Principles of Economics Test
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Course Introduction
Principles of Economics introduces students to the fundamental concepts of microeconomics and macroeconomics, exploring how individuals, firms, and governments make choices regarding the allocation of limited resources. The course covers topics such as supply and demand, market equilibrium, consumer and producer behavior, the role of government, national income, inflation, unemployment, and monetary and fiscal policy. By examining real-world scenarios and case studies, students gain a foundational understanding of economic decision-making and the factors that influence economic growth, stability, and efficiency in modern societies.
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) What does the slope of a straight line equal? How is the slope of a curved line calculated?
Answer: The slope of a straight line is calculated between two points on the line.Between the two points on the line,the slope equals the change in the value of the variable measured on the vertical axis (the y-axis)divided by the change in the value of the variable measured on the horizontal axis (the x-axis).The slope of a curved line is calculated at a point on the line.At that point on the curved line,draw a straight line that touches the curved line at only that point.Then,calculate the slope of the straight line.The slope of the curved line at that point equals the slope of the straight line.
Q2) Why is the benefit of something measured by what you are willing to give up?
Answer: The benefit of a good or service,say a slice of pizza,is the pleasure it brings the consumer.But it is impossible to measure someone's pleasure.In order to measure the benefit of the slice of pizza,we need something that we can measure.Thus,to measure the benefit of the slice of pizza,we ask the consumer what he or she is willing to give up to get the slice of pizza.So,if the consumer was willing to give up,say,three hot dogs to get the slice of pizza,we can determine that the benefit of the slice of pizza to the consumer is three hot dogs.
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Chapter 2: The Usand Global Economies
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Sample Questions
Q1) Within the circular flow model,economists define households as
A) families with at least 2 children.
B) families living in their own houses.
C) individuals or groups living together.
D) married or engaged couples.
E) individuals or groups within the same legally defined family.
Answer: C
Q2) What effect,if any,will a good college education have on your human capital? Explain your answer.
Answer: Human capital refers to the skills people possess.These skills can be gained through education,on the job training,and experience.Thus your college education is increasing your human capital.
Q3) What are the payments each factor of production receives?
Answer: Rent is paid for the use of land.Wages are paid for the services of labor.Interest is paid for the use of productive capital.Entrepreneurs earn a profit.
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4
Chapter 3: The Economic Problem
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Sample Questions
Q1) A bowed out production possibilities frontier shows
A) that resources are equally productive in all uses.
B) increasing opportunity cost.
C) that resources are not equally productive in all uses.
D) Both answers B and C are correct.
E) Both answers A and B are correct.
Answer: D
Q2) 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
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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Page 5
Chapter 4: Demand and Supply
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Q1) In the above figure,an increase in productivity
A) shifts the supply curve from S to S .
B) shifts the supply curve from S to S .
C) results in a movement from point a to point b.
D) results in a movement from point b to point a.
E) has no effect.
Q2) Other things remaining the same,the quantity of a good or service demanded will increase if the price of the good or service
A) rises.
B) falls.
C) does not change.
D) rises or does not change.
E) rises or falls.
Q3) The figure above shows the market for iPods.Which of the following shifts the demand curve from D to D ?
A) a decrease in the price of Zunes, a substitute for iPods
B) an increase in the price of iPods
C) a requirement that all students at universities have an iPod
D) a decrease in the price of iPods
E) an increase in people's incomes
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Chapter 5: Elasticities of Demand and Supply
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Q1) Which of the following explains why supply is more elastic as more time passes?
A) It is difficult or impossible to increase the quantity produced in a short period of time.
B) Consumers have more time to search for substitutes.
C) Sellers try to take advantage of a high price in the short term.
D) The supply curve becomes generally steeper as more time passes.
E) There is no explanation for this phenomenon.
Q2) If the quantity supplied increases by 8 percent when the price rises by 2 percent,the price elasticity of supply is ________ .
A) 10.0
B) 6.0
C) 0.25
D) 16.0
E) 4.0
Q3) The income elasticity of demand for movies in the United States is 3.41.If people's incomes decrease by 1 percent,what is the decrease in the quantity of movies demanded?
Q4) What is the price elasticity of demand? In terms of percentage changes,what is its formula?
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Chapter 6: Efficiency and Fairness of Markets
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Q1) In 2009,tickets to a Presidential Town Hall meeting were distributed to individuals through a random selection of those who registered on a website.The tickets were allocated by which method?
A) lottery
B) majority rule
C) contest
D) first-come, first-served
E) personal characteristics
Q2) In the figure above,the cost of producing 10,000 pizzas a day is
A) $60,000.
B) $100,000.
C) $40,000.
D) $80,000.
E) $50,000.
Q3) Which of the following is an example in which "the big tradeoff" can occur?
A) The government redistributes income from the rich to the poor.
B) Ford increases the price of a pickup truck.
C) A basketball player signs a $5 million contract.
D) A college lowers tuition.
E) The price of personal computers falls year after year.
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Chapter 7: Government Actions in Markets
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Q1) Suppose the current equilibrium wage rate for lifeguards in Houston is $7.85 an hour.A minimum wage law that creates a price floor of $8.50 an hour leads to
A) a surplus of lifeguards in Houston.
B) a shortage of lifeguards in Houston.
C) no changes in the lifeguard market.
D) a change in the quantity of lifeguards supplied but no change in the quantity of lifeguards demanded.
E) an increase in the number of lifeguards employed.
Q2) A black market for housing exists because of a rent ceiling.The rent for housing in the black market is
A) the same as the equilibrium rent.
B) lower than the ceiling rent.
C) somewhere between the ceiling rent and the maximum rent a tenant is willing to pay.
D) somewhere between zero and the equilibrium rent.
E) not defined because the market is not legal.
Q3) Explain why in cities such as New York City that have rent ceiling laws,so many people who work in the city commute from outside the city.
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Chapter 8: Taxes
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Q1) A sales tax creates a deadweight loss because
A) there is some paperwork opportunity cost of sellers paying the sales tax.
B) demand and supply both decrease.
C) less is produced and consumed.
D) citizens value government goods less than private goods.
E) the government spends the tax revenue it collects.
Q2) If Congress wanted to change the social security tax so that firms paid most of the tax,they would need to
A) change the tax laws so that all of the social security tax was imposed on firms.
B) change the tax laws so that all of the social security tax was imposed on workers.
C) change the tax laws so that more than 50 percent of the social security tax was imposed on firms.
D) change the tax laws so that more than 50 percent of the social security tax was imposed on workers.
E) None of the above because the incidence of the social security tax does not depend on the tax laws but instead depends on the elasticities of the demand for labor and the supply of labor.
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Page 10
Chapter 9: Global Markets in Action
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Q1) Who gains from international trade?
A) only the exporting nation
B) only the importing nation
C) both the importing and the exporting nations
D) neither the importing nor the exporting nations
E) The gains depends on which nation gets to keep the total revenue from the sale
Q2) The table above gives the domestic demand and supply schedules for a good.Suppose the world price of the good is $40 and the government imposes a $20 per unit tariff.How much will the government collect as tariff revenue?
A) $160
B) $320
C) $80
D) $240
E) $360
Q3) How does a quota affect the consumer surplus and the producer surplus from the imported good? Is the overall economy helped or harmed by quotas? Briefly explain your answers.
Q4) How do imports affect sellers' producer surplus?
Q5) How do exports affect sellers' producer surplus?
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Chapter 10: Externalities
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Q1) In part,the Coase theorem is a proposition about
A) assigning property rights.
B) measuring private costs.
C) subsidizing external benefits.
D) taxing external costs.
E) how increasing transactions costs can reduce deadweight losses.
Q2) In order for pollution taxes to be effective in eliminating the deadweight loss resulting from pollution,the pollution tax must be set equal to the
A) marginal private cost.
B) marginal external cost.
C) marginal social cost.
D) marginal benefit of polluting.
E) price of the good.
Q3) If a good has an external cost,then the marginal private cost curve
A) lies below then the marginal social cost curve.
B) lies above the marginal social cost curve.
C) lies below the horizontal axis.
D) is the same as the marginal external cost curve.
E) is undefined because the firms' costs are not equal to the social costs.
Q4) What do we mean by "property rights" and why are they important?
Page 12
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Chapter 11: Public Goods and Common Resources
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Q1) Lowe's starts to offer free weekend carpentry classes because Home Depot does.This decision is an example of
A) the principle of minimum differentiation.
B) provision of a public good.
C) rational ignorance.
D) overproduction of a private good.
E) overproduction of a public good.
Q2) What is the tragedy of the commons?
Q3) Which of the following is an example of a pure private good?
A) national defense
B) the Florida State Turnpike, a non-congested toll freeway
C) Lake Erie
D) the Metropolitan Museum of Art in New York City
E) the new heat pump your neighbor bought for her house
Q4) A good is nonexcludable if
A) only the government can produce it.
B) nobody can be excluded from enjoying the benefits of the good.
C) when you pay for the good, you are guaranteed to be the sole consumer.
D) when you consume a unit, that means there is no less for someone else.
E) it is also nonrival.
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Chapter 12: Markets With Private Information
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Q1) Bill purchases property insurance for his office building,which includes coverage for fire damage.The policy offers premium discounts for smoke detectors,fire alarms,fire extinguishers and sprinkler systems.This is an incentive system to help avoid
A) adverse selection.
B) adverse signals.
C) moral hazard.
D) screening.
E) None of the above answers are correct.
Q2) What is the private information in the market for health-care insurance? What is the private information in the market for health care?
Q3) Used car buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because
A) a warranty on a lemon is costly to the seller.
B) warranties are only offered on lemons.
C) the signal cannot be false.
D) adverse selection means that warranties will not be used as a signal.
E) a false signal has no effect on the seller.
Q4) Explain the concept of adverse selection.Give an example.
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Page 14
Chapter 13: Consumer Choice and Demand
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Sample Questions
Q1) A preference map is a set of
A) indifference curves.
B) budget lines.
C) demand curves.
D) substitution curves.
E) marginal rate of substitution curves.
Q2) Mary likes to consume either pizza or spaghetti.She has $48 to spend on these meals.
a.One week the price of pizza is $8 and the price of spaghetti is $6.Mary uses the indifference curve analysis she learned in microeconomics to decide how much of each type of meal to buy.She puts pizza on the vertical axis and spaghetti on the horizontal axis.What is the marginal rate of substitution at the combination of pizza and spaghetti that Mary chooses?
b.The next week,the price of pizza is $6 and the price of spaghetti is $8 so Mary adjusts her consumption combination to maximize her total utility.What is her marginal rate of substitution now?
Q3) What does the term "indifferent" mean and what is its relationship to an indifference curve?
Q4) What is the "principle of diminishing marginal utility"?
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Chapter 14: Production and Cost
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Q1) The return to entrepreneurship is known as
A) economic profit.
B) normal profit.
C) opportunity revenue.
D) normal revenue.
E) explicit profit.
Q2) The difference between a firm's total revenue and its total cost is its ________ profit.
A) explicit
B) normal
C) economic
D) accounting
E) excess
Q3) Based on the figure above,curve D is the firm's A) marginal cost curve.
B) total cost curve.
C) average total cost curve.
D) average variable cost curve.
E) average fixed cost curve.
Q4) What is the difference between a normal profit and an economic profit?
Page 16
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Chapter 15: Perfect Competition
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Q1) In a market undergoing technological change,firms that
A) adopt the new technology temporarily incur an economic loss.
B) adopt the new technology temporarily make an economic profit.
C) do not adopt the new technology temporarily make an economic profit.
D) do not adopt the new technology increase their market share.
E) do not adopt the new technology continue to make a normal profit.
Q2) The market demand curve in a perfectly competitive market is ________ and the demand curve for a perfectly competitive firm's output is ________.
A) downward sloping; downward sloping
B) downward sloping; horizontal
C) horizontal; downward sloping
D) horizontal; horizontal
E) downward sloping; upward sloping
Q3) We know that a perfectly competitive firm is a price taker because
A) its MC curve slopes upward.
B) its ATC curve is U-shaped.
C) its demand curve is horizontal.
D) MC and ATC are equal at the profit-maximizing amount of output.
E) it has no supply curve.
Q4) What are the four types of markets? Give a brief description of each type.
Page 17
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Chapter 16: Monopoly
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Q1) A single-price monopoly can sell 2 units for $8.50 per unit.In order to sell 3 units,the price must be $8.00 per unit.The marginal revenue from selling the third unit is
A) $24.00.
B) $8.50.
C) $7.00.
D) $6.50.
E) $17.00.
Q2) A marginal cost pricing rule sets marginal cost equal to A) minimum average variable cost.
B) price.
C) average cost.
D) marginal revenue.
E) the smaller of price or marginal revenue.
Q3) In the figure above,the length of the double sided arrow is the A) consumer surplus.
B) deadweight loss.
C) producer surplus.
D) economic loss per unit.
E) economic profit.
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Page 18
Chapter 17: Monopolistic Competition
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Q1) The shampoo industry is constantly coming out with new products.The reason is that when a firm introduces a new shampoo into the market,the demand for the shampoo becomes ________ temporarily and economic profit ________.
A) more elastic; decreases B) less elastic; increases
C) more elastic; increases
D) less elastic; decreases E) unit elastic; increases
Q2) For a firm in monopolistic competition,innovation and product development are A) senseless because economic profit is always zero in the long run.
B) necessary in order to have a chance of making at least a short-run economic profit. C) inconsequential because each firm produces a different product.
D) necessary to allow new firms to enter.
E) uncommon because other firms already produce similar products.
Q3) For a firm in monopolistic competition,define efficient scale and excess capacity.Briefly explain each.
Q4) "One of the defining features of monopolistic competition is product variety." Is the previous statement correct or incorrect?
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Page 19
Chapter 18: Oligopoly
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Sample Questions
Q1) The equilibrium in the prisoners' dilemma
i.minimizes the prisoners' combined jail time. ii.has one prisoner confessing and the other denying.
iii.is a Nash equilibrium.
A) i only
B) ii only
C) iii only
D) i and iii
E) i, ii, and iii
Q2) When economies of scale limit the number of firms in an industry to 3,there is a
A) natural monopoly.
B) natural oligopoly.
C) legal oligopoly.
D) legal cartel.
E) natural monopolistic competition.
Q3) "If firms in an oligopoly operate as a monopoly,the industry produces the most output and if they operate as perfect competitors,the industry produces the least output." Is the previous statement correct or incorrect? Why?
Q4) What is the dilemma faced by firms in oligopoly?
Q5) Describe the characteristics of an oligopoly.
Page 20
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Chapter 19: Markets for Factors of Production
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Q1) If the demand for labor decreases,then the equilibrium wage rate ________ and the equilibrium quantity of labor ________.
A) falls; increases
B) might rise, fall, or not change; increases C) rises; might increase, decrease, or not change
D) falls; decreases
E) falls; does not change
Q2) Derived demand means that the demand for a factor of production is derived from the
A) supply of that factor of production.
B) price of that factor of production.
C) demand for the goods and services the factor of production is used to produce.
D) costs of production.
E) government, which forces large firms to hire at least some minimum number of different resources.
Q3) How does a firm's demand for labor change if the price of the firm's product increases? Relate your answer to the value of marginal product.
Q4) Explain why an individual's labor supply curve is backward bending.
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Chapter 20: Economic Inequality
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Q1) Three types of income maintenance programs used by the United States are
A) income taxes, Social Security, and the earned income tax credit.
B) Social Security programs, OASDHI, and income taxes.
C) Social Security programs, unemployment compensation, and welfare programs.
D) welfare programs, income taxes, and the earned income tax credit.
E) income taxes, Social Security, and subsidized services.
Q2) Which type of household has the lowest poverty rate?
A) black
B) Hispanic
C) white
D) White and Hispanic are almost tied.
E) White and black are almost tied.
Q3) The three main ways that governments in the United States redistribute income are
A) using the rule of law, subsidized services, and income taxes.
B) private property rights, income taxes and the minimum wage.
C) income taxes, income maintenance programs, and subsidized services.
D) income taxes, rent control, and food stamps.
E) sales taxes, food stamps, and subsidized services.
Q4) Which is distributed more equally: income or wealth?
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