Economic Theory Review
Questions
Course Introduction
Economic Theory explores the foundational principles that underpin the functioning of economies at both micro and macro levels. The course covers core concepts such as supply and demand, market equilibrium, consumer behavior, production and costs, as well as firms' pricing and output decisions under various market structures. Students will also examine themes in welfare economics, market failures, and the role of government intervention. Analytical frameworks and mathematical models are introduced to enhance students ability to interpret economic outcomes and policy implications, equipping them with tools to critically analyze real-world economic issues.
Recommended Textbook
Principles of Economics 5th Edition by Robert Frank
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26 Chapters
3218 Verified Questions
3218 Flashcards
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Page 2
Chapter 1: Thinking Like an Economist
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134 Verified Questions
134 Flashcards
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Sample Questions
Q1) What is the opportunity cost of living in a house that you already own?
A)Zero,because you already own it.
B)That mostly depends on current mortgage rates.
C)The rent you could receive if you rented the house out to someone else.
D)The taxes you pay your local government.
Answer: C
Q2) Dividing the total cost of n units of an activity by n reveals the:
A)average benefit.
B)marginal cost.
C)units per cost.
D)average cost.
Answer: D
Q3) If the total benefits of watching 1,2,and 3 baseball games on TV are 100,120,and 125 respectively,then the marginal benefits of watching 1,2 and 3 baseball games on TV are:
A)100,120,and 125 respectively.
B)100,20,and 5 respectively.
C)100,609,and 41.67 respectively.
D)100,240,and 375 respectively.
Answer: B
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Page 3
Chapter 2: Comparative Advantage
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109 Verified Questions
109 Flashcards
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Sample Questions
Q1) The core principle that is illustrated by the production possibilities curve is:
A)the Scarcity Principle.
B)the Cost-Benefit Principle.
C)the Incentive Principle.
D)The Principle of Comparative Advantage.
Answer: A
Q2) If your linear,two-good production possibilities graph has a slope steeper than -1:
A)you would have to give up more than one unit of the good measured on the horizontal axis to gain an additional unit of the good measured on the vertical axis.
B)you would have to give up less than one unit of the good measured on the horizontal axis to gain an additional unit of the good measured on the vertical axis.
C)by specializing in the good measured on the horizontal axis you would be able to make more total units than you would if you specialized in the good measured on the vertical axis.
D)you have a comparative advantage in the good measured on the vertical axis.
Answer: B
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Chapter 3: Supply and Demand
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120 Verified Questions
120 Flashcards
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Sample Questions
Q1) Supply curves are generally _______ sloping because _______________.
A)downward;more consumers will buy the good if the price falls.
B)upward;of the principle of increasing opportunity costs.
C)downward;it is less expensive to mass-produce goods.
D)upward;of inflation.
Answer: B
Q2) Assume consumers eat either rice or pasta for dinner every night.If the price of rice increases,in the pasta market one would expect to see:
A)an increase in the quantity of pasta demanded.
B)an increase in the demand for pasta.
C)a decrease in the quantity of pasta demanded.
D)a decrease in the demand for pasta.
Answer: B
Q3) Suppose that both supply and demand for iPads decrease.One can predict that the:
A)equilibrium price will rise but the equilibrium quantity can increase or decrease.
B)equilibrium price and quantity will decrease.
C)equilibrium price and quantity will rise.
D)equilibrium quantity will fall but the equilibrium price can rise or fall.
Answer: D
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Page 5
Chapter 4: Elasticity
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130 Flashcards
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Sample Questions
Q1) Price elasticity of demand is _______ the slope of the demand curve. A)not related to B)inversely related to C)positively related to D)equal to
Q2) A cross-price elasticity of -1.2 indicates that the two goods under consideration are: A)inferior.
B)elastically demanded. C)complements.
D)substitutes.
Q3) For OutBack Steakhouse,seating capacity is limited in the short run.In the long run they can add as many seats as they want.Therefore,the price elasticity of supply for the meals in OutBack would be _____ in the short run than in the long run. A)higher
B)lower
C)the same D)more variable
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Chapter 5: Demand
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103 Flashcards
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Sample Questions
Q1) In some countries,medical care is provided free to citizens and paid for by the government.In those countries,medical care is
A)not a scarce resource.
B)available at zero opportunity cost.
C)rationed by non-monetary costs.
D)available at no cost to everyone who wants it.
Q2) Assume that Dusty has $30 in income,the price of a loaf of bread is $1.50,and the price of a jar of peanut butter is $3.
If Dusty's income rises to $45,the rational spending rule would predict that Dusty will buy
A)more bread and less peanut butter.
B)more bread and more peanut butter.
C)less bread and more peanut butter.
D)more bread and the same amount of peanut butter.
Q3) Shelter for homeless people is an example of
A)a want
B)a need
C)something they can live without D)something hard to find
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Chapter 6: Perfectly Competitive Supply
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108 Flashcards
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Sample Questions
Q1) Average variable cost is defined as
A)Total cost divided by output.
B)Total cost divided by number of workers.
C)Variable cost divided by output.
D)Variable cost divided by price.
Q2) Jenny sells lemonade by the street during the summer time.Several other kids also sell lemonade in Jenny's neighborhood.
Refer to the information above.The lemonade market in Jenny's neighborhood is more likely to be perfectly competitive if:
A)all of the kids advertise heavily.
B)each stand tries to get more customers by offering a different variety of lemonades and snacks.
C)each lemonade stand sells the same kind of lemonade.
D)some of the neighborhood parents build elaborate booths for their kids' stands while some kids sell from makeshift tables.
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Chapter 7: Efficiency, Exchange, and the Invisible Hand in Action
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115 Verified Questions
115 Flashcards
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Sample Questions
Q1) Ingrid has been waiting for the show "Mamma Mia!" to come to town.When it finally does come,ticket prices are $60.Ingrid's reservation price is $75.But when Ingrid tries to buy a ticket,they are sold out.
Refer to the information above.The fact that Ingrid cannot buy a ticket to "Mamma Mia!" is evidence of:
A)Pareto efficiency in this market.
B)A price ceiling above the equilibrium price.
C)A situation that is not Pareto efficient.
D)The benefits of allocating resources on the first-come,first-served basis.
Q2) Last year Pat was a soybean farmer and Chris was a corn farmer.This year,high demand for ethanol,an automobile fuel made from corn,causes the price of corn to increase.
Refer to the information above.Suppose Pat stopped growing soybeans and began growing corn.What principle would explain that change?
A)The principle of comparative advantage.
B)The scarcity principle.
C)The incentive principle.
D)The equilibrium principle.
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Chapter 8: Monopoly, Oligopoly, and Monopolistic Competition
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104 Flashcards
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Sample Questions
Q1) Both the perfectly competitive firm and the monopolist find that:
A)price and marginal revenue are the same.
B)they can sell all they want to at the market price.
C)it is best to expand production until the benefits and costs of the last unit produced are equal.
D)price is less than marginal revenue.
Q2) Which of the following is not an example of the hurdle method of price discrimination?
A)A "Buy two,get the third free" special.
B)Mail-in rebate coupon on a printer.
C)Early-bird shopper discount for customers before 10 a.m.
D)A going-out-of-business sale.
Q3) Market power refers to the firm's ability to:
A)undercut its competitors.
B)force consumers to pay prices higher than their reservation prices.
C)raise its price without losing all of its sales.
D)influence the price its competitors charge.
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Page 10
Chapter 9: Games and Strategic Behavior
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113 Flashcards
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Sample Questions
Q1) For a game involving two players with two possible strategies,which of the following is a requirement for a prisoner's dilemma?
A)Neither player has a dominant strategy.
B)The payoff for each player if both play the dominated strategies must be more than the payoff for each player if both play dominant strategies.
C)The payoff if both play the dominant strategies must be more than the payoff if both play their dominated strategies.
D)There is no Nash equilibrium.
Q2) Most cartels end or cease to be effective because:
A)of enforcement of antitrust legislation.
B)of the incentive to cheat on the cartel agreement.
C)the dominant member firm buys out the other firms.
D)consumers discover the cartel agreement and buy instead from other firms.
Q3) Game theory provides tools that are used to model:
A)how perfectly competitive firms behave.
B)cost functions faced by firms.
C)consumer demand.
D)interdependence.
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Chapter 10: Externalities and Property Rights
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127 Flashcards
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Sample Questions
Q1) Shel and Fran are neighbors.They work at the same firm and hold the same title.Shel finds that when Fran's consumption rises,Shel feels worse off.Fran feels the same way towards Shel's consumption.
Refer to the information given above.Fran has bought a new Jaguar (a luxury car)and shortly thereafter Shel bought a new Mercedes (also a luxury car).Shel and Fran seem to be:
A)making independent rational consumption decisions.
B)unaware of the other's actions.
C)involved in a positional arms race.
D)imposing external benefits on each other.
Q2) When some fraction of the benefit of an activity is received by people not participating in the activity,it is called a(n):
A)winner's curse.
B)positive externality.
C)external cost.
D)efficient allocation.
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Chapter 11: The Economics of Information
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145 Verified Questions
145 Flashcards
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Sample Questions
Q1) Suppose that there is not enough parking at an urban university.Sometimes students come to campus,spend a few minutes searching for a parking spot,and then decide that going to class isn't worth the effort of continuing to search for a spot and go home.Assume that all professors give midterm exams on the same day.You would expect the optimal time spent searching for a parking space on that day to __________ because __________.
A)decrease;the marginal costs are higher.
B)increase;the marginal costs are lower.
C)increase;the marginal benefits are higher.
D)decrease;the marginal costs are lower.
Q2) The lemons model is used to analyze
A)the market for citrus products.
B)markets with asymmetric information.
C)the smart-for-one-dumb-for-all principle.
D)the low hanging fruit principle.
Q3) The marginal cost of collecting information
A)rises as more information is collected.
B)falls as more information is collected.
C)is now zero because of the Internet.
D)is independent of the size of the expenditure.
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Chapter 12: Labor Markets, Poverty, and Income Distribution
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143 Verified Questions
143 Flashcards
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Sample Questions
Q1) Which of the following factors is not part of one's stock of human capital?
A)I.Q.
B)Years of education.
C)The current level of unemployment.
D)Ability to concentrate.
Q2) If demand for the product you make were to suddenly decline you would expect the equilibrium price of the product to fall,
A)causing an increase in the VMP of each worker.
B)causing a decrease in the VMP of each worker.
C)but no change in the VMP of each worker because product prices don't affect worker productivity.
D)causing the marginal productivity of each worker to fall.
Q3) The degree of income inequality produced by competitive markets,in Professor Rawls' view,is
A)minor.
B)greater than the amount people would prefer.
C)consistent with the ideal amount.
D)acceptable.
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Chapter 13: The Environment, Health, and Safety
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140 Verified Questions
140 Flashcards
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Sample Questions
Q1) The amount of waste caused by full insurance coverage depends on
A)the individual who is covered by the insurance plan.
B)the price elasticity of demand for medical service.
C)the price elasticity of supply of medical service.
D)whether people care about the equitable distribution of care.
Q2) If the marginal cost of treating an illness is zero,the optimal amount of treatment to receive is the amount
A)for which the marginal benefit is zero.
B)that cures the illness.
C)for which average benefit is zero.
D)for which the total benefit is zero.
Q3) Workplace safety laws are ___ in developed countries because
A)rare;policy makers believe that they undermine the free market system.
B)rare;corporate lobbyists convince legislators to vote against them.
C)necessary;without them firms that hire workers in competitive labor markets would have no incentive to provide safe workplaces.
D)common;policy makers believe that labor markets are not perfectly competitive and so firms may not provide the optimal level of safety.
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Chapter 14: Public Goods and Tax Policy
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144 Verified Questions
144 Flashcards
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Sample Questions
Q1) The very small city of Pleasantville is considering building a public swimming pool that costs $1,000.The table shows the five voters in the city and their marginal benefit of a swimming pool.It takes a 4/5 majority to pass any tax measure and all voters must vote. \[\begin{array} { | c | c | }
\hline \text { VOTER } & \text { MARGINAL BENEFIT } \\
\hline \text { Kyle } & \$ 420 \\
\hline \text { Dylan } & \$ 360 \\
\hline \text { Fran } & \$ 350 \\
\hline \text { Ronnie } & \$ 190 \\
\hline \text { Sam } & \$ 170 \\
\hline
\end{array}\]
Building the swimming pool would __________ total economic surplus because
A)reduce;the costs exceed the benefits
B)reduce;taxes would have to be collected to build it
C)increase;the benefits exceed the costs
D)increase;the costs can be passed to users from other towns
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Page 16
Chapter 15: Spending, Income, and GDP
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150 Flashcards
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Sample Questions
Q1) An economy produces only 500,000 tables valued at $100 each.Of these,100,000 are sold to consumers,200,000 are sold to businesses,100,000 are sold to the government,and 50,000 are sold abroad.No tables are imported.The unsold tables at the end of the year are held in inventory by the table manufacturers.What is the value of the investment component of GDP?
A)$2 billion
B)$10 million
C)$20 million
D)$25 million
Q2) Factories and machines are examples of:
A)consumption goods.
B)non-market goods.
C)value-added goods.
D)capital goods.
Q3) Consumption expenditures include spending by households on:
A)exports.
B)inventories.
C)residential housing.
D)services.
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Page 17
Chapter 16: Inflation and the Price Level
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Sample Questions
Q1) Two types of bias that tend to cause the CPI to overstate the "true" rate of inflation are the ______ bias and the ______ bias.
A)substitution;quality adjustment
B)price;quantity
C)aggregation;price
D)quality adjustment;price adjustment
Q2) To ensure that a nominal payment represents a constant level of purchasing power over time,one should:
A)add a price index to it.
B)subtract a price index from it.
C)divide it by a price index.
D)increase it by a percentage equal to the rate of inflation for that year.
Q3) One family earned an income of $28,000 in 1990.Over the next five years,their income increased by 15%,while the CPI increased by 15%.After five years,this family's nominal income ______,and their real income ______.
A)decreased;also decreased
B)decreased;increased
C)increased;did not change
D)increased;also increased
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Page 18
Chapter 17: Wages and Unemployment
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Sample Questions
Q1) All of the following describe trends in labor markets EXCEPT:
A)growing wage equality in the United States in recent decades.
B)a slowdown in real wage growth since the 1970s.
C)substantial growth in the level of employment in the United States.
D)over-sixteen population growth rates that fall short of the growth rate of new jobs in the United States.
Q2) In a small town of 100 people,there are 10 children under 16,10 retired people,60 people with full-time jobs,3 people with part-time jobs,3 full-time students over 16,and 4 full-time homemakers.The remaining people did not have jobs,but wanted them.All but one of these had actively looked for a job in the previous four weeks.What is the participation rate in this town?
A)63.0%
B)72.0%
C)80.0%
D)87.5%
Q3) The participation rate is the number of people:
A)employed divided by the labor force.
B)employed divided by the population aged 16 years and older.
C)employed and unemployed divided by the labor force.
D)employed and unemployed divided by the population aged 16 years and older.
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Chapter 18: Economic Growth
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Sample Questions
Q1) Empirical studies suggest that as real GDP per person increases the level of pollution: A)increases.
B)decreases.
C)remains constant.
D)first increases then decreases.
Q2) More economic growth is not necessarily better unless the benefits of growth:
A)exceed the costs of growth.
B)increase average labor productivity.
C)increase real GDP per capita.
D)increase human capital.
Q3) A government policy of providing free public education is an example of a policy to promote economic growth by:
A)increasing human capital.
B)increasing physical capital.
C)improving technology.
D)increasing the availability of natural resources.
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Page 20
Chapter 19: Saving, Capital Formation, and Financial Markets
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Sample Questions
Q1) The Hatfields and the McCoys both earn $50,000 per year in real terms in the labor market,and both families are able to earn a 25% real interest rate on their savings.In the year 2000,both families began to save.The Hatfields saved 8% of their income each year;the McCoys saved 10%.In 2000,the Hatfields consumed ______ more than the McCoys;in 2001,the Hatfields consumed ______ than the McCoys.
A)$1,000;$25 more
B)$2,000;$25 more
C)$1,000;$25 less
D)$2,000;$25 less
Q2) Holding other factors constant,if the income tax is replaced with a consumption tax so that saving is not taxed,then the real interest rate will ______ and the equilibrium quantity of saving and investment will _______.
A)increase;increase
B)increase;not change
C)increase;decrease
D)decrease;increase
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Chapter 20: Money, Prices, and the Financial System
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Sample Questions
Q1) The introduction of credit cards and debit cards has ______ velocity.
A)increased
B)decreased
C)had no impact on
D)eliminated
Q2) If the public switches from using cash for most transactions to using checks instead,then all else equal,the money supply will:
A)increase.
B)decrease.
C)not change.
D)either increase or decrease.
Q3) Two reasons savers keep deposits at banks are to:
A)secure mortgages and to purchase stocks.
B)earn a return on their savings and to facilitate making payments.
C)lower interest rates and to increase the money supply.
D)equalize loan supply and demand and to earn interest.
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Chapter 21: Short-Term Economic Fluctuations
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Sample Questions
Q1) The cyclical unemployment rate is zero when:
A)there is not a recessionary gap.
B)there is not an expansionary gap.
C)actual GDP and potential GDP are equal.
D)frictional unemployment equals structural unemployment.
Q2) All of the following are characteristics of short-term economic fluctuations EXCEPT:
A)expansions and recessions are felt in only a few sectors of the economy.
B)expansions and recessions are irregular in length and severity.
C)unemployment rises during recessions.
D)durable-goods industries are more sensitive to short-term fluctuations than service and non-durable industries.
Q3) A period in which the economy is growing at a rate significantly above normal is called a(n):
A)depression.
B)expansion.
C)peak.
D)recession.
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23
Chapter 22: Spending, Output, and Fiscal Policy
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Sample Questions
Q1) In the short-run Keynesian model,to close an expansionary gap of $10 billion dollars government purchases must be:
A)increased by $10 billion.
B)decreased by $10 billion.
C)increased by more than $10 billion.
D)decreased by less than $10 billion.
Q2) The recession of 2007-2009 happened in part because,after the housing bubble burst in 2006,the ensuing financial crisis:
A)made it difficult for government to finance deficit spending.
B)led to widespread inflation.
C)increased the level of uncertainty about the future.
D)shifted the PAE line upward.
Q3) In the Keynesian cross diagram,the ______ line relates planned aggregate expenditure to output and the ______ line represents the condition that planned aggregate expenditure equals short-run equilibrium output.
A)consumption function;45°
B)45°;consumption function
C)expenditure;45°
D)45°;expenditure
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Page 24
Chapter 23: Monetary Policy and the Federal Reserve
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Sample Questions
Q1) The interest rate that commercial banks charge each other for very short-term loans is called the:
A)prime rate.
B)federal funds rate.
C)Federal Reserve discount rate.
D)commercial paper rate.
Q2) One problem with using monetary policy to address "bubbles" in asset markets is that:
A)the Federal Reserve is better than financial-market professionals at identifying bubbles.
B)monetary policy is not a very good tool for addressing the problem of inappropriately high asset prices.
C)reducing the real interest rate to deal with the bubble could lead to inflation.
D)the Federal Reserve is not interested in stabilizing output.
Q3) When Argentines increase their savings in U.S.dollars,the U.S.money:
A)supply curve shifts left.
B)supply curve shifts right.
C)demand curve shifts right.
D)demand curve shifts left.
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Page 25
Cycles
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Sample Questions
Q1) Starting from long-run equilibrium,a negative inflation shock results in a short-run equilibrium with ___ inflation and ____ output.
A)higher;higher
B)higher;lower
C)higher;potential
D)lower;lower
Q2) Suppose the economy is currently operating at potential output;an expansionary gap may be caused by each of the following EXCEPT:
A)a positive demand shock.
B)a positive inflation shock.
C)an increase in government spending.
D)an increase in the inflation rate.
Q3) When the economy is in short-run equilibrium,there will be ______ output gap.
A)no
B)only a recessionary
C)either a recessionary or an expansionary
D)only an expansionary
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Page 26
Chapter 25: Macroeconomic Policy
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Sample Questions
Q1) All of the following are ways to enhance central bank credibility EXCEPT to:
A)announce inflation targets.
B)appoint inflation hawks as central bankers.
C)put no obligation on the central bank to finance the national deficit.
D)make central bank actions subject to frequent review and veto by the executive and legislative branches of government.
Q2) The Fed cannot achieve a negative real interest rate if the inflation rate is zero or negative because:
A)the nominal interest rate cannot fall below zero.
B)inflation doves will not permit a negative real interest rate.
C)zero or negative values of inflation cannot be accurately measured.
D)inflationary expectations are not anchored when the inflation rate is zero.
Q3) Someone who is committed to maintaining low inflation even at the short-run cost of reduced output and employment is called a(n):
A)anchored central banker.
B)reactionary central banker.
C)inflation dove.
D)inflation hawk.
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Chapter 26: Exchange Rates, International Trade, and Capital Flows
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Sample Questions
Q1) The following table provides nominal exchange rates for the U.S.dollar. \[\begin{array} { l c c }
\underline { \text { Country }} &\underline { \text { Foreign currency/dollar }} & \underline { \text { Dollar/foreign currency } }\\ \text { Canada (Canadian dollar) } & 1.488 & .672 \\ \text { Mexico (peso) } & 9.259 & .108 \end{array}\]
Based on these data,the nominal exchange rate equals approximately ______ pesos per Canadian dollar or,equivalently,______ Canadian dollars per peso.
A)0.672;1.488
B)9.259;0.108
C)6.222;0.161
D)7.771;0.129
Q2) A decrease in the real exchange rate will tend to ______ exports and to ______ imports.
A)increase;decrease
B)increase;increase
C)decrease;decrease
D)decrease;increase
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