Economic Principles and Applications
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Course Introduction
Economic Principles and Applications introduces students to the fundamental concepts and analytical tools of economics, focusing on how individuals and societies allocate scarce resources. The course examines core topics such as supply and demand, market structures, consumer behavior, production costs, and the role of government in the economy. Emphasis is placed on real-world applications, enabling students to use economic reasoning to understand current events, evaluate policy decisions, and make informed personal and professional choices. Through practical examples and case studies, students gain a foundational understanding of both microeconomic and macroeconomic principles, developing critical thinking skills applicable across a range of disciplines.
Recommended Textbook
Survey of Economics Principles Applications and Tools 7th Edition by Arthur OSullivan
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Chapter 1: Introduction: What Is Economics
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Sample Questions
Q1) Talking about alternatives is the first step in a process that helps us make better choices about how we use our resources.
A)True
B)False
Answer: True
Q2) Would an economist consider clean air a scarce resource? Explain.
Answer: Yes, because the air had alternative uses. We can choose to use it to either breathe or to undertake activities that pollute it. The more we want to breathe clean air the more we must limit the production of pollutants. The more we pollute the air the less we can breathe clean air.
Q3) A key assumption of most economic analysis is that people are altruistic, meaning that they act in their own self-interest.
A)True
B)False
Answer: False
Q4) An economic model is a detailed version of an economic environment.
A)True
B)False Answer: False
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Chapter 2: The Key Principles of Economics
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Sample Questions
Q1) The cost of a bachelor's degree in philosophy equals the tuition plus the cost of room and board.
A)True
B)False
Answer: False
Q2) The face value of money or income is called its ________ value.
A) real
B) marginal
C) nominal
D) external
Answer: C
Q3) Diminishing returns occurs because
A) not enough people have jobs.
B) one of the inputs in the production process is fixed.
C) consumers don't buy enough of the products produced.
D) two people have not satisfied their self-interests.
Answer: B
Q4) If your salary increases at a lower rate than prices are increasing, what would happen to your buying power?
Answer: Your money would have less buying power.
Page 4
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Chapter 3: Demand, Supply, and Market Equilibrium
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Sample Questions
Q1) Describe the changes in the variables that will cause the demand for a product to decrease, shifting the demand curve to the left.
Answer: a decrease in income if the product is a normal good; an increase in income if the product is an inferior good; a decrease in the price of a substitute good; an increase in the price of a complementary good; a decrease in population; a decrease in consumer preference for the good; a decrease in the expected future price of the good
Q2) According to this Application, in recent years the European Union has reformed its agriculture policies by reducing or eliminating minimum prices. Ceteris paribus, these policy reforms would ________ excess supply by ________ prices.
A) reduce; raising
B) reduce; lowering C) increase; raising
D) increase; lowering
Answer: B
Q3) People will buy more of a normal good when their income decreases.
A)True
B)False
Answer: False
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Chapter 4: Elasticity: A Measure of Responsiveness
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Sample Questions
Q1) A vertical supply curve is infinitely elastic.
A)True
B)False
Q2) Restaurants and retail stores often give 10% senior citizen discounts. Use the concept of elasticity to explain how this can be profit maximizing behavior.
Q3) The price elasticity of supply is calculated by
A) dividing the percentage change in quantity supplied by the price.
B) dividing the percentage change in income by the percentage quantity supplied.
C) dividing the percentage change in price by the percentage quantity supplied.
D) dividing the percentage change in quantity supplied by the percentage change in price.
Q4) In the case of perfectly inelastic demand, the demand curve is
A) upward sloping.
B) downward sloping.
C) vertical.
D) horizontal.
Q5) What will make a change in demand cause a large change in price?
Q6) Explain why the demand for a particular brand of fast food tends to be more elastic than demand for all fast food.
Page 6
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Chapter 5: Production Technology and Cost
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Sample Questions
Q1) Economic cost differs from accounting cost because accountants do not consider implicit costs.
A)True
B)False
Q2) Economic profit is total revenue less economic costs.
A)True
B)False
Q3) From 1998 to 2010, the cost of electricity produced with nuclear power has ________ and the cost of electricity produced with solar power has ________. A) increased; increased B) increased; decreased C) decreased; increased D) decreased; decreased
Q4) Can a firm experience diminishing returns in the long run?
Q5) If a firm has reached the minimum efficient scale, any additional output produced by the firm will result in a lower average cost in the long run.
A)True B)False
Q6) What is economic profit?
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Chapter 6: Perfect Competition
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Sample Questions
Q1) Figure 6.3 shows the cost structure of a firm in a perfectly competitive market. The price at which the firm is just as well off either operating or shutting down is
A) $3.
B) $4.50.
C) $6.
D) $10.
Q2) Which of the following is NOT a characteristic of a perfectly competitive market?
A) a large number of firms in a market
B) selling a standardized product
C) substantial barriers to entry
D) an individual firm having no control over price
Q3) Recall the Application. If the minimum average total cost for switchgrass farmers is $55 per ton and the minimum average variable cost is $40 per ton, then at a price of $50 per ton in the short run the switchgrass farmer will
A) shut down, that is bring no switchgrass to market.
B) operate and lose money.
C) make a zero economic profit.
D) make a positive economic profit.
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Chapter 7: Monopoly and Price Discrimination
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Sample Questions
Q1) After the first unit, a monopolist's marginal revenue is less than the price it charges because to sell an additional unit it needs to lower its price.
A)True
B)False
Q2) When a firm engages in price discrimination it sets marginal revenue equal to marginal cost for each separate set of consumers.
A)True
B)False
Q3) If we observe a firm engaging in price discrimination, it must be TRUE that
A) the firm is enjoying higher total profits than it would have earned if it charged a single price for the product.
B) the firm can identify the preferences of every customer it serves.
C) the firm earns higher profits per unit than it would have earned if it charged a single price for the product.
D) All of the above are correct.
Q4) What is a patent?
Q5) How does a monopolist's marginal revenue change as output increases? Why?
Q6) Why does the government grant patents to companies that research new drugs?
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Chapter 8: Market Entry, Monopolistic Competition, and Oligopoly
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Sample Questions
Q1) Suppose Kevin offers to match his competitors' prices in an oligopoly market. This will have the effect of
A) providing consumers with the lowest possible price.
B) decreasing his competitors' incentive to reduce price.
C) driving out his competition.
D) triggering an antitrust investigation.
Q2) In which of the following cases did the government break up a monopoly?
A) Staples/Office Depot
B) Interstate Bakeries and Continental Bakery
C) Xidex
D) AT&T
Q3) Tie-in sales
A) are legal under the Clayton Act.
B) are the same as predatory pricing.
C) were banned under the Hart-Scott-Rodino Act.
D) are contracts that prevent purchasing one good without purchasing another.
Q4) The higher the Herfindahl-Hirschman Index, the more firms there are in a market.
A)True
B)False
Page 10
Q5) List four examples of oligopolies in the United States.
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Chapter 9: Imperfect Information, External Benefits, and External Costs
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Sample Questions
Q1) The reason that air and water pollution impose external costs is that
A) providers of goods and services ignore costs that they do not have to pay.
B) they affect the quality of the out-of-doors.
C) environmentalists object to the degradation of the earth.
D) the damage from pollution crosses international boundaries.
Q2) Which one of the following is NOT true of a thin market?
A) It is caused by asymmetric information.
B) There are relatively few high-quality goods sold.
C) There may be some sellers of high-quality goods because people are in a hurry to sell.
D) The price of the good sold will be higher than if the market were thicker.
Q3) Suppose that your local government provides drinking water and charges a 10 cent per gallon fee. Explain whether or not the drinking water is a public good.
Q4) If eight lemons (low quality) and two plums (high quality) are supplied and buyers assume that there is a 40% chance of getting a lemon, there is an equilibrium.
A)True
B)False
Q5) Health insurance leads to what types of moral hazards?
Page 11
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Chapter 10: The Labor Market and the Distribution of Income
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Sample Questions
Q1) If the worker's costs of the training necessary to perform a job increase, labor ________ shifts to the ________.
A) demand; left
B) demand; right
C) supply; left
D) supply; right
Q2) Explain why women, on average, earn less than men in the United States.
Q3) Explain why people might work less if the wage increases.
Q4) Given their skills, a college graduate may be perceived as a good manager of time and the better fit for a managerial job than a high school graduate. This is an example of A) the learning effect of a college education.
B) the signaling effect of a college education.
C) the discriminatory effect of a college education.
D) all of the above
Q5) Marginal revenue product is the additional revenue for the firm when it hires one additional unit of labor.
A)True
B)False
Q6) What is featherbedding and why do unions engage in the practice?
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Chapter 11: Measuring a Nations Production and Income
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Sample Questions
Q1) Why is GDP only an imperfect valid measure of the value of output produced by an economy?
Q2) If an economy produced 220 pounds of jelly beans at $5 per pound and 90 pounds of gum drops at $2 per pound in 2016, its real gross domestic product (GDP) was
A) 310 pounds of candy.
B) $180.
C) $1,100.
D) $1,280.
Q3) According to the Application, large increases in per capita income in the United States over the past 30 years have
A) had the greatest impact on retired people.
B) not increased happiness levels.
C) led to a higher divorce rate.
D) lowered stress levels.
Q4) The amount of income that households keep after paying taxes is A) national income.
B) personal income.
C) personal disposable income.
D) value added income.
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Chapter 12: Unemployment and Inflation
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Sample Questions
Q1) The costs of inflation that arise from trying to reduce cash holdings are known as A) shoe leather costs.
B) menu costs.
C) chain-index costs.
D) diminishing costs.
Q2) The principal reason why the chain-weighted index for GDP and the CPI both overstate actual changes in prices is that
A) it is hard to measure quality changes.
B) the basket of goods purchased by consumers never changes.
C) price data is often inaccurate.
D) all of the above
Q3) How costly are biases in the CPI?
Q4) Economists define the unemployed as individuals who are A) not currently working.
B) not currently working but are actively looking for work.
C) working but looking for a different job.
D) working less than their desired amount of time.
Q5) What is the Consumer Price Index (CPI)?
Q6) What is frictional unemployment?
14
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Chapter 13: Why Do Economies Grow
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Sample Questions
Q1) Suppose consumers save 5 percent of their incomes. If the government collects 100 dollars in taxes from each taxpayer, private saving will ________ per taxpayer.
A) increase by $105
B) decrease by $95
C) decrease by $5
D) decrease by 95 cents
Q2) Monopoly profits lead to technological process by
A) carefully investing deadweight loss.
B) encouraging the development of innovations by firms attempting to break a monopoly.
C) firms lobbying Congress for protection of their monopolies.
D) increasing the amount of human capital in the economy.
Q3) Do inventions have to be major technological breakthroughs to affect the efficiency of producing goods? Explain.
Q4) Education is an integral part of economic growth.
A)True
B)False
Q5) What are the trade-offs involved in shortening the length of a patent for pharmaceuticals?
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Chapter 14: Aggregate Demand and Aggregate Supply
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Sample Questions
Q1) Identify three key factors that can cause a shift in the aggregate demand curve.
Q2) Changes in demand will often be met with changes in output rather than changes in prices because of formal and informal contracts.
A)True
B)False
Q3) Workers whose wages tend to adjust slowly include all of the following EXCEPT A) union workers.
B) unskilled, low wage workers.
C) those with long-term contracts.
D) movie stars, professional athletes, and rock stars.
Q4) An implication of the long-run aggregate supply curve is that continuous increases in the money supply will result in continuous
A) increases in price level.
B) decreases in output and price level.
C) decreases in output.
D) increases in output and price level.
Q5) For most firms, the biggest cost of doing business is wages.
A)True
B)False
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Chapter 15: Fiscal Policy
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Sample Questions
Q1) Why are transfer payments not included in GDP?
A) The amount is too low to have any effect.
B) Unemployment varies and can't be tracked.
C) They do not represent payments to those who contributed resources to currently produced goods or services.
D) Money companies receive from the government isn't reported.
Q2) Suppose the economy is operating below potential output. If policy makers try to avoid a budget deficit by raising taxes or reducing government spending, these actions would
A) increase inflation.
B) help pull an economy out of a depression.
C) make a recession worse.
D) negate the multiplier effect.
Q3) When the economy slows down and national income falls, the government will have ________ tax revenue to fund programs.
A) more
B) less
C) about the same
D) a rapid increase in
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Chapter 16: Money and the Banking System
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Sample Questions
Q1) Banks prefer to make loans than keep reserves because they earn interest on loans and must pay interest on reserves.
A)True
B)False
Q2) Suppose a bank has $600,000 in deposits, a reserve ratio of 20 percent, and bank reserves of $240,000. This bank can make new loans in the amount of
A) $840,000.
B) $360,000.
C) $120,000.
D) $12,000.
Q3) Every country in the world has an independent central bank.
A)True
B)False
Q4) Suppose a bank has $200,000 in deposits, a reserve ratio of 10 percent, and reserves of $45,000. This bank has excess reserves of A) $155,000.
B) $25,000.
C) $10,000.
D) $5,000.
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Chapter 17: Monetary Policy and Inflation
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Sample Questions
Q1) The most commonly used tool in monetary policy is
A) changes in required reserve ratios.
B) changes in the discount rate.
C) open market operations.
D) express lending transactions.
Q2) How would the Fed's changing the discount rate affect the money supply?
Q3) When people expect inflation, they assume that prices are going to increase at a certain rate and factor this into their decision making.
A)True
B)False
Q4) An open market sale by the Fed
A) increases the money supply and increases output.
B) increases the money supply and decreases output.
C) decreases the money supply and increases output.
D) decreases the money supply and decreases output.
Q5) The real rate of interest is defined as the
A) expected inflation rate minus the nominal interest rate.
B) expected inflation rate plus the nominal interest rate.
C) nominal interest rate minus the expected inflation rate.
D) nominal inflation rate plus the expected inflation rate.
Page 19
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Chapter 18: International Trade and Finance
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Sample Questions
Q1) A(n) ________ in U.S. prices will cause a decrease in the demand for U.S. dollars and a(n) ________ in the (per dollar) exchange rate.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Q2) Today, the average U.S. tariff is 4.6 percent of the value of imported goods, which is very low by historical standards.
A)True
B)False
Q3) Referring to Figure 18.3, the effect of an increase in U.S. interest rates is represented by a movement from point
A) a to d.
B) c to b.
C) a to b.
D) d to c.
Q4) Explain what is meant by the economic principle of voluntary exchange.
Q5) What is a voluntary export restraint (VER)?
Q6) What is an import quota?
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