Economics I Pre-Test Questions
Course Introduction
Economics I provides a comprehensive introduction to the fundamental principles of microeconomics and macroeconomics. The course explores how individuals, firms, and governments make decisions about resource allocation in the context of scarcity, examining topics such as supply and demand, market equilibrium, consumer behavior, production and costs, and the functioning of various market structures. Additionally, students gain an understanding of broader economic concepts including national income, inflation, unemployment, and the role of government in the economy. Through theoretical analysis and real-world examples, the course equips students with analytical tools and critical thinking skills essential for understanding contemporary economic issues.
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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Q1) Which of the following is an example of self-interest that attempts to promote the public interest?
A) A mother prevents her children from becoming vaccinated against measles, mumps, and rubella because of fears of autism.
B) The President of the United States restricts American consumers from buying foreign-made products.
C) The New York Yankees beat the Boston Red Sox.
D) An entrepreneur risks his life savings to open up a grocery store in an underserved area.
Answer: D
Q2) Adam Smith's "invisible hand" refers to:
A) people's pursuit of their own self-interest.
B) people's pursuit of the social interest.
C) social justice.
D) government control.
Answer: A
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Chapter 2: The Power of Trade and Comparative
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Q1) (Figure: PPF Goods X & Y) Refer to the figure. Point A represents an allocation of resources that is:
A) efficient.
B) inefficient.
C) impossible.
D) the result of trade.
Answer: B
Q2) If a country has an absolute advantage in both items produced when compared to another country, there can never be any benefit for them to trade.
A)True
B)False
Answer: False
Q3) Comparative advantage is determined by which of the following?
A) efficiency
B) bargaining power
C) opportunity cost
D) productivity
Answer: C
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Chapter 3: Supply and Demand
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Q1) Total consumer surplus is measured by the area beneath the demand curve.
A)True
B)False
Answer: False
Q2) If the price of shotguns ______, the demand for shotgun shells will _______.
A) increases; decrease
B) increases; increase
C) decreases; decrease
D) decreases; stay the same
Answer: A
Q3) If producers form expectations that copper prices will be higher in the future, then this will shift the:
A) demand curve for copper to the left.
B) supply curve of copper to the right.
C) demand curve for copper to the right.
D) supply curve of copper to the left.
Answer: D
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Page 5
Chapter 4: Equilibrium
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Sample Questions
Q1) A market can be described by the equations Q<sub>d</sub> = 50 - 3P and Q<sub>s</sub> = 2P. What are the equilibrium price and quantity in this market?
A) The equilibrium price is $20 and the equilibrium quantity is 10 units.
B) The equilibrium price is $50 and the equilibrium quantity is 100 units.
C) The equilibrium price is $30 and the equilibrium quantity is 10 units.
D) The equilibrium price is $10 and the equilibrium quantity is 20 units.
Q2) (Figure: Price and Quantity 2) At a cost of $20 per unit in the diagram, the demanders whose wants are satisfied are represented by the section of the demand curve between a price of:
A) $100 and $80.
B) $100 and $50.
C) $0 and $100.
D) $20 and $80.
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
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Chapter 5: Elasticity and Its Applications
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Q1) Suppose that large oil reserves are discovered off the coast of Cuba, and these reserves will increase the world's supply of oil by 2.5 percent. If the elasticity of demand and supply of oil are 0.50 and 0.40, respectively, what happens to the price of oil?
A) It falls by 2.5 percent.
B) It falls by 25 percent.
C) It falls by 2.78 percent.
D) It falls by 36 percent.
Q2) If the price elasticity of supply is 4, an increase in the price of Good X by 5 percent causes the quantity supplied of it to:
A) rise 20 percent.
B) fall 20 percent.
C) rise 1.25 percent.
D) fall 1.25 percent.
Q3) The midpoint method of calculating elasticity yields the same results as other methods.
A)True
B)False
Q4) Summarize the factors that cause goods to have a more inelastic supply.
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Chapter 6: Taxes and Subsidies
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Q1) (Figure: Soda Market) Suppose the U.S. Congress passes a tax of $0.70 on each can of soda. Using the diagram and the "wedge shortcut," determine how much deadweight loss this would create.
A) $10,500
B) $21,000
C) $35,000
D) $70,000
Q2) (Figure: Deadweight Loss) Which of the areas in this figure represents the lost consumer surplus resulting from a $2 tax?
A) A
B) B
C) B + E
D) B + C
Q3) (Figure: Tax Imposed on Sellers) According to the figure, the price that sellers receive AFTER the tax is imposed is:
A) $5.
B) $4.40.
C) $4.
D) $3.40.
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Page 8
Chapter 7: The Price System
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Sample Questions
Q1) Although large parts of beef cattle become meat products, other parts become leather jackets. As the demand for beef rises, what happens in the market for leather jackets?
A) Supply decreases and price increases.
B) Demand and price increase.
C) Supply increases and price decreases.
D) Demand and price decrease.
Q2) Futures contracts:
A) allow individuals to speculate in various markets without having to store the product.
B) typically increase risk.
C) almost always result in the delivery of the product.
D) decrease economic efficiency by skewing the information delivered by prices.
Q3) If we observe that the price of orange juice futures is extremely high, we might conclude that:
A) there will be a bumper crop of oranges in the future.
B) bad weather is expected to destroy orange crops.
C) there will be weak demand conditions for oranges in the future.
D) good weather is expected in orange-growing areas.
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Chapter 8: Price Ceilings and Floors
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Q1) Price ceilings cause the quantity demanded to be less than the quantity supplied.
A)True
B)False
Q2) The minimum wage is an example of a price floor in the labor market.
A)True
B)False
Q3) (Figure: Effects of Price Ceilings) Refer to the figure. At a price ceiling of $2 per unit, consumers are willing to pay a maximum of:
A) $2.00.
B) $2.50.
C) $3.00.
D) $4.00.
Q4) The price floor regulation of the airline industry:
A) was the leading factor in the development of low-cost airlines.
B) led to a misallocation of resources by preventing the entry of innovative airlines.
C) allowed the middle class the opportunity to fly at reduced rates.
D) was based on the principle of low prices and low quality.
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Chapter 9: International Trade
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Sample Questions
Q1) ______ have a similar effect upon domestic consumption levels.
A) Subsidies and tariffs
B) Tariffs and quotas
C) Quotas and subsidies
D) Subsidies, tariffs, and quotas
Q2) 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
Q3) (Figure: World Imports) Refer to the figure. The imposition of a $20 tariff would generate a value of lost gains from trade of:
A) $45.
B) $90.
C) $70.
D) $160.
Q4) Trade moves jobs from import-competing industries to export industries.
A)True
B)False
Q5) What are the three major benefits of trade? Explain briefly.
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Chapter 10: Externalities- When the Price Is Not Right
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Q1) The Coase theorem states that private solutions can correct for the inefficiencies of externalities if transaction costs are low and property rights are clearly defined.
A)True
B)False
Q2) (Figure: Softella) Refer to the figure. The figure shows a market for medicated tissues. Assume that the only use for these tissues is to wipe and clean one's hands, thus preventing germs from spreading to other people. If the government were to subsidize the users of these tissues, what would be the efficient quantity in this market?
A) 700
B) 500
C) 1,200
D) 200
Q3) If a steel manufacturer does NOT bear the entire cost of the sulfur dioxide it emits, it will:
A) emit a lower level of sulfur dioxide than is socially efficient.
B) emit a higher level of sulfur dioxide than is socially efficient.
C) emit an acceptable level of sulfur dioxide
D) not emit any sulfur dioxide in an attempt to avoid paying the entire cost.
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Chapter 11: Costs and Profit Maximization Under Competition
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Q1) Firms should enter the industry if marginal revenue is greater than the total costs.
A)True
B)False
Q2) In a competitive, constant cost industry:
A) there is no entry or exit.
B) demand never changes.
C) supply is inelastic.
D) the long-run price is constant.
Q3) To maximize profits, firms produce the level of output that:
A) equates total revenue and total cost.
B) equates marginal revenue with marginal cost.
C) minimizes costs.
D) maximizes revenues.
Q4) The short run is the period after all exit and entry has occurred. A)True
B)False
Q5) The short run is the period before exit or entry can occur. A)True B)False
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Chapter 12: Competition and the Invisible Hand
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Sample Questions
Q1) If there are below-normal short run profits in an industry, there will be:
A) entry.
B) exit.
C) no entry or exit.
D) below-normal profits in the next period.
Q2) Consider the market for DVD players and HDTVs (high-definition televisions). A firm can produce DVD players at an average cost of $20 each, or HDTVs at a cost of $150 each. Which product should this firm produce if the price of DVD players is $15 and the price of HDTVs is $200? Why? Explain what you would expect other firms in both the markets for DVD players and HDTVs to do. Assume both markets are competitive.
Q3) According to the elimination principle, firms enter a market when ______ and exit a market when ______.
A) P > AC; P = AC
B) P > AC; P < AC
C) P = AC; P < AC
D) P < AC; P > AC
Q4) Explain two ways in which the competitive industry displays the actions of the invisible hand.
Q5) Explain how market entry affects the profit level of a competitive firm.
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Chapter 13: Monopoly
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Sample Questions
Q1) (Figure: Regulated versus Unregulated Monopolist) Refer to the figure. Calculate consumer surplus when this monopoly is regulated.
A) $6,400
B) $2,800
C) $3,600
D) $400
Q2) Which of the following was the result of government deregulation of cable TV in the 1980s?
A) The price of cable television fell.
B) The number of cable television stations increased.
C) The quality of cable television declined dramatically.
D) Consumers were upset as the price of cable television rose dramatically.
Q3) Explain how a firm can use its monopoly power to earn above-normal profits.
Q4) One of the great lessons of economics is that:
A) higher prices lead to less demand and increased innovation by firms.
B) monopolies may increase efficiency if properly constructed by the government.
C) good institutions channel self-interest toward social prosperity, whereas poor institutions channel self-interest toward social destruction.
D) corruption may increase efficiency if it leads to increased innovation.
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Chapter 14: Price Discrimination
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Q1) (Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets-Market A and Market B-through the process of price discrimination, how much profit is the monopolist making in Market B?
A) $260
B) $780
C) $1,040
D) $520
Q2) Which of the following statements is FALSE?
I. If the demand curves are different, it is more profitable to set a single price than different prices in markets.
II. To maximize profit the firm should set a lower price in markets with more elastic demand.
III. The presence of arbitrage makes it easy for a firm to price discriminate.
A) I and II only
B) II only
C) III only
D) I and III only
Q3) What conditions are necessary for a firm to practice price discrimination?
Q4) Explain the two basic principles of successful price discrimination.
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Chapter 15: Oligopoly and Game Theory
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Sample Questions
Q1) Strategic decision making is decision making in situations that are interactive.
A)True
B)False
Q2) A dominant strategy is a strategy that a player should take only if the other player cheats.
A)True
B)False
Q3) A government-supported cartel usually means:
A) lower prices.
B) higher quality of service.
C) more innovation.
D) higher prices.
Q4) Major league sports are illegal cartels.
A)True
B)False
Q5) Which of the following laws makes cartel behavior illegal?
A) Monopoly Act of 1897
B) Sherman Antitrust Act of 1890
C) Sewon Act of 1955
D) Frame Act of 1910
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Chapter 16: Competing for Monopoly
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Q1) Suppose you decide to stop using Internet Explorer and switch to Google Chrome. Why will Chrome immediately ask you if you wish to import your saved bookmarks from IE?
A) It increases switching costs.
B) It helps maintain contestability in the browser market.
C) Google has the slogan "Don't be evil."
D) Allowing the importation of bookmarks is the Nash equilibrium.
Q2) After you have been in a job for a while, you should portray your switching costs as:
A) high because the firm will think that they do not need to pay you much.
B) high because then they can ask you to manage the most unpleasant responsibilities.
C) low so they can begin to interview for your replacement.
D) low so the firm will think that they need to pay you more to prevent you from leaving.
Q3) Which statement is FALSE?
A) Network goods are usually sold by monopolies or oligopolies.
B) When networks are important the "best" products usually win.
C) Standard wars are common in establishing network goods.
D) Competition in network goods is for the market, not in the market.
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Chapter 17: Monopolistic Competition and Advertising
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Q1) Monopolistically competitive firms create:
A) zero deadweight loss.
B) a small deadweight loss.
C) a large deadweight loss.
D) negative deadweight loss.
Q2) In a stable, monopolistically competitive market for restaurants there are:
A) zero profits on average, and consumers are indifferent about where they eat.
B) zero profits on average, and consumers have strong preferences about where they eat.
C) positive profits on average, and consumers are indifferent about where they eat.
D) positive profits on average, and consumers have strong preferences about where they eat.
Q3) How do monopolistically competitive firms inform consumers about their products?
A) They rely on word-of-mouth.
B) They inform consumers through advertising.
C) There is no need to do such.
D) Their products are well-known enough to stand on their own.
Q4) In what ways is the market for books a monopoly?
Q5) Products can be differentiated along many dimensions. Explain.
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Chapter 18: Labor Markets
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Q1) Which of the following statements is TRUE?
I. Customer-based discrimination weakens as more and more people trade and exchange with one another in market places.
II. Economic growth causes production costs to fall, reducing the risks of business experimenting with integrated workplaces.
III. Employer-based discrimination is negatively correlated with customer-based discrimination.
A) I, II, and III
B) III only
C) I and II only
D) II only
Q2) A compensating differential is the difference in wages that are offered to different workers sometimes working the same job.
A)True
B)False
Q3) Explain why employer discrimination is not likely to persist in markets.
Q4) Unions are the fundamental reason why wages are higher in wealthy countries.
A)True
B)False
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Chapter 19: Public Goods and the Tragedy of the Commons
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Sample Questions
Q1) Both public goods and common resources are:
A) rival in consumption.
B) nonexcludable.
C) excludable.
D) nonrival in consumption.
Q2) Asteroid deflection is a good that would be profitable for an insurance company to provide.
A)True
B)False
Q3) Tuna fish are being driven to extinction because of overfishing. If all the fishermen know about this, why don't they fish less to slow down the extinction?
A) The kind of fishing equipment that is used does not allow for smaller catches.
B) There is a lack of well-defined property rights over the stock of tuna fish in the sea.
C) The fishermen do not realize that their way of life will also become extinct.
D) Their governments have not considered tradable allowances as a solution.
Q4) List and describe the three methods that are used to minimize the tragedy of the commons and achieve an efficient use of a common resource.
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Chapter 20: Political Economy and Public Choice
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Q1) Much to the chagrin of some Americans, conventional light bulbs were effectively banned in 2014 leaving only compact florescent lights (CFLs) on store shelves. The ban was encouraged, in part, by the makers of the more expensive CFLs. Which concept is best captured in this story?
A) rational ignorance
B) opportunity cost
C) diffused costs and concentrated benefits
D) median voter theorem
Q2) Sugar consumers are likely to oppose sugar quotas because the widespread costs, although small, fall on all households in the form of higher prices.
A)True
B)False
Q3) Which of the following was the main cause of the 1974 famine in Bangladesh?
A) floods
B) lack of food
C) lack of economic and political freedoms
D) high rice prices
Q4) Explain the assumptions behind the median voter theorem. In which cases will the median voter theorem NOT apply?
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Chapter 21: Economics, Ethics, and Public Policy
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Q1) It's often difficult to resolve meddlesome preferences with other values that are considered important.
A)True
B)False
Q2) Which principle would most likely be favored by J. K. Rowling, the author of the Harry Potter book series and one of the richest persons in the world?
A) John Rawls's maximin principle
B) utilitarianism
C) Robert Nozick's entitlement theory of justice
D) efficiency theory
Q3) Tom is in need of a kidney to stay alive, and he is willing and able to pay up to $15,000 for a new kidney. David has two well-functioning kidneys (that are also compatible with Tom). David, aware of the risks of surgery, would be willing to sell one of his kidneys to Tom for $10,000. If kidney trade were legal, would this trade take place? What price would a kidney sell for in this scenario?
Plenty of people are still against organ trade even if it generates mutual gains from trade. Explain why this is the case.
Q4) Discuss the problems of implementing utilitarianism?
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Chapter 22: Managing Incentives
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Q1) It is true that incentives matter, and:
A) getting incentives right is not a major issue.
B) the right incentives can be hard to figure out.
C) the ideal would be to remove all incentives.
D) using wrong incentives is better than no incentives.
Q2) Which of the following would best reduce ability risk in tournaments?
A) excluding players with low ability from contesting in tournaments
B) creating strong incentive for effort in tournaments
C) enhancing the rewards for players in tournaments
D) structuring tournaments so that rewards are closely tied to effort
Q3) What is the concern with private prisons?
A) Private prisons may cut costs to increase profit at the expense of prisoner rehabilitation programs, civil rights, and safety.
B) The increased efficiency of private prisons may put public prisons out of business.
C) Private prisons will cost taxpayers too much money to operate because they will cut costs in the short run and decrease recidivism rates.
D) Private prisons are likely to overemphasize quality and cost taxpayers too much money in the long run.
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Chapter 23: Stock Markets and Personal Finance
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Q1) The textbook recommends buying mutual funds that:
A) charge high commissions.
B) charge large management fees.
C) have high loads.
D) have the lowest fees.
Q2) Why does it make sense to avoid paying high fees when investing with mutual funds or stock brokers?
A) The funds with high fees are too expensive.
B) The funds with high fees likely hire managers who are not experts.
C) The funds with high fees do not perform any better than other funds.
D) It does make sense, since you should pay high fees to get access to experts.
Q3) Which statement is TRUE?
A) In the long run, stock returns are higher than bond returns.
B) Passive investments underperform active investments.
C) One can earn higher returns by investing in funds with high loading costs.
D) The efficient markets hypothesis only holds in the short run.
Q4) According to the evidence, very few mutual fund managers can beat the market averages.
A)True
B)False
Page 25
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Chapter 24: Price Discrimination
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Q1) 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.
Q2) A signal is an expensive action that is taken to reveal information.
A)True
B)False
Q3) Aligning the incentives of buyers and sellers will reduce moral hazard.
A)True
B)False
Q4) Obtaining a college education signals that a potential employee:
A) is wealthy enough to afford college.
B) is not a very good worker
C) has determination and a relatively high IQ.
D) knows much of the information needed to do the job without training.
Q5) The individual mandate in the Affordable Care Act reduces the price of health insurance policies by pushing people into the insurance pools.
A)True
B)False
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Chapter 25: Consumer Choice
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Q1) (Figure: Water vs. Soda 2) Refer to the figure. These figures show the marginal utility Janet receives when she consumes bottled water and soda. Both water and soda cost $1 each. If Janet has $5 in income, what mix of bottled water and soda will maximize Janet's utility?
A) five bottles of water
B) four bottles of water and three sodas
C) three bottles of water and two sodas
D) 2.5 bottles of water and 2.5 sodas.
Q2) If the marginal utility per dollar for hamburgers is higher than the marginal utility per dollar for tacos, then to maximize utility the consumer should only consume hamburgers.
A)True
B)False
Q3) If the marginal utility of apples is 4 and marginal utility of grapes is 4, the consumer is maximizing utility.
A)True
B)False
Q4) A point above the budget constraint is sometimes affordable.
A)True
B)False
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