Applied Microeconomics
Test Questions
Course Introduction
Applied Microeconomics explores the practical aspects of microeconomic theories by analyzing how individuals, firms, and governments make decisions regarding the allocation of scarce resources. The course covers topics such as consumer behavior, production and cost analysis, market structures, welfare economics, and the impact of government policies. Through case studies and real-world applications, students learn to evaluate economic outcomes, interpret data, and use economic models to address issues like pricing, market failure, and externalities. The emphasis is on developing analytical and quantitative skills necessary for solving practical problems in business, policy, and everyday life.
Recommended Textbook
Microeconomic Theory Basic Principles and Extensions 10th Edition by Walter Nicholson
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17 Chapters
334 Verified Questions
334 Flashcards
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2
Chapter 1: Preferences and Utility
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Sample Questions
Q1) For an individual who consumes only two goods,x and y,the opportunity cost of consuming one more unit of x in terms of how much y must be given up is reflected by
A)the individual's marginal rate of substitution.
B)the market prices of x and y.
C)the slope of the individual's indifference curve.
D)none of these is correct.
Answer: B
Q2) Indifference curves
A)are non-intersecting.
B)are contour lines of a utility function.
C)are negatively sloped.
D)all of these are correct.
Answer: D
Q3) If an individual's utility function is quasi-concave,his or her MRS will
A)diminish as x is substituted for y.
B)increase as x is substituted for y.
C)be undefined except in special cases.
D)always depend only on the ratio of x to y.
Answer: A
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Page 3
Chapter 2: Utility Maximization and Choice
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Sample Questions
Q1) An individual has a utility function for tennis rackets (x)and tennis balls (y)of the form
U(x,y)= min (3x,y).His or her expenditure function is given by
A)\(E = \left( \frac { 1 } { 3 } p _ { x } + p _ { y } \right) U\) .
B)\(E = \left( p _ { x } + 3 p _ { y } \right) U\) .
C)\(E = \left( p _ { x } + \frac { 1 } { 3 } p _ { y } \right) U\) .
D)\(E = \left( p _ { x } + p _ { y } \right) U / 3\) .
Q2) An increase in an individual's income without changing relative prices will
A)rotate the budget constraint about the X-axis.
B)shift the indifference curves outward.
C)shift the budget constraint outward in a parallel way.
D)rotate the budget constraint about the Y axis.
Q3) If utility is given by \(U ( x , y ) = x ^ { 2 } + y ^ { 2 }\) and p<sub>x</sub> = 2,p<sub>y</sub> = 3,I = 50,this person will choose
A)(10,10).
B)(15,6.67).
C)(25,0).
D)(0,50/3).
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Chapter 3: Income and Substitution Effects
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Sample Questions
Q1) The price elasticity of demand for good x is defined as
A)percentage change in p<sub>x</sub> / percentage change in x.
B)percentage change in x /percentage change in p<sub>x</sub> .
C)percentage change in x/percentage change in income.
D)percentage change in x /percentage change in p<sub>y</sub> .
Q2) Consider the following three concepts:
I. Marshallian Demand [x = x(p<sub>x</sub>,,p<sub>y </sub>,I)]
II. Indirect Utility [V = g (p<sub>x</sub>,,p<sub>y </sub>,I)]
III.Compensated Demand [x = x<sup>c</sup> (p<sub>x</sub>,,p<sub>y </sub>,U)]
Which of these functions is necessarily homogeneous of degree zero in all its argument?
A)All of them.
B)None of them.
C)Only I.
D)I and III,but not II.
Q3) The price elasticity of demand for a horizontal demand curve is
A)0.
B)-1.
C)1.
D)-infinity.
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Page 5
Chapter 4: Demand Relationships Among Goods
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Sample Questions
Q1) If utility is separable in a three-good utility function \(\left[ U \left( x _ { 1 } , x _ { 2 } , x _ { 3 } \right) = U _ { 1 } \left( x _ { 1 } \right) + U _ { 2 } \left( x _ { 2 } \right) + U _ { 3 } \left( x _ { 3 } \right) , U _ { i } ^ { \prime } > 0 \quad U _ { i } ^ { \prime } < 0 \right]\) then for changes in \(p _ { 1 } , x _ { 2 } \text { and } x _ { 3 } \text { must }\)
A)both be gross substitutes for x<sub>1</sub> .
B)both be gross complements for x<sub>1</sub> .
C)be such that if one is a gross substitute for x<sub>1</sub> ,the other is a gross complement for x<sub>1</sub> .
D)both be gross substitutes or both be gross complements for x.
Q2) Homogeneity of the demand function is shown by:
A)\(e _ { x , p _ { x } } + e _ { x , p _ { y } } + e _ { \chi , 1 } = 0\) .
B)\(e _ { x , p _ { x } } + e _ { \chi , p _ { y } } + e _ { \chi , l } = 1\) .
C)\(s _ { x } e _ { x , p _ { \lambda } } + s _ { y } e _ { x , p _ { y } } = - e _ { x , I }\) .
D)\(s _ { x } e _ { x , I } + s _ { y } e _ { y , I } = l\) .
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6
Chapter 5: Uncertainty and Information
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Sample Questions
Q1) Which of the following utility functions would indicate the most (relative)risk averse behavior?
A)U(W)= W.
B)U(W)= \(\sqrt { W }\) .
C)U(W)= ln W.
D)U(W)= -1/W.
Q2) Risk aversion is best explained by A)timidness.
B)increasing marginal utility of wealth.
C)constant marginal utility of wealth.
D)decreasing marginal utility of wealth.
Q3) If a fair game is played many times the monetary losses or gains will
A)approach zero.
B)be negative.
C)be positive.
D)result in an outcome that cannot be determined without more information.
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Chapter 6: Strategy and Game Theory
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Sample Questions
Q1) The strategy profile in which both players remain silent in the Prisoners' Dilemma can be described as
A)non-Pareto optimal and unstable.
B)Pareto optimal and unstable.
C)non?Pareto optimal and stable.
D)Pareto optimal and stable.
Q2) Nash equilibria
A)always exist in pure strategies.
B)generally come in even numbers.
C)always exist in finite games.
D)All of these answers are correct.
Q3) In a mixed-strategy Nash equilibrium,a player is willing to randomize because
A)this confuses opponents.
B)he or she is indifferent between the actions in equilibrium.
C)the actions provide the same payoffs regardless of what the other player does.
D)he or she does not know what the other player is doing.
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8
Chapter 7: Production Functions
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Sample Questions
Q1) Which of the following production functions exhibits a constant elasticity of substitution?
A)q = 3k + 2l.
B) \(q = k ^ { 0~5 } l ^ { 0~5 }\) .
C) \(q = l - \frac { l } { k } - \frac { l } { l }\) .
D)All of these production functions have a constant elasticity of substitution.
Q2) The <u>average</u> productivity of labor reaches its maximum
A)at the point of inflection of the total product curve.
B)where the slope of the total product curve is steepest.
C)where the slope of the total product curve is zero.
D)where marginal and average productivity are equal.
Q3) If more and more labor is employed while keeping all other inputs constant,the marginal physical productivity of labor will eventually A)increase.
B)decrease.
C)remain constant.
D)We cannot tell from the information provided.
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Chapter 8: Cost Functions
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Sample Questions
Q1) Technical progress will
A)shift a firm's production function and its related cost curves.
B)not affect the production function,but may shift cost curves.
C)shift a firm's production function and alter its marginal revenue curve.
D)shift a firm's production function and cause more capital (and less labor)to be hired.
Q2) The input demand functions that can be derived from cost functions are referred to as "contingent" demand functions because the functions:
A)assume input costs are constant.
B)express input demand as a function of output.
C)depend on the assumption of profit maximization.
D)assume constant returns to scale in production.
Q3) As long as marginal cost is below average cost,average cost will be A)falling.
B)rising.
C)constant.
D)changing in a direction that cannot be determined without more information.
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Chapter 9: Profit Maximization
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Sample Questions
Q1) The size of the reduction in quantity of labor hired by a firm due to an increase in the wage rate depends upon all of the following except
A)what percentage of total costs are made up of labor costs.
B)how much quantity demanded in the output market will be reduced by a higher price.
C)the capital to labor ratio before the wage increase.
D)how easily other inputs can be substituted for labor.
Q2) The substitution effect of a change in wage rate on a firm's demand for labor input will be more significant
A)the greater the change in output.
B)the more sharply curved are the firm's isoquants.
C)the flatter are the firm's isoquants.
D)the larger the quantity of labor employed.
Q3) If the demand curve a firm faces shifts to the right,usually
A)it would be impossible to tell whether the marginal revenue curve shifts.
B)the marginal revenue curve would shift to the left.
C)the marginal revenue curve would shift to the right.
D)the marginal revenue curve would not shift.
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Chapter 10: The Partial Equilibrium Competitive Model
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Sample Questions
Q1) A change in the distribution of income that leaves total income constant will not shift the market demand curve for a product providing
A)everyone has an income elasticity of demand of zero for the product.
B)everyone has the same income elasticity of demand for the product.
C)individuals have differing income elasticities for the product,but the average income elasticity for income gainers is equal to the average income elasticity for income losers.
D)any of these conditions occur.
Q2) In the opening of free trade,if world prices of a good are less than domestic prices of that same good,
A)domestic consumers will experience a loss of surplus.
B)domestic prices will drop to the world price level.
C)all domestic producers of that good will try to find another market because they can't compete with foreign producers.
D)domestic producers will increase the quantity supplied in order to crowd out the foreign-produced good.
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12
Chapter 11: General Equilibrium and Welfare
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Sample Questions
Q1) A market characterized by imperfect information will have an equilibrium price if at that price
A)quantity demanded equals quantity supplied when all participants have the same information.
B)quantity demanded equals quantity supplied given prevailing information levels.
C)quantity demanded equals quantity supplied under perfect information.
D)quantity demanded exceeds quantity supplied if suppliers are better informed (and vice-versa).
Q2) The slope of the production possibility frontier shows
A)the marginal rate of substitution between the two goods.
B)the relative marginal costs of the two goods.
C)the efficient combination of outputs possible using fixed amounts of input.
D)the relative marginal productivities of the two goods.
Q3) The reason externalities distort the allocation of resources is that
A)too few goods are usually produced.
B)firms often go out of business because of the externality.
C)a firm's private costs do not reflect the social cost of production.
D)regulating externalities uses scarce resources.
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Chapter 12: Monopoly
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Sample Questions
Q1) A natural monopoly
A)is a monopoly in the production of raw materials.
B)occurs when one firm can supply the entire market more cheaply than can a number of firms.
C)is one result of a patent.
D)necessarily involves inefficient pricing.
Q2) A monopoly's economic profits are represented by
A)(price minus marginal cost)times number of units sold.
B)(price minus average cost)times number of units sold.
C)(marginal revenue minus price)times number of units sold.
D)(marginal cost minus price)times number of units sold.
Q3) Which of the following is not a technical barrier to entry in a monopolized market?
A)A patent.
B)Decreasing average cost.
C)A low cost method of production known only by monopolist.
D)Increasing returns to scale.
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14
Chapter 13: Imperfect Competition
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Sample Questions
Q1) The Nash equilibrium of the Cournot game in which two identical firms face market demand \(P ( Q ) = 300 - 3 Q\) and have costs \(C \left( q _ { i } \right) = 50 q _ { i }\) is given by \(q _ { 1 } ^ { * } = q _ { 2 } ^ { * } =\)
A)50.0.
B)41.7.
C)31.5.
D)27.8.
Q2) In the Hotelling model of spatial competition,profits arise from A)monopoly power.
B)rents based on locational advantage.
C)the ability to price discriminate.
D)increasing returns to scale.
Q3) What factor would not help resolve the Bertrand paradox (that a perfectly competitive outcome can emerge with as few as two firms in the market)if the basic Bertrand model were extended to include it?
A)Repeated interaction.
B)Search costs.
C)Sequential moves.
D)Product differentiation.
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Page 15
Chapter 14: Labor Markets
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Sample Questions
Q1) If an individual's supply of labor curve is positively sloped throughout,then
A)the substitution effect always dominates the income effect.
B)the income effect always dominates the substitution effect.
C)the substitution effect dominates at low real wage levels and the income effect dominates at high real wage levels.
D)the income effect dominates at low real wage levels and the substitution effect dominates at high real wage levels.
Q2) A price discriminating monopsonist could increase its profits by
A)paying the minimum wages possible.
B)hiring as little capital as possible.
C)paying lower wages to workers with inelastic supply of labor curves than to workers with elastic curves.
D)paying lower wages to workers with elastic supply of labor curves than to workers with inelastic curves.
Q3) The slope of an individual's "consumption-leisure" budget constraint is
A)24 hours minus the number of leisure hours.
B)total consumption divided by the wage rate.
C)the real wage rate.
D)the negative of the real wage rate.
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Page 16
Chapter 15: Capital and Time
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Sample Questions
Q1) In Fisher's model of the determination of the rate of return,the price of a "future good" is
A)less than the price of a current good if the interest rate is negative.
B)equal to the price of a current good if the interest rate is positive.
C)greater than the price of a current good if the interest rate is positive.
D)less than the price of a current good if the interest rate is positive.
Q2) A fall in interest rates leads to
A)an increase in the rental rate on a machine.
B)a decrease in the rental rate on a machine.
C)no change in the rental rate on a machine.
D)a fall in the marginal productivity of capital.
Q3) The present value of $1 payable in two years is
A)$1.
B)$1/(1 + 2r).
C)$1/(1 - 2r).
D)$1/(1 + r)<sup>2</sup>.
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Chapter 16: Asymmetric Information
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Sample Questions
Q1) When the monopoly insurer cannot observe the care taken by the insured party to avoid an accident,the most profitable contract for it
A)offers full insurance at a higher price than the full-information policy.
B)offers full insurance at a lower price than the full-information policy.
C)offers partial insurance at a higher price than the full-information policy.
D)offers partial insurance at a lower price than the full-information policy.
Q2) Which statement best characterizes the second-best policy offered by a monopoly insurer when it can't observe the consumer's risk?
A)It is a single contract offering partial insurance at an intermediate price such that all types are served.
B)It is a menu of contracts providing full insurance for the least risky types and partial insurance for higher risks.
C)It is a menu of contracts providing full insurance for the riskiest type and partial insurance at lower prices for lower risks.
D)The market breaks down since the monopolist cannot design contracts without observing each consumer's risk.
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18
Chapter 17: Externalities and Public Goods
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Sample Questions
Q1) In the case of a negative externality,the social marginal cost will
A)exceed the private marginal cost.
B)be equal to private marginal cost.
C)fall short of private marginal cost.
D)bear no significant relation to private marginal cost.
Q2) Some economists have hypothesized that government bureaucracies seek to maximize
A)social well being.
B)gross national product.
C)fringe benefits for bureaucrats.
D)their own budgets.
Q3) Median voter decisions may not yield efficient allocations of resources because
A)votes are allocated differently than income.
B)externalities may cause private and social costs to diverge.
C)free riders will cause too few public goods to be produced.
D)the median voter may not be the same as the mean voter.
Q4) A nonexclusive good is a good which
A)is sold in various markets.
B)is impossible to keep people from enjoying the benefits the good provides.
C)is produced by a perfectly competitive firm.
D)is produced at the lowest possible cost.
Page 19
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