Principles of Economics Test
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Course Introduction
Principles of Economics introduces students to the fundamental concepts and analytical tools used by economists to understand and explain economic behavior. The course covers both microeconomics the study of individual households, firms, and markets and macroeconomics, which examines overall economic activity, including topics such as national income, inflation, unemployment, and fiscal and monetary policy. Students will learn how scarcity and choices drive economic decision-making, explore the role of government in market economies, and apply economic reasoning to contemporary social and policy issues. This course provides a comprehensive foundation for further study in economics and related fields.
Recommended Textbook
Foundations of Economics 6th Edition by Robin Bade
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Chapter 1: Getting Started
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Sample Questions
Q1) If the marginal benefit of the next slice of pizza exceeds the marginal cost,you will
A) eat the slice of pizza.
B) not eat the slice of pizza.
C) be unable to choose between eating or not eating.
D) eat half the slice.
E) More information is needed about how much the marginal benefit exceeds the marginal cost to determine if you will or will not eat the slice.
Answer: A
Q2) Moving rightward along a straight line,the slope of the line
A) always increases.
B) always decreases.
C) stays the same.
D) increases if the line slopes upward to the right.
E) decreases if the line slopes downward to the right.
Answer: C
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Chapter 2: The Usand Global Economies
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Q1) The circular flow model shows the
A) distribution of income and consumption goods across income levels.
B) combinations of the factors of production needed to produce goods and services.
C) flow of expenditure and incomes that arise from the households', firms', and governments' decisions.
D) flow of natural resources from firms to the private market to government and back to firms.
E) distribution of income to the different factors of production.
Answer: C
Q2) Explain how public goods provided by the federal government differ from public goods provided by the state and local governments.
Answer: The federal government provides goods and services such as national defense and the legal system.These are goods and services that benefit the entire nation or else substantial parts of it.The state and local governments provide mainly education and highways,which benefit primarily residents within the state or locality.
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4
Chapter 3: The Economic Problem
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Sample Questions
Q1) The above figure shows the production possibility frontier for a country.What is the opportunity cost to move from point D to point B?
A) 12 tons of rice
B) 15 thousand bottles of wine
C) 6 thousand bottles of wine
D) 9 thousand bottles of wine
E) Nothing, it is a free lunch.
Answer: A
Q2) Relative to Al,Joe has ________ if Joe can produce a good at a lower opportunity cost than Al.
A) a comparative advantage
B) more production efficiency
C) a comparative benefit
D) a marginal benefit
E) a free lunch
Answer: A
Q3) How is economic growth shown in a production possibilities frontier graph?
Answer: Economic growth is illustrated as an outward shift of the PPF.
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Chapter 4: Demand and Supply
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Q1) 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.
Q2) A change in the demand for apples could result from any of the following EXCEPT
A) a change in the number of buyers.
B) increased preferences for fresh fruit consumption for health reasons.
C) a change in the price of an apple.
D) a change in the price of a banana.
E) a change in income.
Q3) The market demand curve for mangos is
A) the same as the demand curve of one buyer in a market with many buyers. B) upward sloping because rich people can afford more mangos than poor people can buy.
C) the horizontal sum of the individual demand curves of all the buyers.
D) the vertical sum of the individual demand curves of all the buyers.
E) the horizontal average of the individual demand curves of all the buyers.
Q4) Suppose Katie,Mark,and Bobby are the only consumers in the market for ice cream.Using the demand schedules in the table above,what is the market demand curve for ice cream?
Q5) What leads to a decrease in the quantity supplied of a good or service?
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Chapter 5: Elasticities of Demand and Supply
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Q1) The demand for necessities generally is ________ the demand for luxury goods. A) as elastic as B) more elastic than C) less elastic than D) flatter than E) not comparable to
Q2) If the price elasticity of demand for a good is 2,then a 10 percent increase in the price of that good ________ the quantity demanded by ________ percent.
A) increases; 20
B) decreases; 2
C) decreases; 10
D) decreases; 20
E) increases; 8
Q3) The price of the good multiplied by the quantity sold is its A) total revenue.
B) total cost.
C) total spending.
D) total income.
E) total quantity.
Q4) List factors that increase the price elasticity of supply.
Page 7
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Chapter 6: Efficiency and Fairness of Markets
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Sample Questions
Q1) If the price of a pizza is $10 per pizza,the consumer surplus from the first pizza consumed ________ the consumer surplus from the second pizza consumed. A) is greater than B) equals C) is less than D) cannot be compared to E) None of the above answers is correct because more information is needed about the marginal cost of producing the pizzas to answer the question.
Q2) Suppose a market produces 5,000 tons of wheat.At this quantity,the marginal cost exceeds the marginal benefit.This outcome could be the result of A) a quantity regulation limiting the amount that can be produced. B) a monopoly.
C) a subsidy.
D) an external benefit.
E) producing a public good.
Q3) Is the marginal benefit someone enjoys from a good or service the same as the price he or she pays? Explain your answer.
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8
Chapter 7: Government Actions in Markets
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Sample Questions
Q1) If a minimum wage is introduced that is above the equilibrium wage rate,
A) the quantity of labor demanded increases.
B) job search activity increases.
C) the supply of labor increases and the supply of labor curve shifts rightward.
D) unemployment decreases because more workers accept jobs at the higher minimum wage rate.
E) the quantity of labor supplied decreases because of the increase in unemployment.
Q2) In a competitive labor market,a minimum wage law set above the equilibrium wage rate
A) creates a shortage of labor.
B) causes equality between the quantity of labor supplied and the quantity demanded.
C) creates a surplus of labor.
D) lowers the wage rate paid to workers.
E) has no impact.
Q3) The above figure shows the market for a prescription drug.What is the equilibrium price of the drug? How many doses are purchased? Suppose the government imposes a price ceiling of $1.50 a dose.How many doses are purchased after the price ceiling is imposed?
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Chapter 8: Taxes
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Sample Questions
Q1) After the tax is imposed,the price paid by the buyer is ________,and the price received (and kept)by the seller is ________.
A) $2.20; $2.00
B) $2.00; $2.20
C) $2.00; $2.00
D) $2.20; $2.20
E) $2.00; $1.80
Q2) After the tax is imposed,the government collects tax revenue of ________ a week.
A) $20,000
B) $10,000
C) $50,000
D) $60,000
E) $40,000
Q3) The assertion that Bill Gates and Paris Hilton should pay more taxes than Average Joe best represents the idea of
A) horizontal equity.
B) vertical equity.
C) the benefits principle of tax fairness.
D) fairness principle of taxation.
E) benefits paid principle of taxation.
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Chapter 9: Global Markets in Action
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Sample Questions
Q1) Which of the following chain of events occurs when a tariff is imposed on a good?
A) Domestic prices rise, shifting the domestic supply curve rightward.
B) Domestic prices fall, shifting the demand curve rightward, and consumers buy more of the good.
C) Domestic prices fall, decreasing the domestic quantity supplied and increasing the quantity demanded.
D) Domestic prices rise, decreasing the quantity demanded and increasing the domestic quantity supplied.
E) Domestic prices rise, shifting the demand curve leftward and the domestic supply curve rightward.
Q2) The table above has the domestic supply and domestic demand schedules for a product.What is the equilibrium price with no trade? Over what range of prices will the country export the good? Over what range will it import the good? Suppose the world price is $20.What is the quantity demanded,the quantity supplied,and the amount of the good exported or imported?
Q3) Briefly define a tariff and a quota.Do any of these methods restrict trade without harming domestic consumers?
Q4) What is "rent seeking"? How does it apply to restricting imports?
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Chapter 10: Externalities
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Q1) The table above gives the marginal social cost (which equals the price),marginal private benefit,and marginal social benefit of students attending Diablo Valley College (DVC)in Concord,California.
a.When 4,500 students attend DVC,what does the marginal external benefit equal?
b.If the market is competitive and left without government intervention,what is the quantity of students that will attend DVC and what will be the price of a course?
c.What is the efficient quantity of students attending DVC?
d.If the government can set the price per course,in order to have the efficient quantity of students attending DVC,what should the government set as the price?
Q2) The figure above illustrates the marginal private cost and the marginal social cost to the city of Seattle for each rock concert that is offered.At 10 concerts,the
A) marginal private cost equals the marginal external cost.
B) marginal social cost equals $60,000.
C) marginal private cost is more than $40,000.
D) marginal external cost equals $60,000.
E) marginal external cost equals $80,000.
Q3) Why does an external cost lead to inefficient overproduction?
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Chapter 11: Public Goods and Common Resources
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Sample Questions
Q1) What is an individual transferable quota (ITQ)?
Q2) A basketball game aired as a pay-per-view show by your local cable network and to which you can invite your friends to watch is a ________ good.
A) rival
B) nonrival
C) nonexcludable
D) rival and nonexcludable
E) quasi public/quasi private
Q3) The marginal benefit of a public good is the
A) sum of the marginal benefits of all the individuals at each quantity.
B) marginal benefit of the individual person who places the lowest value on the good, multiplied by the number of people in the economy.
C) marginal benefit of the individual person who places the highest value on the good, multiplied by the number of people in the economy.
D) benefit of the last person's consumption.
E) average of the marginal benefits of all the individuals at each quantity.
Q4) What is the tragedy of the commons?
Q5) What is the free-rider problem and with what is it associated?
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Chapter 12: Markets With Private Information
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Q1) The lemons problem is caused by
A) health-care providers' incentive to order unnecessary tests..
B) used car buyers' inability to determine the quantity of used cars offered for sale.
C) auto insurance companies inability to adequately screen drivers.
D) the missing health care market.
E) government regulations than make some information private.
Q2) Explain the concept of moral hazard.Give an example.
Q3) Which of the following has a positive externality and hence can be under provided?
A) chronically ill people are not allowed to buy insurance.
B) health insurance purchased through an employer
C) vaccination
D) Health Maintenance Organizations
E) None of the above have a positive externality.
Q4) What is the private information in the market for health-care insurance? What is the private information in the market for health care?
Q5) What role does moral hazard play in the market for health care?
Q6) "People buy insurance do protect themselves from moral hazard." True or false? Explain.
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Chapter 13: Consumer Choice and Demand
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Sample Questions
Q1) How are total and marginal utility related?
Q2) Moving along an indifference curve,if a consumer requires a large amount of the good measured along the y-axis to make up for one unit less of the good measured on the x-axis,then
A) total utility is increasing.
B) the marginal rate of substitution is low and the indifference curve is flat.
C) the marginal rate of substitution is low and the indifference curve is steep.
D) the marginal rate of substitution is high and the indifference curve is steep.
E) the marginal rate of substitution is high and the indifference curve is flat.
Q3) If you get 40 units of utility from eating the first bag of pretzels,30 from the second bag,and 20 from the third bag,the total utility of three bags of pretzels is ________ units of utility.
A) 40
B) 70
C) 90
D) 50
E) 20
Q4) If your budget increases,what is the effect on your budget line?
Q5) What is "marginal utility?"
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Chapter 14: Production and Cost
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Q1) In the long run,if 1,000 units are produced at a cost of $8,000 and 1,200 units at a cost of $9,200,then over this range of output there are
A) constant economies of scale.
B) constant returns to scale.
C) diseconomies of scale.
D) economies of scale.
E) constant diseconomies of scale.
Q2) Increasing marginal returns to labor
A) occur when a particularly efficient worker is employed.
B) describe the portion of a total product curve where the marginal product is negative.
C) mean that two workers produce less than twice the output of one worker.
D) are the result of specialization and division of labor in the production process.
E) occur only when there are increasing marginal returns to capital.
Q3) What resources can a firm change in the short run? In the long run?
Q4) A firm increases its output and its average total costs remain unchanged.Is the firm experiencing increasing returns to scale,constant returns to scale,or decreasing returns to scale?
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Page 16
Chapter 15: Perfect Competition
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Q1) In the long run,a perfectly competitive firm
A) can make either an economic profit or a normal profit.
B) incurs an economic loss.
C) makes zero economic profit.
D) can make an economic profit, zero economic profit, or incur an economic loss.
E) makes an economic profit.
Q2) In the long run,a perfectly competitive firm makes zero economic profit.What incentive does the firm have to stay in business if it is making zero economic profit?
Q3) 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?
Q4) The characteristics that describe a perfectly competitive industry include
A) many firms selling an identical product.
B) one firm selling to many buyers.
C) many firms selling a slightly differentiated product.
D) a few firms selling to many buyers.
E) None of the above answers is correct.
Q5) What four conditions define a perfectly competitive market?
Q6) Why do you never see firms in a perfectly competitive market advertise their product?
Page 17
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Chapter 16: Monopoly
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Q1) Assume someone organizes all farms in the nation into a single-price monopoly.What is the monopoly's marginal revenue curve?
A) It is a horizontal line at the competitive industry's price.
B) It is a line that lies below the new monopoly's demand curve.
C) It is a vertical line at the monopoly's chosen output level.
D) It is identical to the demand curve for the monopolist's output.
E) It is a line that lies above the new monopoly's demand curve.
Q2) Which of the following is correct for a single-price monopoly?
i.The firm can determine the quantity it produces and the price it charges.
ii.It would never profitably produce output in the inelastic range of its demand. iii.Its marginal revenue is less than price.
A) i only
B) i and iii
C) ii only
D) ii and iii
E) i, ii, and iii
Q3) Why do some firms price discriminate? Relate your answer to the common practice of public colleges charging lower tuition to in-state students and higher tuition to out-of-state students.
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Page 18
Chapter 17: Monopolistic Competition
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Q1) If the four-firm concentration ratio equals 0.1 percent for the Mexican tomato industry,then this industry is best characterized as
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) either a monopoly or monopolistic competition.
Q2) If firms in monopolistic competition are making economic profits,eventually
A) they shut down.
B) they exit the industry.
C) the market turns into a monopoly.
D) new firms enter the industry.
E) the firms in the market increase their production so that their economic profit disappears.
Q3) Product differentiation involves making a product that is
A) slightly different from the products of competing firms.
B) no different than the products of competing firms.
C) very different from the products of competing firms.
D) completely different from the products of competing firms.
E) cheaper than the products of competing firms.
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Chapter 18: Oligopoly
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Sample Questions
Q1) When oligopolies seek to operate as a single-price monopoly,the firms produce at the point where:
A) P = MC.
B) MR = MC.
C) P < ATC.
D) P = MR.
E) MC = ATC.
Q2) A cartel is
A) another name for a firm in an oligopoly.
B) a collusive agreement among a number of firms.
C) a government body that regulates an industry.
D) an antitrust law.
E) a type of regulation that focuses on quantities rather than price.
Q3) Firms operating in an oligopoly
A) always compete on price.
B) always compete on price, product quality and marketing.
C) can make the same profit as a monopoly but there is no assurance that they will do so.
D) usually achieve the competitive outcome.
E) always make the same profit as a monopoly.
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Chapter 19: Markets for Factors of Production
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Q1) The supply of land is perfectly ________ because no matter the amount of rent offered for land,the quantity of land is ________.
A) elastic; fixed
B) inelastic; fixed
C) elastic: renewable
D) inelastic; nonrenewable
E) elastic; nonrenewable
Q2) A worker has a marginal product of 15 units a day,each of which can be sold for $10.Is it profitable to hire this worker if the wage rate is $100 a day? Briefly explain your answer.
Q3) Which of the following decreases the supply of labor that competes with union labor?
A) an increase in the minimum wage
B) an increase in the demand for imported goods
C) an increase in union members' productivity
D) new laws that restrict immigration
E) All of the above would decrease the supply of labor.
Q4) What factors shift the demand for labor curve? Briefly describe the effect of each.
Q5) Why does an increase in the minimum wage increase the demand for union labor?
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Chapter 20: Economic Inequality
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Sample Questions
Q1) Workers who have invested in education and training
A) are more likely to find jobs that are not rewarding.
B) have a higher value of marginal product.
C) have a more difficult time finding a job because their wage rate is higher.
D) have identical supply curves to otherwise similar workers who have not invested in education and training.
E) None of the above answers is correct.
Q2) What percent of income is earned by the richest forty percent?
A) 5 percent
B) 20 percent
C) 70 percent
D) 55 percent
E) More information is needed to answer the question.
Q3) In the figure above,if the value of the marginal product of skill increased,then the
A) SL curve shifts leftward.
B) SH curve shifts leftward.
C) DH curve shifts rightward.
D) DH curve shifts leftward.
E) DL curve shifts leftward.
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