Economics I Pre-Test Questions
Course Introduction
Economics I provides an introduction to the fundamental principles of microeconomics. The course explores concepts such as supply and demand, market equilibrium, elasticity, consumer and producer behavior, the theory of the firm, and the functioning of perfect and imperfect markets. Students will learn how individuals and organizations make economic decisions, how markets allocate resources, and how government intervention can affect economic outcomes. By applying theoretical models to real-world examples, the course equips students with the foundational tools needed for further study in economics and for understanding economic issues in daily life.
Recommended Textbook Microeconomics 5th Edition by Glenn
Hubbard
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Page 2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) Refer to the Article Summary.The article mentions increased economic equality is needed in terms of wealth,and for some people this means a more equitable distribution of wealth.Would an equitable distribution of wealth necessarily be the most efficient distribution of wealth?
A) Yes, equitable and efficient are two different words which have the same definition.
B) Yes, in order for the distribution to be equitable, it must also be efficient.
C) No, it is impossible to have an economically efficient distribution which is also an equitable distribution.
D) No, an economically efficient distribution of wealth would not necessarily be equitable.
Answer: D
Q2) What is meant by the statement that "optimal decisions are made at the margin"?
Answer: In economics,the word "marginal" means "extra" or "additional." Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost,so optimal decisions are made at the point where the extra benefit received from an activity is equal to the extra cost associated with that activity.
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Sample Questions
Q1) Refer to Table 2-10.Which of the following statements is true?
A) Horace has an absolute advantage in both tasks.
B) Tammi has an absolute advantage in both tasks.
C) Horace has an absolute advantage in dog grooming and Tammi in cat bathing.
D) Horace has an absolute advantage in cat bathing and Tammi in dog grooming.
Answer: B
Q2) Refer to Figure 2-10.What is the opportunity cost of producing one gallon of honey in Tahiti?
A) 5/6 gallon of milk
B) 0.9 gallon of milk
C) 1.2 gallons of milk
D) 1 1/3 gallons of milk
Answer: A
Q3) The production possibilities frontier model assumes which of the following?
A) Labor, capital, land and natural resources are unlimited in quantity.
B) The economy produces only two products.
C) Any level of the two products that the economy produces is currently possible.
D) The level of technology is variable.
Answer: B
Page 4
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) In October,market analysts predict that the price of platinum will fall in November.What happens in the platinum market in October,holding everything else constant?
A) The supply curve shifts to the right.
B) The supply curve shifts to the left.
C) The quantity demanded and the quantity supplied of platinum increase.
D) The demand curve shifts to the right.
Answer: A
Q2) The ________ effect refers to the change in quantity demanded for a good that results from the effect of a change in the good's price on consumer's purchasing power.
A) ceteris paribus
B) population
C) substitution
D) income
Answer: D
Q3) All else equal,as the price of a product falls,the quantity supplied increases.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Economic Efficiency, government Price Setting, and Taxes
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Sample Questions
Q1) Economic surplus
A) does not exist when a competitive market is in equilibrium.
B) is equal to the sum of consumer surplus and producer surplus.
C) is the difference between quantity demanded and quantity supplied when the market price for a product is greater than the equilibrium price.
D) is equal to the difference between consumer surplus and producer surplus.
Q2) Refer to Table 4-4.Suppose that the quantity of labor supplied decreases by 80,000 at each wage level.What are the new free market equilibrium hourly wage and the new equilibrium quantity of labor?
A) W = $8.50; Q = 550,000
B) W = $12.50; Q = 550,000
C) W = $8.50; Q = 630,000
D) W = $11.50; Q = 610,000
Q3) What do economists mean by an efficient tax?
Q4) Producer surplus is the difference between the lowest price a firm is willing to accept for a product and the price it actually receives for the product.
A)True
B)False
Page 6
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Chapter 5: Externalities, environmental Policy, and Public Goods
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Sample Questions
Q1) In economics,the optimal level of pollution is the level for which the net benefit from reducing the pollution is the greatest.
A)True
B)False
Q2) Refer to Figure 5-3.The deadweight loss due to the externality is represented by the area
A) mso.
B) msn.
C) nso.
D) mtn.
Q3) Who was the economist who first proposed that governments use taxes and subsidies to correct for externalities?
A) Ronald Coase
B) A. C. Pigou
C) Adam Smith
D) David Hume
Q4) Define the tragedy of the commons.Give three examples of common resources.Briefly explain why common property resources are subject to overuse.
Q5) What are some of the limitations of the Coase theorem in practice?
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Chapter 6: Elasticity: The Responsiveness of Demand and Supply
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Q1) The absolute value of the price elasticity of demand for telescopes is 1.5.Therefore,telescopes can be classified as a luxury.
A)True
B)False
Q2) Last year,Joan bought 50 pounds of hamburger when her household income was $40,000.This year,her household income was only $30,000 and Joan bought 60 pounds of hamburger.Holding everything else constant,Joan's income elasticity of demand for hamburger is
A) positive, so Joan considers hamburger to be an inferior good.
B) negative, so Joan considers hamburger to be an inferior good.
C) positive, so Joan considers hamburger to be a normal good and a necessity.
D) negative, so Joan considers hamburger to be a normal good.
Q3) What factors would make you more sensitive or less sensitive to price when purchasing gasoline?
Q4) If a firm's goal is to maximize revenue,it will price its product to correspond to the unit-elastic segment of its demand curve.
A)True
B)False
Q5) Briefly explain the economic concept of elasticity.
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Chapter 7: The Economics of Health Care
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Sample Questions
Q1) In the United States,private health insurance companies
A) are all for-profit firms.
B) are all not-for-profit firms.
C) can be either for-profit or not-for-profit firms.
D) are all government-run firms.
Q2) The health care system in Canada is referred to as ________,and is a system in which the government provides national health insurance to all Canadian residents.
A) an out-of-pocket system
B) a single-payer health care system
C) a universal health insurance system
D) socialized medicine
Q3) Economists who support market-based reforms for health care believe that increased competition among providers of health care would ________ costs and ________ economic efficiency.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Q4) What is the principle-agent problem?
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Chapter
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Sample Questions
Q1) Why is a dollar today more valuable than a dollar a year from now?
A) The dollar today can be immediately used to buy something.
B) A dollar a year from now will likely have less purchasing power because of inflation.
C) The unknown future is riskier than the known present.
D) all of these
Q2) On a balance sheet
A) total assets must equal total liabilities plus equity.
B) total assets plus equity must equal total liabilities.
C) total assets plus total liabilities must equal zero.
D) total assets plus total liabilities plus equity must equal zero.
Q3) Which of the following is a characteristic of stock?
A) Stock represents a promise to repay a fixed amount of funds.
B) The face value or principal plus interest is repaid at a specified period of time.
C) The length of coupon payments is fixed by the stated maturity period.
D) Stock represents ownership in a firm
Q4) An increase in liabilities will reduce a firm's net worth.
A)True
B)False
Page 10
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Chapter 9: Comparative Advantage and the Gains From International Trade
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Sample Questions
Q1) Refer to Figure 9-3.What is the area of domestic producer surplus after the imposition of a quota?
A) B
B) B + C
C) B + E + I + J + M
D) E + I + J + M
Q2) Refer to Figure 9-1.Suppose the government allows imports of leather footwear into the United States.What will be the domestic quantity supplied?
A) 5 units
B) 10<sub> </sub>units
C) 15 units
D) 20 units
Q3) Refer to Table 9-6.If the actual terms of trade are 1 hat for 1.8 clocks and 150 hats are traded,how many hats will Belize gain compared to the "without trade" numbers?
A) -100
B) 0
C) 150
D) 250
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Chapter 10: Consumer Choice and Behavioral Economics
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Sample Questions
Q1) Marginal utility is
A) the change in total utility divided by the price of the last unit of a good or service consumed.
B) the change in total utility a person receives from consuming an additional unit of a good or service.
C) the utility from consuming a given quantity of a good or service.
D) the decrease in total utility from consuming more and more units of a good or service.
Q2) The marginal utility per dollar that Harold Stratton receives from oranges is greater than the marginal utility per dollar Harold receives from pears.To maximize his utility,what should Harold do?
A) He should acquire more income so that he can afford to buy more oranges and pears.
B) He should reduce his consumption of both oranges and pears so that he can buy a greater variety of goods.
C) He should buy fewer pears and more oranges.
D) He should buy fewer oranges and more pears.
Q3) Why might network externalities result in products that contain inferior technologies?
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Chapter 11: Technology, production, and Costs
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Q1) When the marginal product of labor rises
A) the marginal cost of production will exceed the average total cost.
B) the marginal cost of production also rises.
C) the marginal cost of production falls.
D) the average total cost of production also rises.
Q2) If a firm is experiencing diseconomies of scale,its long-run average cost curve is increasing.
A)True
B)False
Q3) Economies of scale exist as a firm increases its size in the long run because of all of the following except
A) the firm can afford more sophisticated technology in production.
B) labor and management can specialize even further in their tasks.
C) as a larger input buyer, the firm can purchase inputs at a lower per unit cost.
D) as a firm expands its production, its profit margin per-unit of output increases.
Q4) In the long run,all of a firm's inputs are variable.
A)True
B)False
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Chapter 12: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) Refer to Figure 12-1.If the firm is producing 200 units
A) it breaks even.
B) it is making a loss.
C) it should cut back its output to maximize profit.
D) it should increase its output to maximize profit.
Q2) Refer to Figure 12-5.What is the amount of the firm's fixed cost of production?
A) $5,400
B) $6,750
C) $8,100
D) It cannot be determined.
Q3) The demand curve for an individual seller's product in perfect competition is
A) the same as market demand.
B) downward sloping.
C) vertical.
D) horizontal.
Q4) Refer to Figure 12-4.What is the amount of its total fixed cost?
A) $1,080
B) $1,440
C) $2,520
D) It cannot be determined.
14
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Chapter 13: Monopolistic Competition: the Competitive
Model in a More Realistic Setting
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Q1) The economic analysis of monopolistic competition shows that market forces eliminate profits in the long run.However,it is possible for a firm to continue to earn economic profits if the firm
A) expands its marketing budget.
B) adopts new technologies that enable it to lower its cost of production.
C) expands its product offerings to appeal to a wider range of consumers.
D) reduces its price to expand its market.
Q2) Refer to Figure 13-11.The diagram depicts a firm
A) in a constant cost industry.
B) in an increasing cost industry.
C) in long run equilibrium.
D) that is making short run losses.
Q3) Advertising is the action of a firm that is intended to maintain the differentiation of its product over time.
A)True
B)False
Q4) Why are demand and marginal revenue represented by the same curve for a firm in a perfectly competitive market,but by separate curves for a firm in a monopolistically competitive market?
Page 15
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Chapter 14: Oligopoly: Firms in Less Competitive Markets
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Sample Questions
Q1) Since 1972,the world price of oil has been largely determined by OPEC,which controls about 75 percent of the world's proven oil reserves.Since 1972 the price of oil has
A) fluctuated. OPEC's situation is an example of a prisoner's dilemma.
B) risen slowly, but steadily. Members of OPEC fear that if they raise the price of oil too quickly this will lead oil-buying nations to accuse OPEC of price gouging, which is illegal under international law.
C) steadily fallen through the 1970s, then risen continually in the years since then. OPEC's actions are an example of implicit collusion.
D) been tied by OPEC to the rate of inflation in the United States. If, for example, the rate of inflation is 5 percent in one year, OPEC will raise the price of oil by 5 percent the next year.
Q2) Because of the shortcomings of concentration ratios,some economists prefer another measure of competition called
A) the Competition Index.
B) the Marginal Revenue-Marginal Cost Index.
C) the Economic Profit Index.
D) the Herfindahl-Hirschman Index.
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Chapter 15: Monopoly and Antitrust Policy
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Q1) Refer to Figure 15-13.From the monopoly graph above,identify the area representing the deadweight loss. Would the deadweight loss be larger if the demand curve was more elastic or less elastic?
Q2) Merger guidelines developed by the Antitrust Division of the U.S.Department of Justice use four-firm concentration ratios as measures of concentration.
A)True
B)False
Q3) Refer to Figure 15-2.If the firm's average total cost curve is ATC<sub>2</sub>,the firm will
A) suffer a loss.
B) break even.
C) make a profit.
D) face competition.
Q4) If the market for a product begins as perfectly competitive and then becomes a monopoly,there will be a reduction in economic efficiency and a deadweight loss.
A)True
B)False
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Chapter 16: Pricing Strategy
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Q1) The Walt Disney Company is in a position to use a two-part tariff by charging for admission and also charging for rides inside its two theme parks,Disneyland and Disney World.Which of the following statements regarding Disney's pricing strategy is true?
A) At one time, admission fees were charged at both parks but all rides were free. Disney has since changed its pricing policy; it earns higher profits by charging for both admission and rides.
B) At one time, customers had to pay for admission and rides at Disneyland and Disney World. Disney has since changed its pricing policy; it earns higher profits by charging for admission but not for rides.
C) At one time, customers had to pay for admission and rides at Disneyland and Disney World. Disney has since changed its pricing policy; it earns higher profits by charging for rides but not for admission.
D) At one time, fees for admission and rides at both parks were set at their profit-maximizing levels. Disney has since changed its pricing policy; it uses a cost-plus pricing strategy for admission and does not charge for rides.
Q2) Why is it necessary for a firm that practices price discrimination be a price maker rather than a price taker?
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Chapter 17: The Markets for Labor and Other Factors of Production
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Q1) Wally,Vijay,Sandra and Consuela make up a software development team at Javasoft.The firm is considering implementing one of two incentive compensation schemes.In scheme A,each programmer receives an annual bonus if he or she meets all individual programming deadlines.In scheme B,members of the team share equally in a joint bonus if the team meets all of its product delivery deadlines.All four employees are equally talented but Wally is a slacker who does as little work as he can get away with.Which scheme might team members prefer? Which scheme will management prefer?
Q2) Which of the following is not a reason for firms to choose a salary system rather than a commission system to compensate their employees?
A) Research has shown that most companies will find that a salary system will be more profitable than a commission system.
B) It is often difficult to attribute output to particular workers.
C) If workers are paid on the basis of the number of units of output they produce, they may become less concerned about quality.
D) Commission compensation systems are riskier for employees than a salary system, and many workers dislike risk.
Q3) What is the marginal productivity theory of income distribution?
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Chapter 18: Public Choice,taxes,and the Distribution of Income
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Sample Questions
Q1) Refer to Figure 18-2.If the government imposes an excise tax of $1.00 on every unit sold,the government's revenue from the tax
A) is larger if the supply curve is S<sub>0</sub>.
B) is larger if the supply curve is S<sub>1</sub>.
C) is identical under either supply curve.
D) is not maximized.
Q2) Rapid economic growth tends to increase the degree of income mobility.
A)True
B)False
Q3) The person or firm that pays a tax bears the burden of the tax.
A)True
B)False
Q4) When considering changes in tax policy,economists usually focus on
A) the average tax rate.
B) the marginal tax rate.
C) people's willingness to pay taxes.
D) people's ability to pay taxes.
Q5) If you pay $14,000 in taxes on an income of $125,000,and $17,400 in taxes on an income of $144,000,what is your marginal tax rate? Show your work.
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