Introduction to Economics Study Guide Questions
Course Introduction
Introduction to Economics provides students with a foundational understanding of how individuals, businesses, and governments make choices about allocating scarce resources. The course explores the basic principles of microeconomics and macroeconomics, including supply and demand, market structures, the role of government in the economy, monetary and fiscal policies, and issues such as inflation and unemployment. Through real-world examples and case studies, students gain insights into how economic theory applies to daily life and global events, preparing them for further study in the field or informed participation in economic discussions.
Recommended Textbook Microeconomics 12th Edition by Michael Parkin
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Page 2
Chapter 1: What Is Economics
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Q1) Misty has the option of purchasing one of three products: Brand A, Brand B, or Brand C. Each costs ten dollars. If she decides that Brand A meets her needs best, then the opportunity cost of this decision is
A) Brand B plus Brand C.
B) twenty dollars.
C) Brand A.
D) Brand B or Brand C, depending on which is considered the highest-value alternative forgone.
Answer: D
Q2) If a large change in the variable measured on the x-axis is associated with a small change of the variable measured on the y-axis, the line is ________ and the slope is ________.
A) downward-sloping; large
B) downward-sloping; small
C) upward-sloping; small
D) either downward or upward-sloping; small
Answer: D
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Chapter 2: The Economic Problem
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Q1) President Obama has proposed a goal that everyone complete at least one year of formal education or training beyond high school. This policy would
A) increase human capital and increase economic growth.
B) increase physical capital and increase economic growth.
C) increase financial capital and increase economic growth.
D) eliminate opportunity costs and increase economic growth.
Answer: A
Q2) Draw a production possibilities frontier between beans and peas. Label the unattainable points, the attainable points with fully employed resources, and the attainable points with unemployed resources.
Answer: 11ea68e8_eb65_a5aa_935e_3319ea322a9f_TB5274_00 The production possibilities frontier, with the points labeled, is above. Any point beyond the production possibilities frontier is unattainable. Any point on the production possibilities frontier is attainable and resources are fully employed. Finally, any point within the production possibilities frontier is attainable and has unemployed resources.
Q3) A production point beyond the production possibilities frontier represents what?
Answer: A production point beyond the production possibilities frontier is an unattainable combination of goods and services.
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Chapter 3: Demand and Supply
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Q1) If the price per bushel of apples increased from $7.00 to $8.00 because of a poor harvest, the
A) demand for apples decreases.
B) quantity of apples demanded decreases.
C) quantity of apples supplied decreases.
D) Both answers A and B are correct.
Answer: B
Q2) Wants, as opposed to demands
A) are the unlimited desires of the consumer.
B) are the goods the consumer plans to acquire.
C) are the goods the consumer has acquired.
D) depend on the price.
Answer: A
Q3) When income increases, the demand curve for X shifts rightward and the demand curve for Y shifts leftward. These shifts mean that
A) X and Y are complements.
B) X and Y both normal goods.
C) X is an inferior good and Y is a normal good.
D) X is a normal good and Y is an inferior good.
Answer: D
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Chapter 4: Elasticity
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Q1) The income elasticity of demand is
A) always positive.
B) always negative.
C) negative for a normal good and positive for an inferior good.
D) positive for a normal good and negative for an inferior good.
Q2) If a price hike of 5 percent increases the quantity demanded of another good by 2 percent, the goods must be ________ and the cross elasticity of demand equals ________.
A) substitutes; 0.40
B) substitutes; 2.5
C) complements; 0.40
D) complements; 2.5
Q3) The quantity of new cars increases by 10 percent. If the price elasticity of demand for new cars is 1.25, the price of new cars will fall by A) 2.5 percent.
B) 8 percent.
C) 10 percent.
D) 12.5 percent.
Q4) What factors determine the magnitude of the price elasticity of demand?
Q5) What is the price elasticity of demand and how is it measured?
Page 6
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Chapter 5: Efficiency and Equity
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Q1) Joe is willing to pay $4 for his first slice of pizza and $3 for his second slice of pizza. If the price is $2, on his two slices of pizza Joe receives a total consumer surplus of
A) $4.
B) $3.
C) $2.
D) $1.
Q2) Using the "It's not fair if the result isn't fair" principle of fairness, an income tax designed to transfer wealth from the rich to the poor
A) increases efficiency and equity.
B) increases efficiency and does not affect equity. C) decreases efficiency and increases equity.
D) decreases efficiency and equity.
Q3) What are some of the potential obstacles that can prevent a market from reaching the efficient outcome? Briefly define each obstacle.
Q4) What is consumer surplus?
Q5) Why do societies face a tradeoff between the size of the economic pie and the degree of equality with which it is shared?
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Chapter 6: Government Actions in Markets
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Q1) The more elastic the demand for a good, the
A) less a sales tax lowers the price paid by buyers.
B) more a sales tax lowers the price paid by buyers.
C) less a sales tax raises the price paid by buyers.
D) more a sales tax raises the price paid by buyers.
Q2) A minimum wage set above the equilibrium wage rate has no effect.
A)True
B)False
Q3) The above figure shows the market for neckties after the government has imposed a tax. How much deadweight loss results from this tax?
A) $250.00
B) $200.00
C) $150.00
D) $50.00
Q4) Economists generally agree that increases in the minimum wage increase employment.
A)True
B)False
Q5) How does a production quota influence farm prices and output?
Q6) Explain the relationship between the incidence of a tax and elasticity.
Page 8
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Chapter 7: Global Markets in Action
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Q1) A U.S. tariff imposed on items that can be produced more cheaply abroad
A) benefits Americans by making these goods cheaper.
B) makes the goods more expensive in foreign markets.
C) creates a deadweight loss.
D) makes the world market more efficient.
Q2) A tariff hurts
A) the government by decreasing its revenue.
B) domestic producers who can't compete with cheaper imports.
C) consumers who pay more for the imported good.
D) All of the above answers are correct.
Q3) Compared to the situation before international trade, after the United States imports a good production in the United States ________ and consumption in the United States ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Q4) How does the United States attempt to compensate losers from lower trade restrictions?
Q5) Discuss reasons why we see trade restrictions. Are any of these reasons valid?
Page 9
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Chapter 8: Utility and Demand
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Q1) With respect to water and diamonds, water
A) has a higher marginal utility than diamonds.
B) has a lower marginal utility than diamonds.
C) is cheaper than diamonds because it has a lower total utility.
D) is cheaper than diamonds because it has a higher total utility.
Q2) Joe consumes pizza and movies. He is currently spending his entire income and his marginal utility of pizza is 15 and his marginal utility of movies is 10. If the price of a pizza is $10 and the price of a movie is $5, then to maximize his utility Joe should
A) increase consumption of pizza and decrease consumption of movies.
B) increase consumption of movies and decrease consumption of pizza.
C) not change his current bundle of movies and pizza.
D) increase consumption of both goods.
Q3) Julie's total utility from cheeseburgers is given in the table above. What is the marginal utility of the third cheeseburger?
A) 86
B) 28.7
C) 20
D) 14
Q4) What does "diminishing marginal utility" mean?
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Chapter 9: Possibilities, Preferences, and Choices
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Q1) In the above figure, if the budget line shifts from RT to RS, the income effect is illustrated by the move from
A) a to b.
B) A to c.
C) b to c
D) T to S.
Q2) The income effect from a fall in the price of a gallon of gasoline is shown in the above figure by the movement from
A) point A to point C.
B) point A to point B.
C) point B to point C.
D) point A to point B and then to point C.
Q3) Given the budget line in the above figure, what is the household's real income in terms of pizzas per month?
A) 5 pizzas per month
B) 4 pizzas per month
C) 3 pizzas per month
D) All of above represent the household's real income.
Q4) What is a household's real income?
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Chapter 10: Organizing Production
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Q1) The table above lists the market shares of the twenty makers of personal computers. The four-firm concentration ratio tells us that
A) the four largest firms have 20 percent of the market.
B) there are no barriers to entry in this market.
C) the firms sell differentiated products.
D) all firms sell identical products.
Q2) In the above table, if the price of labor is $10 per hour and the price of capital is $20 per unit, which method of producing 50 space crafts is economically efficient?
A) Technique W
B) Technique X
C) Technique Y
D) Technique Z
Q3) What is the difference between a four-firm concentration ratio and a Herfindahl-Hirschman Index?
Q4) One of the ways of coping with the principal-agent problem is A) giving orders.
B) providing incentive pay.
C) shirking.
D) using only short-term contracts.
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Chapter 11: Output and Costs
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Q1) The long run
A) means a long period of time, always longer than a year.
B) is a period of time in which all factors of production can be varied.
C) is different for different firms.
D) Both answers B and C are correct.
Q2) The above table gives some production and cost information for Flaming Fernando's, a restaurant that sells Fiery Frijoles. What is the average variable cost of producing 1,000 frijoles?
A) $1
B) $2
C) $3
D) More information is needed to determine the answer.
Q3) In the long run all costs are variable costs. Why?
Q4) All the decisions made by people who operate firms have one overriding objective, which is to ________.
A) make maximum attainable profit
B) maximize the firm's total revenue
C) maximize the firm's market share
D) maximize the quantity that the firm sells
Q5) What are diseconomies of scale and why might they occur?
Page 13
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Chapter 12: Perfect Competition
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Q1) In the above figure, the line represented by the "4" is the A) average fixed cost.
B) marginal revenue.
C) average total cost.
D) marginal cost.
Q2) Will a perfectly competitive firm ever produce in the short run even though it is incurring an economic loss?
Q3) In the above figure, at a price of $4 per unit, a profit-maximizing perfectly competitive firm will
A) shut down because its total revenue is less than its variable costs.
B) incur an economic loss.
C) produce 5 units.
D) Both answers A and B are correct.
Q4) In the long run, a perfectly competitive firm leaves the market if the market price is less than the firm's average total cost.
A)True
B)False
Q5) Why does the profit-maximizing level of production occur at the point where marginal revenue equals marginal cost?
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Chapter 13: Monopoly
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Q1) When a natural monopoly is regulated using an average cost pricing rule, what can you say about the firm's profit and the market's efficiency?
Q2) The monopolist always maximizes its profits by producing the amount of output that sets the marginal revenue equal to zero.
A)True
B)False
Q3) Dee's TV Repair is the only TV repair shop in a small town. Dee is a single-price monopolist. Based on the demand and cost information in the table above, what quantity of TV repairs should Dee undertake?
A) 0 per week
B) 10 per week
C) 20 per week
D) 30 per week
Q4) How does marginal revenue compare to price for a single-price monopoly?
Q5) For the single-price monopoly shown in the figure above, the deadweight loss is A) zero.
B) between $0 and $10.
C) between $10.01 and $20.
D) more than $20.01.
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Chapter 14: Monopolistic Competition
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Q1) All of the following characteristics apply to monopolistic competition EXCEPT
A) a large number of firms compete.
B) each firm produces the same identical product.
C) firms compete on product quality, price, and marketing.
D) there are no barriers to enter or exit the industry.
Q2) Agave, Six Feet Under, Globe, Silk, Sotto Sotto and Zocalo are all restaurants in Atlanta. Suppose at the profit maximizing quantity, Zocalo charges $22 for each dinner entrée, and its ATC is equal to $24. What should Zocalo do?
A) Cannot determine whether Zocalo should stay open or shut down in short run, but Zocalo should go out of business in the long run.
B) Produce in the short run and go out of business in the long run.
C) Shut down in the short run and go out of business in the long run.
D) Cannot determine whether Zocalo's should stay open or shut down in the short or long run.
Q3) In the long-run equilibrium in monopolistic competition, price equals marginal cost.
A)True B)False
Q4) What is a firm's markup? What does it show?
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Chapter 15: Oligopoly
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Q1) Suppose the Herfindahl-Hirschman Index (HHI) in the market for chocolate is 3,200. Two companies want to merge. The FTC definitely will challenge the merger if it increases the HHI by more than
A) 150 points.
B) 100 points.
C) 40 points.
D) 200 points.
Q2) A monopolistically competitive firm is like an oligopolistic firm insofar as A) both face perfectly elastic demand.
B) both can earn an economic profit in the long run.
C) both have MR curves that lie beneath their demand curves.
D) neither is protected by high barriers to entry.
Q3) The ABC Nail Company has entered into a collusive agreement with the other firm in the industry, the DC Nail Company. What occurs in the nail industry if ABC decides to cheat on the agreement?
A) ABC lowers the price of its nails.
B) The total industry output increases.
C) The total profits in the nail industry will decrease.
D) All of the above answers are correct.
Q4) What is the Sherman Act and what is its purpose?
Page 17
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Chapter 16: Public Choices, Public Goods, and Healthcare
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Q1) Some years ago The Wall Street Journal reported that the government of Thailand "plans to launch a chain of more than 3,000 Thai restaurants world-wide over the next five years, with the largest number, more than 1,000, slated for the United States." The Thai government will have a 30 percent minority stake in the restaurants and the rest will be given to Thai owners. The country's deputy commerce minister explains that the government will play an active role in drawing up menus, making sure that genuine Thai food is served and ensuring that 70 percent of supplies for the restaurants are imported from Thailand. Because the Thai government will be part owner of these restaurants, are these restaurants public goods?
Q2) Michigan Radio is the state's most listened-to public radio service, attracting approximately 400,000 listeners each week. The on-air fundraiser, which ran during October 2010, generated over 7400 pledges from donors. The money raised helps pay for programming costs at the station, with membership support being the single largest source of income. The 392,600 listeners who did not call and donate can be classified as what?
A) free riders
B) marginal beneficiaries
C) rival consumers
D) rationally ignorant
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Chapter 17: Externalities
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Q1) The above figure shows the marginal private cost curve, marginal social cost curve, and marginal social benefit curve for cod, a common resource. The efficient outcome is
A) 0 tons per week
B) 300 tons per week
C) 400 tons per week
D) None of the above answers is correct.
Q2) In the figure above, if no one owns the lake, what is the deadweight loss in the market?
A) $2,400 per month
B) $1,800 per month
C) $3,600 per month
D) zero
Q3) For a common resource, the marginal private benefit of the resource is greater than the marginal social benefit.
A)True
B)False
Q4) Discuss the difference between a private cost and a social cost.
Q5) What are ITQs? Where are they used?
Q6) What is the tragedy of the commons?
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Chapter 18: Markets for Factors of Production
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Q1) The above table has the total product schedule for Joe's Barber Shop. Joe charges $6 per haircut. If the wage rate falls from $24 per worker to $12 per worker, the quantity of labor hired ________ and the new number of workers employed is ________.
A) increases; 2
B) decreases; 2
C) increases; 5
D) increase; 3
Q2) The change in total revenue that results from employing one more unit of labor is called the
A) wage rate.
B) value of marginal product of labor.
C) average revenue.
D) marginal product of labor.
Q3) The figure above shows a labor market. If this labor market is perfectly competitive, employment is
A) 0 hours per week.
B) 50 hours per week.
C) 100 hours per week.
D) 150 hours per week.
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Chapter 19: Economic Inequality
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Q1) The "big tradeoff" refers to the tradeoff between
A) work and leisure.
B) equity and efficiency.
C) public goods and private goods.
D) taxes and transfers.
Q2) With respect to redistribution, one reason "The Big Tradeoff" exists is because
A) government programs employ resources that could have been productive elsewhere.
B) government policymakers must choose between funding the various programs.
C) government programs only employ resources that had no value to society otherwise.
D) government programs only pay workers their opportunity cost.
Q3) Measured distributions of wealth that do not consider the role of human capital
A) are more equal than the distribution of income.
B) overstate the inequality in wealth distribution.
C) are more equal than the distribution of consumption.
D) understate the inequality in wealth distribution.
Q4) How do income and wealth change over a person's lifetime? How does this affect the distribution of income at a point in time?
Q5) What is a Lorenz curve and what does it show?
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Chapter 20: Uncertainty and Information
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Q1) Gunnar can work as a campus security officer at a guaranteed salary of $20,000 per year or as a real estate agent. If Gunnar works as a real estate agent, there is a 50 percent chance that he will earn $10,000 per year and a 50 percent chance that he will earn $30,000 per year. Based on the above table, to maximize his expected utility, Gunnar will
A) choose to work as a campus security officer.
B) choose to work as a real estate agent.
C) be indifferent between being a campus security officer and being a real estate agent.
D) It is impossible to tell which job he would prefer without additional information.
Q2) You took a job as a salesperson in an insurance company with the knowledge that you have 0.5 chance of making $2,000 a month or $3,000 a month. How much will you make each month?
A) definitely $2,500
B) definitely $2,000
C) definitely $3,000
D) either $2,000 or $3,000
Q3) Explain the concept of moral hazard. Give an example.
Q4) What is private information and what problems does it create?
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