Economic Decision Making
Test Preparation
Course Introduction
Economic Decision Making explores the principles and processes that individuals, businesses, and governments employ to make choices about resource allocation in various contexts. The course examines how economic theories, behavioral insights, and data-driven analysis influence decisions under conditions of scarcity, uncertainty, and risk. Students will learn to apply decision-making frameworks, analyze trade-offs, evaluate incentives, and understand how market and non-market forces shape outcomes. Emphasis is placed on real-world applications, case studies, and the role of information, preferences, and constraints in shaping economic behavior.
Recommended Textbook Microeconomics and Behavior 9th Edition by
Robert H. Frank
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18 Chapters
932 Verified Questions
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Chapter 1: Thinking Like an Economist
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Sample Questions
Q1) Unbridled self-interest fails to coordinate resource flows most effectively in which of the following cases?
A)The production of bread.
B)The building of a tornado warning siren.
C)The production of cars.
D)The production of haircuts.
Answer: B
Q2) You are considering renting a car for the weekend. It costs $200 for the car plus $0.20 per mile (including gas). If you decide to take a detour that adds 50 miles above the 300 miles, what is the cost of the detour?
A)$10
B)$70
C)$270
D)$200
Answer: A
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Chapter 2: Supply and Demand
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Sample Questions
Q1) Which statement is true?
A)You can have a shortage without scarcity.
B)You can have scarcity without a shortage.
C)The terms "shortage" and "scarcity" are identical concepts in economics.
D)No scarcity will exist at a market equilibrium price.
Answer: B
Q2) Explain why an equilibrium point in a free market is considered to be the socially efficient point. Sketch graph a situation where a government price ceiling below equilibrium leads to inefficiency. Explain in words why the inefficiency exists and shade in on your graph the lost benefit that creates the inefficiency.
Answer: At equilibrium all units for which benefit exceeded cost would be produced. Thus net benefit is maximized. As shown in Figure 2.6 in the text, at the ceiling equilibrium, output is under-produced so marginal benefits exceed the marginal cost.
Q3) If the demand curve of a market is P = 14 - Q and the supply curve is P = 2 + 2Q, but a price ceiling of 6 is imposed, what will the shortage be?
Answer: Quantity demanded will be 8 and the quantity supplied will be 2 so the shortage is 6.
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Page 4
Chapter 3: Rational Consumer Choice
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Sample Questions
Q1) If the price of a good shown on the vertical axis of a budget graph is cut in half and the price of the good on the horizontal axis is cut by 75%, then the budget constraint shifts
A)left and becomes steeper.
B)right and becomes steeper.
C)left and becomes flatter.
D)right and becomes flatter.
Answer: A
Q2) Diminishing marginal rate of substitution implies that the marginal rate of substitution
A)falls as one travels down (eastward) on an indifference curve.
B)rises as one travels down (eastward) on an indifference curve.
C)stays the same as one travels down (eastward) on a typical indifference curve.
D)falls as one move to higher (northeast) in the indifference curve map.
Answer: A
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5
Chapter 4: Individual and Market Demand
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Sample Questions
Q1) The cross-price elasticity of demand for complements is A)positive.
B)negative.
C)zero.
D)cannot be specified without more information
Q2) Say a study reveals that price elasticity of demand for teenage smoking was -0.5. If the government imposed a tax on cigarettes the total expenditure teenagers spend on buying cigarettes would A)increase.
B)decrease.
C)stay the same.
D)we can't answer with the information given.
Q3) The following two individual demand curves represent the entire market for a commodity. What is the market demand curve for the commodity? Show the market demand in equation and graphical form. (a) P = 60 - 10Q (b) P = 60 - 15Q
Q4) One of the management groups is arguing for a price reduction as a way to sell more gallons and increase income. Is this a good suggestion?
Q5) Based on your sketch, is the good a normal or inferior good?
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Chapter 5: Applications of Rational Choice and Demand
Theories
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Sample Questions
Q1) Suppose you receive Y1 of your income this period and Y2 of your income in the next period. If you can either borrow or lend at an interest rate r, what is the most you can consume in the future period?
A)Y1(1 + r) + Y2
B)Y2(1 + r) + Y1
C)Y1/(1 + r) + Y2
D)Y2/(1 + r) + Y1
Q2) Suppose a bank will pay you a 10% interest rate on your deposits for 1 period. In this case you must sacrifice $10 of current consumption to finance
A)$9 of future consumption.
B)$10 of future consumption.
C)$11 of future consumption.
D)$1 of future consumption.
Q3) If the marginal rate of substitution between future and current consumption is less than one, then this consumer exhibits
A)a positive time preference.
B)a negative time preference.
C)a neutral time preference.
D)an increasing preference.
Page 7
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Chapter 6: The Economics of Information and Choice
Under Uncertainty
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Sample Questions
Q1) The Affordable Care Act (Obama Care) requires people to sign up for health insurance or pay a penalty. This seems harsh to some but others claim it is good policy because
A)health care premiums are higher than expected loses even for the highest risk patients.
B)adverse selection will cause premiums to continually increase eliminating many from care.
C)statistical discrimination means that health care plans are losing propositions for everyone.
D)the costly to fake principle implies that it is hard to hide sickness or injury.
Q2) A gamble in which you win D dollars if the coin comes up heads, but lose D dollars if the coin comes up tails has an expected value of
A) 1/2D.
B) -1/2D.
C) D.
D) 0.
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Page 8
Chapter 7: Departures From Standard Rational Choice
Models With and Without Regret
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Sample Questions
Q1) In an earlier chapter we learned that a risk neutral person would be indifferent to a gamble that involved a coin flip with a $1,000 win if heads and a $1,000 loss if tails. In this chapter that conclusion is qualified. What changes does this chapter introduce that make the earlier conclusion altered?
Q2) Some sports writers seem so sure that rookies of the year and MVPs will not repeat the following year. They could be relying on which of the following to make that judgment
A)bounded rationality.
B)psychophysics of perception.
C)hedonic framing.
D)regression effect.
Q3) Based on the present-aim standard a person who drinks gasoline and subsequently dies could be consider rational as long as:
A)her behavior helps other people.
B)she really likes the taste of gasoline and death.
C)she thinks her behavior will result in more gasoline for other people.
D)her death is not painful.
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Page 9
Chapter 8: Production
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Sample Questions
Q1) Diminishing returns begin to occur when the
A)slope of the ray from the origin reaches a maximum.
B)total product curve reaches a maximum.
C)slope of the total product curve reaches a maximum.
D)marginal product curve intersects the average product curve.
Q2) Which is true?
A)Production functions consider only the value added part of a particular production process.
B)Production functions are as subjective as utility functions.
C)Production functions count raw materials, but not labor, as inputs into the production process.
D)Production functions do not count technology into the production process.
Q3) Say you are the owner of a Pizza place. You know that when you produce 10 pizzas, the average product of each of your workers is 10, and the marginal product of your last worker is 15. From this information you know that
A)the marginal product is increasing.
B)the average product is increasing.
C)the average product is decreasing.
D)the marginal product is decreasing.
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Page 10
Chapter 9: Costs
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Sample Questions
Q1) The short-run output expansion path is __________ in the relevant area.
A)a ray
B)horizontal
C)U-shaped
D)upward sloping
Q2) A firm that is trying to produce a given level of output Q<sub>0</sub> at the lowest possible cost will
A)select the input combination at which an isocost line is tangent to the Q<sub>0</sub> isoquant.
B)select the input combination at which an isocost line is above the Q<sub>0</sub> isoquant.
C)select the input combination at which an isocost line is below the Q<sub>0</sub> isoquant.
D)choose to produce at a level where variable costs are less than or equal to fixed costs.
Q3) The slope of a ray from the origin to a point on the total cost curve is the
A)average fixed cost of producing the corresponding level of output.
B)average total cost of producing the corresponding level of output.
C)marginal cost of producing the corresponding level of output.
D)variable cost of producing the corresponding level of output.
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Page 11
Chapter 10: Perfect Competition
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Sample Questions
Q1) The elasticity of supply is given by
A) \(\frac { \Delta Q } { \Delta P } \times \frac { P } { Q }\)
B) \(\frac { P } { Q } \times \frac { 1 } { \text { slope } }\)
C) \(\frac { \frac { \Delta Q } { Q } } { \frac { \Delta P } { P } }\)
D)All of these are correct.
Q2) Joe is self-employed in a store that has a rental value of $500 a month which he pays, but he can vacate the building without giving notice. His other expenses are $100 a month for maintenance. He makes $25,000 a year on net sales (total revenue minus the wholesale cost of the product). If he quit his job and worked the same number of hours elsewhere at a job he liked equally well, he estimates that he could make $20,000 a year. No one else can be hired to work in the store. Joe should
A)quit his job.
B)keep the job.
C)work part-time.
D)It is impossible to say with the information given in the problem.
Q3) A competitive industry consists of 100 firms. The short-run marginal cost curve for each firm is given by MC = 200 + .3Q. The demand curve faced by the industry is given as P = 400 - .1Q. What is the equilibrium price and quantity produced by the industry as a whole?
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Page 12
Chapter 11: Monopoly
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Sample Questions
Q1) In long-run equilibrium for a single-price monopolist,
A)the plant size is always the one at the bottom of the long-run ATC curve.
B)output is at the level where short-run and long-run marginal costs are the same.
C)marginal cost equals ATC.
D)marginal revenue equals price.
Q2) If a profit maximizing monopolist sells output for $100, then we know that its marginal revenue is
A)more than $100 if it is a perfect price discriminator.
B)less than $100 if it is a single price monopolist.
C)equal to $100 in all cases.
D)less than $100 if it is a perfect price discriminator.
Q3) The total revenue curve for a firm is given by TR = 2Q.
A)The firm is definitely a monopolist.
B)The firm is definitely not a monopolist.
C)The firm may be a monopolist or a perfectly competitive firm.
D)One cannot tell from the equation what market form applies.
Q4) Show graphically why economists refer to single-price monopoly market structure as inefficient.
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Page 13
Chapter 12: A Game-Theoretic Approach to Strategic Behavior
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Sample Questions
Q1) In a prisoner's dilemma game, a dominant strategy would mean that one of the players
A)follows the moves of the opponent no matter what the opponent does.
B)knows the payoff matrix outcomes while the other does not.
C)is sure to come out with the most preferred outcome no matter what the other does.
D)will benefit most from one particular move no matter what the opponent does.
Q2) Consider a population with the following givens: 1) 75% cooperators and 25% defectors
2) a 8 unit payoff goes to cooperators who interact with another cooperator
3) a zero unit payoff goes to a cooperator who interacts with a defector
4) the cost of knowing which is 2
If the population balance rises above 75%,
A)it will no longer make sense for cooperators to pay the price of scrutiny.
B)defectors will have a lower payoff.
C)cooperators will all pay the cost of scrutiny.
D)defectors will all pay the cost of scrutiny.
Q3) Describe a situation where you have been a cooperator and explain how the commitment problem was solved. In other words, how did you know your partner would not cheat?
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Chapter 13: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) Which of the following is an application of the Hoteling model of monopolistic competition?
A)Politicians tend toward positions more extreme than what they actually believe
B)Stores of similar types tend to cluster
C)Efficiency requires that stores are spread equidistant from each other in a given space
D)As space increases between firms, each firm produces less
Q2) The following question relate to a community that is circular in nature with a one mile circumference. There are 81 people evenly distributed around the lake where the town is built. The travel cost is $10 per mile, a restaurant costs $100 to set up, and the cost per meal is $2. Beginning from the initial population of 81, how high would the cost per mile have to go before the optimal number of restaurants would be one more than it was with transportation costs at $10 per mile? Round off small residuals to the nearest whole number.
Q3) Describe in words how the business department in your college decides how many majors to offer when the range is from one general major to perhaps a half dozen or more possibilities.
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Page 15
Chapter 14: Labor
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Sample Questions
Q1) Economic theory supports the view that increasing the minimum wage will
A)increase the employment of teenagers.
B)decrease the employment of teenagers.
C)decrease the employment of unionized labor.
D)increase the number of monopsony firms.
Q2) We see a backward-bending labor supply curve whenever
A)minimum wages are set too low.
B)minimum wages are set too high.
C)the income effect dominates the substitution effect over some range of wage rates.
D)the substitution effect dominates the income effect over some range of wage rates.
Q3) The income effect of an increase in the wage rate on the quantity of leisure demanded
A)makes leisure more expensive which leads people to work more.
B)makes leisure less expensive which causes people to work less.
C)gives people more purchasing power and causes people to work less.
D)gives people less purchasing power and so they will work more.
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Chapter 15: Capital
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Sample Questions
Q1) According to the text discussion of efficient capital markets, which of the following would a well-trained economist recognize as logical and expected?
A)Monkeys throwing darts at a financial page can hit stocks that perform as well as stocks picked by financial experts
B)The best managed companies usually earn higher returns than companies rated lower on the list of well managed companies
C)Experienced investors pay handsome sums to get investment advice from expert advisors
D)Only expert investors should invest in the stock market
Q2) A computer you are considering for your business would add $4,000 per year to your profit. It would cost $400 a year to buy a complete maintenance contract so that you would never have repair and upkeep expense. The obsolescence depreciation is 25% a year. The going market interest rate is 5%. Assume all costs and revenue occur at the end of the year. What is the maximum you should be willing to pay for the machine?
Q3) You have a mortgage that has a nominal interest rate of 7%. The inflation rate is 3.5%. Your real interest rate is _________.
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Chapter 16: Externalities, Property Rights, and the Coase
Theorem
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Sample Questions
Q1) An example of a positive externality is A)pollution.
B)an apple orchard increasing the number of trees next to a bee farm. C)the Clean Air Act.
D)smoking in a crowded place.
Q2) Provide an example of a positive externality and explain: 1) why it should be considered a positive externality and 2) what could be done in order to internalize the externality.
Q3) According to Pigou, the best way to deal with a negative externality is to A)allow both parties to negotiate.
B)assign liability to the party with the highest cost of prevention. C)assign liability to the party with the lowest cost of prevention. D)tax it.
Q4) Each citizen in a small town suffers 5 units of irritation for each bushel of leaves burned in the town. The charge for hauling a bushel of leaves to the land fill is a fee equal to 20 units of irritation. There are 25 people in the town, each of whom minimizes personal irritation and has 10 bushels of leaves. How much irritation is the most efficient amount for each person in the town to absorb?
Q5) Define in technical terms the tragedy of the commons.
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Chapter 17: General Equilibrium and Market Efficiency
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Sample Questions
Q1) On the consumption contract curve
A)supply equals demand of both goods.
B)all allocations are Pareto optimal.
C)there will be no further voluntary exchange.
D)All of these are true.
Q2) If one is inside the production possibilities frontier,
A)production of one commodity can be produced but not more of both.
B)more resources are needed to move to the frontier.
C)production is not on the production contract curve.
D)All of these are true
Q3) According to the invisible hand theorem, as stated in the text,
A)non-market forces can prevent the markets from guiding consumers to the contract curve.
B)an equilibrium produced by competitive markets will exhaust all gains from exchange.
C)government interaction is sometimes needed as an invisible hand to lead the economy toward efficiency.
D)even non-competitive markets are able to achieve Pareto efficient outcomes.
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Chapter 18: Government
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Sample Questions
Q1) Congress has not been able to vote with clarity on a war in country X. It seems like there are three options that they consider. (1) They could negotiate the best agreement they can get and leave the area. (2) They could continue the air campaign. (3) They could continue the air campaign and send ground troops into the area. In terms of expense the options get increasingly expensive. If a representative from Illinois has a preference order of (1), (3), (2), we can say that
A)the median voter rule will not apply.
B)the representative has a single peaked voting preference.
C)the representative does not have a voting preference.
D)it cannot be answered with the information given.
Q2) Each year around July 4 the town of Flagston has a controversy over how big a fireworks display they should have on the holiday. The three citizens have the demand functions for fireworks that are shown here. The cost per firecracker is $18. Elmer has the demand function P = 20 - Q. Ethel's demand equation is P = 12 - .6Q, and Edith has the demand P = 8 - .4Q. If the city father (Elmer), true statesman that he is, tried to work toward efficiency by structuring a user benefit tax on the July 4 display, and if he were able to assess accurately the benefits received, how would he tax the citizens?
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