Economic Theory
Test Questions
Course Introduction
Economic Theory is a foundational course that explores the fundamental principles and models that underpin how economies function. Students will examine both microeconomic and macroeconomic concepts, including consumer behavior, producer theory, market structures, and the allocation of resources. The course also covers topics such as equilibrium analysis, efficiency, welfare, and the impact of government interventions. Through the study of economic models and theoretical frameworks, students will develop a rigorous understanding of how individual and collective decisions influence the broader economic environment.
Recommended Textbook
Essentials of Economics 4th Edition by R. Glenn Hubbard
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Page 2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) In the first six months of 2003,branches of Commerce Bank in New York City were robbed 14 times.The New York City Police recommended steps the bank could take to deter robberies,including the installation of plastic barriers called "bandit barriers." The police were surprised the bank did not take their advice.According to a deputy commissioner of police,"Commerce does very little of what we recommend.They've told our detectives they have no interest in ever putting in the barriers." It would seem that Commerce bank would have a strong incentive to install "bandit barriers" to deter robberies.Why wouldn't they do it?
A)The banks would rather delay installation of any theft deterring equipment in anticipation of new lower cost innovations in the security devices market.
B)The banks must have weighed the cost of installing bandit barriers against the benefits and decided that they have "no interest in ever putting in the barriers."
C)The banks are concerned that "bandit barriers" would send the wrong message to customers -- that the bank is unsafe.
D)The banks probably resent any interference from the police department.
Answer: B
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Page 3
Chapter 2: Trade-Offs, comparative Advantage, and the Market System
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Q1) Refer to Figure 2-2.The linear production possibilities frontier in the figure indicates that
A)Mendonca has a comparative advantage in the production of vegetables.
B)Mendonca has a comparative disadvantage in the production of meat.
C)the tradeoff between meat and vegetables is constant.
D)it is progressively more expensive to produce meat.
Answer: C
Q2) Refer to Table 2-18.What is Minnie's opportunity cost of making an umbrella?
A)1/10 of a hat
B)1/4 of a hat
C)4 hats
D)40 hats
Answer: C
Q3) Refer to Figure 2-15.Which country has a comparative advantage in the production of snow cones?
A)Greenland
B)They have equal productive abilities.
C)Iceland
D)neither country
Answer: C
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Q1) If consumers believe the price of LCD televisions will decrease in the future,this will cause the demand for LCD televisions to increase now.
A)True
B)False
Answer: False
Q2) If an increase in income leads to an decrease in the demand for salami,then salami is
A)an inferior good.
B)a neutral good.
C)a necessity.
D)a normal good.
Answer: A
Q3) In much of Europe,the legal age to obtain a driver's license is 18.If the legal driving age in the United States was changed to 18,how would this affect the market for new automobiles? The market for automobile insurance?
Answer: The demand for new automobiles would decrease,as would the demand for automobile insurance.
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Page 5
Chapter 4: Market Efficiency and Market Failure
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Sample Questions
Q1) What is deadweight loss? When is deadweight loss equal to zero?
Q2) Refer to Figure 4-11.What is the value of the portion of consumer surplus that has been transferred to producer surplus as a result of the price floor?
A)$1,200
B)$1,500
C)$1,800
D)$3,000
Q3) Black markets only exist in developing nations.
A)True
B)False
Q4) A demand curve shows
A)the willingness of consumers to buy a product at different prices.
B)the willingness of consumers to substitute one product for another product.
C)the relationship between the price of a product and the demand for the product.
D)the relationship between the price of a product and the total benefit consumers receive from the product.
Q5) How does a positive externality in consumption reduce economic efficiency?
Q6) What is meant by the term "economic efficiency"?
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Chapter 5: The Economics of Health Care
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Sample Questions
Q1) The number of people receiving Medicare is expected to grow to 80 million by the year
A)2105.
B)2020.
C)2030.
D)2075.
Q2) What is the term that describes a situation in which one party to an economic transaction has less information than the other party?
A)inefficient market hypothesis
B)asymmetric information
C)unequal market structure
D)monopsony
Q3) As a percentage of GDP,health care spending on Medicare and Medicaid is expected to double over the next 40 years unless health care costs begin to grow at a slower rate.
A)True
B)False
Q4) What is moral hazard?
Q5) What is adverse selection?
Q6) What is the principle-agent problem?
Page 7
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Chapter 6: Firms, the Stock Market, and Corporate Governance
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Q1) All of the following are examples of explicit cost a firm might incur except A)the out-of-pocket expense to hire employees.
B)taxes owed to the state government.
C)the rental value of the warehouse space the company owns and uses for itself.
D)the revenue a firm generates in using its resources.
Q2) In the United States,partnership profits are taxed at the business level and then are taxed again as personal income in the form of dividend payments.
A)True
B)False
Q3) In May 2012,Facebook stock sold for $38 per share in its initial public offering (IPO).More than a year later,in June 2013,the value of Facebook stock
A)had more than doubled in price.
B)had declined by nearly 40 percent from the IPO price.
C)languished at the same $38 per share price.
D)had increased by almost 60 percent from the IPO price.
Q4) The only type of business that faces limited liability is a corporation.
A)True
B)False
Q5) Define a partnership.
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Chapter 7: Consumer Choice and Elasticity
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Sample Questions
Q1) Which of the following goods would have the most inelastic demand?
A)ski vacations
B)bread
C)luxury cars
D)big screen TVs
Q2) If the demand for a life-saving drug was perfectly inelastic and the price doubled,the quantity demanded would
A)also double.
B)decrease by 50%.
C)be cut in half.
D)remain constant.
Q3) You participate in a taste test for a new protein supplement called "Boost." You are given five consecutive one ounce vials of the supplement and after consuming each vial you are asked to note your reaction.You consume the first vial and your response is: "Hmmm,quite good!" After the second,you say,"Not bad at all." After the third,you note,"It's alright." and after the fourth you wince,"No more,the after-taste is getting to me.I need water." What economic principle does this scenario illustrate? Define the principle.
Q4) Explain the endowment effect.
Q5) Briefly explain the economic concept of elasticity.
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Chapter 8: Technology, production, and Costs
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Q1) If an airport decides to expand by building an additional passenger terminal,and in doing so it lowers its average cost per airplane landing,it was previously operating at A)minimum efficient scale.
B)more than minimum efficient scale.
C)less than minimum efficient scale.
D)minimum capacity.
Q2) Implicit costs can be defined as
A)accounting profit minus explicit cost.
B)the non-monetary opportunity cost of using the firm's own resources.
C)the deferred cost of production.
D)total cost minus fixed costs.
Q3) The change in a firm's total cost from producing one more unit of a good or service is
A)the result of economies of scale.
B)the definition of marginal product
C)the definition of marginal cost.
D)impossible to observe in large firms with many manufacturing plants.
Q4) Describe how Wal-Mart has used positive technological change to manage its inventory.
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Chapter 9: Firms in Perfectly Competitive Markets
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Q1) A perfectly competitive firm in a constant-cost industry produces 1,000 units of a good at a total cost of $50,000.If the prevailing market price is $48,the number of firms and the industry's output will decrease in the long run.
A)True
B)False
Q2) Refer to Figure 9-1.If the firm is producing 500 units
A)it is making a profit.
B) it is making a loss.
C)it should maintain its output to maximize profit.
D)it should increase its output to maximize profit.
Q3) Being a price-taker,a perfectly competitive firm cannot receive a producer surplus in the short run.
A)True B)False
Q4) Refer to Figure 9-10.Total revenue at the profit-maximizing level of output is
A)$1,200.
B)$2,500.
C)$4,800.
D)$6,000.
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Chapter 10: Monopoly and Antitrust Policy
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Sample Questions
Q1) A price maker is
A)a person who actively seeks out the best price for a product that he or she wishes to buy.
B)a firm that has some control over the price of the product it sells.
C)a firm that is able to sell any quantity at the highest possible price.
D)a consumer who participates in an auction where she announces her willingness to pay for a product.
Q2) Refer to Figure 10-15.What is the economically efficient output level and what is the price at that level?
A) Q , P
B)Q , P
C)Q , P
D)Q , P
Q3) Refer to figure 10-16.In the absence of any government regulation,the profit-maximizing owners of this firm will produce ________ units and charge a price of ________.
A)Q units; P
B)Q units; P
C)Q units; P
D)Q units; P
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Chapter 11: Monopolistic Competition and Oligopoly
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Q1) A monopolistically competitive market is described as one in which there are
A)a few firms producing an identical product.
B)a large number of firms selling similar, but not identical, products.
C)a few firms producing differentiated products.
D)one large firm and many small firms producing identical products.
Q2) When a monopolistically competitive firm breaks even in the long run,this is equivalent to earning a zero accounting profit.
A)True
B)False
Q3) Which of the following is not an example of a government-imposed entry barrier? A)patents
B)occupational licensing
C)barriers to international trade
D)antitrust legislation
Q4) If the painting firms in a city sign a contract outlining a pricing plan,they are involved in
A)price competition.
B)a legal form of business contract in the United States.
C)collusion.
D)price regulation.
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Chapter 12: Gdp: Measuring Total Production and Income
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Q1) For developed countries like the United States,GDP will always exceed GNP.
A)True
B)False
Q2) The measure of production that values production using current prices is called
A)value-added GDP.
B)nominal GDP.
C)real GDP.
D)underground GDP.
Q3) Transfer payments are subtracted from national income to get to personal income.
A)True
B)False
Q4) Marla is an architect who is designing a home for Chuck.Chuck is paying Marla $150 per hour to design his new home.When Chuck and Marla get married,Marla continues to work on designing the home,but she no longer charges Chuck for her work.As a result,GDP ________ because ________.
A)falls; Marla's work takes place in the underground economy once she's married
B)falls; Marla's work becomes less valuable once she's married
C)falls; Marla's architectural design services are no longer bought by Chuck once they're married
D)rises; Marla becomes more productive once she's married
Page 14
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Chapter 13: Unemployment and Inflation
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Sample Questions
Q1) The producer price index measures the prices that firms
A)pay for imported natural resources that go into the production process.
B)receive for the goods and services they export.
C)receive for the goods and services they use at all stages of production.
D)pay for labor, whether or not the labor is foreign or domestic.
Q2) In 1986,an Apple IIe computer with 65 kilobytes of memory cost around $1,500.Today,a $1,500 iMac computer (also made by Apple)comes with 8 gigabytes of memory.This illustrates the potential for what kind of bias in CPI calculations?
A)new product bias
B)increase in quality bias
C)substitution bias
D)outlet bias
Q3) The Bureau of Labor Statistics counts as employed people who work part-time,but would prefer to work full-time.Suppose the people who had part-time jobs,but wanted full-time jobs,were counted as unemployed.Explain how the unemployment rate and the labor force participation rate would change.
Q4) Eliminating structural unemployment would be good for the economy.
A)True
B)False
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Chapter 14: Economic Growth, the Financial System, and Business Cycles
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Q1) Which of the following explains why fluctuations in real GDP have become less volatile in the United States since 1950?
A)Services have become a smaller fraction of GDP since the 1950s.
B)Unemployment insurance and other government transfer programs are more prevalent since the 1950s.
C)The government has become more reluctant to intervene when real GDP declines and unemployment rises since the 1950s.
D)both B and C
Q2) When production in an economy grows more quickly than the population in that economy,which of the following must be occurring?
A)Real GDP is falling.
B)Incomes are growing at a slower rate than the population.
C)Real GDP per capita is rising.
D)Living standards are falling.
Q3) When a recession ends
A)interest rates decrease.
B)households decrease spending on durable goods.
C)the household sector decreases spending substantially.
D)firms increase the amount of borrowing.
Page 16
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Chapter 15: Aggregate Demand and Aggregate Supply Analysis
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Q1) Refer to Figure 15-2.Ceteris paribus,an increase in the price level would be represented by a movement from
A)SRAS to SRAS .
B)SRAS to SRAS .
C)point A to point B.
D)point B to point A.
Q2) Which of the following is one explanation as to why the aggregate demand curve slopes downward?
A)Increases in the price level lower the interest rate and decrease consumption spending.
B)Increases in the price level lower the interest rate and decrease investment spending. C)Increases in the U.S.price level relative to the price level in other countries lowers net exports.
D)Increases in the price level raise real wealth and lowers consumption spending.
Q3) President Obama has discussed raising income taxes for individuals earning over $250,000 in income.Explain how these higher income taxes will affect the aggregate demand curve.
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Page 17
Chapter 16: Money, banks, and the Federal Reserve System
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Q1) Fiat money has
A)little to no intrinsic value but is backed by the quantity of gold held by the central bank.
B)little to no intrinsic value and is authorized by the central bank or governmental body. C)value, because it can be redeemed for gold by the central bank.
D)a great intrinsic value that is independent of its use as money.
Q2) Suppose Bill Gates deposits $20 million into his checking account at Wells Fargo Bank.If the required reserve ratio is 10 percent,what is the maximum change in money supply?
A)-$200 million
B)-$180 million
C)$2 million
D)$180 million
E)$200 million
Q3) A series of bank runs in a country should have no effect on M1 as money simply moves from checking deposits to currency.
A)True
B)False
Q4) How do open market operations work?
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Chapter 17: Monetary Policy
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Q1) A monetary policy target is a variable that the Fed can affect directly,which then affects one or more of the Fed's policy goals.
A)True
B)False
Q2) A decrease in interest rates can ________ the demand for stocks as stocks become relatively ________ attractive investments as compared to bonds.
A)increase; more B)decrease; less C)decrease; more D)increase; less E)increase; similar
Q3) Using the money demand and money supply model,show and explain why the Federal Reserve cannot achieve a target for both the money supply and an interest rate.
Q4) The Fed's two main monetary policy targets are
A)the money supply and the inflation rate.
B)the money supply and the interest rate.
C)the interest rate and real GDP.
D)the inflation rate and real GDP.
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Chapter 18: Fiscal Policy
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Q1) A law requiring the government to balance its budget in each year would serve as an automatic destabilizer.
A)True
B)False
Q2) Suppose Congress increased spending by $100 billion and raised taxes by $100 billion to keep the budget balanced.What will happen to real equilibrium GDP?
A)Real equilibrium GDP will fall.
B)Real equilibrium GDP will rise.
C)There will be no change in real equilibrium GDP.
D)Real equilibrium GDP will initially rise, but then fall below its previous equilibrium value.
Q3) A decrease in which of the following would decrease the tax wedge?
A)marginal tax rate
B)money supply
C)national debt
D)federal budget deficit
Q4) Explain why the timing of fiscal policy may be more difficult than the timing of monetary policy.
Q5) What is expansionary fiscal policy? What is contractionary fiscal policy?
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Chapter 19: Comparative Advantage, international Trade, and Exchange Rates
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Sample Questions
Q1) Refer to Table 19-8.Fill in the following table with the opportunity costs of producing bows and arrows for Ahmet and MyLinh.
\[\begin{array} { | l | l | l | }
\hline & \text { Bows } & \text { Arrows } \\
\hline \text { Ahmet } & & \\
\hline \text { MyLinh } & & \\
\hline
\end{array}\]
Q2) Refer to Figure 19-3.If there was no quota,how many pounds of peanuts would domestic consumers purchase?
A)10 million
B)28 million
C)34 million
D)40 million
Q3) The simple trade model demonstrates that countries can expand consumption by specializing in the production of goods and services in which they have a comparative advantage.In reality we do not see complete specialization in production.State three reasons why this is case.
Q4) What is dumping? Who benefits and who loses from dumping?
Page 21
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