Principles of Economics Question
Bank
Course Introduction
Principles of Economics offers a foundational understanding of the economic forces that shape individuals, businesses, and societies. This course introduces fundamental concepts such as scarcity, opportunity costs, supply and demand, market equilibrium, and the roles of consumers and producers. Students will also explore how different market structures operate, how government policies influence economic outcomes, and key macroeconomic indicators like inflation, unemployment, and economic growth. By the end of the course, students will be equipped with analytical tools to better understand everyday economic issues and contribute to informed decision-making in both personal and professional contexts.
Recommended Textbook
Economics 4th Edition by Paul Krugman
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Page 2
Chapter 1: First Principles
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Q1) When people want more goods and services than are available, the economy undergoes inflation. This statement best represents this economic concept:
A) Resources are scarce.
B) When markets don't achieve efficiency, government intervention can improve society's welfare.
C) Overall spending sometimes gets out of line with the economy's productive capacity.
D) Government policies can change spending.
Answer: C
Q2) The primary emphasis in macroeconomics is on:
A) how firms set prices.
B) the national economy.
C) marginal analysis.
D) bits and pieces of the economy.
Answer: B
Q3) According to the textbook, markets usually lead to efficiency.
A)True
B)False
Answer: True
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Chapter 2: Economic Models- Trade-Offs and Trade
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Sample Questions
Q1) When building a model, economists:
A) simplify reality to highlight what really matters.
B) attempt to duplicate reality in all of its complexity.
C) ignore the facts and instead try to determine what the facts should be.
D) are careful to avoid the scientific method.
Answer: A
Q2) If an economy has to sacrifice increasing amounts of good X for each additional unit of good Y produced, then its production possibility frontier is:
A) bowed out.
B) bowed in.
C) a straight line.
D) a vertical line.
Answer: A
Q3) If Mary accepts a job as a nurse, she has sold a factor of production in the factor market.
A)True
B)False
Answer: True
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4
Chapter 3: Supply and Demand
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Sample Questions
Q1) Markets that are characterized by many buyers and many sellers are:
A) inefficient.
B) competitive.
C) foreign.
D) monopolies.
Q2) A decrease in the price of eggs will result in:
A) an increase in the demand for eggs.
B) an increase in the supply of eggs.
C) a shift in the supply curve for eggs.
D) a movement along the demand curve for eggs.
Q3) Suppose that supply increases and demand decreases. What is the most likely effect on price and quantity?
A) The price will increase, but quantity may increase, decrease, or stay the same.
B) The price will decrease, but quantity may increase, decrease, or stay the same.
C) The price will decrease and quantity will decrease.
D) The price will increase and quantity will increase.
Q4) Explain the law of demand. What does it tell us about the shape of a demand curve?
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Chapter 4: Consumer and Producer Surplus
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Q1) The total surplus generated in the market for blackberries is the total net gain to consumers in that market.
A)True B)False
Q2) The gains from trade are the reason that consumers and producers are better off participating in a market economy than they would be if each tried to be self-sufficient.
A)True B)False
Q3) (Figure: Consumer Surplus III) In the figure Consumer Surplus III, when the price falls from $30 to $25, consumer surplus _____ for a total consumer surplus of _____.
A) increases by $25; $74
B) decreases by $15; $34
C) increases by $15; $64
D) increases by $5; $54
Q4) Total surplus is the excess of consumer surplus over producer surplus. A)True B)False
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6
Chapter 5: Price Controls and Quotas- Meddling With Markets
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Q1) The most likely reason that the government would implement a _____ is because it feels that the price is too low for _____.
A) price ceiling; consumers
B) price floor; consumers
C) price ceiling; producers
D) price floor; producers
Q2) Suppose the government of the oil-rich country Saudi Arabia sets gasoline prices at $0.25 per gallon when the market price is $1.50. The Saudi government's actions will:
A) improve efficiency, since the low prices will force producers to find cheaper production methods.
B) result in gasoline surpluses even in an oil-rich country.
C) cause gasoline shortages even in an oil-rich country.
D) improve equality between rich and poor, since the poor can now afford gasoline.
Q3) A persistent shortage may occur if:
A) the government imposes a price ceiling.
B) the government imposes a price floor.
C) demand keeps falling.
D) supply shifts rightward.
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Chapter 6: Elasticity
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Q1) All else equal, when the demand for oil increases, the price will increase. Some economists say that this is only a short-run worry because in the long run a more elastic supply curve will benefit consumers. Do you agree? Explain.
Q2) Sarah has been told she has only one week to finish some pottery for a show. Sarah has exhausted her supply of clay, and new clay is absolutely necessary for finishing her products. For Sarah, the price elasticity of demand for new clay is elastic.
A)True
B)False
Q3) When the absolute value of the percentage change in quantity demanded is less than the absolute value of the percentage change in price, demand is:
A) inelastic.
B) elastic.
C) unit-elastic.
D) unknown.
Q4) Demand for Wendy's hamburgers is more inelastic than the demand for all fast food.
A)True
B)False
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Chapter 7: Taxes
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Sample Questions
Q1) State governments levy excise taxes on cigarettes because:
A) they want to subsidize tobacco farming.
B) they want to discourage cigarette smuggling.
C) it is an easy way to raise tax revenue while discouraging smoking.
D) they want to minimize the tax burden on consumers.
Q2) The burden of a tax on a good is said to fall completely on the consumers if the:
A) price paid by consumers for the good declines by the amount of the tax.
B) price paid by consumers for the good increases by the amount of the tax.
C) price paid by consumers does not change.
D) wages received by workers who produce the good increase by the amount of the tax.
Q3) If the demand curve is downward-sloping and supply is perfectly elastic, then the burden of an excise tax is:
A) borne entirely by consumers.
B) borne entirely by producers.
C) shared by consumers and producers, with the burden falling mainly on consumers.
D) shared by consumers and producers, with the burden falling mainly on producers.
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Page 9
Chapter 9: The Rational Consumer
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Q1) Joe's budget line reflects the _____ available to Joe if he spends _____ of his income.
A) consumption bundles; all
B) consumption bundles; part
C) utility; all
D) utility; part
Q2) The principle of diminishing marginal utility means that when Sarah eats pizza, her satisfaction from the second slice of pizza is probably _____ that from the first.
A) greater than
B) equal to C) less than
D) not comparable to
Q3) Chuck spends all of his income on tacos and milkshakes. His income is $100, the price of tacos is $10, and the price of milkshakes is $2. If the price of each good doubles and Chuck's income doubles:
A) Chuck's budget line will be unaffected.
B) Chuck's budget line will shift out.
C) Chuck's budget line will shift in.
D) Chuck will be able to buy more of both goods.
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Page 10
Chapter 8: International Trade
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Q1) In a single year, Argentina can raise 100 tons of beef or produce 1,000 boxes of tulips. In the same growing season, Venezuela can raise 50 tons of beef or produce 750 boxes of tulips. When the two countries begin trading beef for tulips, we expect the price of beef in Venezuela:
A) to fall.
B) to rise.
C) to remain at the autarky price.
D) to be 15 boxes of tulips.
Q2) (Table: Production Possibilities in the United States and Colombia) Look at the table Production Possibilities in the United States and Colombia. Suppose that each nation specializes in producing the good in which it has the comparative advantage, and the two nations agree to trade. A year later we observe Colombia consuming 20 computers and 20 tons of coffee, and we observe the United States consuming 80 computers and 5 tons of coffee. How many computers does the United States export? How many tons of coffee does the United States import? If the world price of a computer is $500, what is the world price of a ton of coffee? Justify your answers.
Q3) Explain the difference between comparative advantage and absolute advantage.
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Page 11
Chapter 10: Decision Making by Individuals and Firms
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Q1) Profit is the difference between _____ and _____.
A) total sales; total revenues
B) total profits; total costs
C) total revenues; total costs
D) marginal costs; marginal revenues
Q2) (Table: Marginal Analysis of Sweatshirt Production II) Look at the table Marginal Analysis of Sweatshirt Production II. The optimal quantity of sweatshirts to produce is:
A) two.
B) three.
C) four.
D) five.
Q3) (Figure: The Marginal Benefit Curve) Look at the figure The Marginal Benefit Curve. The total benefit of mowing six lawns is approximately:
A) $19.
B) $35.
C) $154.
D) $200.
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Chapter 11: Perfect Competition and the Supply Curve
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Q1) (Figure: The Perfectly Competitive Firm) Look at the figure The Perfectly Competitive Firm. The firm faces demand curve d and maximizes profit. In a long-run equilibrium, this firm will produce _____ units of output and sell its output for _____.
A) 100; $1.00
B) 250; $1.90
C) 300; $2.00
D) 400; $3.00
Q2) (Table: Total Cost and Output) Look at the table Total Cost and Output, which describes Sergei's total costs for his perfectly competitive all-natural ice cream firm. If the market price of a tub of ice cream is $67.50, how much is Sergei's profit at the profit-maximizing output?
A) $680.00
B) $270.00
C) $102.50
D) $100.00
Q3) State and explain the price-taking firm's optimal output rule.
Q4) Why are perfectly competitive firms described as price takers?
Q5) Explain how the long-run perfectly competitive equilibrium is efficient.
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Chapter 12: Monopoly
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Sample Questions
Q1) A monopoly's short-run marginal cost is constant at $10. This implies that its average variable cost is also constant and equal to $10.
A)True
B)False
Q2) A natural monopoly is one that:
A) monopolizes a natural resource such as a mineral spring.
B) is based on control of something occurring in nature (such as diamonds).
C) has increasing returns to scale over the entire relevant range of output.
D) typically has low fixed costs, making it easy and "natural" for it to shut out competitors.
Q3) To increase profits with price discrimination, different groups of an oligopolist's customers must respond differently to prices of the good.
A)True
B)False
Q4) What are the fundamental differences between the perfect competition and monopoly market structures?
Q5) Producer surplus in monopoly is smaller than in perfect competition.
A)True
B)False
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Chapter 13: Oligopoly
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Q1) (Table: Demand Schedule for Gadgets) Look at the table Demand Schedule for Gadgets. The market for gadgets consists of two producers, Margaret and Ray. Each firm can produce gadgets with no marginal cost or fixed cost. If industry output is 350 gadgets produced by Margaret and 250 gadgets produced by Ray and if Ray decides to increase output by 100, Margaret's profit will be _____ and Ray's profit will be _____.
A) $1,750; $1,250
B) $1,250; $1,250
C) $1,400; $1,000
D) $1,050; $1,050
Q2) Which of the following characteristics make an industry more conducive to collusive behavior?
A) Firms in the industry have very different marginal costs of production.
B) Firms in the industry produce goods with significantly different product attributes.
C) Firms in the industry are operating at a maximum productive capacity that cannot be easily altered in the short run.
D) Firms in the industry serve customers that can easily switch between firms as they search for the best price.
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Page 15
Chapter 14: Monopolistic Competition and Product
Differentiation
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Q1) A monopolistically competitive firm is operating in the short run at the optimal level of output and is earning negative economic profits. Which of the following must be TRUE?
A) ATC > P > MR = MC.
B) ATC = P > MR = MC.
C) ATC > P = MR = MC.
D) ATC > P > MR > MC.
Q2) A(n) _____ is a single firm with _____, whereas a(n) _____ implies an industry with _____ firm(s) and _____.
A) oligopoly; no barriers to entry; monopoly; many; easy entry and exit
B) monopoly; barriers to entry; monopolistic competition; many; easy entry and exit
C) monopoly; barriers to entry; oligopoly; few; no barriers to entry
D) monopolistic competitor; barriers to entry; monopoly; one; barriers to entry
Q3) If a monopolistically competitive firm is in long-run equilibrium, price:
A) equals average total cost.
B) equals marginal cost.
C) equals marginal revenue.
D) is greater than average total cost.
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Page 16
Chapter 15: Externalities
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Q1) (Figure: Pollution and Efficiency) Look at the figure Pollution and Efficiency. In this market, whose sulfur emission is a result of production, an efficient solution is one in which:
A) MSB < MSC.
B) MSC < MSB.
C) total cost = total benefit.
D) MSC = MSB.
Q2) (Table: Externalities from Parks) The table Externalities from Parks shows the marginal social benefit and the marginal social cost of preserving various amounts of land in a city for a public park. If 1 acre is dedicated to the park, this outcome is _____ because _____.
A) efficient; MSB = MSC
B) efficient; MSB > MSC
C) inefficient; MSB > MSC
D) inefficient; MSB < MSC
Q3) With tradable emissions permits, the price of the permit is determined by:
A) the government.
B) the supply of and demand for permits.
C) environmental protection organizations.
D) the World Trade Organization.
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Chapter 16: Public Goods and Common Resources
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Q1) Public goods differ from common resources in that both are _____, but public goods are _____, while common resources are _____.
A) nonrival in consumption; excludable; nonexcludable
B) excludable; nonrival in consumption; rival in consumption
C) nonexcludable; are nonrival in consumption; rival in consumption
D) rival in consumption; nonexcludable; excludable
Q2) Since the public safety that a police force provides is _____ in consumption, the efficient price _____.
A) rival; is zero
B) nonrival; is zero
C) rival; equals marginal social benefit
D) nonrival; equals marginal social benefit
Q3) No individual is willing to pay to provide the efficient level of a public good, since the:
A) marginal cost of production is zero.
B) good will be nonrival and thus underconsumed.
C) individual's marginal benefit is less than the marginal social benefit.
D) marginal benefit of allowing one more individual to consume the good is zero.
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Chapter 17: The Economics of the Welfare State
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Q1) Which of the following countries gives all of its citizens a choice between private doctors and hospitals and care in a system run directly by the government?
A) United States
B) Canada
C) France
D) Great Britain
Q2) Health care in the United States is DIFFERENT FROM that of other wealthy countries in all of the following ways EXCEPT that:
A) Americans rely more on private health insurance.
B) Americans spend more per person on health care.
C) the United States is the only country in which large numbers of people lack health insurance.
D) the United States is the only country that provides government health care.
Q3) In 2012 _____ of the U.S. population was living in poverty.
A) approximately 15%
B) 20% to 24%
C) 25% to 29%
D) more than 30%
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19
Chapter 18: Factor Markets and the Distribution of Income
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Q1) An increase in the demand for construction workers may come about because of a(n):
A) increase in the demand for new housing.
B) decrease in the market wage rate for construction workers.
C) decrease in the productivity of construction workers.
D) decrease in the supply of other factors that construction workers use.
Q2) According to the marginal productivity theory of income distribution, in a competitive economy each factor of production is paid its equilibrium value of the marginal product.
A)True
B)False
Q3) Andy's individual labor supply curve is positively sloped, so for Andy, the substitution effect dominates the income effect.
A)True
B)False
Q4) The invention of labor-saving appliances has decreased the supply of labor in the United States.
A)True B)False
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Chapter 19: Uncertainty, Risk, and Private Information
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Sample Questions
Q1) Through insurance and other devices, the modern economy offers many ways for individuals to reduce their exposure to risk.
A)True
B)False
Q2) (Table: Income and Utility for Whitney) Look at the table Income and Utility for Whitney. Whitney's income next year is uncertain: there is a 40% probability she will make $40,000 and a 60% probability she will make $80,000. The expected value of Whitney's income is:
A) $64,000.
B) $80,000.
C) $40,000.
D) $56,000.
Q3) We would consider a tornado and a CEO scandal that hit a construction company on the same day as _____ events.
A) independent
B) dependent
C) premium
D) probable
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Chapter 20: Macroeconomics- the Big Picture
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Q1) When the Great Depression reached its trough in 1933, the unemployment rate was approximately:
A) 5%.
B) 10%.
C) 25%.
D) 50%.
Q2) The point on a business cycle when real GDP stops falling and begins rising is a(n): A) peak.
B) expansion.
C) trough.
D) recession.
Q3) Per capita economic growth is:
A) growth per unit of capital.
B) growth per person.
C) always accelerated during a business cycle.
D) a sustained increase in interest rates.
Q4) You read a newspaper article that says the unemployment rate rose this month. Are we in a recession? Explain.
Q5) What are Keynesian policies?
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Chapter 21: Gdp and the Consumer Price Index
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Q1) (Figure: Circular-Flow Model) Look at the figure Circular-Flow Model. If the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of it) and there is a decrease in government spending, which of the following is likely to happen?
A) an increase in the nominal GDP
B) an increase in the real GDP
C) an increase in the unemployment rate
D) an increase in the inflation rate
Q2) The best available common measure of a nation's standard of living is:
A) nominal GDP.
B) market GDP.
C) real GDP per capita.
D) nominal GDP per capita.
Q3) The national income and product accounts are calculated by:
A) the Congressional Budget Office.
B) the Federal Reserve.
C) the Bureau of Economic Analysis.
D) the Office of Management and Budget.
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Chapter 22: Unemployment and Inflation
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Q1) If the actual unemployment rate is 7% and the natural rate is 5%, then the cyclical rate is:
A) 2%.
B) 5%.
C) 7%.
D) 9%.
Q2) People who are counted as unemployed by the Bureau of Labor Statistics are:
A) people without a job who are actively seeking a job.
B) discouraged workers.
C) workers who are underemployed.
D) people without a job who are actively seeking a job, discouraged workers, and workers who are underemployed.
Q3) The percentage of the labor force that is unemployed is the:
A) labor force participation rate.
B) employment ratio.
C) unemployment rate.
D) natural employment rate.
Q4) If a labor market is in equilibrium at a wage that sets the quantity of labor demanded equal to the quantity of labor supplied, how can there still be unemployment?
24
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Chapter 23: Long-Run Economic Growth
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Q1) Sustainable long-run economic growth is long-run growth that can continue in the face of decreases in the growth rate of the world's population.
A)True
B)False
Q2) In 1798 the British economist Thomas Malthus predicted that Nazi Germany would invade Poland.
A)True
B)False
Q3) (Scenario: Growth Rates in Two Countries) Look at the scenario Growth Rates in Two Countries. How long will it take India to double its real GDP per capita?
A) 7.8 years
B) 10.2 years
C) 14.6 years
D) 90 years
Q4) If an economy has a real GDP per capita growth rate of 2%, it will take 14 years for GDP per capita to double.
A)True
B)False
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Page 25
Chapter 24: Savings, Investment Spending
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Q1) The present value of a $110 payment in one year, given an annual 10% interest rate, is:
A) $10.
B) $11.
C) $100.
D) $110.
Q2) An important advantage of bonds as a financial asset is that they:
A) are standardized and therefore are easier to sell than loans.
B) offer higher rates of return than stocks.
C) allow the owner to receive a share of the company's profits in the form of dividends.
D) are guaranteed to be risk free.
Q3) Capital inflow into a country is associated with:
A) imports exceeding exports.
B) a small amount of funds available for domestic investment.
C) imports equaling exports.
D) exports exceeding imports.
Q4) When expected inflation was high during the 1970s, interest rates were low.
A)True
B)False
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26
Chapter 25: Fiscal Policy
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Q1) A $100 million increase in government spending increases equilibrium GDP by:
A) $100 million.
B) more than $100 million.
C) less than $100 million.
D) zero.
Q2) Contractionary fiscal policy shifts the aggregate demand curve to the _____ and is used to close a(n) _____ gap.
A) right; inflationary
B) right; recessionary
C) left; inflationary
D) left; recessionary
Q3) In 2009 many lenders refused to make more loans to Greece because they were not confident that Greece was able to repay its debt.
A)True
B)False
Q4) Increased government transfers constitute contractionary fiscal policy.
A)True
B)False
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Page 27
Chapter 26: Money, Banking, and the Federal Reserve System
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Q1) If the Federal Reserve conducts a $10 million open-market sale and the reserve requirement is 20%, the maximum change in the money supply is:
A) an increase of $10 million.
B) a decrease of $10 million.
C) a decrease of $8 million.
D) a decrease of $50 million.
Q2) The eurozone is
A) another name for Scandinavia.
B) the only countries in Europe that engage in free trade with the United States.
C) the countries that use the euro as their common currency.
D) made up of the communist countries in eastern Europe.
Q3) Decisions about monetary policy are made by:
A) the president and Congress.
B) the President's Council of Economic Advisers.
C) the Federal Open Market Committee.
D) representatives of banks that are members of the Federal Reserve System.
Q4) Subprime lending takes place at below-prime interest rates.
A)True
B)False
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Chapter 27: Monetary Policy
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Q1) If the economy is at potential output and the Fed decreases the money supply, in the long run real GDP will likely decrease.
A)True
B)False
Q2) The money demand curve shows the relationship between the _____ and the _____ of money demanded.
A) money supply; quantity
B) aggregate price level; nominal quantity
C) interest rate; nominal quantity
D) real GDP; nominal quantity
Q3) In the long run, a change in monetary policy will affect only the aggregate price level.
A)True
B)False
Q4) The money demand curve is shown in a graph with the interest rate on short-term assets on the vertical axis. Why use this short-term interest on the vertical axis and not the rate of return on other financial assets?
Q5) Why does a recession, all else equal, decrease the demand for money?
Q6) What is the opportunity cost of holding money?
29
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Chapter 28: Inflation, Disinflation, and Deflation
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Q1) In debt deflation, deflation raises the cost of existing debt by increasing the value of money needed to pay it off, leading to a(n) _____ in aggregate _____.
A) increase; supply
B) reduction; supply
C) increase; demand
D) reduction; demand
Q2) If the short-run Phillips curve has shifted upward, the _____ curve has shifted to the _____.
A) AD; right
B) AD; left
C) SRAS; right
D) SRAS; left
Q3) Suppose that the natural rate of unemployment is 5% and that the economy is operating at 97.5% of potential output. Use Okun's law to determine the unemployment rate.
Q4) Suppose that the natural rate of unemployment is 5% and that the economy is operating at 101% of potential output. Use Okun's law to determine the unemployment rate.
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Chapter 29: Crises and Consequences
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Q1) Lehman Brothers was forced to declare bankruptcy in September 2008, when:
A) Barack Obama was elected president.
B) it purchased Bear Stearns, another investment bank.
C) one of its short-term lenders, JPMorgan Chase, demanded $5 billion in cash as collateral for loans it had made to Lehman.
D) the European Union abandoned the euro.
Q2) The asset bubble that caused the savings and loan crisis of the 1980s was in:
A) gold.
B) oil futures.
C) stocks of Internet companies.
D) commercial real estate.
Q3) In debt overhang consumers' debt level is diminished and the value of their assets has increased.
A)True
B)False
Q4) Maturity transformation is conversion of long-term liabilities to short-term assets.
A)True
B)False
Q5) Explain how shadow banks, which don't take deposits, can have bank runs.
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Chapter 30: Macroeconomics- Events and Ideas
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Q1) _____ answers NO to all five key questions about whether macroeconomic policy, either monetary or fiscal, can help fight recession, reduce unemployment, or should be used in a discretionary way.
A) Classical macroeconomics
B) Keynesian economics
C) Rational expectations theory
D) Monetarism
Q2) Which of the following does NOT explain why the official chronology of past U.S. business cycles maintained by the National Bureau of Economic Research goes back only to 1854?
A) The further back in time you go, the fewer economic data are available.
B) There may not have been business cycles in the modern sense much before 1854.
C) Before 1854 the U.S. economy was mostly agricultural, and therefore the short-run aggregate supply curve was probably close to vertical.
D) There were no banks before 1854.
Q3) The policies that seemed to be effective during the Great Moderation seemed to be inadequate to fight the Great Recession.
A)True
B)False
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Chapter 31: Open-Economy Macroeconomics
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Q1) The difference between a country's exports and its imports of goods and services is known as the:
A) trade balance.
B) balance of payments on goods and services.
C) balance of payments on current account.
D) balance of exchange.
Q2) (Scenario: Exchange Rates) Look at the scenario Exchange Rates. The dollar has:
A) depreciated.
B) appreciated.
C) been revalued.
D) not been affected for use in international trade.
Q3) If the rate of exchange is 1 = US$2, then US$1 = A) 0.50.
B) 2.
C) $0.50.
D) $2.00.
Q4) All other things equal, a contractionary monetary policy will cause the domestic currency to appreciate.
A)True
B)False
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Chapter 32: Graphs in Economics
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Q1) The ratio of the change in the variable on the vertical axis to the change in the variable on the horizontal axis, measured between two points on the curve, is the:
A) axis.
B) slope.
C) dependent variable.
D) independent variable.
Q2) (Figure: Unemployment Rate over Time) Look at the figure Unemployment Rate over Time. In the time-series graph, as we move from 1993 to 1995, we see that the unemployment rate has _____ from approximately _____ to approximately _____.
A) decreased; 5%; 4%
B) increased; 5.3%; 7.3%
C) decreased; 7%; 5.5%
D) increased; 4%; 6.3%
Q3) (Figure: Consumption of Pizza and Tacos) Look at the figure Consumption of Pizza and Tacos. The figure shows the number of tacos and pizza slices Matt can eat in a day.
The best estimate of the slope between point A and point B is -4.
A)True
B)False
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Chapter 33: Toward a Fuller Understanding
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Q1) If a firm finds that the net present value of a project is _____ for a given interest rate, it will _____ the project.
A) positive; undertake
B) positive; not undertake
C) negative; undertake
D) positive or negative; undertake
Answer Key
Q2) The present value of a future payment _____if the _____.
A) increases; wait period increases.
B) decreases; future payment increases.
C) increases; interest rate decreases.
D) decreases; stock market rises.
Q3) You have recently graduated from high school and are debating whether to attend college or get a job. Assume that you can spend a certain amount today for tuition and receive your college degree in only one year. When you graduate, you will receive a job that pays you $100,000 immediately and $100,000 the following year. If you begin working immediately, you can earn $35,000 today and each of the next two years. If the interest rate is 10%, solve for the amount of tuition that would make you indifferent between going to college and working immediately.
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Chapter 34: Consumer Preferences and Consumer Choice
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Q1) LaToya sees honey and sugar as perfect substitutes. She is always willing to substitute 1 teaspoon of honey for 2 teaspoons of sugar. If honey is twice as expensive as sugar, LaToya will:
A) use only honey.
B) use only sugar.
C) use a lot of honey and a little sugar.
D) be willing to purchase either sugar or honey.
Q2) Higher indifference curves represent _____ lower curves. A) less utility than B) more utility than C) the same utility as D) either more or less utility than
Q3) Luis is consuming his optimal consumption bundle of pizza and tacos. The marginal utility associated with the last pizza he consumes is 1 util, and the marginal utility associated with the last taco is 3 utils. What must be the relative price of pizza in terms of tacos?
A) 0.33
B) 1
C) 3
D) The relative price is undefined.
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Chapter 35: Indifference Curve Analysis of Labor Supply
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Q1) (Figure: The Time Allocation Budget Line) Look at the figure The Time Allocation Budget Line. If the wage rate decreases, then the time allocation budget line will rotate _____ along the _____ axis.
A) left; leisure
B) up; income
C) right; leisure
D) down; income
Q2) To maximize utility, an individual should allocate time so that the marginal utility of the earnings from an hour spent working is equal to the marginal utility of an additional hour of leisure.
A)True
B)False
Q3) Diana's labor supply curve changes slope and begins to bend backward at a wage of $44. Thus, for a wage _____ $44, the substitution effect of a wage increase will
A) above; cause Diana to work fewer hours
B) below; cause Diana to work fewer hours
C) below; dominate the income effect
D) above; cause Diana to work more hours
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