Principles of Economics
Chapter Exam Questions
Course Introduction
Principles of Economics introduces students to the fundamental concepts and analytical tools used to understand how individuals, firms, and societies make choices regarding the allocation of limited resources. The course covers key topics such as supply and demand, market equilibrium, consumer and producer behavior, the role of government in the economy, and basic macroeconomic indicators. Through real-world examples and economic models, students gain insight into how economic forces shape local, national, and global markets, and are encouraged to apply economic reasoning to contemporary issues and policy debates.
Recommended Textbook
Foundations of Economics 6th Edition by Robin Bade
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Page 2
Chapter 1: Getting Started
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Q1) Demonstrating how an economic variable changes from one year to the next is best illustrated by a
A) scatter diagram.
B) time-series graph.
C) linear graph.
D) cross-section graph.
E) Venn diagram.
Answer: B
Q2) When a landscaping company decides to use drafting software and computers instead of hiring designers to draw design plans by hand,it is answering the ________ question.
A) how
B) what
C) for whom
D) opportunity cost
E) why
Answer: A
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Page 3
Chapter 2: The Usand Global Economies
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Q1) In the circular flow model,which of the following is on the selling side in the goods market?
A) federal, state, and local governments
B) only households
C) exporters
D) only firms
E) both firms and households
Answer: D
Q2) In the circular flow model,
A) the government is represented as a separate market.
B) the government buys goods and services from firms.
C) goods and services are sold by households and purchased by firms.
D) factor markets are where goods rather than services are bought and sold.
E) the government has no direct interaction with either households or firms.
Answer: B
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Page 4
Chapter 3: The Economic Problem
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Sample Questions
Q1) Suppose that Germany,France,Estonia,and India all have the same production possibilities,illustrated in the figure above.Based on the production points in the figure,India is most likely to expand its PPF to
A) PPF or PPF .
B) PPF .
C) PPF .
D) PPF . or PPF .
E) PPF .
Answer: C
Q2) When a nation is producing on its production possibilities frontier,if more resources are used to produce one good,then the production of other goods
A) must increase.
B) must decrease.
C) must remain the same.
D) must change but they might increase or decrease.
E) might increase if the nation can produce more efficiently.
Answer: B
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Chapter 4: Demand and Supply
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Q1) The quantity supplied of a good,service,or resource is ________ during a specified period and at a specified price.
A) the amount that people are able to sell
B) the amount that people are willing to sell
C) the amount that people are able and willing to sell
D) the amount that people are willing and able to buy
E) the amount sold
Q2) Teenagers drink more soda than other age groups.If the number of teenagers increases,everything else remaining the same,
A) market demand for soda increases.
B) market demand for soda decreases.
C) market demand for soda does not change.
D) there is a movement along the market demand curve for soda.
E) None of the above answers is correct because the effect on the demand depends whether the supply curve shifts rightward, leftward, or not at all.
Q3) Soft drinks and milk are substitutes for consumers.Draw a graph showing the effect of an increase in the price of milk on the demand for soft drinks.
Q4) Why does an increase in supply lead to lower prices?
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Page 6
Chapter 5: Elasticities of Demand and Supply
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Q1) In the figure above,at the point where the price is $50 per bunch,the price elasticity of supply is
A) 2.14.
B) 0.47.
C) 1.
D) 3.
E) 0.33.
Q2) Refer to the figure above.Suppose Starbucks charges $3.50 per cup for its latte.Which of the following is true?
i.At this price,the demand for Starbucks latte is inelastic.
ii.If Starbucks raises the price of its latte,its revenue will increase.
iii.If Starbucks lowers the price of its latte,it will increase its revenue.
A) Only iii
B) Only i
C) Only ii
D) i and ii
E) i and iii
Q3) How does elasticity of supply differ for a product that can be stored,compared to a product that cannot be stored?
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Chapter 6: Efficiency and Fairness of Markets
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Q1) The figure above shows the supply and demand curves for pizza.If the market is at its competitive equilibrium,what area in the graph above represents:
a.consumer surplus?
b.producer surplus?
Q2) A supply curve shows the marginal
A) benefit consumers receive from consuming a good.
B) profit businesses earn from selling a good.
C) cost of producing the good.
D) price paid for a good.
E) benefit sellers receive from selling a good.
Q3) The "fair rules" view of fairness is based on A) income transfers from the rich to the poor.
B) property rights and voluntary exchange.
C) utilitarianism.
D) the big tradeoff.
E) allocating resources using majority rule.
Q4) "A demand curve is the same as a marginal cost curve." Is this statement correct or incorrect? Explain your answer.
Q5) Why is the demand curve the same as the marginal benefit curve?
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Chapter 7: Government Actions in Markets
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Q1) When a price support is set above the equilibrium price,producers ________ the quantity supplied and consumers ________ the quantity demanded.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
E) do not change; do not change
Q2) To be effective in raising people's wages,a minimum wage must be set
A) above the equilibrium wage rate.
B) below the equilibrium wage rate.
C) equal to the equilibrium wage rate.
D) below $7.
E) either above or below the equilibrium wage depending on whether the supply curve of labor shifts rightward or leftward in response to the minimum wage.
Q3) The table above gives the demand and supply schedules for the housing market in a small town.If a rent ceiling of $600 a month is imposed,what is the quantity demanded,the quantity supplied,and the shortage of housing?
Q4) What are the effects of a rent ceiling set below the equilibrium rent?
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Page 9
Chapter 8: Taxes
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Q1) Neither the demand nor the supply of sugar is perfectly elastic or inelastic.If the government imposes a 5 percent tax on sugar,the
A) price of sugar buyers pay falls by 5 percent.
B) price of sugar buyers pay increases by less then 5 percent.
C) price of sugar buyers pay does not change.
D) quantity of sugar increases.
E) price of sugar buyers pay rises by 5 percent.
Q2) The figure above shows the market for tires.The figure shows that the government has imposed a tax of ________ per tire and that ________ pay most of the tax.
A) $30; buyers
B) $40; buyers
C) $30; sellers
D) $60; sellers
E) $60; buyers
Q3) Consider the market for dining at Mexican restaurants.Suppose the price elasticity of demand for Mexican food is 1.23 and the price elasticity of supply is 0.47.If the government imposes a tax on Mexican food,do buyers or sellers pay most of the tax? Why?
Q4) What is the marginal tax rate? Average tax rate? Can these rates ever differ?
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Chapter 9: Global Markets in Action
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Q1) After NAFTA was signed,the United States allowed more tomatoes to be imported from Mexico.What happened to the price of tomatoes in the United States when the United States allowed more tomatoes to be imported?
Q2) Of the following,who gains from a tariff?
A) the government of the importing country
B) the government of the exporting country
C) consumers in the importing country
D) producers in the exporting country
E) both the government of the exporting country and the government of the importing country
Q3) The above figure shows the U.S.market for 1 carat diamonds.Suppose the United States imposes the import quota shown in the figure.With the import quota,how many diamonds can be imported?
A) 500,000
B) 700,000
C) 400,000
D) 900,000
E) 300,000
Q4) What is dumping?
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Chapter 10: Externalities
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Q1) The government can overcome the inefficiency created by a good with an external benefit by using
A) public provision.
B) marketable permits.
C) taxes.
D) emission charges.
E) None of the above answers is correct.
Q2) In a market with an external cost,government action
A) cannot decrease the amount of the deadweight loss from the external cost.
B) can sometimes help to achieve an efficient outcome.
C) cannot alter firms' cost curves.
D) Both answers A and C are correct.
E) Both answers B and C are correct.
Q3) Which of the following is the best example of a transactions cost?
A) the value of the time spent negotiating a contract
B) the price of a new set of tires
C) the cost associated with producing a golf club
D) the price of labor and materials used to produce a house
E) the price of food
Q4) Discuss the difference between a private cost and a social cost.
Page 12
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Chapter 11: Public Goods and Common Resources
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Q1) A good or resource is excludable if
A) only the government can produce them.
B) nobody can be excluded from enjoying the benefits of the good or resource.
C) when you pay for the good or resource, you are guaranteed to be the sole consumer.
D) when you consume a unit, that means there is one less for someone else.
E) it is a common resource.
Q2) Which of the following is an example of the free-rider problem?
A) John attends a lecture on investing in high-tech companies for which he paid $100 to hear.
B) Tom watches Mystery on his local PBS television station but Tom does not contribute anything to PBS.
C) Sarah works overtime while her co-workers opt for a traditional schedule.
D) Jethro buys a skunk-hunting permit that he refuses to share with his sister.
E) Katie catches a swordfish in the ocean.
Q3) Why is watching sports more important to many prospective voters than watching the news? In your answer,mention the role played by rational ignorance and the cost of gathering information.
Q4) What is an individual transferable quota (ITQ)?
Q5) How is the efficient quantity of public goods determined?
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Chapter 12: Markets With Private Information
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Q1) Signals are believable when the cost of sending a ________ is known to be
A) false signal; low
B) false signal; high
C) true signal; low
D) true or false signal; low
E) true signal; high
Q2) Explain the concept of moral hazard.Give an example.
Q3) The lemons problem in the used car market is that
A) the price of a lemon is too high.
B) the price of a lemon is too low.
C) no lemons are bought and sold.
D) only lemons are bought and sold.
E) Both answers A and D are correct.
Q4) If buyers cannot assess the quality of used cars and there are no warranties,
A) only lemons are sold.
B) only good used cars are sold.
C) good cars are sold at a higher price than bad cars.
D) there is no adverse selection problem.
E) lemons and good cars sell for the same price.
Page 14
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Chapter 13: Consumer Choice and Demand
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Q1) Based on the figure above,which of the following would lead the consumer's budget line to shift from BL to BL ?
A) A rise in the price of water.
B) A fall in the price of water.
C) A rise in the price of water and the price of gum.
D) A decrease in the consumer's budget.
E) An increase in the consumer's budget.
Q2) If the slope of the budget line changes,there must have been
A) a change in the consumer's preferences.
B) an increase in the consumer's income.
C) a change in the price of at least one good.
D) a change in the price of both goods.
E) None of these could cause a change in the slope of the budget line.
Q3) If the price of steak rises,a consumer who had been maximizing his or her utility before will buy less steak because its
A) total utility falls.
B) ratio of marginal utility to price is now less than that for other goods.
C) marginal utility has fallen.
D) ratio of marginal utility to total utility falls.
E) ratio of marginal utility to price is now larger than that for other goods.
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Chapter 14: Production and Cost
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Questions
Q1) Professor Rush decided to quit teaching economics and opens a shoe store out at the mall.He gave up an annual income of $50,000 to open the store.A year after opening the shoe store,the total revenue for the year was $200,000.Rush's expenses were $30,000 for labor,rent was $18,000,and utilities were $1,200.He also had to purchase new shoes from manufacturers,at a cost of $60,000,which was financed by cashing in his savings of $60,000 that had been in a bank earning 8 percent per year.The normal profit from operating a shoe store in the mall is $20,000.Determine Professor Rush's explicit costs,implicit costs,and economic profit.
Q2) A firm decreases its scale of operation and discovers that its long-run average costs decrease.Which of the following does this indicate?
A) Labor's marginal product has increased.
B) Diseconomies of scale were absent in the larger plant.
C) The firm's scale initially was so large that it experienced diseconomies of scale.
D) The firm's scale initially was too small to experience economies of scale.
E) Its long-run marginal cost was smaller with the larger plant than with the smaller plant.
Q3) What are economies of scale? What is the main source of economies of scale?
Q4) What resources can a firm change in the short run? In the long run?
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Chapter 15: Perfect Competition
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Q1) John keeps beehives and sells 100 quarts of honey per month.The honey market is perfectly competitive,and the price of a quart of honey is $10.John has an average variable cost of $5 and an average fixed cost of $3.At 100 quarts per month,John's marginal cost is $10.
a.Is John maximizing his profit? If not,what should John do?
b.Calculate John's total revenue,total cost,and total economic profit or economic loss when he produces 100 quarts of honey.
Q2) The marginal revenue curve for a perfectly competitive firm is A) horizontal.
B) vertical.
C) upward sloping.
D) downward sloping.
E) a straight line coming out of the origin with a 45 degree slope.
Q3) Will a perfectly competitive firm ever produce in the short run even though it is suffering an economic loss?
Q4) If the market price is less than a perfectly competitive firm's average total cost,what sort of profit or loss is the firm earning?
Q5) What is the shape of the demand curve faced by the perfectly competitive firm,and why?
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Chapter 16: Monopoly
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Q1) Gene's Car Wash is a natural monopoly.To wash 100 cars a week,if Gene is unregulated,he would charge a price of $10.Gene's average total cost for washing 100 cars is $8,his average variable cost is $6,and his marginal cost is $4.If Gene is regulated using an average cost pricing rule,the price he is allowed to charge to wash 100 cars is
A) $10.
B) $8.
C) $6.
D) $4.
E) $400.
Q2) Ron's Hamburger Joint is the only restaurant in town.The above figure represents Ron's cost,the market demand,and marginal revenue curves.Ron operates as a single-price monopoly.
a.How many hamburgers does Ron produce?
b.What price does Ron charge for a hamburger?
c.What is Ron's total revenue?
d.What is his total cost?
e.What is Ron's economic profit?
Q3) Why do some utilities have an incentive to exaggerate their costs of production?
Q4) Why are water companies considered a natural monopoly?
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Chapter 17: Monopolistic Competition
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Q1) Kevin owns a personal training gymnasium in Orlando.The above figure shows the demand and cost curves for his firm,which competes in a monopolistically competitive market.What price will Kevin charge per session?
A) $100
B) $60
C) $40
D) $20
E) $80
Q2) In monopolistic competition,there are ________ barriers to entry and so firms in monopolistic competition ________ make an economic profit in the long run.
A) high; can
B) high; cannot
C) no; can
D) no; cannot
E) sometimes; can sometimes
Q3) There are 9 firms in an industry with market shares in the table above.Calculate the HHI for the industry.What kind of market does this operate in and why?
Q4) List four characteristics of monopolistic competition.
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Chapter 18: Oligopoly
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Q1) The figure above shows the market demand curve and the ATC curve for a firm.If all firms in the market have the same ATC curve,the figure shows a ________ can profitably operate.
A) natural monopoly in which 1 firm
B) natural monopoly in which 2 firms
C) natural oligopoly in which 3 firms
D) natural oligopoly in which 2 firms
E) natural oligopoly in which 8 firms
Q2) Which of the following is always illegal?
A) possessing a very large market share
B) selling at a price below other producers because of efficiency
C) price fixing
D) attempting to merge with a competitor
E) price discrimination
Q3) Does section 2 of the Sherman Act make it a felony to "attempt" to monopolize an industry or must the attempt succeed before it is a felony?
Q4) "Because firms in an oligopoly are so large,they do not need to consider each others actions." Is the previous statement correct or incorrect? Explain your answer.
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Page 20
Chapter 19: Markets for Factors of Production
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Q1) Using the above table,suppose the price of a bat is $3.If the wage rate for a worker in a baseball bat manufacturing plant is $18 an hour,then the firm will hire ________ workers; if the wage rate falls to $12 an hour,then the firm will hire ________.
A) 1; 2
B) 2; 4
C) 3; 3
D) 5; 4
E) 3; 5
Q2) If the price of movie tickets increases,there is
A) an increase in the demand for actors and actresses.
B) a decrease in the demand for actors and actresses.
C) no change in the demand for actors and actresses.
D) a decrease in the supply of actors and actresses.
E) an increase in the supply of actors and actresses.
Q3) "The decision to employ an additional unit of labor depends on whether the value of marginal product of labor is greater than or less than the wage rate." Is the previous statement correct or incorrect?
Q4) What factors shift the demand for labor curve? Briefly describe the effect of each.
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Page 21
Chapter 20: Economic Inequality
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Q1) Which of the following is correct? On the average, i.the wage differential between white males and white females has narrowed since 2000. ii.black females are paid more than black males.
iii.Hispanic males are paid more than black males.
A) i only
B) ii only
C) ii and iii
D) i and iii
E) i, ii, and iii
Q2) A ________ tax is one that taxes income at an average rate that increases with the level of income.
A) regressive
B) progressive
C) flat
D) consumption
E) proportional
Q3) What is "human capital"? How is it important in the determination of a worker's wage rate?
Q4) Describe how a negative income tax works.
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