Principles of Economics Question
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Course Introduction
Principles of Economics introduces students to the foundational concepts of both microeconomics and macroeconomics, focusing on how individuals, firms, and societies make choices in the face of scarcity. The course explores topics such as supply and demand, market equilibrium, elasticity, consumer behavior, production and costs, competitive and monopolistic markets, national income, fiscal and monetary policies, and international trade. By applying economic reasoning to real-world issues, students gain a deeper understanding of how economic forces shape daily life, influence government policy, and drive global trends.
Recommended Textbook
Essentials of Economics 4th Edition by
R. Glenn Hubbard
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Page 2
Chapter 1: Economics: Foundations and Models
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Q1) Economists assume that rational behavior is useful in explaining choices people make
A)because irrational people do not make economic choices.
B)even though people may not behave rationally all the time.
C)because individuals act rationally all the time in all circumstances.
D)even though people rarely, if ever, behave in a rational manner.
Answer: B
Q2) When voluntary exchange takes place,both parties gain from the exchange. A)True
B)False
Answer: True
Q3) When every good or service is produced up to the point where the last unit provides ________,allocative efficiency occurs.
A)a marginal benefit to society equal to the marginal cost of producing it
B)a marginal benefit to society greater than the marginal cost of producing it
C)a marginal benefit to society less than the marginal cost of producing it
D)a marginal benefit to society equal to zero
Answer: A
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Chapter 2: Trade-Offs, comparative Advantage, and the Market System
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Q1) In a simple circular flow diagram,who supplies factors of production in markets and who buys these factors of production? Who supplies goods and services in markets and who buys these goods and services?
Answer: Households supply factors of production and buy goods and services in markets.Firms buy factors of production and supply goods and services in markets.
Q2) If a country produces only two goods,it is possible to have an absolute advantage in the production of both those goods.
A)True
B)False
Answer: True
Q3) Refer to Figure 2-15.If the two countries have the same amount of resources and the same technological knowledge,which country has an absolute advantage in the production of popsicles?
A)Greenland
B)They have the same advantage.
C)Iceland
D)cannot be determined
Answer: A
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Q1) Which of the following would cause the equilibrium price of white bread to decrease and the equilibrium quantity of white bread to increase?
A)a decrease in the price of flour
B)an increase in the price of flour
C)an increase in the price of rye bread, a substitute for white bread
D)an increase in the price of butter, a complement for white bread
Answer: A
Q2) Refer to Figure 3-2.A technological advancement would be represented by a movement from
A)A to B.
B)B to A.
C)S to S .
D)S to S .
Answer: C
Q3) If the price of refillable butane lighters was to decrease,then
A)the demand for butane would decrease.
B)the demand for butane would increase.
C)the quantity of butane demanded would increase.
D)the quantity of butane demanded would decrease.
Answer: B
Page 5
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Chapter 4: Market Efficiency and Market Failure
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Q1) Economic surplus is maximized in a competitive market when A)demand is equal to supply.
B)the deadweight loss equals the sum of consumer surplus and producer surplus.
C)marginal benefit equals marginal cost.
D)producers sell the quantity that consumers are willing to buy.
Q2) The willingness of consumers to buy a product at different prices is shown on a A)demand curve.
B)supply curve.
C)production possibilities frontier.
D)marginal cost curve.
Q3) Refer to Table 4-5.The table above lists the highest prices five consumers are willing to pay for a concert ticket.If the price of one ticket is $50
A)everyone will buy a ticket.
B)consumer surplus will be maximized.
C)Violet's consumer surplus is $2.
D)no one will buy a ticket.
Q4) What is a Pigovian tax? What happens to deadweight loss when a Pigovian tax is implemented?
Q5) What is economic surplus? When is economic surplus at a maximum?
Q6) How does a negative externality in production reduce economic efficiency?
Page 6
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Chapter 5: The Economics of Health Care
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Q1) Of the following,the most to the rapid rise in health care costs in the United States can be attributed to
A)the cost of malpractice insurance.
B)the cost to treat uninsured patients.
C)slow growth in labor productivity in health care.
D)the cost of malpractice lawsuit settlements.
Q2) A majority of people in the United States do not have private health insurance. A)True B)False
Q3) Refer to Figure 5-4.If consumers paid the full price of medical services,the equilibrium quantity would be A)200.
B)500.
C)700.
D)>700.
Q4) Adverse selection is a situation in which one party to an economic transaction has less information than the other party.
A)True B)False
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Chapter 6: Firms, the Stock Market, and Corporate Governance
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Q1) Corporate managers and shareholders always have the same goals.
A)True
B)False
Q2) Raising funds through financial intermediaries is called
A)direct finance.
B)corporate finance.
C)indirect finance.
D)dividend reinvestment.
Q3) Explain the relationships between a corporation's shareholders,its board of directors,and its top managers.
Q4) In the United States,partnership profits are taxed at the business level and then are taxed again as personal income in the form of dividend payments.
A)True
B)False
Q5) Direct finance includes the sale by a corporation of stocks or bonds,but does not include borrowing money from a bank.
A)True
B)False
Q6) What is the difference between explicit and implicit costs?
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Chapter 7: Consumer Choice and Elasticity
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Q1) All but one of the following have been suggested by some economists as possible consequences of path dependency and switching costs.Which of the following is not a possible consequence of path dependency and switching costs?
A)Consumers may get locked into using products with inferior technology.
B)market failure
C)diseconomies of scale
D)Government intervention may be necessary in affected markets in order to improve economic efficiency.
Q2) The ultimatum game and the dictator game are used in economic experiments to test whether fairness is an important influence on consumer decision-making.
A)True
B)False
Q3) The income effect due to a price decrease will result in an increase in the quantity demanded for
A)a Giffen good.
B)an inferior good.
C)a public good.
D)a normal good.
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Chapter 8: Technology, production, and Costs
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Sample Questions
Q1) Which of the following statements is true?
A)Opportunity cost = explicit cost - implicit cost.
B)Total cost = fixed cost + implicit cost.
C)Total cost = fixed cost + variable cost.
D)Variable cost = wages + salaries + benefits.
Q2) If the long-run average total cost curve is downward-sloping,then the firm is experiencing decreasing returns to scale.
A)True
B)False
Q3) If average total cost is falling marginal cost must also be falling.
A)True
B)False
Q4) Diseconomies of scale occur when
A)long-run average costs rise as a firm increases its output.
B)long-run average cost fall as a firm expands its plant size.
C)short-run average costs rise as a firm expands its plant size.
D)long-run labor costs rise as a firm increases its output.
Q5) As output increases,average fixed cost gets smaller and smaller.
A)True
B)False
Page 10
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Chapter 9: Firms in Perfectly Competitive Markets
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Q1) When firms exit a perfectly competitive industry,the market supply curve shifts to the left.
A)True
B)False
Q2) What assumptions are necessary for a market to be perfectly competitive? Explain why each of these assumptions is important.
Q3) Which of the following does not hold true for a perfectly competitive firm in long-run equilibrium?
A)Its economic profit will be zero.
B)It will minimize average total cost.
C)It will charge a price equal to marginal cost.
D)Marginal cost will be minimized.
Q4) Perfect competition is characterized by all of the following except A)heavy advertising by individual sellers.
B)homogeneous products.
C)sellers are price takers.
D)a horizontal demand curve for individual sellers.
Q5) What is meant by productive efficiency? How does a perfectly competitive firm achieve productive efficiency?
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Chapter 10: Monopoly and Antitrust Policy
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Q1) "Being the only seller in the market,the monopolist can choose any price and quantity it desires." Evaluate this statement: is it true or false? Explain your answer.
Q2) What is a public franchise? Are all public franchises natural monopolies?
Q3) The Sherman Act prohibited
A)marginal cost pricing.
B)setting price above marginal cost.
C)collusive price agreements among rival sellers.
D)selling below average total cost.
Q4) Refer to Table 10-1.What is the marginal revenue from the sale of the 12th unit?
A)$75
B)$50
C)$20
D)-$5
Q5) Network externalities refer to the situation where the usefulness of a product increases with the number of consumers who use it.
A)True
B)False
Q6) Explain why the monopolist has no supply curve?
Q7) Identify four reasons for high entry barriers? Briefly explain each reason.
Page 12
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Chapter 11: Monopolistic Competition and Oligopoly
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Q1) One of the assumptions of monopolistic competition is that firms produce differentiated products.What does this assumption imply about the demand curve facing a representative firm?
Q2) The breakfast cereal industry has a four-firm concentration ratio of 78 percent.Is this enough information to classify the industry as an oligopoly? Is a high concentration ratio evidence that an industry is not competitive?
Q3) A monopolistically competitive industry that earns economic profits in the short run will
A)continue to earn economic profits in the long run.
B)experience the entry of new rival firms into the industry in the long run.
C)experience the exit of existing firms out of the industry in the long run.
D)experience a rise in demand in the long run.
Q4) Refer to Table 11-4.At Victoria's profit-maximizing 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.
Q5) What are the most important differences between perfectly competitive markets and monopolistically competitive markets?
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Chapter 12: Gdp: Measuring Total Production and Income
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Q1) Suppose that in 2013,the national income in the United States was $200 billion,depreciation was $15 billion,personal taxes were $20 billion,and transfer payments were $10 billion.Gross domestic product in 2013 is
A)$185 billion.
B)$215 billion.
C)$220 billion.
D)$245 billion.
Q2) In the United States in 2013,the Bureau of Economic Analysis began counting spending on research and development as ________,which counts as a part of GDP.
A)investment
B)consumption
C)depreciation
D)intermediate goods
Q3) The nominal GDP of the U.S.in 2012 was approximately $16.2 trillion.This means that A)the value of output in 2012 was around $16.2 trillion.
B)total income in 2012 was around $16.2 trillion.
C)total spending in 2012 was around $16.2 trillion.
D)all of the above are true.
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Chapter 13: Unemployment and Inflation
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Questions
Q1) Using a broader measure of the unemployment rate where discouraged workers and part-time workers who wished to work full time were counted as unemployed,the BLS estimates the unemployment rate in September 2011 would have ________ compared to the measured unemployment rate.
A)increased by more than 7 percentage points
B)more than doubled
C)decreased by less than 1 percentage point
D)barely changed
Q2) Paying efficiency wages are a way for a company to cut costs and become more efficient,and are therefore lower than market wages.
A)True
B)False
Q3) The substitution bias in the consumer price index refers to the idea that consumers ________ the quantity of products they buy in response to price,and the CPI does not reflect this and ________ the cost of the market basket.
A)change; over-estimates
B)change; under-estimates
C)do not change; over-estimates
D)do not change; under-estimates
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Page 15
Chapter 14: Economic Growth, the Financial System, and Business Cycles
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Q1) In a closed economy,which of the following components of GDP is not included?
A)investment
B)government spending
C)net exports
D)consumption
Q2) Consider the following data for a closed economy:
a.Y = $12 trillion
b.C = $8 trillion
c.I= $3 trillion
d.TR = $2 trillion
e.T = $3 trillion
Use the data provided to calculate the level of private saving and the level of public saving and demonstrate their relationship to investment.
Q3) Empirical evidence shows that the impact of government budget deficits and surpluses on the equilibrium interest rate is quite large.
A)True
B)False
Q4) Outline the various actions the government sector could take to promote growth.
Q5) How are unemployment,inflation,and the business cycle related?
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Chapter 15: Aggregate Demand and Aggregate Supply Analysis
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Q1) Refer to Figure 15-1.Ceteris paribus,an increase in the value of the domestic currency relative to foreign currencies would be represented by a movement from
A)AD to AD .
B)AD to AD .
C)point A to point B.
D)point B to point A.
Q2) Explain how each of the following events would affect the aggregate demand curve.
a.Lower interest rates
b.A decrease in net exports
c.A decrease in the price level
d.Slower income growth in other countries
e.A decrease in imports
Q3) Suppose the U.S.GDP growth rate is slower relative to other countries' GDP growth rates.This will
A)move the economy up along a stationary aggregate demand curve.
B)move the economy down along a stationary aggregate demand curve.
C)shift the aggregate demand curve to the left.
D)shift the aggregate demand curve to the right.
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Chapter 16: Money, banks, and the Federal Reserve System
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Q1) In 1980,one Zimbabwean dollar was worth 1.47 U.S.dollars.By the end of 2008,the exchange rate was one U.S.dollar to 2 billion Zimbabwean dollars.When an economy experiences rapid increases in the price level such as what occurred in Zimbabwe,the economy is said to experience
A)stagflation.
B)deflation.
C)inflation.
D)hyperinflation.
Q2) According to the quantity theory of money,the inflation rate equals
A)the money supply minus real output.
B)the growth rate of the money supply minus the growth rate of real output.
C)real output minus the money supply.
D)the growth rate of real output minus the growth rate of the money supply.
Q3) According to the quantity theory of money,deflation will occur if the
A)money supply is less than real GDP.
B)money supply is more than real GDP.
C)money supply grows at a slower rate than real GDP.
D)money supply grows at a faster rate than real GDP.
Q4) What are the implications of the quantity theory of money for monetary policy and price stability?
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Chapter 17: Monetary Policy
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Q1) While many analysts defended the actions taken by the Fed and the Treasury to respond to the financial crisis in 2008,others were critical of these actions.The critics were concerned that by not allowing large firms to fail
A)smaller firms will resent not receiving similar assistance.
B)stockholders and bondholders of these firms were not allowed to receive the proceeds from the sale of assets that would have occurred if the firms had declared bankruptcy.
C)there is an increased likelihood that other firms will engage in risky behavior in the future with the expectation that they will also not be allowed to fail.
D)there will be less competition in the U.S.economy, which could led to higher prices for consumers.
Q2) The Fed has adopted an interest rate target for most of the time since World War II. A)True B)False
Q3) When Congress established the Federal Reserve in 1913,what was its main responsibility? When did Congress broaden the Fed's responsibilities?
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Chapter 18: Fiscal Policy
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Q1) Crowding out will be greater
A)the less sensitive consumption spending is to changes in the interest rate.
B)the further equilibrium GDP is below potential GDP.
C)the more sensitive investment spending is to changes in the interest rate.
D)if the economy is in recession, rather than at full employment.
Q2) Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.
A)higher; higher
B)higher; lower
C)lower; higher
D)lower; lower
Q3) The federal government debt as a percentage of GDP did not rise
A)during the Great Depression.
B)during World War II.
C)during the 1960s.
D)during the 1980s.
Q4) What is expansionary fiscal policy? What is contractionary fiscal policy?
Q5) President Bush lowered taxes on capital gains and dividends in 2003.Explain how this might increase aggregate supply.
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Chapter 19: Comparative Advantage, international Trade, and Exchange Rates
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Q1) Assume that Bulgaria has a comparative advantage in producing sandals and Finland imports sandals from Bulgaria.We can conclude that A)Bulgaria also has an absolute advantage in producing sandals relative to Finland. B)Bulgaria has a lower opportunity cost of producing sandals relative to Finland. C)Finland has an absolute disadvantage in producing sandals relative to Bulgaria.
D)Labor costs are higher for sandal producers in Finland than in Bulgaria.
Q2) Refer to Table 19-11.If the actual terms of trade are 1 hat for 1.8 clocks and 150 hats are traded,how many clocks will Denmark gain compared to the "without trade"numbers?
A)30
B)100
C)150
D)900
Q3) Globalization is the process of countries imposing trade restrictions on other countries.
A)True
B)False
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