Economic Analysis
Exam Practice Tests
Course Introduction
Economic Analysis is a foundational course that explores the principles and tools used to assess economic decisions and outcomes. Students will learn to apply microeconomic and macroeconomic theories to analyze how individuals, firms, and governments allocate resources, make choices, and interact within markets. Through real-world case studies and quantitative methods, the course emphasizes topics such as demand and supply, market structures, cost-benefit analysis, production efficiency, and the impact of policy interventions on economic welfare. By the end of the course, students will be equipped with analytical frameworks essential for evaluating economic issues and making informed decisions in both public and private sectors.
Recommended Textbook
Microeconomics An Intuitive Approach with Calculus 1st Edition by Thomas Nechyba
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Chapter 1: Introduction
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Sample Questions
Q1) Positive economics can tell us which policies are efficient and which are not.
A)True
B)False Answer: True
Q2) When economists assume that people are rational,they are assuming that people generally agree what is good for human beings.
A)True
B)False Answer: False
Q3) One of the aims of positive economics is to rank policies under consideration from most desirable to least desirable.
A)True
B)False Answer: False
Q4) To say that one policy is better than another because it is more efficient is a normative,not a positive,statement.
A)True
B)False Answer: True
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Chapter 2: A Consumers Economic Circumstances
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Q1) A consumer has $1,000 a week to spend on renting square feet of housing x<sub>1</sub> (at a price of $5 per square foot)and eating out meals x<sub>2</sub> (at a price of $20 per meal).Derive the budget line equation and find the opportunity cost of housing in terms of meals in your equation.
Answer: The budget equation x<sub>2</sub>=I/p<sub>2</sub>(p<sub>1</sub>/p<sub>2</sub>)x<sub>1</sub> becomes x<sub>2</sub>=1000/20(5/20)x<sub>1</sub> or x<sub>2</sub>=50 - (1/4)x<sub>1</sub>.The slope of the budget line is equal to the opportunity cost of housing in terms of meals --- and this slope is -1/4 in the equation.
Q2) When the good on the vertical axis is a composite good,the slope of the budget line is equal to minus the price of the good on the horizontal axis.
A)True
B)False
Answer: True
Q3) If all consumers are price-takers facing the same prices,then their budget lines will all have the same slope.
A)True
B)False
Answer: True
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Chapter 3: Economic Circumstances in Labor and Financial Markets
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Sample Questions
Q1) A bond will pay $10,000 to its owner in 5 years.If the relevant annual interest rate is 5%,what is the bond worth today (rounded to the nearest 100)?
a.
$9,500
b.
$7,800
c.
$6,600
d.
$1,900
e.
None of the above.
Answer: B \[\frac { \$ 10,000 } { ( 1 + 0.05 ) ^ { 5 } } = \$ 7,835\]
Q2) Write down the budget constraint equation as well as the choice set for a worker who has 100 possible hours of leisure per week and can earn a wage of $25 per hour.
Answer: Equation: \(c = 2500 - 25 \ell\) Choice Set: \(C = \left\{ ( c , \ell ) \in R _ { + } ^ { 2 } \mid c = 2500 - 25 \ell \right\}\)
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Chapter 4: Tastes and Indifference Curves
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Sample Questions
Q1) Suppose bundle A is better than bundle B for a consumer,and bundle C is an average of bundles A and B.
a.Use the continuity,convexity and monotonicity assumptions to formally prove that this implies that bundle C is better than bundle B.
b.Did you also -- implicitly or explicitly -- use the rationality axioms?
Q2) Complete tastes are tastes that make people desire at least some of every good.
A)True
B)False
Q3) Explain the following statement: Individuals with different tastes might have the same tastes at the margin at their current consumption bundles.
Q4) If you observe me choosing bundle A over bundle B on Monday,bundle B over bundle C on Tuesday and bundle C over bundle A on Wednesday,it must be that my tastes violate transitivity.
A)True
B)False
Q5) Prove formally that the rationality axioms alone rule out the possibility of indifference curves crossing.
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Chapter 5: Different Types of Tastes
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Q1) Suppose our tastes can be represented by the function \(u \left( x _ { 1 } , x _ { 2 } \right) = \left( \alpha x _ { 1 } ^ { - \rho } + ( 1 - \alpha ) x _ { 2 } ^ { - \rho } \right) ^ {1 / \rho }\) .It is often observed that people become more rigid --- more set in their ways --- as they get older.What parameter is changing as we get older --- and how is it changing? (Explain.)
Q2) Suppose the only characteristic of beer that a consumer cares about is alcohol content.Currently,Bud Light and Miller Lite have the same alcohol content.
a.Using
\(x _ { 1 }\) to denote ounces of Miller Lite and \(x _ { 2 }\) to denote ounces of Bud Light,what's the simplest possible utility function that can describe this consumer's tastes over the two products.
b.Suppose Bud Light lowers its alcohol content by 50%.How would you change the utility function to account for this?
c.Derive the MRS for the functions in (a)and (b)--- and interpret your answer.
Q3) Homothetic tastes are always tastes over essential goods.
A)True
B)False
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Chapter
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Sample Questions
Q1) If not all goods are essential,a consumer will end up optimizing at a corner solution.
A)True
B)False
Q2) Which of the following statements is correct and which is not? Explain why.
a.When we all face the same prices,our tastes become the same.
b.When we all face the same prices,our tastes become the same at the margin.
Q3) Suppose you solve a consumer's constrained 2-good optimization problem for a given economic environment --- and your answer contains a negative consumption level of good 2.Which of the following is a valid conclusion on your part: a.
The true optimum has the consumer consume none of good 1.
b.
The true optimum has the consumer consume none of good 2.
c.
There are multiple "true" optimal consumption bundles.
d.
The consumer will sell good 2.
e.
None of the above.
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Chapter 7: Income and Substitution Effects in Consumer
Goods Markets
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Sample Questions
Q1) Bottles of Coca-Cola and equally-sized bottles of Pepsi Cola are perfect substitutes for a consumer,but a bottle of Coke costs 10 cents less than bottles of Pepsi.The income effect of a 15 cent increase in the price of Pepsi will be for the consumer to drink less cola.
A)True
B)False
Q2) All quasilinear goods are necessities.
A)True
B)False
Q3) Quasilinear goods are borderline goods between the set of normal and the set of inferior goods.
A)True B)False
Q4) Goods with small substitution effects tend to be normal goods. A)True B)False
Q5) All homothetic goods are normal goods. A)True B)False
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Chapter 8: Wealth and Substitution Effects in Labor and Capital Markets
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Q1) In the U.S.,everyone has to pay social security taxes on labor income until pre-tax income reaches a certain amount after which no additional taxes are due.Consider the case of workers A,B and C who have 60 hours of leisure per week and who earn an hourly wage of $40.Suppose the social security tax is 50% up to a pre-tax weekly income of $1,200 and then falls to zero for any income above $1,200 per week.Assume tastes are homothetic.
a.Worker A is observed to work 40 hours per week under this tax system.Is he working more or less than he would if the system were abolished?
b.Worker B is observed to work 30 hours a week under this tax system.Is he working more or less than he would if the system were abolished?
c.Worker C is observed to work 20 hours per week under this system.Is he working more or less than he would if the system were abolished?
d.Could any of the three workers above share exactly the same tastes?
e.For which of these workers is there no deadweight loss from the tax?
Q2) Taxing savings in ways that lower the interest rate received by savers will lower savings.
A)True B)False
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Chapter 9: Demand for Goods and Supply of Labor and Capital
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Sample Questions
Q1) Suppose your utility function is given by \(u \left( x _ { 1 } , x _ { 2 } \right) = \min \left\{ 3 x _ { 1 } , 5 x _ { 2 } \right\}\) .What is your demand function for \(x _ { 2 }\) ?
Q2) A downward sloping income-demand curve indicates that the good is a necessity. A)True
B)False
Q3) An increase in the price of good 2 will cause the demand curve for good 1 to shift out. A)True B)False
Q4) Leisure being an inferior good is necessary but not sufficient for labor supply to slope up.
A)True B)False
Q5) The cross-price demand curve for Cobb-Douglas tastes is perfectly vertical. A)True
B)False
Q6) When tastes are quasilinear in leisure,the labor supply curve is vertical.
A)True B)False
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Chapter 10: Consumer Surplus and Deadweight Loss
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Sample Questions
Q1) As we move to higher indifference curves,compensated demand (or MWTP)curves shift to the right.
A)True
B)False
Q2) There is a compensated demand (or MWTP)curve for every indifference curve just as there is an uncompensated demand curve for every income level.
A)True
B)False
Q3) Indirect utility functions are homogeneous of degree 1 in income.
A)True
B)False
Q4) When a taxed good is normal,using the (uncompensated)demand curve to estimate deadweight loss will over-state the actual deadweight loss.
A)True
B)False
Q5) Why is the following statement incorrect: "A tax on all consumption goods is efficient because it equally taxes all goods and therefore does not distort their prices."
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Chapter 11: One Input and One Output: a Short-Run
Producer Model
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Sample Questions
Q1) Output supply curves always slope up in the one-input model.
A)True
B)False
Q2) For price-taking producers,isoprofit curves are always parallel to one another.
A)True
B)False
Q3) Suppose a single-input production function has initially increasing but eventually decreasing marginal product -- and suppose we know that an interior solution is profit maximizing.In this case,the first order condition for the profit maximization problem
a.
is necessary for identifying the profit maximizing production plan.
b. is sufficient for identifying the profit maximizing production plan.
c. is both necessary and sufficient for identifying the profit maximizing production plan. d. is neither necessary nor sufficient for identifying the profit maximizing production plan.
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Chapter 12: Production With Multiple Inputs
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Q1) Assuming an interior solution,a production plan is profit maximizing if and only if all marginal revenue products are equal to input prices.
A)True
B)False
Q2) Increasing returns to scale production technologies cannot give rise to convex producer choice sets.
A)True B)False
Q3) Cost functions must be homogeneous of degree 1 in (input and output)prices.
A)True B)False
Q4) Cobb-Douglas production function have decreasing returns to scale.
A)True B)False
Q5) Just as indifference maps represent consumer tastes,so isoquant maps represent a producer tastes.
A)True B)False
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Chapter 13: Production Decisions in the Short and Long Run
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Q1) The more substitutable capital and labor are in production,the more likely it is that the cross-price demand curve for capital (relative to the wage)is upward sloping.
A)True
B)False
Q2) If the rental rate increases,we know for sure that the firm will produce less and will (in the long run)use less capital.
A)True
B)False
Q3) Short run economic costs must be lower than long run economic costs because long run economic costs include the cost of inputs that are fixed in the short run (and thus are not part of short run cost).
A)True
B)False
Q4) Conditional input demand curves always slope down,but unconditional input demand curves can slope up.
A)True
B)False
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Chapter 14: Competitive Market Equilibrium
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Sample Questions
Q1) Suppose all firms in a perfectly competitive industry have production processes characterized by the production function \(f ( \ell , k ) = \ell ^ { 1 / 2 } k ^ { 1 / 4 }\)
.Suppose the cost of labor is 20 and the cost of capital is 10.
a.Suppose that the industry is in long run equilibrium and that firms are using 1 unit of capital.What is the short run cost function of each firm?
b.Suppose there are 5,000 firms in long run equilibrium.What is the short run market supply function?
c.Suppose market demand is \(X ^ { d } ( p ) = 10,000 - 125 p\) What is the equilibrium price?
d.Firms in this industry face a recurring fixed cost FC.What must FC be in order for this industry to indeed be in long run equilibrium with its 100 firms?
Q2) The reason long run market supply curves are shallower than short run market supply curves is because individual firm supply curves are shallower in the long run than in the short run.
A)True
B)False
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Chapter 15: The Invisible Hand and the First Welfare
Theorem
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Sample Questions
Q1) Aggregate producer surplus in an industry is measured along the market supply curve is and only if firm production technologies exhibit the quasilinearity property.
A)True
B)False
Q2) If the individuals in a group of consumers all have homothetic tastes,then we can treat the group as a single representative consumer.
A)True
B)False
Q3) Aggregate producer surplus in an industry can be measured along the market supply curve in the short run but not in the long run.
A)True
B)False
Q4) Suppose all individuals in a group have homothetic tastes.Then we can be sure that the group can be treated as a single representative consumer is if the group members also have identical tastes.
A)True
B)False
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Chapter 16: General Equilibrium
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Q1) If good 1 is essential for one person but not for the other,the first person will end up with all of good 1 in a competitive equilibrium within the Edgeworth Box.
Q2) If the two goods in an Edgeworth Box are perfect complements for one person and perfect substitutes for the other,then all efficient allocations are such that the first person has the same amount of good 1 as of good 2.
Q3) Suppose we live in an exchange economy with two goods.Together,we own 300 of good 1 and 300 of good 2.My tastes are captured by the utility function \(u \left( x _ { 1 } , x _ { 2 } \right) = x _ { 2 } + 50 \ln x _ { 1 }\) and yours are captured by the utility function \(u \left( x _ { 1 } , x _ { 2 } \right) = x _ { 2 } + 100 \ln x _ { 1 }\) .
a.Calculate the portion of the contract curve that lies in the interior of the Edgeworth Box. b.Can you make intuitive sense of your answer?
Q4) A proof by contradiction can only be used to disprove a statement but not to prove a statement to be correct.
A)True
B)False
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Chapter 17: Choice and Markets in the Presence of Risk
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Q1) The independence axiom implies that if I prefer a bottle of wine over a six pack of beer I will prefer half a bottle of wine with a bag of pretzels over half a sixpack of beer with a bag of pretzels.
A)True
B)False
Q2) When tastes are risk loving,a person will always choose a gamble that is riskier over one that is less risky.
A)True
B)False
Q3) When tastes are risk averse,an individual will always choose less risk over more risk. A)True
B)False
Q4) Suppose that individuals with state-independent and risk-averse tastes insure each other through state-contingent trades.If there is no aggregate risk,the competitive equilibrium price will then result in actuarily fair insurance terms.
A)True
B)False
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Chapter 18: Elasticities, Price-Distorting Policies, and Non-Price Rationing
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Q1) Suppose a consumer's demand function is \(x ( p ) = 100 - 3 p\) .
a.What's the general equation for the own-price elasticity of demand for this consumer?
b.What's the price elasticity of demand when p=25?
c.Suppose instead that the demand function is \(x \left( p _ { x } , p _ { y } \right) = 100 - 3 p _ { x } + p _ { y }\) .How does the equation for own-price elasticity change?
d.Continue with the demand equation in (c).Suppose p=25.What's the cross-price elasticity for x?
e.Continuing with part (d),what's the cross-price elasticity when the price of y is equal to 50?
Q2) Deadweight loss from the imposition of a price floor increases as consumer demand becomes more price elastic.
A)True
B)False
Q3) Price ceilings have to be set above the undistorted market equilibrium price in order to have any impact.
A)True
B)False
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Chapter 19: Distortionary Taxes and Subsidies
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Q1) In perfectly competitive markets with identical firms,the burden of a tax is shared by consumers and producers in the short run so long as market demand is not perfectly elastic.
A)True
B)False
Q2) Regardless of whether goods are inferior or normal,the deadweight loss from a per-unit tax is always greater the more price elastic the market demand curve for a good.
A)True
B)False
Q3) To identify the burden of a per-unit tax on consumers,we have to use the aggregate marginal willingness to pay curve whenever the underlying good is not quasilinear.
A)True
B)False
Q4) The consumer-side deadweight loss from a per-unit tax in the goods market arises from solely from the fact that output falls under the tax.
A)True
B)False
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Chapter 20: Prices and Distortions Across Markets
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Q1) Explain how an import quota might be more inefficient than an import tariff that has the same impact on prices.
Q2) Suppose the price of good x in country A is lower than the price of good x in country B when no trade is permitted.In the absence of transportation costs,if the supply curve for good x in the two countries is sufficiently elastic,free trade in good x implies that country B will stop producing x.
A)True B)False
Q3) Suppose there is a tradeable goods market (such as products like textiles that can be shipped across markets)and a non-tradable goods market (such as services like hair cuts).Can outsourcing impact wages in the non-tradable market?
Q4) A speculator who takes a long position in a market buys low and sells high,whereas a speculator who taxes a short position in a market buys high and sells low. A)True B)False
Q5) Explain the impact of speculators on markets is similar and how it may be different from the impact of exporters and importers.
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Chapter 21: Externalities in Competitive Markets
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Q1) In order for a Pigouvian subsidy to be efficient,the amount it costs the government to implement the subsidy must be less than the economic value of the additional externality benefits created by the subsidy.
A)True
B)False
Q2) It the marginal social benefit from contributions to charities is the same for all individuals who give to charities,then allowing individuals to deduct charitable contributions from their income taxes cannot serve as a Pigouvian subsidy under a progressive income tax system.
A)True
B)False
Q3) To implement an efficient Pigouvian tax in a competitive market that has negative production externalities,the government would need to know the shape of the entire social marginal cost curve.
A)True
B)False
Q4) Explain how any cap-and-trade system can be made to be equivalent to a pollution tax and vice versa.
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Chapter 22: Asymmetric Information in Competitive Markets
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Q1) Whenever there is adverse selection,there will be missing market.
A)True
B)False
Q2) If all consumers are willing to buy insurance at the zero-profit pooling price,there cannot be a separating equilibrium.
A)True
B)False
Q3) Explain the following statement: "In health insurance markets,moral hazard implies individuals will consume too much health care,whereas adverse selection implies too little health care will be consumed."
Q4) In equilibrium,consumers will incur costs to signal their type (in markets with adverse selection)only if this results in a price that is lower than the pooling equilibrium price.
A)True
B)False
Q5) Adverse selection in insurance markets results in missing markets because people engage in riskier behavior once they are insured.
A)True
B)False
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Chapter 23: Monopoly
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Q1) The more consumer surplus is generated in a market dominated by a single monopoly,the more efficient the outcome.
A)True
B)False
Q2) In the absence of recurring fixed costs,a monopolist will always produce a positive output quantity.
A)True
B)False
Q3) How would a regulator of a monopoly think differently about regulating price discrimination depending on whether the regulator's objective is to maximize efficiency or to maximize consumer surplus?
Q4) One way to deal with the efficiency problem of monopolies is to tax the profits of monopolists.
A)True
B)False
Q5) If a monopolist has downward sloping average costs,he will not produce if he cannot price discriminate.
A)True
B)False
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Chapter 24: Strategic Thinking and Game Theory
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Q1) Cooperation is difficult to achieve in a Prisoners' Dilemma because each player thinks the other player might not cooperate.
A)True
B)False
Q2) In a simultaneous move,incomplete information game in which player 1 is unsure of which of two types player 2 is,player 1's strategy must include an action for each possible type that player 2 might be,but player 2 only needs to pick one action since he knows what type he is.
A)True
B)False
Q3) Dominant strategy Nash equilibria are efficient.
A)True
B)False
Q4) Suppose a player in a sequential game has 5 potential decision nodes,with 2 possible actions at each node.Then he has 25 possible pure strategies.
A)True
B)False
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Chapter 25: Oligopoly
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Q1) Explain how two Bertrand price competitors can price above marginal cost in an infinitely repeated game setting.
Q2) Suppose a market is currently served by an incumbent firm.If a potential entrant can enter prior to the incumbent firm announcing its output (or price),the incumbent cannot deter entry through its actions.
A)True
B)False
Q3) Firms in a cartel have an incentive to cheat on the cartel agreement because they suspect the other firms are cheating as well.
A)True
B)False
Q4) The more firms there are in an oligopoly in which the strategic firm variable is quantity,the more price converges to marginal cost.
A)True
B)False
Q5) Explain why firms in a cartel might lobby for government regulation.
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Chapter 26: Product Differentiation and Innovation in Markets
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Q1) In a monopolistically competitive market with Dixit-Stiglitz preferences,equilibrium price falls as the goods in the differentiated product market become more substitutable.
A)True
B)False
Q2) Information advertising might provide information about prices in stores,or it might provide information about product characteristics that consumers might not know about.Which one do you think is more likely to be efficient?
Q3) Since firms within a monopolistically competitive industry set output where marginal revenue is equal to marginal cost,the size of the fixed entry cost does not impact the equilibrium price.
A)True
B)False
Q4) Describe the tradeoffs involved when thinking about setting the time over which a patent grants an innovator exclusive monopoly rights.
Q5) Comment on the following statement: "Since product differentiation allows price competitors to establish some market power,it would be more efficient to not permit product differentiation."
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Chapter 27: Public Goods
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Q1) If the formation of Lindahl prices to support an efficient level of public goods is derived from individuals' reporting their marginal willingness to pay,people will under-report their true willingness to pay.
A)True
B)False
Q2) What problem are mechanism designers attempting to overcome when they "design mechanisms" to provide public goods?
Q3) If giving to public goods is subsidized through deductions under a progressive income tax,the government subsidizes public goods consumed by higher income individuals at greater rates than public goods consumed by lower income individuals.
A)True
B)False
Q4) If private giving to public goods involves externalities,what is a Pigouvian solution to the public goods problem?
Q5) Public goods arise because of externalities. A)True
B)False
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Chapter 28: Governments and Politics
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Q1) If a coalition D is decisive over a pair of social outcomes (x,y)under a social choice process that satisfies Arrow's axioms,then another coalition C (that differs from D)cannot be decisive over a different pair (a,b)of social outcomes.
A)True
B)False
Q2) In settings where the policy space is single dimensional,non-single peaked preferences by some implies there is no Condorcet winner.
A)True
B)False
Q3) Suppose voter preferences over a public good funded through a head tax are single peaked.If everyone has the same tastes and the public good is a normal good,then ideal points for higher income individuals will lie to the right of ideal points of lower income individuals.
A)True
B)False
Q4) A presidential candidate once famously said about a particular policy: "I voted for it before I voted against it." How might such a statement make sense in the context of sophisticated voting along agendas.
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Page 30
Chapter 29: What Is Good Challenges From Psychology and Philosophy
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/62741
Sample Questions
Q1) If social indifference curves are straight lines with slope of -1,the ethical standard for judging outcomes places all weight on the sum of outcomes and no weight on the distribution of outcomes.
A)True
B)False
Q2) One way to think of ideas coming out of behavioral economics is to map the ideas into either impacting "tastes" or "constraints".Can you give an example of each?
Q3) Of all the constant elasticity of substitution social welfare function,only the one with elasticity of infinity will always choose the efficient outcome from a second-best consumption possibility frontier.
A)True
B)False
Q4) Any consequentialist approach to normative economics that uses standard indifference maps as social indifference maps (over utilities or consumption)will choose efficient outcomes in the first-best case.
A)True
B)False
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