Economics Principles
Test Bank
Course Introduction
Economics Principles introduces students to the fundamental concepts and tools used in the study of economics, focusing on both microeconomic and macroeconomic perspectives. The course covers core topics such as scarcity, opportunity cost, supply and demand, market equilibrium, consumer and producer behavior, as well as the roles of government and market structures. Additionally, it explores broader macroeconomic issues including national income, inflation, unemployment, and fiscal and monetary policy. Through real-world examples and analytical frameworks, students gain a foundational understanding of how individuals, businesses, and societies make choices about allocating limited resources.
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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12 Verified Questions
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Sample Questions
Q1) If utility is given by \(U ( x , y ) = \sqrt { x y }\) ,then the person's MRS at the point x = 5,y = 2 is given by
A)0.4.
B)1.0.
C)2.5.
D)5.0.
Answer: A
Q2) 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
Q3) 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
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Chapter 2: Utility Maximization and Choice
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Sample Questions
Q1) If utility is given by \(U ( x , y ) = x ^ { 2 } + y ^ { 2 }\) and p<sub>x</sub> = 2,p<sub>y</sub> = 3,I = 50,this person will choose A)(10,10).
B)(15,6.67).
C)(25,0).
D)(0,50/3).
Q2) Suppose that at current consumption levels an individual's marginal utility of consuming an extra hot dog is 10 whereas the marginal utility of consuming an extra soft drink is 2.Then the MRS (of soft drinks for hot dogs)-- that is,the number of hot dogs the individual is willing to give up to get one more soft drink-is A)5.
B)2.
C)1/2.
D)1/5.
Q3) If the price of x falls,the budget constraint
A)shifts outward in a parallel fashion.
B)shifts inward in a parallel fashion.
C)rotates outward about the x?intercept.
D)rotates outward about the y?intercept.
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Page 4
Chapter 3: Income and Substitution Effects
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Sample Questions
Q1) If income doubles and the quantity demanded of good x more than doubles,then good x can be described as a
A)substitute good.
B)complement good.
C)necessity.
D)luxury.
Q2) Demand functions are "homogeneous of degree zero in all prices and income." This means
A)a proportional increase in all prices and income will leave quantities demanded unchanged.
B)a doubling of all prices will not alter consumption decisions.
C)prices directly enter individuals' utility functions.
D)an increase in income will cause all quantities demanded to increase proportionately.
Q3) The price elasticity of demand for a horizontal demand curve is A)0.
B)-1.
C)1.
D)-infinity.
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Chapter 4: Demand Relationships Among Goods
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Sample Questions
Q1) "Hicks' Second Law of Demand" states that "most" goods must be
A)gross substitutes.
B)gross complements.
C)net substitutes.
D)net complements.
Q2) 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.
Q3) Homogeneity of the demand function is shown by:
A)\(e _ { x , p _ { x } } + e _ { x , p _ { y } } + e _ { \chi , 1 } = 0\) .
B)\(e _ { x , p _ {
C)\(s _ { x } e _
D)\(s _ { x } e _ { x , I } + s _ { y } e _ { y , I } = l\) .
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6
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) Which of the following utility functions exhibits constant relative risk aversion?
A)U(W)= W.
B) \(U ( W ) = W - 0.5 W ^ { 2 }\)
C)U(W)= ln W.
D)U(W)= \(- e ^ { - W }\) .
Q3) Risk aversion is best explained by A)timidness.
B)increasing marginal utility of wealth.
C)constant marginal utility of wealth.
D)decreasing marginal utility of wealth.
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Chapter 6: Strategy and Game Theory
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Sample Questions
Q1) 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.
Q2) 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.
Q3) The difference between a Nash equilibrium strategy and a dominant strategy is A)nothing; they are synonymous.
B)the former is stable but the latter is unstable.
C)the former must be a best response to all others' strategy profiles,whereas the latter need only be a best response to others' Nash equilibrium strategies.
D)the former need only be a best response to others' Nash equilibrium strategies,whereas the latter must be a best response to all others' strategy profiles.
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Chapter 7: Production Functions
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Sample Questions
Q1) Which of the following production functions exhibits a constant elasticity of substitution?
A)q = 3k + 2l.
B) \(q = k ^ { 0~5 } l ^ { 0~5 }\) .
C) \(q = l - \frac { l } { k } - \frac { l } { l }\) .
D)All of these production functions have a constant elasticity of substitution.
Q2) A production function may exhibit
A)constant returns to scale and diminishing marginal productivities to all inputs.
B)constant returns to scale and diminishing marginal productivities to all but one input,but at least one input must have a constant marginal productivity.
C)constant returns to scale and diminishing marginal productivity to at most one input. D)constant returns to scale and diminishing marginal productivities for no inputs.
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Chapter 8: Cost Functions
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Sample Questions
Q1) The firm's expansion path records
A)profit-maximizing output choices for every possible price.
B)cost-minimizing input choices for all possible output levels for when input rental rates expand along with production.
C)cost-minimizing input choices for all possible output levels for a fixed set of input prices.
D)cost-minimizing input choices for profit-maximizing output levels.
Q2) The Cobb-Douglas production function \(q = k ^ { ~.5 } l ^ {~ .75 }\) yields the cost function C = (where B is a constant).
A) \(B q v ^ { 1 / 2 } w ^ { 3 / 4 }\) .
B) \(B q ^ { 5 / 4 }~ v ^ { 1 / 2 } ~w ^ { 3 / 4 }\) .
C) \(B q ^ { 4 / 5 } ~~v ^ { I / 2 } ~~w ^ { 3/4 }\) .
D) \(B q ^ { 4 / 5 } ~~v ^ { 2 / 5 } ~~w ^ { 3 / 5 }\) .
Q3) A linear total cost curve which passes through the origin implies that
A)average cost is constant and marginal cost is variable.
B)average cost is variable and marginal cost is constant.
C)average and marginal costs are constant and equal.
D)We need more information to answer question.
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Chapter 9: Profit Maximization
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Sample Questions
Q1) Short-run producer surplus can be caluculated by integration as (where q* is the firm's profit maximizing output level and MC(q)is its marginal cost function)
A) \(\int _ { 0 } ^ { q ^ { * } } M C ( q ) d q - p\) .
B) \(\int _ { 0 } ^ { q ^ { * } } [ M C ( q ) - p q ] d q\) .
C) \(\int _ { 0 } ^ { q ^ { * } } p q - M C ( q ) d q\) .
D) \(\int _ { 0 } ^ { q ^ { * } } [ p - M C ( q ) ] d q\) .
Q2) A firm's demand for labor is known as a "derived demand" because
A)the firm gains utility from hiring more labor.
B)the amount of labor hired depends upon how much output the firm can sell.
C)the wage rate paid to workers is derived from the market for labor.
D)it is derived from the demand for capital.
Q3) A profit-maximizing firm will never hire that quantity of a factor of production for which that factor has an increasing marginal productivity because
A)it would not be maximizing output.
B)it would not be maximizing the productivity of labor.
C)it would not be minimizing costs.
D)it would not be maximizing profits.
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Chapter 10: The Partial Equilibrium Competitive Model
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Sample Questions
Q1) An increase in the price of good x will be accompanied by
A)a shift in the market demand curve for good x.
B)a shift in the market demand curve for good y (a substitute for good x).
C)a movement along the market demand curve for good x.
D)a shift in the market demand curve for good y (a substitute for good x)and a movement along the market demand curve for good x.
Q2) If quantity supplied is either greater or less than the equilibrium quantity,then all of the following are true except:
A)total loss of surplus will depend on the shape of the demand and supply curves.
B)the resulting loss of consumer surplus will depend on the price of the good.
C)total loss of surplus will depend on the price of the good.
D)there will be an inefficient allocation of resources.
Q3) Price controls
A)are always popular with consumers because they lower prices.
B)create shortages.
C)increase producer surplus because firms can now sell a greater quantity of a good at a lower price.
D)are necessary to preserve equity.
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Chapter 11: General Equilibrium and Welfare
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Sample Questions
Q1) Suppose two goods (x and y )are being produced efficiently and that the production of x is always more labor intensive than the production of y.Production depends only on two factors (capital and labor); these may be smoothly substituted for each other.The total quantities of these inputs are fixed.An increase in the production of x and a decrease in the production of y will
A)increase the capital-labor ratio in each firm.
B)decrease the capital-labor ratio in each firm.
C)leave the capital-labor ratio for each firm unchanged.
D)increase the capital-labor ratio in y production and decrease the capital-labor ratio in x production.
Q2) The "Classical Dichotomy" refers to
A)a distinction between "value in use" and "value in exchange."
B)separate theories of demand and supply.
C)the possibility of Giffen's Paradox
D)determination of relative prices independent of the nominal price level.
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Chapter 12: Monopoly
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Sample Questions
Q1) A monopoly's economic profits are represented by
A)(price minus marginal cost)times number of units sold.
B)(price minus average cost)times number of units sold.
C)(marginal revenue minus price)times number of units sold.
D)(marginal cost minus price)times number of units sold.
Q2) The "deadweight loss" from a monopoly refers to
A)the portion of a monopolist's profits that are above the competitive profit level.
B)the increase in price due to the monopolization of a market.
C)the inefficient use of factors of production by a monopoly.
D)the loss of consumer surplus due to the monopolization of a market that is not transferred to another economic actor.
Q3) The supply curve for a monopoly is given by
A)the firm's marginal cost curve above the average variable cost curve.
B)the one point on the demand curve that corresponds to the quantity for which price is equal to MC.
C)the one point on the demand curve that corresponds to the quantity for which MR equals MC.
D)the entire demand curve above the point where price is equal to average cost.
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Chapter 13: Imperfect Competition
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Sample Questions
Q1) The more a firm invests in a new production technology,the lower its marginal costs.Which of the following scenarios involving this incumbent firm and a potential entrant makes the least economic sense?
A)The incumbent overinvests to deter entry when this investment is observable to the entrant.
B)The incumbent overinvests to deter entry when this investment is unobservable to the entrant.
C)The incumbent underinvests to accommodate entry when this investment is observable and they compete in prices.
D)The incumbent overinvests to accommodate entry when this investment is observable and they compete in quantities.
Q2) A profit-maximizing firm should spend an additional dollar on advertising so long as this expenditure results in more than one dollar of:
A)additional sales.
B)reduced costs.
C)increased profits.
D)demand.
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Chapter 14: Labor Markets
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Sample Questions
Q1) Which of the following strategies that a union might pursue would result in the lowest wage rate for its members?
A)Maximizing the total wage bill.
B)Maximizing employment of its members.
C)Restricting union membership severely.
D)Maximizing the total economic rent obtained by its members.
Q2) "Compensating wage differentials" arise because
A)workers possess different skills.
B)workers prefer some jobs to others.
C)firms pay higher wages for workers with higher marginal productivities.
D)firms discriminate in hiring.
Q3) If an individual is maximizing his or her utility,his or her marginal rate of substitution of leisure hours for consumption will be
A)equal to one divided by his or her wage rate.
B)greater than one divided by his or her wage rate.
C)equal to his or her wage rate.
D)less than his or her wage rate.
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16
Chapter 15: Capital and Time
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Sample Questions
Q1) The present value of $1 payable in the future decreases
A)the higher r is and the sooner it is to be paid.
B)the lower r is and the sooner it is to be paid.
C)the higher r is and the longer time until it is paid.
D)the lower r is and the longer time until it is paid.
Q2) The annual rental rate for a machine is
A)the yearly depreciation and maintenance costs for the machine.
B)the yearly interest costs associated with owning the machine.
C)the initial purchase price of the machine divided by the number of years the machine is expected to last.
D)the sum of the yearly depreciation,maintenance,and interest costs associated with owning the machine.
Q3) Under competitive conditions the relative price of a finite resource would be expected to
A)rise at an increasing rate.
B)rise at a rate equal to the real interest rate.
C)rise at a rate equal to the nominal interest rate.
D)rise at a rate determined by demand conditions.
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17
Chapter 16: Asymmetric Information
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Sample Questions
Q1) What tradeoffs are present in the moral-hazard-in-insurance problem?
A)Full insurance benefits the risk-averse customer but gives him excessive incentives to take care to avoid harm.
B)Full insurance benefits the risk-averse customer but provides him with no incentive to take care to avoid harm.
C)Full insurance benefits the risk-averse consumers but does not allow the insurer to extract as much surplus from all types.
D)Full insurance is beneficial for all consumers,but if sold at an actuarially fair price for the population will draw only the riskiest types.
Q2) What is the term for the contract that maximizes the principal's payoff subject to the constraint that the principal lacks the agent's private information?
A)First best.
B)Second best.
C)Third best.
D)Pareto optimum.
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18
Chapter 17: Externalities and Public Goods
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Sample Questions
Q1) If bargaining is costless,the assignment of property rights for an externality
A)has no impact on the possibility of an efficient outcome and no distributional impact.
B)has no impact on the possibility of an efficient outcome but does have a distributional impact.
C)does have an impact on the possibility of an efficient outcome but has no distributional impact.
D)does have an impact on the possibility of an efficient outcome and does have a distributional impact.
Q2) Each of the following provides incentives to reduce a negative externality except
A)merger with affected firms.
B)subsidizing consumption of the good being produced.
C)bargaining among firms.
D)taxation of the externality.
Q3) Some economists have hypothesized that government bureaucracies seek to maximize
A)social well being.
B)gross national product.
C)fringe benefits for bureaucrats.
D)their own budgets.
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Page 19