Introduction to Economics Practice Questions - 2448 Verified Questions

Introduction to Economics Practice Questions

Course Introduction

Introduction to Economics provides students with a foundational understanding of key economic concepts, principles, and models that shape individual and societal decision-making. The course explores the basics of supply and demand, market structures, consumer behavior, and the role of government in the economy. Students will examine how resources are allocated, the functioning of different types of markets, and the factors influencing economic growth and stability. By integrating real-world examples and current events, this course fosters critical thinking about global economic issues and prepares students for further study in economics and related fields.

Recommended Textbook Microeconomics 8th Edition by

Jeffrey M. Perloff

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20 Chapters

2448 Verified Questions

2448 Flashcards

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Page 2

Chapter 1: Introduction

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Sample Questions

Q1) Which of the following is an example of a positive statement?

A) Prices determine what goods and services are produced in a market economy.

B) The government of the Soviet Union determined the three fundamental questions of microeconomics (i.e., what is produced, how it is produced, who receives the product).

C) The production of goods and services should be determined by market prices.

D) A and B

Answer: D

Q2) The price of a good is

A) always equal to the cost of producing the good.

B) never affected by the number of buyers and sellers.

C) usually determined in a market.

D) None of the above.

Answer: C

Q3) Economic models are most often tested

A) using computer simulations.

B) using data from the distant past.

C) using data from the real world.

D) using logic alone.

Answer: C

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Page 3

Chapter 2: Supply and Demand

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Sample Questions

Q1) Assume that the market for annual physical checkups is in equilibrium,and not everyone gets an annual physical checkup.What is the effect on price and quantity if a government regulation fixes price at the current level and requires everyone to get an annual physical checkup?

Answer: 11ea66c3_56fc_4338_a97f_3ffe472019a4_TB6808_00 See the above figure.Requiring everyone to get a physical would shift the demand curve rightward.With price remaining fixed,a shortage will result.

Q2) Holding all other factors constant,consumers demand more of a good the A) higher its price.

B) lower its price.

C) steeper the downward slope of the demand curve.

D) steeper the upward slope of the demand curve.

Answer: B

Q3) Consumer groups tend to lobby for A) price floors.

B) price ceilings. C) quantity quotas.

D) taxes.

Answer: B

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Page 4

Chapter 3: Applying the Supply-And-Demand Model

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Sample Questions

Q1) If a linear supply curve has a zero intercept,the elasticity of supply is always unitary.

A)True

B)False

Answer: True

Q2) Government revenue from an excise tax of a given amount is greater when demand is relatively inelastic than when it is relatively elastic.

A)True

B)False

Answer: True

Q3) As the demand for corn increases to provide input for ethanol production,what is expected to happen to the price elasticity of corn supply?

A) It will decrease.

B) It will become zero.

C) It will increase.

D) It will not change.

Answer: A

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Page 5

Chapter 4: Consumer Choice

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Sample Questions

Q1) An interior solution to a consumer's utility maximization problem implies

A) consuming a positive amount of all goods.

B) consuming negative amounts of all goods.

C) consuming less than optimal amounts of all goods.

D) consuming more than an optimal amount of at least one good.

Q2) If the utility for two goods "x" and "y" is measured as U = x + y,then it can be concluded that

A) "x" and "y" are perfect substitutes.

B) "x" and "y" are perfect complements.

C) "x" and "y" are both bads.

D) the indifference curves on the x,y graph will be upward sloping.

Q3) By selecting a bundle where MRS = MRT,the consumer is saying

A) "I value my last unit of each good equally."

B) "I am willing to trade one good for the other at the same rate that I am required to do so."

C) "I will equate the amounts spent on all goods consumed."

D) All of the above.

Q4) Explain the difference between the marginal rate of substitution and the marginal rate of transformation.

Q5) What is the difference between ordinal and cardinal measurement?

Page 6

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Chapter 5: Applying Consumer Theory

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Sample Questions

Q1) In the case of a normal good,

A) demand curves always slope downward.

B) the income effect and substitution effect are in the same direction.

C) the Engel curve slopes upward.

D) All of the above.

Q2) The real wage in Fantasyland has been constant since 1950.The nominal wage in 2015 was $100,and the Consumer Price Index (CPI)was 200 in 2015.What was the nominal wage in 2002 if the CPI was 50 in 2002?

A) Nominal wage = $25

B) Nominal wage = $400

C) Nominal wage = $100

D) Nominal wage = $250

Q3) Why would you expect the demand for diamond jewelry to fall faster than plastic,costume jewelry when all incomes fall?

Q4) When income increases by 1%,the quantity demanded of a good decreases by 2%.What is the income elasticity of the good? Is the good normal or inferior? Why?

Q5) An increase in unearned income always creates a disincentive to work.

A)True

B)False

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Chapter 6: Firms and Production

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Sample Questions

Q1) The above figure shows the short-run production function for Albert's Pretzels.The average productivity of labor when the firm employs five workers is

A) 6.

B) 8.

C) 24.

D) not known from the information provided.

Q2) Only corporations benefit from limited liability.

A)True

B)False

Q3) The Marginal Product of Labor is

A) the change in total product resulting from an extra unit of labor, holding other factors constant.

B) the ratio of output to the number of workers used to produce that output.

C) the amount of output that can be produced by a given amount of labor.

D) equal to the marginal product of labor when the average product is increasing.

Q4) Show that increasing returns to scale can co-exist with diminishing marginal productivity.

Q5) What do we mean by efficient production?

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Chapter 7: Costs

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Sample Questions

Q1) Suppose the production function is q = 12 L^0.25K^0.75.Determine the long-run capital-to-labor ratio (K/L)if the cost a unit of capital (r)is three times the cost of a unit of labor (w).

Q2) A production possibilities frontier that is bowed-inward implies

A) economies of scale.

B) diseconomies of scope.

C) economies of scope.

D) no economies of scope.

Q3) Explain the difference between fixed costs in the short run and fixed costs in the long run.

Q4) In the short run,a firm 's output level is 10 units.Its total cost is $4000 and its average fixed cost is $100.What is this firm's average variable cost (AVC)of producing 10 units?

A) AVC = $250

B) AVC = $275

C) AVC = $300

D) AVC = $400

Q5) "If the wage rate paid to one form of labor is twice the cost of another form of labor,the first type of labor must be twice as productive." Comment.

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Chapter 8: Competitive Firms and Markets

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Sample Questions

Q1) In the absence of any government regulation on price,if a firm has no power to set price on its own,one can safely conclude

A) the demand curve for the firm's product is horizontal.

B) there aren't many firms in the industry.

C) the market is in long-run equilibrium.

D) the firms in this industry are not profitable.

Q2) A firm should always shut down if its revenue is

A) declining.

B) less than its average fixed costs.

C) less than its total costs.

D) less than its avoidable costs.

Q3) Under what circumstances will the residual supply curve for a country be upward sloping?

A) when it does not import any of the good from the rest of the world

B) when it imports a small portion of the rest of the world's supply of the good

C) when it imports a large portion of the rest of the world's supply of the good

D) Either A or B

Q4) A competitive firm's supply curve is identical to its marginal cost curve.

A)True

B)False

Page 10

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Chapter 9: Applying the Competitive Model

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Sample Questions

Q1) The above figure shows the market for rice in Japan.S represents the domestic supply curve,and the horizontal line at P =1 represents the world supply curve.If imported rice is banned,the loss in social welfare is

A) a + b + c + d + e.

B) a.

C) c + e.

D) i.

Q2) In a competitive market,the demand and supply curves are Q = 12 - P and Q = 5P,respectively.If output is fixed at Q = 5,what is the amount of the resulting deadweight loss?

A) 0

B) 5

C) 10

D) It cannot be determined without more information.

Q3) Figure 9.6 shows an individual's demand curve for time per month spent telecommunicating while driving (talking on the car phone.)A car phone is useless except for talking with somebody who is not in the car.If calls are priced at ten cents per minute,what is the consumer surplus derived from talking? What is the most this person would pay for the car phone? Explain.

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Page 11

Chapter 10: General Equilibrium and Economic Welfare

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Sample Questions

Q1) Explain why Robin Hood's practice of stealing from the rich to give to the poor is never Pareto efficient.

Q2) Any policy change that results in a Pareto-superior allocation

A) will increase welfare under certain conditions.

B) must increase welfare.

C) will leave welfare unchanged.

D) will have an unpredictable effect on welfare.

Q3) The end of slavery in the United States represented

A) a large wealth transfer from the South to the North.

B) a large wealth transfer from the future to the present.

C) a large wealth transfer from Southern slave-holders to newly freed slaves.

D) a nominal wealth transfer from Southern slave-holders to newly freed slaves.

Q4) When two people trade their initial endowments to a point on the contract curve,only the level of the endowments will determine the new allocation.

A)True

B)False

Q5) The above figure shows a production possibility frontier for a society with two members,Al and Bruce.If point "a" is the efficient product mix,draw a possible Edgeworth box and indifference curves.

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Chapter 11: Monopoly

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Sample Questions

Q1) The above figure shows the demand and cost curves facing a monopoly.In order to maximize its profit,the monopolist produces ________ less units than the competitive market level of output.

A) 15

B) 25

C) 50

D) 75

Q2) The less elastic is the demand for a firm's product,the greater is that firm's market power.

A)True

B)False

Q3) If a firm is able to influence its price,

A) it is a monopoly.

B) it has constant marginal revenue.

C) it sells its output at a constant price.

D) it faces a downward-sloping demand curve.

Q4) Forcing a natural monopoly to charge P = MC will not work.

A)True

B)False

Q5) Why is the monopoly total welfare lower than the competitive total welfare?

Page 13

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Chapter 12: Pricing and Advertising

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Sample Questions

Q1) If a monopoly can advertise and as a result the demand curve will become more inelastic,the monopoly

A) should always engage in the advertising.

B) should engage in the advertising until the demand curve becomes more elastic.

C) will earn higher gross profit if it advertises.

D) None of the above.

Q2) Assume a firm organizes all individuals by their willingness to pay (least to most).If the firm starts to perfectly price discriminate,what is likely to happen?

A) Consumers start to arbitrage amongst themselves.

B) The firm's profits will be maximized.

C) The firm's costs will be minimized.

D) The firm starts to arbitrage with consumers.

Q3) If a market is controlled by a perfect-price-discriminating monopoly,then

A) a deadweight loss is generated.

B) there is no consumer surplus.

C) consumer surplus is the same as under perfect competition.

D) output is less than that of a single-price monopoly.

Q4) Explain why a firm can earn more profit by price discrimination than from setting a uniform price.

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Chapter 13: Oligopoly and Monopolistic Competition

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Sample Questions

Q1) The above figure shows the reaction functions for two pizza shops in a small isolated down.The Stackelberg leader will produce

A) 25 pizzas.

B) 50 pizzas.

C) 66.7 pizzas.

D) 100 pizzas.

Q2) The above figure shows the reaction functions for two pizza shops in a small isolated town.The perfect competitive outcome is that

A) each firm produces 40 pizzas.

B) each firm produces 50 pizzas.

C) the firms split the production of 200 pizzas.

D) each firm produces 200 pizzas.

Q3) The number of firms in a monopolistically competitive market will be smaller if A) the market demand curve shifts rightward.

B) the minimum efficient scale is lower.

C) fixed costs are smaller.

D) fixed costs are larger.

Q4) Explain why the intersection of the best-response functions is the Cournot equilibrium.

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Chapter 14: Game Theory

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Sample Questions

Q1) The Internet auction site eBay is an example of a(n)

A) Sealed Bid Auction.

B) Second-Price Auction.

C) English Auction.

D) Both A and B.

Q2) Laboratory experiments of the ultimatum games revealed that

A) participants' actions were always part of a Nash equilibrium.

B) participants always split the money equally.

C) the first mover always kept the smaller share.

D) the first mover always kept the largest share.

Q3) If the payoff to the United States to pursuing nuclear weapons is 100 if the USSR does not pursue nuclear weapons and 50 if they do,and the payoff to the USSR to pursuing nuclear weapons is 80 if the USA doesn't pursue nuclear weapons and 30 if they do,what is the non-cooperative equilibrium?

A) The USA pursues nuclear weapons, the USSR does not.

B) The USA pursues nuclear weapons, the USSR pursues nuclear weapons.

C) The USA does not pursue nuclear weapons, the USSR does not pursue nuclear weapons.

D) The USA does not pursue nuclear weapons, the USSR does pursue nuclear weapons.

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Page 16

Chapter 15: Factor Markets

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Sample Questions

Q1) If a firm buys some labor in a competitive market and some labor as a monopsonist,the firm is most likely to

A) pay the same wage to both types of labor.

B) pay a lower wage to the labor purchased in the competitive market.

C) pay a higher wage to the labor purchased in the competitive market.

D) not exercise any of its monopsony power.

Q2) The steeper the labor supply curve,

A) the higher the wage the monopsonist pays.

B) the lower the wage the monopsonist pays.

C) the smaller the difference between the wage and the marginal expenditure on labor. D) the better off workers are.

Q3) Suppose a monopoly producer is also a monopsonist in the labor market.Demand for the output is p = 100 - Q.The production function is Q = L,and the labor supply curve is w = 10 + L.How much labor does the firm hire? What wage is paid?

Q4) Explain why a decrease in an input price causes less of an increase in the quantity demanded of the factor if we assumed that product price remained constant.

Q5) Why is the short-run demand curve for labor downward sloping?

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Page 17

Chapter 16: Interest Rates, Investments, and Capital Markets

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Sample Questions

Q1) Government borrowing may crowd out borrowing by private interests because A) funds are not available at any interest rate.

B) the equilibrium interest rate increases.

C) the supply curve shifts to the left.

D) None of the above.

Q2) If an asset has a present value of $50 and appreciates at an interest rate of 4%,what is the asset's future value in 47 compounding periods?

A) Approximately $400

B) Approximately $316

C) Approximately $137

D) Approximately $1143

Q3) Interest rates are positive because inflation makes purchases more expensive in the future than today.

A)True

B)False

Q4) You sign a contract to pay $1000 next year for the refrigerator you bought today.The rate of inflation is 10% and the real interest rate is 7%.Alternatively,you could pay $875 today.What should you do to save the most money?

Q5) In an economy with no inflation,explain why interest rates are positive.

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Chapter 17: Uncertainty

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Sample Questions

Q1) Jill's utility from an additional dollar increases more when she has $400 than when she has $200.From this,we can conclude that Jill

A) has an increasing marginal utility of wealth.

B) has a decreasing marginal utility of wealth.

C) is risk neutral.

D) has a negative marginal utility of wealth.

Q2) The above figure shows Bob's utility function.He currently has $50 and is considering investing all of it in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0.Bob will

A) definitely make the investment because the expected utility of the investment exceeds the utility of his $50.

B) definitely not make the investment because the expected utility of the investment is less than the utility of his $50.

C) definitely make the investment because he is indifferent between having $50 and having an investment with an expected value of $50.

D) definitely not make the investment because he is indifferent between having $50 and having an investment with an expected value of $50.

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Page 19

Chapter 18: Externalities, Open-Access, and Public Goods

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Sample Questions

Q1) Suppose two neighbors share a park.One neighbor,Al,leaves trash in the park.This bothers the other neighbor,Bert.According to Coase's Theorem,the optimal level of trash in the park can be achieved if

A) someone is assigned property rights to the park.

B) government limits the use of the park.

C) nobody catches Al leaving the trash.

D) Bert moves.

Q2) The above figure shows the payoff matrix for two firms.A chemical firm must choose between a low level of production which yields one ton of pollution into a nearby lake and a high level of production which yields two tons of pollution into the nearby lake.A private beach on the lake must decide whether to operate or not.Increased pollution reduces the number of people who wish to visit the beach.Determine the Nash equilibrium without property rights.

Q3) A specific tax in a monopoly market equal to the marginal harm of pollution

A) will increase welfare.

B) will decrease welfare.

C) will leave welfare unchanged.

D) All of the above are possible.

Q4) Explain why the optimal amount of pollution is often not zero.

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Chapter 19: Asymmetric Information

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Sample Questions

Q1) If a person attends a public college and is not hired because the boss went to a private college,this might be an example of

A) statistical discrimination.

B) racial discrimination.

C) screening.

D) moral hazard.

Q2) The minor league system in professional baseball can be thought of as

A) a screening tool.

B) a signaling tool.

C) a form of statistical discrimination.

D) being used for the wrong reasons.

Q3) The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.What is the maximum share of lemons that will still allow for all cars being sold?

A) 12%

B) 16%

C) 20%

D) 23%

Q4) Explain how product liability laws can reduce adverse selection.

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Chapter 20: Contracts and Moral Hazards

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Sample Questions

Q1) Monitoring is often used by firms in an attempt to decrease A) shirking.

B) piece rates.

C) adverse selection.

D) signaling.

Q2) A good salesperson can sell $500,000 worth of goods,while a poor one can sell only $100,000 worth of goods.Job applicants know if they are good or bad,but the firm does not.A firm will offer job applicants a choice between a fixed salary of $10,000 or a 10% commission.Assuming risk-neutral salespersons and no opportunistic behavior,can the firm determine a prospective good salesperson from a poor one?

A) Yes, because a poor salesperson will always choose the fixed salary.

B) Yes, because a good salesperson will always choose the fixed salary.

C) No, because a poor salesperson is indifferent between the two contracts.

D) No, because a good salesperson is indifferent between the two contracts.

Q3) Wage reduction policies are less common than layoffs because

A) workers never prefer wage reduction policies.

B) workers always trust the firm to tell the truth.

C) of asymmetric information.

D) of adverse selection problems.

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