Economics Principles
Pre-Test Questions
Course Introduction
This course introduces students to the foundational concepts of economics, exploring both microeconomics and macroeconomics principles. Key topics include supply and demand, market equilibrium, elasticity, consumer and producer behavior, types of market structures, and the role of government in the economy. Emphasis is also placed on national income, unemployment, inflation, fiscal and monetary policies, and international trade. By the end of the course, students will be equipped with a basic understanding of how economic systems operate, how economic agents make decisions, and how these choices affect overall economic outcomes.
Recommended Textbook
Microeconomic Theory Basic Principles and Extensions 10th Edition by Walter Nicholson
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17 Chapters
334 Verified Questions
334 Flashcards
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Page 2
Chapter 1: Preferences and Utility
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Sample Questions
Q1) If bundles of goods A and B lie on the same indifference curve,one can assume the individual
A)prefers bundle A to bundle B.
B)prefers bundle B to bundle A.
C)enjoys bundle A and B equally.
D)bundle A contains the same goods as bundle B.
Answer: C
Q2) For this utility function,the MRS
A)depends on the values of x and y.
B)is always 0.
C)is always 2.
D)is always 4.
Answer: C
Q3) If an individual's utility function is quasi-concave,his or her MRS will
A)diminish as x is substituted for y.
B)increase as x is substituted for y.
C)be undefined except in special cases.
D)always depend only on the ratio of x to y.
Answer: A
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Chapter 2: Utility Maximization and Choice
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Sample Questions
Q1) Suppose an individual's MRS (of steak for beer)is 2:1.That is,at the current consumption choices he or she is willing to give up 2 beers to get an extra steak.Suppose also that the price of a steak is $1 and a beer is 254.Then in order to increase utility the individual should
A)buy more steak and less beer.
B)buy more beer and less steak.
C)continue with current consumption plans.
Q2) "If an individual is to maximize the utility received from consumption,he or she should spend all available income...." This statement assumes
A)that saving is impossible.
B)that the individual is not satiated in all goods.
C)that no goods are "inferior."
D)that saving is impossible and that the individual is not satiated in all goods.
Q3) The slope of the budget constraint line is
A)the ratio of the prices (p<sub>x</sub>/p<sub>y</sub>).
B)the negative of the ratio of the prices (p<sub>x</sub>/p<sub>y</sub>).
C)the ratio of income divided by price of y (I/p<sub>y</sub>).
D)none of these is correct.
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4
Chapter 3: Income and Substitution Effects
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Sample Questions
Q1) Which of the following demand functions is not homogenous of degree zero in p<sub>x </sub>,p<sub>y </sub>,and I?
A)x = I / (p<sub>x</sub>,+ p<sub>y </sub>).
B)\(x = I ^ { .5 } p _ { x } ^ { - 03 } p _ { y } ^ { - 0.2 }\) .
C)\(x = I p _ { y } / p _ { x } ^ { 2 }\) .
D)\(x = I p _ { y } / p _ { x }\) .
Q2) If the demand for a product is elastic,then a rise in price will
A)cause total spending on the good to increase.
B)cause total spending on the good to decrease.
C)keep total spending the same,but reduce the quantity demanded.
D)keep total spending the same,but increase the quantity demanded
Q3) The price elasticity of demand for a linear demand curve follows the pattern (moving from high prices to low prices)
A)elastic,unit elastic,inelastic.
B)unit elastic,inelastic,elastic.
C)inelastic,unit elastic,elastic.
D)elastic,inelastic,unit elastic.
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Chapter 4: Demand Relationships Among Goods
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Sample Questions
Q1) A generalization of Engel's Law is given by
A)\(e _ {
B)\(s _ {
C)\(e _ {
,
_
D)\(s _ { x } + s _ { y } = l\) .
Q2) With the Cobb-Douglas utility function \(U ( x , y ) = \sqrt { x y }\) ,x and y are
A)net and gross substitutes.
B)net substitutes and gross complements.
C)net substitutes and neither gross substitutes or complements.
D)net and gross complements.
Q3) If goods x and y are complements,then the cross price elasticity of demand between them will be
A)positive.
B)negative.
C)zero.
D)infinity.
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Chapter 5: Uncertainty and Information
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Sample Questions
Q1) More risk averse people will
A)hold fewer risky assets because marginal utility is rapidly diminishing.
B)hold fewer risky assets because marginal utility is greater.
C)hold fewer risky assets because rates of return are more uncertain.
D)hold fewer risky assets because marginal utility is negative.
Q2) People who always choose not to participate in fair games are called
A)risk takers.
B)risk averse.
C)risk neutral.
D)broke.
Q3) Which of the following utility functions exhibits constant absolute risk aversion?
A)U(W)= W.
B) \(U ( W ) = W - 0.5 W ^ { 2 }\)
C)U(W)= ln W.
D)U(W)= \(- e ^ { - W }\) .
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Chapter 6: Strategy and Game Theory
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Sample Questions
Q1) The strategy profile in which both players remain silent in the Prisoners' Dilemma can be described as
A)non-Pareto optimal and unstable.
B)Pareto optimal and unstable.
C)non?Pareto optimal and stable.
D)Pareto optimal and stable.
Q2) Nash equilibria
A)always exist in pure strategies.
B)generally come in even numbers.
C)always exist in finite games.
D)All of these answers are correct.
Q3) A subgame-perfect equilibrium
A)is not a Nash equilibrium; it is a refinement of Nash equilibrium.
B)is an equilibrium concept used in simultaneous games.
C)is a special sort of Nash equilibrium.
D)can be ruled out using backward induction.
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8
Chapter 7: Production Functions
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Sample Questions
Q1) If more and more labor is employed while keeping all other inputs constant,the marginal physical productivity of labor will eventually
A)increase.
B)decrease.
C)remain constant.
D)We cannot tell from the information provided.
Q2) The marginal physical productivity of labor is
A)the slope of the total output curve at the relevant point.
B)the negative of the slope of the total output curve at the relevant point.
C)the slope of the line connecting the origin with the relevant point on the total output curve.
D)the negative of the slope of the line connecting the origin with the relevant point on the total output curve.
Q3) The production function \(q = k ^ { .6 } l ^ { .5 }\) exhibits
A)increasing returns to scale and diminishing marginal products for both K and L.
B)increasing returns to scale and diminishing marginal product for L only.
C)increasing returns to scale but no diminishing marginal productivities.
D)decreasing returns to scale.
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9
Chapter 8: Cost Functions
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Sample Questions
Q1) A firm's economic profits are given by
A)total revenue minus total accounting cost.
B)the owner's opportunity cost.
C)total revenue minus total economic cost.
D)total revenue minus the cost of capital.
Q2) The shape of a firm's long-run average cost curve is determined by
A)the degree to which each input encounters diminishing marginal productivity.
B)the underlying nature of the firm's production function when all inputs are able to be varied.
C)how much the firm decides to produce.
D)the way in which the firm's expansion path reacts to changes in the rental rate on capital.
Q3) The cost function \(C = Q \left[ v ^ { 1 / 2 } + w ^ { 1 / 2 } \right] ^ { 2 }\) arises from
A)a Cobb-Douglas production function.
B)a CES production function.
C)a fixed proportions production function.
D)a Translog production function.
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Chapter 9: Profit Maximization
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Sample Questions
Q1) If the wage rate rises,labor's share in the total costs of a production process
A)will increase.
B)will decrease.
C)may increase or decrease depending on the elasticity of demand for the product.
D)may increase or decrease depending on the ease of substitution of other inputs for labor.
Q2) If the firms in perfectly competitive industries each have a production function given by \(q = k ^ { 1 / 4 } l ^ { 3 / 4 }\) and the price elasticity of demand for the industry's output is -1,the wage elasticity of demand for labor by the industry will be A)0.
B) \(- \infty\)
C)-1.
D)-2.
Q3) A firm's marginal revenue is defined as
A)the ratio of total revenue to total quantity produced.
B)the additional output produced by lowering price.
C)the additional revenue received due to technical innovation.
D)the additional revenue received when selling one more unit of output.
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Chapter 10: The Partial Equilibrium Competitive Model
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Sample Questions
Q1) One example of Ricardian rent is
A)rent paid to landlords under price controls.
B)the difference between the price of a highly demanded unique piece of artwork and the opportunity cost of maintaining it.
C)the amount paid to a seller above the equilibrium price of tourist class tickets in order to receive higher quality seats in first class.
D)the price rise of wool from a disease among sheep.
Q2) Quotas that limit the quantity of imports of a foreign good provide an incentive for foreign suppliers to
I.provide higher quality goods.
II.seek more open markets elsewhere.
III.lower prices to be more competitive.
IV.stop all trade with the country imposing the quotas. Which of the above statements are true?
A)I and II.
B)I and III.
C)II and IV.
D)I,III,and IV.
E)III only.
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12
Chapter 11: General Equilibrium and Welfare
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Sample Questions
Q1) Under a perfectly competitive price system
A)an equitable allocation of the available resources will always result.
B)there is no opportunity for individuals to trade amongst themselves.
C)there is no reason to expect that voluntary trading will result in an equitable allocation of the available resources.
D)none of these is correct.
Q2) If markets are perfect,a rational actor may reasonably conclude from the high price of a good that the good
A)is produced by a monopoly.
B)is of better quality.
C)has a greater demand for it.
D)is not known about by other consumers.
Q3) If,in a given economy,production is taking place at a point inside the production possibility frontier,
A)resource allocation is technically and allocatively efficient.
B)resource allocation is technically efficient but allocatively inefficient.
C)resource allocation is technically inefficient and allocatively efficient.
D)resource allocation is technically and allocatively inefficient.
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Chapter 12: Monopoly
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Sample Questions
Q1) The principal difference between economic profits for a monopolist and for a competitive firm is that
A)monopoly profits create major problems of equity whereas competitive profits do not.
B)competitive profits exist only in the short run whereas monopoly profits may exist in the long run as well.
C)monopoly profits represent a transfer out of consumer surplus whereas competitive profits do not.
D)monopoly profits are usually larger than competitive profits.
Q2) If a monopoly is maximizing profits
A)price will always be greater than average cost.
B)price will always equal marginal cost.
C)price will always be greater than marginal cost.
D)price will always equal marginal revenue.
Q3) A monopoly producer of a durable good
A)can earn even greater profits than a producer of a non-durable.
B)must consider competition from its own output decisions.
C)will have higher marginal costs than most other monopolies.
D)will not set marginal revenue equal to marginal cost.
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Chapter 13: Imperfect Competition
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Sample Questions
Q1) Which feature of a market would contribute most to overall social welfare?
A)Low prices and high outputs.
B)Reduction in costs due to technological improvements.
C)The invention of new products.
D)Difficult to weigh the other answers without further information about society's preferences.
Q2) In the Hotelling model of spatial competition,profits arise from A)monopoly power.
B)rents based on locational advantage.
C)the ability to price discriminate.
D)increasing returns to scale.
Q3) All of the following are problems associated with maintaining a cartel except A)cartels are illegal.
B)a large amount of information is needed to coordinate a cartel.
C)profits are not maximized by a cartel so it will evolve into a monopoly.
D)each member of the cartel has an incentive to "chisel" by expanding output.
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15
Chapter 14: Labor Markets
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Sample Questions
Q1) Which of the following best explains why the elasticity of supply of labor for an individual with a Cobb-Douglas utility function (for consumption and leisure)is zero?
A)Income and substitution effects are precisely offsetting.
B)The elasticity of substitution of leisure for consumption is zero.
C)Leisure is an inferior good.
D)Consumption is subject to diminishing marginal utility.
Q2) The opportunity cost of leisure is approximated by
A)the price of leisure activities (such as theater tickets).
B)an individual's hourly real wage rate.
C)commuting expense.
D)an individual's total income.
Q3) A monopolist union that desired to maximize its total wage bill (w . l)would offer that quantity of labor for which
A)labor's marginal productivity is zero.
B)labor's wage falls to zero.
C)the quantity of labor hired is as great as possible given the firm's demand curve.
D)the marginal revenue from providing one more worker to the market is zero.
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Chapter 15: Capital and Time
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Sample Questions
Q1) Adding uncertainty to future consumption will tend to increase savings providing:
A) \(U ^ { \prime \prime } > 0\) .
B) \(U ^ { \prime \prime } / U ^ { t } > 0\) .
C) \(U ^ { \prime \prime } / U ^ { t } < 0\) .
D) \(U ^ { \prime\prime\prime} > 0\) .
Q2) If the interest rate rises,the present discounted value of a stream of payments owed in the future
A)rises.
B)stays constant.
C)falls.
D)may rise or fall depending on the shape of the stream.
Q3) Accelerated depreciation laws may increase firms' investment in equipment because
A)machines will wear out more rapidly.
B)profits will be increased.
C)the rental rate on capital will be reduced.
D)the price of machines will fall.
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Chapter 16: Asymmetric Information
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Sample Questions
Q1) Fill in the blanks: _______________ is an important constraint in the moral-hazard problem because _______________________.
A)The budget constraint; it ensures the principal has enough money to pay the agent.
B)The participation constraint; it ensures the agent chooses the action in the principal's best interest.
C)The participation constraint; it ensures the principal is willing to offer the contract.
D)The incentive-compatibility constraint; it ensures the agent chooses the action intended in the contract.
Q2) Adverse selection can arise in employment situations if information about worker quality is
A)better for employees than employers.
B)better for employers than employees.
C)perfect.
D)available at a low enough cost.
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Chapter 17: Externalities and Public Goods
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Sample Questions
Q1) Special interest groups often
A)represent broad questions of public interest.
B)pursue rent seeking behavior.
C)do not use lobbying techniques.
D)have no effect on the political process.
Q2) In drilling a new oil well in an existing oil field,the fact that output on existing wells is reduced means that
A)existing wells have negatively sloped MC curves.
B)existing wells and new wells are owned by different people.
C)existing wells and new wells are owned by the same people.
D)there is a discrepancy between private and social marginal costs.
Q3) In probabilistic voting models, may result in social welfare maximizing decisions.(Which phrase best completes the sentence?)
A)logrolling.
B)bribes.
C)point voting.
D)competition among candidates.
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