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) Managerial economics
A) describes how pay for managers is set.
B) ensures managers always make good decisions.
C) helps managers make decisions in the face of scarcity.
D) explains which products consumers will buy.
Answer: C
Q2) CEOs should focus on
A) beating their competitors.
B) maximizing firm profits.
C) getting the best pay package for the senior management team.
D) minimizing costs.
Answer: B
Q3) Which of the following would NOT be considered part of a firm's strategy?
A) production levels
B) which inputs to use
C) sales strategy
D) None of the above - all are part of a firm's strategy.
Answer: D
Q4) Give an example of a tradeoff a pizza restaurant might face.
Answer: Whether to make pepperoni or combination pizzas.
Page 3
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Chapter 2: Supply and Demand
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Sample Questions
Q1) Agricultural price supports are
A) price ceilings.
B) price floors.
C) quantity quotas.
D) taxes.
Answer: B
Q2) When there is a binding price ceiling
A) there is no equilibrium.
B) the quantity demanded does not equal the quantity supplied.
C) all potential customers are happy because they can buy the good at a lower price.
D) producers move production to another country.
Answer: B
Q3) The supply curve
A) represents the quantity supplied at any given price.
B) represents the quantity actually sold at any given price.
C) is the opposite of the demand curve.
D) always intersects the demand curve.
Answer: A
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Chapter 3: Empirical Methods for Demand Analysis
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Sample Questions
Q1) If the price of orange juice rises 10%,and as a result the quantity demanded falls by 8%,the price elasticity of demand for orange juice is
A) -1.25.
B) elastic.
C) Both A and B above.
D) Neither A nor B above.
Answer: D
Q2) If demand is inelastic
A) then it changes very little in response to a price change.
B) then it changes significantly in response to a price change.
C) then demand is zero.
D) then demand is infinite.
Answer: A
Q3) Smoothing a time series of observations
A) is a form of statistical cheating.
B) is used to reveal an underlying pattern in the data.
C) renders the resultant forecast unusable.
D) allows statisticians to use less data than would otherwise be required.
Answer: B
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Page 5
Chapter 4: Consumer Choice
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Sample Questions
Q1) In behavioral economics,the endowment effect refers to
A) most people believe that most wealthy people inherit their wealth.
B) many people would be indifferent between being endowed with money or knowledge.
C) many people place a higher value on what they own than when they consider purchasing.
D) most people respond to tax incentives to provide an endowment for their children.
Q2) Indifference curves close to the origin are ________ those farther from the origin because of ________.
A) better than; transitivity
B) worse than; nonsatiation
C) better than; completeness
D) worse than; transitivity
Q3) Which of the following might explain the evidence of an endowment effect in behavioral economics?
A) government regulation
B) knowledge and experience
C) the federal tax code
D) class envy
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6
Chapter 5: Production
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Sample Questions
Q1) If MP = 3,and MRTS = -4 what is MPL?
A) 12
B) -12
C) 4/3
D) -4/3
Q2) Let the production function be q=AL K .The function exhibits increasing returns to scale if
A) a + b = 1.
B) a + b > 1.
C) a + b < 1.
D) Cannot be determined with the information given.
Q3) If a Cobb-Douglas production function has alpha = 0.34 and beta = 0.42,then a 1% increase in inputs results in a ________ change in output.
A) 0.8%
B) 8%
C) 0.76%
D) -0.76%
Q4) Explain how firms that each produce as efficiently as they can may not be equally productive.
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Chapter 6: Costs
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Sample Questions
Q1) Variable costs
A) decrease with increasing output.
B) increase with decreasing output.
C) decrease with decreasing output.
D) might increase or decrease with increasing output.
Q2) If a particular production process is subject to diminishing marginal returns to labor at every level of output,then at every level of output
A) AC is upward sloping.
B) MC exceeds AVC.
C) AFC is constant.
D) None of the above.
Q3) Which of the following statements is NOT true?
A) AC = AFC + AVC
B) C = F + VC
C) AVC = wage/MPL
D) AFC = AC - AVC
Q4) The marginal cost curve intersects the average fixed cost curve at its minimum.
A)True
B)False
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Chapter 7: Firm Organization and Market Structure
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Sample Questions
Q1) If a competitive firm cannot earn profit at any level of output during a given short-run period,then which of the following FALSE?
A) It will shut down in the short run and wait until the price increases sufficiently.
B) It will exit the industry in the long run.
C) It will operate at a loss in the short run.
D) It will minimize its loss by decreasing output so that price exceeds marginal cost.
Q2) According to the survivor principle
A) firms will get taken over by their larger rivals over time.
B) only firms that maximize profits survive in highly competitive markets.
C) managers only work hard if they are threatened with their survival at the firm.
D) eventually all firms merge to become one large monopoly.
Q3) If a firm goes out of business because of negative economic profits,its books
A) might indicate a positive accounting profit.
B) might indicate that opportunity costs were zero.
C) might indicate that taxes are too high.
D) might suggest a mistaken value of explicit costs.
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Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) A profit maximizing firm selects output such that A) average profit is maximized.
B) total profit is maximized.
C) marginal profit is maximized.
D) Both A and B.
Q2) A firm will enter a competitive market when
A) it can gather market share at the expense of incumbent firms.
B) it would not be the last firm entering.
C) it can earn a positive long-run profit.
D) the long-run supply curve is upward sloping.
Q3) Suppose that for each firm in the competitive market for potatoes,long-run average cost is minimized at $0.20 per pound when 500 pounds are grown.The demand for potatoes is Q = 10,000/p.If the long-run supply curve is horizontal,then how much will consumers spend,in total,on potatoes?
A) $0
B) $500
C) $10,000
D) $50,000
Q4) When is the profit a firm earns equal to the producer surplus? Explain.
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Chapter 9: Monopoly
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Sample Questions
Q1) When the marginal revenue curve cuts the horizontal axis
A) demand is relatively elastic.
B) demand is relatively inelastic.
C) demand is perfectly elastic.
D) demand is unitary elastic.
Q2) The more elastic the demand curve,a monopoly
A) will have a larger Lerner Index.
B) will face a lower marginal cost.
C) will earn more profit.
D) will lose more sales as it raises its price.
Q3) The Lerner Index is
A) the ratio of the difference between price and marginal cost to price.
B) equal to (Price - MC)/Price
C) a measure of market power.
D) All of the above.
Q4) A firm will increase its spending on advertising until
A) it has monopolized the market.
B) it has deterred all future entry.
C) the marginal benefit of advertising is zero.
D) the marginal benefit of advertising equals the marginal cost of advertising.
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Chapter 10: Pricing With Market Power
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Sample Questions
Q1) Bob is the only carpet installer in a small isolated town.The above figure shows the demand curves of two distinct groups of customers-residential and business.Bob is likely to price discriminate because
A) elasticities differ across markets.
B) the installation of carpets cannot be resold.
C) Bob can probably identify which consumers belong to which segment.
D) All of the above.
Q2) Consumers who place a high value on a good are better off with pricing in the following order: 1)________; 2)________; 3)________.
A) competitive market; perfect price discrimination; single-price monopoly
B) competitive market; single-price monopoly; perfect price discrimination
C) single-price monopoly; competitive market; perfect price discrimination
D) Unable to determine.
Q3) What is one way firms can enforce tie-in sales?
A) one of the goods has no close substitutes
B) contractual arrangements
C) information asymmetry
D) Any of the above.
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Chapter 11: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) Each member of a cartel
A) agrees to reduce output lower than it would if it were acting independently.
B) is operating illegally in every country in which it is doing business.
C) sets output independently of the impact on other members.
D) makes less money than it otherwise would.
Q2) In a Bertrand model,market power is a function of A) marginal cost.
B) the number of firms.
C) price elasticity of supply.
D) product differentiation.
Q3) Television stations have seemingly synchronized their commercial breaks.This is likely an example of A) tacit collusion.
B) explicit collusion.
C) mixed strategies.
D) pure strategies.
Q4) Explain why gasoline stations across the street from each other with large signs displaying their prices may "legally" jointly set monopoly prices.
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Chapter 12: Game Theory and Business Strategy
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Sample Questions
Q1) A private auction is an auction in which
A) individuals know their own value of the good and everyone else's valuation, too.
B) individuals have their own valuation of the good but don't know everyone else's.
C) many auctions are auctioned off at the same time.
D) only one good is auctioned off.
Q2) In a first-price sealed-bid auction,the winner pays
A) its own, highest bid.
B) the amount bid by the runner-up.
C) the average of the three highest bids.
D) the common value.
Q3) In game theory,we usually assume that all players
A) act rationally.
B) use the information available to them to decide on a best strategy.
C) know about the payoffs of the other players.
D) All of the above.
Q4) In auctions,the winner always pays a price equal to the highest (his)bid.
A)True
B)False
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Page 14
Chapter 13: Strategies Over Time
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Sample Questions
Q1) If there are low barriers to entry,a monopolist
A) might undertake investment to lower marginal cost in the face of a potential rival.
B) will undertake investment to lower marginal cost in order to increase profits.
C) will not undertake investment to lower marginal cost under any circumstances because profits are lower.
D) Both A and B.
Q2) In a tit-for-tat strategy,a player
A) randomly punishes its rival.
B) ensures that the joint profit is maximized in each round.
C) copies the action of its rival's prior move in the subsequent rounds.
D) maximizes the joint profit in the game.
Q3) An incumbent announces it will significantly increase output in the next period,but only has contracts for the amount produced this period.The announcement is a A) credible threat.
B) non-credible threat.
C) commitment.
D) mixed strategy.
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15
Chapter 14: Managerial Decision-Making Under Uncertainty
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Sample Questions
Q1) Variance is a measure of ________ and the higher the variance,________.
A) expected profit; the greater the profit
B) risk; the greater the risk
C) standard deviation; greater the standard deviation
D) risk; the lower the risk
Q2) The ability of diversification to reduce risk
A) is greater the more negatively correlated the two events are.
B) is greater the more positively correlated the two events are.
C) is greater the more uncorrelated the two events are.
D) is greater the more risk averse the individual is.
Q3) Which of the following helps to reduce risk?
A) purchasing insurance
B) obtain more information
C) diversify
D) All of the above.
Q4) If Stock A and Stock B both decrease in value at the same time,they are
A) negatively correlated.
B) uncorrelated.
C) positively correlated.
D) bad bets.
Page 16
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Chapter 15: Asymmetric Information
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Sample Questions
Q1) In the automobile insurance market,adverse selection occurs when
A) drivers with greater risks buy a policy with large deductibles.
B) drivers with greater risks buy a policy with no deductibles.
C) uninsured drivers drive recklessly.
D) insured drivers drive recklessly.
Q2) Explain why some people who are applying for a job at a bank dress up,arrive early,and have their paperwork neatly completed for the job interview.
Q3) Adverse selection occurs when
A) a person takes more risks that are not known to the life insurance company because he has life insurance.
B) a person buys life insurance because he has a risky lifestyle that is not known to the life insurance company.
C) a person is a risk lover.
D) pregnant women with health insurance make more doctor visits than uninsured pregnant women.
Q4) How can a warranty at the seller's expense signal that a product is of high quality?
Q5) Explain how product liability laws can reduce adverse selection.
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Page 17
Chapter 16: Government and Business
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Sample Questions
Q1) If the government wants to regulate a natural monopoly while ensuring it does not earn profits or require subsidies,it will force the firm to set price equal to A) average cost.
B) marginal cost.
C) marginal revenue.
D) None of the above.
Q2) In a competitive market,a negative externality creates a deadweight loss because A) the cost of the externality is double counted.
B) a harm is generated.
C) price equals social marginal cost.
D) price equals private marginal cost.
Q3) An example of an essential facility is
A) the telephone line into your house.
B) U.S. Route 66.
C) the Golden Gate Bridge.
D) your local pizza parlor.
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Chapter 17: Global Business
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Sample Questions
Q1) The above figure shows the market for rice in Japan.s represents the domestic supply curve,and s represents the world supply curve.A $1 per unit tariff has the same effect on producer and consumer surplus as a quota of A) 10 units.
B) 20 units.
C) 30 units.
D) 40 units.
Q2) Outsourcing generally results from A) unpatriotic behavior.
B) comparative advantage.
C) tax evasion.
D) rent seeking.
Q3) If the Mexican peso (MXN)to Brazilian real (BRL)exchange rate goes from 5.9 MXN/BRL to 5.2 MXN/BRL
A) Brazilians decrease their demand for Mexican goods.
B) Brazilians increase their demand for Mexican goods.
C) Mexicans decrease their demand for Brazilian goods.
D) Not enough information to determine what happens.
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