Economic Theory
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Course Introduction
Economic Theory explores the foundational principles and analytical frameworks that underpin the study of economics. This course examines both microeconomic and macroeconomic perspectives, introducing key concepts such as supply and demand, market structures, consumer behavior, production and costs, as well as national income, inflation, and unemployment. Through theoretical models and real-world applications, students gain critical insights into how individuals, firms, and governments make economic decisions, and how these choices shape the allocation of scarce resources in society. The aim is to develop reasoning skills essential for understanding and evaluating economic policies and outcomes.
Recommended Textbook
Essentials of Economics 4th Edition by
R. Glenn Hubbard
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20 Chapters
4093 Verified Questions
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Page 2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) What is the difference between positive economic analysis and normative economic analysis? Give one example each of a positive and normative economic issue or question or statement.
Answer: Positive economic analysis is concerned with what is.Positive economic analysis reaches conclusions based on verifiable statements.Normative economic analysis,on the other hand,is concerned with what ought to be.Normative analysis reaches conclusions based on opinions.(Students will give many different examples.)
Q2) Even if the population declines,scarcity will still exist.
A)True
B)False
Answer: True
Q3) The term 'market' refers to trading arrangements by which buyers and sellers come together.
A)True
B)False Answer: True
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Chapter 2: Choices and Trade-Offs in the Market
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Sample Questions
Q1) What are the attainable production points on a production possibility curve?
A) The horizontal and vertical intercepts
B) The points along the production possibility frontier
C) The points outside the area enclosed by the production possibility frontier
D) The points along and inside the production possibility frontier
Answer: D
Q2) Refer to Table 2.4.Which of the following statements is true?
A) Haley has an absolute advantage in making both products.
B) Serena has an absolute advantage in making both products.
C) Haley has an absolute advantage in making bracelets and Serena in making necklaces.
D) Haley has an absolute advantage in making necklaces and Serena in making bracelets.
Answer: C
Q3) When you purchase a new set of spurs you do so in the________.
A) resource market
B) product market
C) input market
D) factor market
Answer: B
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) Refer to Figure 3-8.The graph in this figure illustrates an initial competitive equilibrium in the market for sugar at the intersection of D<sub>1</sub> and S<sub>1</sub> (point
A. The equilibrium point will move from A to B.
A) If there is an increase in the price of fertiliser used on sugar cane and there is a decrease in tastes for sugar-sweetened soft drinks, how will the equilibrium point change?
B) The equilibrium point will move from A to C.
C) There will be no change in the equilibrium point.
D) The equilibrium point will move from A to E.
Answer: D
Q2) If the price of music downloads were to decrease,then
A) the demand for MP3 players would decrease.
B) the demand for MP3 players would increase.
C) the supply of MP3 players would increase.
D) the quantity demanded of MP3 players would decrease.
Answer: B
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Page 5
Chapter 4: Elasticity: The Responsiveness of Demand and Supply
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Sample Questions
Q1) Demand for staples such as dairy products and bread is likely to be both income and price inelastic.
A)True
B)False
Q2) Suppose the supply of bicycles is price elastic.This means that________.
A) consumers will respond significantly to an increase in the quantity supplied of bicycles
B) suppliers will increase the quantity supplied of bicycles, but not immediately
C) suppliers face many substitutes for bicycles
D) suppliers will respond significantly to changes in the price of bicycles
Q3) Which of the following could explain why the demand for table salt is inelastic?
A) Salt is a luxury good.
B) Salt is a rare commodity.
C) Households devote a very small portion of their income to salt purchases.
D) Salt is a luxury for high-income consumers but a necessity for low-income consumers.
Q4) Necessities tend to have more inelastic demands than luxuries.
A)True
B)False
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Chapter 5: Economic Efficiency,government Price Setting and Taxes
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Sample Questions
Q1) Refer to Figure 5.3.The value of consumer surplus at a price of $18 is _______.
A) $60
B) $120
C) $180
D) $240
Q2) If equilibrium is achieved in a competitive market,_________.
A) there is no dead-weight loss
B) the dead-weight loss will be maximised
C) the dead-weight loss will equal the sum of consumer surplus and producer surplus
D) the dead-weight loss will be the same as the opportunity cost of the last unit of output sold
Q3) The incidence of a tax depends on whether the government collects the tax from buyers or sellers.
A)True
B)False
Q4) Rent control is an example of a price ceiling.
A)True
B)False
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Chapter 6: Technology,production and Costs
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Sample Questions
Q1) Another name for the explicit cost of production is _______.
A) variable cost
B) accounting cost
C) direct cost
D) overhead cost
Q2) Which of the following is true at the output level where average total cost is at its minimum?
A) Marginal cost equals average total cost.
B) Average variable cost equals fixed cost.
C) Marginal cost equals average variable cost.
D) Average total cost equals average fixed cost.
Q3) Marginal cost is calculated for a particular increase in output by _________.
A) multiplying the total cost by the change in output
B) multiplying the change in total cost by the change in output
C) dividing the total cost by the change in output
D) dividing the change in total cost by the change in output
Q4) Describe the relationship between marginal cost and average total cost.
Chapter 7: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) If price is equal to average variable cost,a perfectly competitive firm breaks even.
A)True
B)False
Q2) When plasma television sets were first introduced,prices were high and few firms were in the market.Later,economic profits attracted new firms,and the price of plasma televisions fell.This example illustrates
A) a decreasing-cost industry.
B) that consumers receive this new technology 'free of charge' in the sense that they only have to pay a price for plasma televisions equal to the lowest production cost.
C) an industry with a low minimum efficient scale.
D) how fickle consumer demands are.
Q3) Which of the following is not a characteristic of a perfect competition?
A) Heavy advertising by individual sellers
B) Homogeneous products
C) Sellers are price takers
D) A horizontal demand curve for individual sellers
Q4) In a decreasing-cost industry,the entry of new firms lowers average cost at each level of output.
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Page 9
Chapter 8: Monopoly Markets
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Sample Questions
Q1) The 10-year protection period from generic competition for drug manufacturers is a form of -.
A) copyright
B) trademark
C) hallmark
D) patent
Q2) Compared to perfect competition,the consumer surplus in a monopoly
A) is unchanged because price and output are the same.
B) is lower because price is higher and output is lower.
C) is higher because price is higher and output is the same.
D) is eliminated.
Q3) Whenever a firm can charge a price greater than marginal cost
A) the firm must be a monopolist.
B) there is some loss of economic efficiency.
C) consumers have the ability to choose a close substitute.
D) the firm will earn economic profits.
Q4) If a monopolist's marginal revenue is $15 per unit and its marginal cost is $25,then to maximise profit the firm should decrease output.
A)True
B)False
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Chapter 9: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) A monopolistically competitive industry that earns economic profits in the short run will ______.
A) continue to earn economic profits in the long run
B) experience the entry of new rival firms into the industry in the long run
C) experience the exit of existing firms out of the industry in the long run
D) experience a rise in demand in the long run
Q2) Refer to Table 9.1.Is there a dominant strategy for Star Connections and,if so,what is it?
A) No, its outcome depends on what Godrickporter does.
B) Yes, Star Connections should increase its advertising spending.
C) Yes, Star Connections should reduce its advertising spending.
D) Yes, Star Connections' dominant strategy is to collude with Godrickporter.
Q3) Refer to Figure 9.17.The amount of excess capacity is _______.
A) Q<sub>h</sub> - Q<sub>f</sub> units
B) Q<sub>j</sub> -Q<sub>f</sub> units
C) Q<sub>j</sub> - Q<sub>h</sub> units
D) Q<sub>h</sub> - Q<sub>g</sub> units
Q4) Monopolistically competitive firms face a perfectly elastic demand curve.
A)True
B)False
Page 11
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Chapter 10: The Markets for Labour and Other Factors of Production
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Sample Questions
Q1) Refer to Table 10.1.Suppose the output price is $3.If the firm represented in the table is maximising its profit by hiring six workers,the wage rate is
A) $120
B) $65
C) $40
D) There is insufficient information to answer the question
Q2) Suppose a competitive firm is paying a wage of $12 an hour.Assume that labour is the only input.If hiring another worker would increase output by four units per hour,then to maximise profits the firm should
A) not change the number of workers it currently hires.
B) hire the extra worker.
C) lay off some workers.
D) There is not enough information to answer the question.
Q3) Refer to Table 10.3.Hotspur's profit-maximising quantity of labour is _________.
A)2 workers
B) 3 workers
C) 5 workers
D) 6 workers
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Chapter 11: Government Intervention in the Market
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Sample Questions
Q1) A negative externality is an example of market failure.The root of the problem lies in the definition and enforcement of property rights.Explain.
Q2) Which of the following must be present to reach a private solution to an externality problem?
A) A majority of the parties affected by the externality must agree to a solution.
B) The transactions costs to negotiate a solution must be relatively low.
C) The total number of people, creators of the problem and those affected, must be relatively large to justify negotiating a solution.
D) The government must approve the solution for it to be a legal solution.
Q3) An externality is an example of a market failure.
A)True
B)False
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Chapter 12: Social Policy and Inequality
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Sample Questions
Q1) As a group,people with high incomes are likely to have
A) greater-than-average family inheritances and greater-than-average SAT scores.
B) greater-than-average holdings of stocks and bonds and lower-than-average productivity.
C) greater-than-average productivity and greater-than-average amounts of capital.
D) a stable marriage and no children.
Q2) The actual division of a tax between buyers and sellers in a market is the excess burden of the tax.
A)True
B)False
Q3) Horizontal equity is achieved when taxes are collected from those who benefit from the government expenditure of the tax revenue.
A)True
B)False
Q4) What happens when the demand for a product is less elastic than the supply?
A) Consumers pay the entire tax on the product.
B) Firms pay the majority of the tax on the product.
C) Firms pay the entire tax on the product.
D) Consumers pay the majority of the tax on the product.
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Chapter 13: Gdp: Measuring Total Production, income and Economic Growth
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Sample Questions
Q1) If an increase in crime causes people to spend money on police and security systems,GDP will rise.
A)True
B)False
Q2) Suppose that real GDP for 2017 was $10 000 billion and real GDP for 2018 was $11 000 billion.What is the rate of growth of real GDP?
A) 11%
B) 10%
C) 5%
D) 2%
Q3) The size of the underground economy as a percentage of GDP is larger in Australia than in poorer countries such as Peru.
A)True
B)False
Q4) In periods when prices are falling on average,
A) real GDP will grow slower than nominal GDP.
B) real GDP will grow faster than nominal GDP.
C) real GDP will grow as fast as nominal GDP.
D) we cannot calculate real GDP.
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Chapter 14: Unemployment and Inflation
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Sample Questions
Q1) Which of the following individuals would be most negatively affected by 'anticipated inflation'?
A) A retired railway engineer who receives a fixed income payment every month
B) A union contractor whose pay is adjusted based on changes in the CPI
C) A full-time employee at a pizza shop who earns more than the minimum wage
D) A student who borrows $10 000 at a nominal interest rate of 5% to finance educational expenses
Q2) Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs is called -.
A) frictional unemployment
B) structural unemployment
C) cyclical unemployment
D) seasonal unemployment
Q3) Who might be disadvantaged by deregulation of the labour market?
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Chapter 15: Aggregate Demand and Aggregate Supply Analysis
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Sample Questions
Q1) When does short-run macroeconomic equilibrium occur?
A) When the price level is constant in the short run.
B) When the equilibrium lies on the long-run supply curve.
C) When aggregate demand and short-run supply intersect.
D) The two criteria-that aggregate demand and short-run aggregate supply intersect and that the equilibrium lies on the long-run supply curve-must both be satisfied.
Q2) An increase in disposable income will shift the aggregate demand curve to the right.
A)True
B)False
Q3) An increase in aggregate demand causes an increase in ________ only in the short run,but causes an increase in ________ in both the short run and the long run.
A) the price level; real GDP
B) real GDP; real GDP
C) the price level; the price level
D) real GDP; the price level
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Chapter 16: Money,banks and the Reserve Bank of Australia
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Sample Questions
Q1) 'Broad money' is usually less than M3 in Australia.
A)True
B)False
Q2) Which of the following is not a major function of the Reserve Bank of Australia?
A) Maintaining the integrity of the financial system
B) Monitoring credit growth
C) Determining taxation rates
D) Controlling the cash rate
Q3) Explain why Australia's currency is suitable to use as a medium of exchange.
Q4) Gold is an example of _______.
A) commodity money
B) fiat money
C) barter money
D) M3
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Chapter 17: Monetary Policy
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Sample Questions
Q1) The Reserve Bank of Australia currently conducts monetary policy by controlling the money supply.
A)True
B)False
Q2) From an initial long-run macroeconomic equilibrium,if the Reserve Bank of Australia anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply,then the RBA would most likely
A) increase income tax rates.
B) decrease income tax rates.
C) increase interest rates.
D) decrease interest rates.
Q3) One goal of monetary policy (according to the Reserve Bank Act (1959))is A) maintaining a strong exchange rate for the dollar relative to other currencies. B) a high rate of unemployment.
C) price stability.
D) a high rate of employment.
Q4) The main goal of monetary policy in Australia is a low inflation rate.
A)True
B)False
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Chapter 18: Fiscal Policy
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Sample Questions
Q1) Which of the following is considered 'expansionary fiscal policy'?
A) The government decreases the income tax rate.
B) The government increases defence spending due to a change in priorities.
C) Legislation that increases education expense deductions from federal income taxes.
D) A state (not federal) government cuts highway spending to balance its budget.
Q2) What is 'long-run crowding out'?
Q3) The tax multiplier _________.
A) is negative
B) is larger in absolute value as compared to the government purchases multiplier
C) only works when taxes are cut
D) is less than one
Q4) Induced taxes and transfer payments reduce the multiplier effects.
A)True
B)False
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Page 20
Chapter 19: Comparative Advantage and the Gains From International Trade
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Sample Questions
Q1) The process of countries becoming more open to foreign trade and investment is known as outsourcing.
A)True
B)False
Q2) Refer to Table 19.6.All of the following are terms of trade that could possibly benefit both countries except _________.
A) 1/5 of a hat : 1 clock
B) 1/3 of a hat : 1 clock
C) 1/2 of a hat : 1 clock
D) 3/4 of a hat : 1 clock
Q3) Refer to Table 19.6.If the actual terms of trade are 1 hat for 1.8 clocks and 150 hats are traded,how many hats will Belize consume?
A) 100
B) 130
C) 250
D) 400
Q4) Free trade refers to trade between countries without government restrictions.
A)True
B)False
21
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Chapter 20: Macroeconomics in an Open Economy
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Sample Questions
Q1) 'Purchasing power parity' is the theory that in the long run,exchange rates move to equalise
A) nominal interest rates across countries.
B) real GDP across countries.
C) corporate profits across countries.
D) the relative purchasing power of currencies across countries.
Q2) If the rate of inflation in Australia exceeds the rate of inflation in Great Britain,we would expect the Australian dollar to depreciate in value against the British pound.
A)True
B)False
Q3) A 'floating exchange rate system' is one in which
A) the central bank does not intervene to adjust the exchange rate.
B) shortages of foreign exchange will result in an appreciation of the domestic currency.
C) foreign exchange traders accept only a fixed price for their goods, regardless of the demand and supply for the currency.
D) the government defines its currency to be worth a certain amount in terms of another currency and ensures that the rate remains at that level.
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