Introduction to Economics
Pre-Test Questions
Course Introduction
Introduction to Economics provides students with a foundational understanding of how societies allocate scarce resources to satisfy unlimited wants. The course introduces key economic concepts such as supply and demand, market equilibrium, opportunity cost, and trade-offs. Students will explore the roles of consumers, firms, and governments in different types of economies, as well as the impact of economic policy decisions on individuals and society as a whole. Through real-world examples and basic analytical tools, this course lays the groundwork for deeper study in microeconomics and macroeconomics.
Recommended Textbook
Essentials of Economics 3rd Edition by Glenn Hubbard
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Page 2
Chapter 1: Economics: Foundations and Models
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Q1) 'The distribution of income should be left to the market' is an example of a positive economic statement.
A)True
B)False
Answer: False
Q2) 'A decrease in the price of tablet computers will decrease the demand for desktop computers'.This statement is an example of a normative economic statement.
A)True
B)False
Answer: False
Q3) Which of the following is a normative economic statement?
A) The price of petrol is too high.
B) The current high price of petrol is the result of strong worldwide demand.
C) When the price of petrol rises, the quantity of petrol purchased falls.
D) When the price of petrol rises, transportation costs rise.
Answer: A
Q4) What is marginal benefit?
Answer: Marginal benefit is the additional benefit received from continuing with an activity.
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Sample Questions
Q1) Refer to Figure 2-7.Which country has a comparative advantage in the production of cashews?
A) Indonesia
B) They have equal productive abilities.
C) Pakistan
D) Neither country
Answer: C
Q2) Refer to Table 2-1.Assume Tomaso's Trattoria only produces pizzas and calzones.A combination of 24 pizzas and 30 calzones would appear
A) along Tomaso's production possibility frontier.
B) inside Tomaso's production possibility frontier.
C) outside Tomaso's production possibility frontier.
D) at the horizontal intercept of Tomaso's production possibility frontier.
Answer: A
Q3) Which of the following is a factor of production?
A) An oven in a bakery
B) A share of General Motors' stock
C) A credit card
D) A $500 Treasury bond
Answer: A
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) What is the law of supply? What does this law imply about the shape of the supply curve?
Answer: The law of supply states that,holding everything else constant,an increase in price causes an increase in quantity supplied.The positive relationship between price and quantity supplied gives rise to an upward-sloping supply curve.
Q2) Refer to Figure 3-8.The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D<sub>1</sub> and S<sub>1</sub> (point A) If the price of oranges, a substitute for apples, decreases and the wages of apple workers increase, how will the equilibrium point change?
A) The equilibrium point will move from A to E.
B) The equilibrium point will move from A to B.
C) The equilibrium point will move from A to C.
D) The equilibrium will first move from A to B, then return to A.
Answer: A
Q3) A shortage occurs when the market price is lower than the equilibrium price.
A)True
B)False
Answer: True
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Chapter 4: Market Efficiency and Market Failure
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Sample Questions
Q1) Refer to Figure 4-3.At the midpoint of the demand curve,in absolute value
A) the price elasticity coefficient is at a maximum.
B) the price elasticity coefficient is at a minimum.
C) the price elasticity coefficient is zero.
D) the price elasticity coefficient is one.
Q2) At a price of $8 per dozen,Chuy sells 40 dozen homemade tamales per week.When he raised his price to $12 per dozen,he still sold 40 dozen per week.Based on this information,the demand for his tamales is
A) perfectly elastic.
B) inelastic.
C) perfectly inelastic.
D) unit-elastic.
Q3) The price elasticity of an upward-sloping supply curve is always A) positive.
B) negative.
C) greater than one.
D) impossible to determine.
Q4) Explain the relationship between price elasticity of demand and total revenue.
Q5) What does price elasticity of demand measure? When is demand elastic? Inelastic? Unit elastic?
Page 6
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Chapter 5: The Economics of Healthcare
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Sample Questions
Q1) Refer to Figure 5-7.What is the size of the unit tax?
A) $2
B) $5
C) $7
D) $12
Q2) Refer to Table 5-4.If a minimum wage of $11.50 an hour is mandated,what is the quantity of labour supplied?
A) 40 000
B) 570 000
C) 610 000
D) 1 180 000
Q3) Producer surplus is the difference between the lowest price a firm is willing to accept for a product and the price it actually receives for the product.
A)True
B)False
Q4) A tax is efficient if it imposes a large excess burden relative to the tax revenue it raises.
A)True
B)False
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Chapter 6: Firms,the Stock Market,and Corporate Governance
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Sample Questions
Q1) Refer to Figure 6-2.Short run output is maximised at A) L<sub>1</sub>.
B) L<sub>2</sub>.
C) L<sub>3</sub>.
D) Insufficient information to determine
Q2) Average fixed cost is equal to
A) the amount of total cost that does not change as output changes in the short run.
B) fixed cost divided by the quantity of output produced.
C) fixed cost multiplied by the quantity of output produced.
D) average total cost plus average variable cost.
Q3) Which of the following are implicit costs for a typical firm?
A) Opportunity costs of capital owned and used by the firm
B) The cost of labour hired by the firm
C) The cost of utilities
D) A business licensing fee
Q4) Economic costs include implicit costs but not explicit costs.
A)True
B)False
Page 8
Q5) Describe the difference between technology and positive technological change.
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Chapter 7: Consumer Choice and Elasticity
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Sample Questions
Q1) A firm's total profit can be calculated as all of the following except A) total revenue minus total cost.
B) average profit per unit times quantity sold.
C) (price minus average total cost) times quantity sold.
D) marginal profit times quantity sold.
Q2) If a firm in a perfectly competitive industry introduces a lower-cost way of producing an existing product,the firm will be able to earn economic profits in the long run.
A)True
B)False
Q3) Letters are used to represent the terms used to answer this question: price (P),quantity of output (Q),total cost (TC)and average total cost (ATC).Which of the following equations is equal to a firm's average profit?
A) P - ATC
B) (P - ATC) × Q
C) (P × Q) - TC
D) P - TC
Q4) Why are individual buyers and sellers in perfect competition called price takers?
Q5) What is meant by the term 'long-run competitive equilibrium'?
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Chapter 8: Technology, production, and Costs
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Sample Questions
Q1) Most pharmaceutical firms selling prescription drugs continue to earn economic profits long after the patents on the prescription drugs expire because they have established a strong foothold in the market.
A)True
B)False
Q2) Refer to Figure 8-4.What is the amount of the monopoly's total cost of production?
A) $21 600
B) $17 700
C) $9340
D) $7800
Q3) If a monopolist's price is $50 at the output where marginal revenue equals marginal cost and average total cost is $43,then the average profit is $7.
A)True
B)False
Q4) Book publishers use price discrimination routinely,but the form of price discrimination they use is different to the form used by airlines and other industries.Explain.
Q5) What happens to a monopoly's revenue when it sells more units of its product?
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Chapter 9: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) An example of a barrier to entry is
A) product differentiation.
B) high profits.
C) superior technological knowledge.
D) increasing marginal costs
Q2) Refer to Table 9-4.At Victoria's profit-maximising output,
A) profit equals $2.
B) total revenue equals $24 and total cost equals $20.
C) total revenue equals $25 and total cost equals $22.
D) total revenue equals $21 and total cost equals $17.
Q3) Firms in monopolistic competition compete by selling similar,but not identical,products.
A)True
B)False
Q4) Consumers benefit from monopolistic competition by
A) being able to choose from products more closely suited to their tastes.
B) paying the lowest possible price for the product.
C) paying the same price as everyone else.
D) being able to purchase high-quality products at low prices.
Q5) What is meant by 'excess capacity'? How does it relate to consumer utility?
Page 11
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Chapter 10: Monopoly and Antitrust
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Sample Questions
Q1) The market demand curve for labour
A) is determined by adding up the quantity of labour demanded by each firm at each wage, holding constant the other variables that affect the willingness of firms to hire workers.
B) is the same as the market demand curve for the product labour produces because it is a derived demand.
C) is determined by adding up the demand for labour by each firm at each wage, holding constant the other variables that affect the willingness of firms to hire workers. D) is perfectly inelastic because there is a finite number of workers in the market for labour.
Q2) Let MP = marginal product,P = output price,and W = wage,then the equation that represents a situation where a competitive firm should lay off some workers to maximise profits is
A) P × MP = W.
B) P × MP > W.
C) P × MP < W.
D) MP × W = P.
Q3) What is a monopsony?
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Chapter 11: Monopolistic Competition and Oligopoly
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Q1) Refer to Figure 11-16.The current market equilibrium output is partly the result of overfishing.In that case,what does S<sub>1</sub> represent?
A) The private marginal benefit of harvesting salmon.
B) The social marginal benefit of harvesting salmon.
C) The private marginal cost of harvesting salmon.
D) The social marginal cost of harvesting salmon.
Q2) Assume that air pollution from a copper smelter imposes external costs on people who live near the smelter.If the victims of the pollution could not legally enforce the right of their property not to be damaged,the amount of pollution reduction
A) would be significantly less than if the owners of the smelter were legally liable for damages.
B) would be less than the amount at which the marginal benefit of pollution reduction equalled the marginal cost.
C) would be the same as it would be if the owners of the smelter were legally liable.
D) would be too small; the government would have to intervene to bring about an efficient outcome.
Q3) What is the relationship between market failure and government failure?
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Chapter 12: GDP: Measuring Total Production and Income
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Sample Questions
Q1) Which factors explain labour productivity?
A) Technological change and the quantity of labour per hour.
B) Diminishing returns and the quantity of labour per hour.
C) Diminishing returns and the quantity of capital per hour.
D) Technological change and the quantity of capital per hour.
Q2) Gross domestic product is the total market value of all
A) intermediate and final goods and services produced in a time period within a country.
B) final goods and services produced in a time period within a country.
C) goods but not services produced in a time period within a country.
D) final goods and services produced in a time period by citizens of a country, both within the country and by citizens working overseas.
Q3) Fees that Australian universities receive from overseas students studying in Australia are not included as part of GDP but are included as part of Gross National Income (GNI),as GNI includes flows of funds from overseas.
A)True
B)False
Q4) What reasons does Paul Romer give to support his claim that firms free ride on knowledge capital?
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Chapter 13: Unemployment and Inflation
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Q1) The natural rate of unemployment consists of frictional unemployment plus cyclical unemployment.
A)True
B)False
Q2) Trade union membership in Australia in 2014 comprised approximately
A) 90 per cent of the workforce.
B) 50 per cent of the workforce.
C) 15 per cent of the workforce.
D) 18 per cent of the workforce.
Q3) What effect does the payment of government unemployment benefits have on the unemployment rate?
Q4) If inflation increases unexpectedly,then
A) borrowers lose.
B) lenders lose.
C) lenders gain and borrowers gain.
D) neither borrowers nor lenders lose.
Q5) The producer price index tracks the prices firms receive for goods and services at all stages of production.
A)True
B)False
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Chapter 14: Economic Growth, the Financial System and Business Cycles
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Sample Questions
Q1) If the economy is currently at point K in Figure 14.4,which of the following could cause it to move to point N?
A) The price level in Australia rises relative to the price level in other countries.
B) The government introduces investment tax incentives.
C) The interest rate rises.
D) Household wealth declines.
Q2) Outline and explain the factors that shift the aggregate demand curve,and the short-run and long-run aggregate supply curves.
Q3) Which of the following experiences in the Australian economy led to an increase in the unemployment rate and the inflation rate?
A) The world oil shock of 1974.
B) The policy of high interest rates in the late 1980s.
C) The introduction of the Goods and Services Tax (GST) in 2000.
D) The introduction of unemployment benefit payments in 1944.
Q4) What is the relationship among the AD,SRAS and LRAS curves when the economy is in long-run equilibrium?
Q5) What is a supply shock,and why might a supply shock lead to stagflation?
Page 16
Q6) Explain how the economy moves back to full employment after a recession.
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Chapter 15: Aggregate Demand and Aggregate Supply Analysis
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Q1) Explain whether credit cards are considered to be money.
Q2) Open market operations refer to the buying and selling of ________ by the ________ to affect the level of liquidity in the economy.
A) government securities; Australian Treasury
B) government securities and private bonds; Reserve Bank of Australia
C) shares and private bonds; Australian Treasury
D) shares and government bonds; Reserve Bank of Australia
Q3) Which of the following is used by the Reserve Bank of Australia as the main measure of monetary movements in Australia?
A) M1.
B) M3.
C) Broad money.
D) Credit.
Q4) Why is the real-world deposit multiplier smaller than 1/RR,where RR is the reserve ratio?
Q5) What is the main monetary policy tool used by the Reserve Bank of Australia (RBA)and why?
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Q6) What are the main measures of money used in Australia? List them from the narrowest to the broadest measure.
Chapter 16: Money, banks, and the Federal Reserve System
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Q1) If the Reserve Bank of Australia's policy is described as contractionary,then it would
A) use open market operations to buy financial securities.
B) use open market operations to sell financial securities.
C) reduce the overnight cash rate.
D) increase the level of liquidity in the financial market.
Q2) Explain why the demand for loanable funds curve has a negative slope.
Q3) The cash rate is the interest rate
A) the Reserve Bank of Australia charges commercial banks.
B) banks charge their largest customers.
C) banks charge each other for overnight loans.
D) on a government bond or security.
Q4) Quantitative easing refers to the action of the central bank
A) to commence open market operations by buying short-term Treasury securities.
B) to add to the effect of a contractionary monetary policy using an increase in the money supply.
C) to offset the effect of a very high cash rate.
D) to buy long-term Treasury notes, when the cash rate can no longer be lowered.
Q5) Briefly discuss the effect of a fall in the cash rate on consumption.
Q6) What is inflation targeting?
Page 18
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Chapter 17: Monetary Policy
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Sample Questions
Q1) Autonomous expenditure is a type of expenditure that does not depend on A) wealth.
B) expectations.
C) interest rates.
D) income.
Q2) A federal budget deficit acts as an automatic stabiliser because
A) government tax revenues decrease during a recession.
B) unemployment benefit payments decrease during a recession.
C) tax receipts decrease during expansionary periods.
D) Medicare payments increase during expansionary periods.
Q3) If the economy were in a recession,we would expect government expenditure to be A) high and tax revenues to be high, probably leading to a budget deficit.
B) high and tax revenues to be low, probably leading to a budget deficit.
C) low and tax revenues to be low, probably leading to a budget surplus.
D) high and tax revenues to be low, probably leading to a budget surplus.
Q4) What is long-run crowding out?
Q5) Which is the largest source of federal government revenue and which is the largest single area of government expenditure in Australia?
Q6) Explain why the tax multiplier is different from the government purchases multiplier.
Page 19
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Chapter 18: Fiscal Policy
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Sample Questions
Q1) Free trade ________ living standards by ________ economic efficiency. A) raises; increasing B) lowers; decreasing C) raises; equalising D) lowers; eliminating
Q2) Refer to Table 18-6.If the actual terms of trade are 1 hat for 1.8 clocks and 150 hats are traded,how many clocks will Belize consume?
A) 150
B) 270
C) 930
D) 1200
Q3) Refer to Table 18-2.Select the statement that accurately interprets the data in the table.
A) Sarita has an absolute advantage in baking cakes and Gabriel has an absolute advantage in baking pies.
B) Sarita has an absolute advantage in baking pies and Gabriel has an absolute advantage in baking cakes.
C) Sarita has an absolute advantage in baking pies and cakes.
D) Gabriel has an absolute advantage in baking pies and cakes.
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Chapter 19: Comparative Advantage, international Trade, and Exchange Rates
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Q1) Explain where,in Australia's balance of payments,an entry would be made for each of the following:
a. a financier from Singapore buys some Australian shares
b. an Australian buys some Italian shoes in Milan,Italy
Q2) In an open economy,fiscal policy has
A) a smaller impact on aggregate demand compared to a closed economy.
B) the same impact on aggregate demand compared to a closed economy.
C) a larger impact on aggregate demand compared to a closed economy.
D) no impact on aggregate demand.
Q3) An excess supply of the dollar in exchange for yen will cause
A) no change in the exchange rate of the yen to the dollar.
B) the dollar to appreciate relative to the yen.
C) the yen to depreciate against all major currencies.
D) the dollar to decline in value relative to the yen.
Q4) When an Australian investor buys a bond issued in a foreign country,ceteris paribus,the
A) balance on the capital account decreases.
B) balance on the current account decreases.
C) balance on the financial account decreases.
D) balance of trade on goods and services decreases.
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