Economics of Decision Making Test
Questions
Course Introduction
Economics of Decision Making explores how individuals, businesses, and governments make choices under conditions of scarcity and uncertainty. The course integrates principles from microeconomics, behavioral economics, and game theory to analyze how incentives, preferences, risk, and information shape decisions. Students will investigate how real-world decisions deviate from classical rational models, consider the effects of bounded rationality and heuristics, and apply economic thinking to personal, managerial, and policy contexts. Through case studies and problem-solving exercises, the course emphasizes practical tools for identifying and improving decision-making strategies across various economic environments.
Recommended Textbook Microeconomics and Behavior 8th Edition by
Robert H. Frank
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18 Chapters
901 Verified Questions
901 Flashcards
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Page 2
Chapter 1: Thinking Like an Economist
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Sample Questions
Q1) If the benefits of X = $50 and the price of X = $50, then
A)$100 is the reservation price
B)You will be indifferent between buying X and keeping your money
C)$0 is the reservation price
D)You should buy X
Answer: B
Q2) Say you and two friends are 13,500 feet into a hiking trip to the summit of a 14,000 peak in Colorado. At that point, a rainstorm comes up all of a sudden and makes the last 500 feet trek quite treacherous. One of your friends wants to stop and head down and argues it would be dangerous to continue. He says he doesn't care about the 4 hours he has hiked already to get where he is, he only cares about the final 500 feet. Your other friend, however, wants to continue and argues that it would be stupid to quit so close to the summit, especially after all the hard work you have incurred.Which one of your two friends has a more rational argument?
Answer: Please explain using the concepts from the textbook.
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Chapter 2: Supply and Demand
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Sample Questions
Q1) My income rose and the price of good y rose also.That means that my demand curve for good X shifted right.
A)This statement is always true
B)This statement will always be true if good y is a substitute for good x
C)This statement will always be true if good x is a normal good
D)This statement will always be true if good y is a substitute for x and x is a normal good
Answer: D
Q2) Suppose the demand for cigarettes was P = 100 - 5Q, and the supply for cigarettes was P = 0.5Q. The market equilibrium price in this market would be about:
A)$18
B)$22
C)$100
D)$50
Answer: A
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4
Chapter 3: Rational Consumer Choice
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Sample Questions
Q1) A diminishing marginal rate of substitution implies that indifference curves are
A)Convex
B)Concave
C)Straight lines
D)Positively sloped
Answer: A
Q2) Given the following budget line, (M = Pf F + Ps S) show the following by reformulating the equation.Assume f (food) is on the horizontal axis and S (shelter) is on the vertical axis.
a.The vertical intercept is __________
b.The horizontal intercept is __________
c.The slope of the budget line is ___________
Answer: a.M/Ps
b.M/Pf
c.Pf/Ps
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5
Chapter 4: Individual and Market Demand
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Sample Questions
Q1) Based on your sketch, is the good a normal or inferior good?
Q2) The cross-price elasticity of demand for complements is
A)Is positive
B)Is negative
C)Is zero
D)Can not be specified without more information
Q3) At $5 Joe buys 1 pen; at $1 he buys 3 pens.What is the arc elasticity over this range?
A)-1.5
B)-.66
C)1
D)-0.75
Q4) The demand curve for a Giffin good
A)Slopes upward
B)Slopes downward
C)Is a straight line
D)Is convex
Q5) If there are no costs in selling mineral water what price should a profit maximizer charge?
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Chapter 5: Applications of Rational Choice and Demand
Theories
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Sample Questions
Q1) If you had a windfall of $5,000 in the present time period and you save some of it, your saving behavior would likely be due to the fact that
A)Your marginal utility of present income falls as your income goes up
B)The extra income changes the slope of your time preference indifference curves making then steeper
C)Your indifference curves for present and future income are vertical
D)Your indifference curves for present and future are horizontal
Q2) When a product depicted on the horizontal axis of a typical indifference curve model of behavior is taxed
A)The budget line becomes steeper
B)The budget line becomes flatter
C)The indifference curve of the consumer shifts right
D)All the indifference curves of the consumer become steeper
Q3) According to the Life-cycle hypothesis if a person received a payment roughly equals to her current income her consumption would:
A)roughly double.
B)increase, but not by as much as the increase in income
C)increase by more than the increase in income
D)would not increase at all.
Page 7
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Chapter 6: The Economics of Information and Choice
Under Uncertainty
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Sample Questions
Q1) Adverse selection is the process by which
A)"Undesirable" members of a particular market are more likely to participate in exchange
B)"Undesirable" members of a particular market are less likely to participate in exchange
C)Adversaries communicate negative messages
D)Full-disclosure becomes impossible
Q2) A person's incentive to spend additional money on conspicuous consumption goods will be ____to the amount and reliability of independent information that people have about his abilities.
A)Unrelated
B)Positively related
C)Inversely related
D)Equal
Q3) Next suppose your utility function for value is U = 100(money).Are you risk averse, a risk lover, or risk neutral.
Q4) Your bike is worth $100 and if you park it outside at school there is a 25% chance that it will be stolen.Your utility function for money is U = (money)<sup>2</sup>.Are you a risk taker?
Page 8
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Chapter 7: Explaining Tastes: The Importance of Altruism and
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Sample Questions
Q1) Consider a population with the following givens: 1) 75% cooperators and 25% defectors,
2) a 8 unit payoff goes to cooperators who interact with another cooperator,
3) a zero unit payoff goes to a cooperator who interacts with a defector, 4) the cost of knowing which is which is 2
If the population balance falls below 75%
A)It will no longer make sense for cooperators to pay the price of scrutiny
B)Defectors will have a higher payoff
C)Cooperators will all pay the cost of scrutiny
D)Less than 75% of the cooperators will pay the cost of scrutiny
Q2) In this chapter, virtue can lead to material gain and therefore is an inevitable part of the social order.Evaluate this view of virtue or moral behavior.Is material gain a sufficient motive for morality? Is moral behavior based on more than the possibility for personal gain?
Q3) The prisoner's dilemma exercise assumes
A)Prisoners are rational
B)Prisoners are altruistic to each other if they know each other well
C)Prisoners believe other prisoners are different then they themselves are
D)Prisoners do not know what the penalties are when they are interrogated
Page 9
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Chapter 8: Cognitive Limitations and Consumer Behavior
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Sample Questions
Q1) It has be said that people would never build a house if they had to go to the lumberyard and buy the framing lumber and each building material by the piece.Where did such a notion come from? Might it be true?
Q2) Say one morning you are considering weather to take a taxi cab or riding the train to work. Both mediums would cost you about $4, but you have already paid in advance for the train (since you pay a flat fee at the beginning of the month). If the cab ride would take slightly less time than the train ride, and you are mostly concerned with the time it takes you to get to work, you should:
A)take the train since you already paid for it
B)take the cab
C)be indifferent between either modes of transportation
D)find another way to get to work
Q3) Suppose a rational consumer faced with a choice between blue pencils and red pencils will always choose the red ones.If she is also offered a choice of green pencils then
A)She will always choose the green ones
B)She will change her mind and choose the blue pencils
C)She will continue to choose the red pencils
D)May choose either the blue or the red pencils
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Page 10
Chapter 9: Production
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Sample Questions
Q1) (Appendix)In the production function Q = 10L<sup>1/2</sup>K<sup>1/2</sup>calculate the marginal product equations of both inputs.
Q2) (Appendix) The defining characteristics of increasing returns to scale may be summarized as
A)F(cK,cL) > cF(K,L)
B)F(cK,cL) = cF(K,L)
C)F(cK,cL) < cF(K,L)
D)Q = min(aK,aL)
Q3) Which of the following statements about isoquant maps is true?
A)They can illustrate diminishing returns to production only when they have numerical values attached
B)They can not illustrate economies of scale unless some numerical values are attached
C)They always have positive slope
D)They always have negative slope
Q4) (Appendix) A daily production function for calculators is Q = 12L<sup>2</sup>L<sup>3</sup>.Show all your work for the following questions.
a) What is the marginal product equation for labor?
b) What is the AP<sub>L </sub>function?
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Chapter 10: Costs
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Sample Questions
Q1) If the total cost function is TC = 10Q<sup>3</sup> - 50Q<sup>2</sup> + 1000Q + 500, what is the equation for AFC
Q2) At one unit of output AVC is
A)Zero
B)Infinite
C)Equal to marginal cost
D)Less than marginal cost
Q3) With constant returns to scale and factor prices invariant with the amount of factors used, the long-run output expansion path is
A)Horizontal
B)A straight line
C)U-shaped
D)Zero
Q4) Let the TC curve be given by the equation TC(Q)=5 + Q.The ATC curve can be expressed as
A)(1/Q) + 5
B)(5/Q) + 1
C)5
D)Q
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Chapter 11: Perfect Competition
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Sample Questions
Q1) Competitive markets result allocative efficiency because they:
A)Maximize the total benefits from exchange
B)Make sure goods are produce at the lowest costs
C)Generate the most benefits for consumers
D)Distribute resources in the most equitable way
Q2) The profit maximizing output level for a perfectly competitive firm is always where
A)P = MC
B)P = AVC
C)MC = ATC
D)MC = AVC
Q3) In the graph above if the price persists at P*, the profit maximizing firm will
A)Shut down immediately
B)Shut down in the long run
C)Operate indefinitely
D)Has a strategy that can not be predicted without an ATC curve
Q4) What is the equilibrium price and quantity produced by the industry as a whole?
Q5) What is the producer surplus for each firm?
Q6) How can a firm stay in business if it makes no economic profit in the long run?
Q7) What is the producer and consumer surplus in the entire market?
Page 13
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Chapter 12: Monopoly
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Sample Questions
Q1) If a profit maximizing monopolist sells its output for $100, then we know that its marginal revenue is
A)More than $100 if it is a perfect price discriminator
B)Less than $100 if it is a single price monopolist
C)Equal to $100 in all cases
D)Less than $100 if it is a perfect price discriminator
Q2) Sketch graph a natural monopoly with the typical ATC, MC, and demand and MR functions
a.Label the profit maximizing monopoly price with a P1.b.Label the typical public utility commission regulated price which requires no subsidy as P2 c.Label the socially efficient price as P3 d.Shade in the area of the subsidy required in one of the cases above
e.Explain why a subsidy is often used for public transportation but not for municipal water supply
Q3) The supply curve for a monopolist
A)Is upward sloping
B)Is vertical
C)Does not exist
D)Is downward sloping
Q4) What is the profit (loss) of the firm in question 44 above?
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Chapter 13: Imperfect Competition: a Game-Theoretic Approach
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Sample Questions
Q1) Which of the duopoly models has the highest overall combined profit level?
A)The Cournot model
B)The Bertrand model
C)The Stackelberg Leader-Follower model
D)The shared monopoly model
Q2) The variety that monopolistic competition provides is paid primarily by
A)The producer whose ability to pass on costs is limited by his demand curve
B)All consumers whether they desire variety or not
C)Those customers who desire the variety
D)No one because variety costs no more to produce than uniform products cost to produce
Q3) What will industry output be at equilibrium in this model?
Q4) One difficulty is that tit-for-tat's effectiveness depends on the existence of
A)Perfect information about another's actions
B)Only two players in the game
C)An infinite number of players in the game
D)An industry that is not growing
Q5) What is the rate at which transportation costs are falling when the optimal number of restaurants is reached?
Page 15
Q6) Is there a Nash equilibrium?
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Page 16
Chapter 14: Labor
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Sample Questions
Q1) Why is it difficult to get a cab on a rainy day?
A)Cab drivers have backward bending daily supply curve
B)Cab drivers must drive much slower when it rains
C)The demand for cabs shifts left and the quantity of cabs supplied falls
D)Cabs don't like to work on rainy days
Q2) If the MRP<sub>L</sub> is greater than the wage rate, and the supply of labor is horizontal, the firm will
A)Hire more labor
B)Hire less labor
C)Increase the wage paid
D)Not change its employment or wage practices
Q3) The market demand for labor is
A)More elastic in the long run than in the short run
B)More elastic in the short run than in the long run
C)Unaffected by time differences
D)Never elastic in the relevant range
Q4) How many laborers will be hired if the product and labor markets are both imperfect?
Q5) How many will be employed if the product market is perfect and the labor market is imperfect?
Page 17
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Chapter 15: Capital
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Sample Questions
Q1) If the machine cost $12,000 to purchase, should you buy it?
Q2) What is the present value of the income stream from the machine?
Q3) If the nominal interest rate is 10% and the rate of inflation is 7%, what is the real rate of interest?
A)2.8%
B)7.0%
C)10.3%
D)3.0%
Q4) Which of the following three statements is true: I The amount of capital equipment a firm wishes to buy depends on the rate of interest II The amount of capital equipment a firm wishes to buy depends on the purchase price of capital III The amount of capital equipment a firm wishes to buy depends on the rates of technological and physical depreciation
A)I
B)II
C)I and II
D)All three statements are true
Q5) If the going interest rate went up to 10%, how much would you be willing to pay for the machine?
Q6) What is the maximum you should be willing to pay for the machine?
Page 18
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Chapter 16: Externalities Property Rights and the Coase
Theorem
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Sample Questions
Q1) The diagram above shows the general equilibrium model for a small economy.Fort this economy, the economically efficient allocation of resources occurs at point: A)A B)B C)C
D)D
Q2) If grazing land is used by all individuals on a free open range, they will operate until
A)The AP of the land equals the opportunity cost of the input
B)The MP of the land equals the opportunity cost of the input
C)The TP of the land equals the opportunity cost of the input
D)The MP of the land is larger than the opportunity cost of the input
Q3) Some time ago an executive of a Broadcasting company argued before a congressional committee that they should make a law rating TV shows for violence content.He said that children are damaged and violence must be curbed.He indicated that his own network shows too much violence and that he would welcome a law himself so that Turner Broadcasting would show less violence.Explain why someone who shows violence on his TV channels is arguing for government regulation of himself.
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Chapter 17: Explaining Tastes: The Importance of Altruism and
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Sample Questions
Q1) The median voter is a voter:
A)Who usually vote with the majority
B)Whose preference represent the middle point of all voter's preferences
C)Who usually never votes
D)Who usually vote based on principle rather than logic
Q2) Which is not a good method of providing public type goods by private means?
A)Funding by donation
B)Private contracts
C)Clubs
D)Free markets with competing entrepreneurs
Q3) If the citizens got together for a city referendum on the issue, and each voted for an amount of fireworks, knowing that each would pay their share (1/3) of the cost, how would the vote come out in a majority rule situation? Why is this not the socially efficient amount?
Q4) If the total costs of providing the public good are $20, then
A)both Jill and John would be willing to vote to approve of providing the good.
B)only Jill would be willing to vote to approve of providing the good.
C)only John would be willing to vote to approve of providing the good.
D)neither Jill nor John would be willing to vote to approve of providing the good.
Page 20
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Chapter 18: General Equilibrium and Market Efficiency
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Q1) The rate of which one input can be traded for another at a point along the production possibilities frontier is called the
A)marginal rate of technical transformation
B)marginal rate of technical substitution
C)marginal rate of substitution
D)marginal reduction rate
Q2) The slope of the contract curve for two consumers is determined by the
A)Relative prices of goods
B)Absolute prices of goods
C)Marginal rates of substitution of the two trades
D)Income of the two traders
Q3) According to the exchange model of production, when two firms are in competitive equilibrium
A)the MRTS for two firms will be equal
B)the marginal products of capital and labor for each firm will be equal.
C)both firms will demand proportional quantities of labor and capital
D)the prices of labor and capital will be at the lowest possible level.
Q4) Graph the problem of Question 35 above and show the solution on the graph.
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