Economics I Exam Solutions
Course Introduction
Economics I introduces students to the fundamental principles and concepts of microeconomics, focusing on how individuals, households, and firms make choices regarding the allocation of scarce resources. The course covers topics such as supply and demand, market equilibrium, elasticity, consumer and producer behavior, market structures, and the role of government in the economy. By using theoretical models and real-world examples, students develop analytical tools to understand and evaluate how economic agents interact within various market settings, laying a strong foundation for more advanced economic studies.
Recommended Textbook
Modern Principles Microeconomics 3rd Edition by Tyler Cowen
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Page 2
Chapter 1: The Big Ideas
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Sample Questions
Q1) What is thinking on the margin?
A) Making decisions that are of noneconomic importance.
B) Making choices that are based on historical precedents.
C) Making choices that ignore the marginal benefits, but not the marginal costs, of some activity.
D) Making choices by comparing the additional benefits and additional costs from doing a little bit more of some activity.
Answer: D
Q2) People are rational and sometimes respond in unpredictable ways to incentives.
A)True
B)False
Answer: False
Q3) The main objective of a central bank is to:
A) supply the right amount of money to keep the economy stable.
B) supply as much money as it can to help the economy grow.
C) supply the government with the money it needs to operate.
D) make sure every citizen has the amount of money he or she wants to have.
Answer: A
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3
Chapter 2: The Power of Trade and Comparative
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Q1) (Figure: Countries A and B) Refer to the figure regarding countries A and B. If both countries fully allocate all of their labor toward the good in which they have a comparative advantage, the combined production for the two countries would be _______ units of Good X, and _______ units of Good Y.
A) 100; 80
B) 70; 90
C) 40; 100
D) 100; 100
Answer: A
Q2) If labor in China is less productive than labor in the United States in all areas of production, then:
A) both the United States and China can benefit from trade.
B) neither nation can benefit from trade.
C) China can benefit from trade but not the United States.
D) the United States can benefit from trade but not China
Answer: A
Q3) Involuntary trades increase value in the same way voluntary trades do.
A)True
B)False
Answer: False
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Chapter 3: Supply and Demand
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Sample Questions
Q1) An inferior good is one of poor quality.
A)True
B)False
Answer: False
Q2) If the price of gas is expected to rise sharply in the future, all else the same, the demand for gas today will:
A) increase
B) decrease
C) remain the same
D) change in an indeterminate direction
Answer: A
Q3) To economists, the term consumer surplus means:
A) the excess money consumers have left over, after purchasing goods.
B) the difference between the price a consumer is willing to pay, and the price that suppliers are willing to accept.
C) the consumer's gain from trading.
D) the difference between the price a consumer is able to pay and willing to pay.
Answer: C
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5
Chapter 4: Equilibrium
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Sample Questions
Q1) In a free market setting where quantity supplied is 50 units and quantity demanded is 40 units, price will:
A) rise.
B) fall.
C) remain the same.
D) move in an indeterminate direction.
Q2) An increase in demand causes an increase in quantity supplied, which causes a decrease in price.
A)True
B)False
Q3) In the market for a normal good, an increase in income will cause an increase in ______, an increase in quantity ______, and a(n) ______ in price.
A) demand; supplied; increase
B) demand; supplied, decrease
C) supply; demanded; decrease
D) supply; demanded; increase
Q4) Economic growth in China and India has reduced the world supply of oil.
A)True
B)False
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Chapter 5: Elasticity and Its Applications
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Q1) Evidence from the Sudan indicates that the supply of slaves is likely:
A) perfectly elastic.
B) perfectly inelastic.
C) more elastic than inelastic.
D) more inelastic than elastic.
Q2) When a good has fewer substitutes in consumption, is a small part of the consumer's budget, and a long time has passed, demand for such a good is inelastic.
A)True
B)False
Q3) The elasticity of demand measures how responsive consumers are to price changes. For example, when a small decrease in price leads to a large increase in quantity demanded, demand is considered elastic.
A)True
B)False
Q4) The elasticity of demand measures how sensitive the:
A) price is to a change in quantity demanded.
B) quantity demanded is to a change in price.
C) price is to a change in the quantity supplied.
D) demand is to a change in the number of suppliers.
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Chapter 6: Taxes and Subsidies
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Sample Questions
Q1) Taxes lead to a loss of beneficial trades.
A)True
B)False
Q2) If there is a tax on both medicine and sugar, ceteris paribus, how will the deadweight losses in each market compare?
A) Medicine has a larger deadweight loss.
B) Sugar has a larger deadweight loss.
C) The deadweight losses are equal.
D) Neither has a deadweight loss due to the tax.
Q3) Which of the following statements is TRUE regarding subsidy?
A) A subsidy causes the value of goods to exceed the cost of producing the goods.
B) A subsidy reduces deadweight loss of nonbeneficial trade.
C) A subsidy means that the sellers receive less than buyers pay.
D) Suppliers receive more benefit of a subsidy if the elasticity of supply is less than the elasticity of demand.
Q4) A commodity tax increases gains from trade.
A)True
B)False
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Page 8
Chapter 7: The Price System
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Sample Questions
Q1) Both ethanol and sugar are made from sugar cane and ethanol can be used as a substitute for oil. As the price of oil increases, Brazilians shift sugar cane from sugar production to ethanol production, thereby:
A) increasing the price of ethanol.
B) increasing the price of sugar.
C) increasing the price of both ethanol and sugar.
D) decreasing the price of both ethanol and sugar.
Q2) Speculation tends to ______ volatility in prices over time.
A) increase
B) decrease
C) not affect
D) eliminate
Q3) Speculation is:
A) pondering the meaning of life.
B) polluting the price signal by guessing wildly about the future.
C) the attempt to profit from future price changes.
D) a disruption of the normal market mechanism.
Q4) Explain what Adam Smith meant when he said that the market operates as if "an invisible hand" is guiding the process.
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Chapter 8: Price Ceilings and Floors
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Sample Questions
Q1) The presence of price floors in a market usually is an indication that:
A) there is an insufficient quantity of a good or service being produced.
B) the forces of supply and demand are unable to establish an equilibrium price.
C) sellers of the good or service outnumber the buyers.
D) policymakers believe the price floor does not involve inequities.
Q2) A legal maximum price at which a good can be sold is a price:
A) stabilization.
B) ceiling.
C) support.
D) floor.
Q3) In situations of excess demand, sellers might lower quality when they are unable to raise prices because they wish to:
A) reduce excess demand.
B) raise their profit levels.
C) decrease surpluses.
D) raise their sales.
Q4) The long-run supply curve for rent-controlled apartments is generally more inelastic than the short-run supply curve.
A)True
B)False
Page 10
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Chapter 9: International Trade
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Q1) (Figure: Costs of Tariffs) Refer to the figure. In the figure representing the market for leather, domestic suppliers are the high-cost producers of leather. However, import restrictions push the domestic price up to $100. Which area represents the deadweight loss that results?
A) A
B) B
C) C
D) D
Q2) Economic growth requires job destruction, since the destroyed jobs free up resources for more productive activities.
A)True
B)False
Q3) With the aid of demand and supply curves, compare the amounts of imports and the prices of goods under (i) free trade, (ii) trade with a tariff, and (iii) a closed economy without trade.
Q4) In a demand and supply diagram, the effects of a tariff and a quota on the supply and demand curves are identical.
A)True
B)False
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Chapter
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Q1) (Figure: Market for Vaccines) Refer to the figure. The figure represents the market for vaccines with external benefits. The market's outcome generates a(n):
A) deadweight loss of approximately $750.
B) shortage of 1,800 vaccines.
C) equilibrium price of $20.
D) All of the answers are correct.
Q2) When the number of tradable allowances is set equal to the efficient market quantity:
A) it is equivalent to a tax set equal to the level of the external cost.
B) the outcome will be more efficient than a tax on pollution.
C) it is equivalent to a government regulation set equal to the efficient market quantity.
D) the price of the allowances will equal the social cost of pollution.
Q3) In a competitive market, a free market approach is always best when no externalities are present.
A)True
B)False
Q4) Briefly list some private and public solutions to the existence of externalities (negative or positive) in markets.
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Page 12
Chapter 11: Costs and Profit Maximization Under Competition
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Sample Questions
Q1) Mike takes $100,000 out of his bank account, which pays a 5% annual interest rate, to build an oil well. An implicit cost of producing the oil well is $5,000, the foregone interest income.
A)True
B)False
Q2) Why can't marginal cost decrease forever?
A) At some point, firms encounter physical limits of production.
B) Demand is not infinite.
C) Marginal cost can't increase forever either, and there must be symmetry.
D) Marginal cost is always constant.
Q3) The change in total revenue from selling an additional unit is called:
A) average revenue.
B) marginal revenue.
C) marginal cost.
D) variable cost.
Q4) Firms should enter the industry if marginal revenue is greater than the total costs.
A)True B)False
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Chapter 12: Competition and the Invisible Hand
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Sample Questions
Q1) Which of the following best illustrates how resources move from low-value industries to high-value industries in competitive markets?
A) Entrepreneurs will always find the market in which price is the highest and increase production in it.
B) The invisible hand will always equate prices in the long run.
C) Entrepreneurs will move production from low-profit industries to high-profit industries.
D) Firms will always be able to recognize high- and low- value industries simply by looking at their costs of production.
Q2) In the long run, competitive firms want to exit industries in which:
A) P = MC.
B) P > MC.
C) P > AC.
D) P < AC.
Q3) Friedrich Hayek described the Invisible Hand Properties as:
A) "products of human design but not of human action."
B) "products of human action and human design."
C) "products of human action but not of human design."
D) "products of neither human action nor human design."
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Chapter 13: Monopoly
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Sample Questions
Q1) Deregulation of cable TV rates led to:
A) lower prices and better service.
B) higher prices, more stations, and better quality programming.
C) lower prices, fewer stations, and lower quality programming.
D) the proliferation of amateur programming.
Q2) Deregulation of cable TV led to:
A) higher prices, higher quality, and more selection.
B) lower prices, higher quality, and more selection.
C) higher prices, lower quality, and less selection.
D) lower prices, lower quality, and less selection.
Q3) A monopoly is able to increase the markup of price over marginal cost:
A) when the demand is more price-elastic.
B) when the demand is less price-elastic.
C) when there is more marginal revenue per unit sold.
D) at will regardless of price-elasticity.
Q4) Explain how a firm can use its monopoly power to earn above-normal profits.
Q5) Monopolies are bad because they convert deadweight losses into additional sales and profit.
A)True
B)False
Page 15
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Chapter 14: Price Discrimination
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Sample Questions
Q1) A firm that spends extra money to practice tying does so to:
A) benefit customers.
B) prevent competition.
C) advertise.
D) increase quality.
Q2) A perfectly price-discriminating monopoly causes:
A) no social surplus.
B) maximum social surplus.
C) as much social surplus as in the case of a standard monopoly.
D) as much social surplus as in the case of monopolistic competition.
Q3) Which of the following is an example of tying?
A) restrictions that prohibit patrons from bringing their own wine to restaurants
B) set menus at a restaurant
C) buy-one-get-one-free offers
D) "value meals" at fast-food restaurants
Q4) Although price discrimination may increase the profits of drug companies, it reduces the incentive for drug companies to develop new drugs.
A)True
B)False
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Chapter 15: Oligopoly and Game Theory
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Q1) Which of the following makes a cartel short-lived?
A) stable market demand
B) few firms in the cartel
C) cheating
D) contracting
Q2) By 1985, OPEC had:
A) sustained effectiveness as a cartel.
B) largely failed as a cartel.
C) disbanded.
D) not yet formed.
Q3) Cartels in manufactured goods are difficult to maintain because other firms can enter the market and easily produce substitute products.
A)True
B)False
Q4) Which of the following statements is TRUE?
A) Cartels generally persist and are quite common.
B) Few cartels move an industry from competition to pure monopoly.
C) Cartels work better when there are more firms involved.
D) Cartels persist because the cartel members enforce their agreements.
Q5) When does "tactic collusion" apply?
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Chapter 16: Competing for Monopoly
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Sample Questions
Q1) In 2000, the Justice Department filed an antitrust suit against:
A) Netscape.
B) Microsoft.
C) Apple.
D) Intel.
Q2) Suppose that some people drive on the left side of the road and some people drive on the right side of the road. Is this a Nash equilibrium?
A) Yes, because no player has an incentive to change his or her strategy unilaterally.
B) Yes, because each person would prefer to unilaterally change strategies.
C) No, because no player has an incentive to change his or her strategy unilaterally.
D) No, because each person would prefer to unilaterally change strategies.
Q3) Duncan J. Watts' research suggested that:
A) the best music is also the most popular music.
B) people base their musical preferences on what other people think.
C) people are biased against free downloaded music.
D) QWERTY was inferior to Dvorak.
Q4) Why is music considered a network good?
Q5) Describe the features of markets for network goods.
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Chapter 17: Monopolistic Competition and Advertising
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Sample Questions
Q1) Monopolistic competitive firms do not produce at the minimum of their average cost curves.
A)True
B)False
Q2) Which of the following statement(s) is/are TRUE?
I. Because monopolistically competitive firms sell differentiated products, their demand curves are downward sloping.
II. Monopolistically competitive firms earn above-normal profits because of high entry barriers.
III. As firms enter a monopolistically competitive industry, the demand curves of the existing firms shift down and to the left.
A) I and III only
B) I and II only
C) II only
D) III only
Q3) Informative advertising is about price, quality, and/or availability.
A)True
B)False
Q4) In what ways is the market for books a monopoly?
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Chapter 18: Labor Markets
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Sample Questions
Q1) Explain why employer discrimination is not likely to persist in markets.
Q2) Suppose that firms can hire whites for $10 an hour or equally productive blacks for $8 an hour. Which of the following is the most likely hiring practice for most firms?
A) All firms would follow the wage rates paid for respective white and black.
B) Firms that want to minimize cost would prefer to hire whites.
C) Firms that want to maximize profit would prefer to hire blacks.
D) All firms would hire an equal number of white and black workers.
Q3) Which of the following statements is TRUE?
I. The presence of a union will decrease the supply of labor.
II. Unions increase the wages of their members by reducing employment.
III. Countries with the highest unionization rates have the highest wage levels.
A) I and III only
B) II and III only
C) I only
D) II only
Q4) Some workers might prefer less safety and more pay than more safety and less pay.
A)True
B)False
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Page 20
Chapter 19: Public Goods and the Tragedy of the Commons
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Q1) Cable TV is an example of a:
A) private good.
B) public good.
C) common resource.
D) nonrival private good.
Q2) A free rider shares the benefit of a ______ without paying a share of the costs.
A) private good
B) public good
C) common resource
D) nonrival private good
Q3) Digital music is an example of a:
A) private good
B) public good.
C) common resource.
D) nonrival private good.
Q4) Public goods are inefficiently provided in the free market because of the forced rider problem.
A)True
B)False
Q5) Does equal sharing in farm output lead to free riders? Explain.
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Chapter 20: Political Economy and Public Choice
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Sample Questions
Q1) Some people argue that mainstream economics ignores important ethical values.
A)True
B)False
Q2) (Figure: Economic Freedom and Living Standards) Refer to the figure. Based on the data in this chart, two countries that have about the same level of economic freedom but very different standards of living are:
A) Venezuela and Niger.
B) Congo and Luxembourg.
C) Haiti and Niger.
D) Luxembourg and the United States.
Q3) Which of the following statements is TRUE?
A) Small groups are less likely to favor efficient policies than large groups.
B) The larger the group, the more likely it will favor special interests rather than economic growth.
C) Quasi-democracies prefer a highly educated population because they are more accepting of the leadership's policies.
D) Oligarchies tend to use the print media to inform public debate and encourage political competition.
Q4) How do special interests affect tax policy in the United States?
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Chapter 21: Economics, Ethics, and Public Policy
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Q1) Consider a regulation prohibiting non-law enforcement people from carrying firearms. Could this be an example of meddlesome preferences? Explain why or why not.
Q2) Someone who believes that the sale of kidneys by the poor is exploitative would find which of the following price tags for a kidney most exploitative?
A) $0
B) $250
C) $10,000
D) $50,000
Q3) Explain why economists and politicians tend to evaluate a public policy like trade or immigration differently?
Q4) Robert Nozick would be concerned about the vast amount of wealth accumulated by Lady Gaga, most likely suggesting that part of her wealth be redistributed to the less fortunate.
A)True
B)False
Q5) Explain the central idea behind the Rawlsian maximin principle.
Q6) Discuss the role for government if markets fail to provide fair and equal treatment? Explain.
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Chapter 22: Managing Incentives
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Q1) The main advantage of piece rate pay is:
A) decreased labor costs.
B) increased quality.
C) increased productivity.
D) easy implementation.
Q2) A successful organization aligns self-interest with the organization's interest.
A)True
B)False
Q3) Tournaments typically increase cooperation.
A)True
B)False
Q4) ______ is a compensation scheme in which payment is based on relative performance.
A) Piece rate
B) Wage rate
C) A tournament
D) A competition
Q5) Sometimes nudging is considered a step toward controlling more of our choices.
A)True
B)False
Page 24
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Chapter 23: Stock Markets and Personal Finance
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Q1) Based on the efficient markets hypothesis, which of the following mutual funds has the better chance of beating the market in the long run?
A) a low-fee fund that is actively managed by a highly respected fund manager
B) a passive fund that simply attempts to mimic a financial index such as the S&P 500
C) a portfolio of stocks that you choose, since nobody has more incentive to manage your money correctly than you do
D) Forget about it-it is nearly impossible to choose a fund that will systematically outperform the market.
Q2) One best reduces risk by buying ______ stocks in ______ geographic regions.
A) few; few
B) few; many
C) many; few
D) many; many
Q3) John Stossel used a monkey to throw darts at a giant wall-sized version of the stock pages of the WSJ.
A)True
B)False
Q4) Discuss the different ways that a person can diversify.
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Chapter 24: Price Discrimination
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Q1) Which is an example of moral hazard?
A) A car dealership recommends that a customer replace barely used tires.
B) A driver drives faster than the speed limit.
C) An unhealthy person purchases health insurance.
D) A driver purchases car insurance.
Q2) Buyers and sellers facing asymmetric information:
A) are not able to solve the problem of asymmetric information.
B) have no reason to solve the problem of asymmetric information.
C) have an incentive to solve the problem of asymmetric information.
D) do not bear the results of asymmetric information.
Q3) What might a newly married woman be signaling if she chooses to take her spouse's last name? If she chooses not to?
Q4) What are the arguments supporting the Affordable Care Act?
Q5) Moral hazard is not a significant problem in markets. A)True B)False
Q6) What are the arguments against the Affordable Care Act?
Q7) Sellers on eBay with good reputations are able to sell their products at higher prices. Describe two ways the reviews that lead to these good reputations lessen moral hazard?
Page 26
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Chapter 25: Consumer Choice
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Q1) (Figure: Optimal Choice 2) Refer to the figure. This figure represents indifference curves for a consumer who purchases flip-flops and sneakers. If the dotted line represents this consumer's budget constraint, then the utility maximizing bundle for this consumer is:
A) A.
B) B.
C) C.
D) E.
Q2) When the price of a good changes, ______ influence(s) the change in consumption.
A) the income effect alone
B) the substitution effect alone
C) both the income effect and the substitution effect
D) neither the income effect nor the substitution effect
Q3) Countries in Western Europe tend to have more generous unemployment benefits for their workers than the United States. All else equal, you would expect workers in Western Europe to:
A) work more hours on average.
B) work fewer hours on average.
C) have higher wages.
D) have lower wages.
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