Public Economics
Test Preparation
Course Introduction
Public Economics examines the role of government in the economy, focusing on government expenditure, taxation, and the provision of public goods and services. The course explores fundamental concepts such as market failure, externalities, and social welfare, alongside the design and impact of tax policies and government programs. Students learn to analyze policy debates, evaluate the efficiency and equity of government interventions, and consider issues like income redistribution and fiscal federalism. Through both theoretical models and empirical evidence, the course equips learners with tools to assess the rationale and consequences of public sector activities within modern economies.
Recommended Textbook
Microeconomics Theory and Applications 12th Edition by Edgar K. Browning
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Chapter 1: An Introduction to Microeconomics
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Sample Questions
Q1) The implicit cost of time spent on shopping:
A)has decreased because of the growth of single-wage-earner families.
B)has increased because of the decline in average income levels.
C)has increased,contributing to the growth of fast-food restaurants.
D)has decreased,contributing to the growth of convenience stores at gas stations.
Answer: C
Q2) The assumption of rationality implies that market participants:
A)always choose the option with the highest gross benefit.
B)assess expected benefits and expected costs.
C)do not make decisions under uncertainty.
D)do not care about benefits or costs accruing in the future.
Answer: B
Q3) Which of the following is generally considered a microeconomic question?
A)The relationship between the money supply and nominal GDP
B)The relationship between the unemployment and inflation
C)The impact of a tax cut on public saving
D)The effect of anti-discrimination laws on employers' hiring practices.
Answer: D
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3
Chapter 2: Supply and Demand
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Sample Questions
Q1) Which of the following is likely to shift the demand for chocolates to the left?
A)An increase in the price of cocoa used to make chocolates
B)Medical reports suggesting increased risk of memory loss among the aged due to high chocolate consumption
C)A decrease in the price of chocolates
D)The introduction of minimum wages by the government in an attempt to improve the average wage level in the economy and alleviate poverty
Answer: B
Q2) The cross-price elasticity of demand between substitutes:
A)is negative.
B)is positive.
C)is zero.
D)is negative if the own-price elasticity of each good is inelastic,but positive if the own-price elasticity of each good is elastic.
Answer: B
Q3) Explain how a change in price affects total expenditure by filling in each cell with the change in price that must have occurred.
Answer: 11ea857e_d75f_1e19_a433_572da5c8f312_TB1826_00_TB1826_00
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Chapter 3: The Theory of Consumer Choice
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Sample Questions
Q1) Suppose initially that the price of X is $5,the price of Y is $10,and the consumer's income is $100.If Y is measured on the vertical axis,X is measured on the horizontal axis,and the price of Y increases to $20:
A)the entire budget line will shift inward toward the origin,with its slope changing from -1/2 to -1/4.
B)the budget line will pivot inward toward the origin along the X axis,with its slope changing from -1/2 to -1/4.
C)the budget line will pivot inward toward the origin along the Y axis,with the slope changing from -1/2 to -1/4.
D)the budget line will pivot inward toward the origin along the Y axis,with the slope changing from -1/4 to -1/2.
Answer: C
Q2) Which of the following will lead to corner equilibrium?
A)The consumer has a fixed amount of income
B)The first unit of one good is not worth its cost
C)The consumer has L-shaped indifference curves
D)The proportion of income spent on both goods is the same
Answer: D
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5
Chapter 4: Individual and Market Demand
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Sample Questions
Q1) Which of the following must be true for a Giffen good?
A)The good must be inferior and the income effect must be larger than the substitution effect.
B)The good must be inferior and the substitution effect must be larger than the income effect.
C)Both the income and the substitution effect of a price rise will be positive.
D)Both the income and the substitution effect of a price rise will be negative.
Q2) If there are only two goods,coffee and donuts,and coffee is an inferior good for a consumer,then:
A)the consumer does not value an extra unit of coffee in terms of donuts.
B)a price increase for coffee leads to a higher level of well-being.
C)donuts cannot be an inferior good.
D)donuts can be an inferior good but not a Giffen good.
Q3) If the price-consumption curve is upward sloping,then demand elasticity:
A)may be greater than 1.0.
B)must be less than 1.0.
C)equals 1.0
D)must be between 0.5 and 1.5.
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Chapter 5: Using Consumer Choice Theory
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Sample Questions
Q1) Walter works for a large firm that produces software and has a capitalized value of $10 billion.This firm pays its employees,in part,with the company's stock,compensating Walter an additional thirty percent of his $50,000 annual salary worth of the company's stock.Which of the following is true?
A)This compensation scheme reduces the level of risk in his portfolio since he is employed at the same company.
B)This compensation scheme provides Walter a good means of minimizing financial risk since he can hold stock in his company rather than money in the bank.
C)To reduce his exposure to risk Walter should purchase more stock in his company if he believes more people will buy computers in the future.
D)To minimize risk Walter should sell the stock in his company and buy other assets to diversify his financial holdings.
Q2) Expected return is defined as _____.
A)the summed value of each possible rate of return discounted for inflation
B)the average probability of profit on a fair investment
C)the expected probability of high returns on an investment
D)the summed value of each possible rate of return weighted by its probability
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Page 7
Chapter 6: Exchange, Efficiency, and Prices
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Sample Questions
Q1) How does a competitive exchange differ from a two-person model of exchange?
A)The Pareto criterion is satisfied only in a competitive exchange and not in a two-person exchange.
B)In two-person exchanges,the exact outcome of bargaining cannot be predicted unlike with a competitive exchange.
C)The outcomes of two-person exchanges tend to be more equitable than competitive exchanges.
D)In two-person exchanges consumers are price-takers while competitive exchange involves price-makers.
Q2) Given an Edgeworth exchange box showing Homer's and Sandy's endowments of donuts and coffee:
A)for Homer to have more coffee Sandy must have less donuts.
B)if Sandy is on the contract curve Homer must be off the contract curve.
C)Homer and Sandy will be equally well off at any point on the contract curve.
D)for Sandy to have more coffee Homer must have less coffee.
Q3) Are non-price allocation mechanisms efficient? Explain.
Q4) What would you expect to see in the market for healthcare if the government decided that healthcare allocation would be done on the basis of altruism? Why?
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Page 8
Chapter 7: Production
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Sample Questions
Q1) The short-run refers to:
A)a time period of two years or less.
B)the time period in which the usage of all inputs are held constant.
C)the time period in which it is too costly to change the usage of at least one input.
D)the time period in which the usage of all inputs can be changed.
Q2) A technologically efficient level of output is the _____.
A)maximum output possible from the least amount of inputs
B)level of output produced using the latest technology available
C)cost-minimizing level of output
D)maximum output available from a given set of inputs
Q3) Consider the following Cobb-Douglas production function,T = aL<sup>b</sup>K<sup>c</sup>E<sup>d</sup>,where T is t-shirts produced,L is labor input,K is capital,and E is energy input.Mathematically show how the returns to scale of the production function depends upon the parameters a,b,c,and d.
Q4) In Figure 7-2,at point C _____.
A)average product equals marginal product
B)marginal product is at a maximum
C)total product is increasing at an increasing rate
D)average product is declining but positive
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Chapter 8: The Cost of Production
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Sample Questions
Q1) Consider the cubic total cost function TC = a + bQ + cQ<sup>2</sup> + dQ<sup>3</sup>,where a = 0,b = 25,c = -10,and d = 1.The firm's minimum efficient scale would be an output of _____ units.
A)ten
B)five
C)one
D)two
Q2) Economies of scale:
A)is the same thing as increasing returns to scale.
B)exist if a firm increases its output more than in proportion to its total input cost.
C)exist if a firm increases its output precisely proportional to its total input cost.
D)refers to the ability to make large-scale investments in capital.
Q3) A firm's costs are determined by:
A)its production function.
B)the market price of its product.
C)the market demand curve.
D)its production possibility frontier.
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Chapter 9: Profit Maximization in Perfectly Competitive Markets
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Sample Questions
Q1) For a perfectly competitive firm,the demand curve:
A)coincides with the marginal revenue curve.
B)is parallel to the vertical axis.
C)is upward sloping.
D)is convex to the origin.
Q2) Derive the first-order and second-order conditions for perfect competition.
Q3) As long as there is free entry into a market:
A)firms in that market can sustain prices above average total cost.
B)firms in that market can maintain market power.
C)economic profits are not sustainable.
D)accounting profits will be zero.
Q4) Assume that labor is the variable input for a firm.Which of the following will occur if the wage rate increases?
A)Its average variable cost,average fixed cost,average total cost,and marginal costs will increase.
B)Its average variable cost and average total costs will increase and profits will decrease.
C)Its marginal cost,average total costs,and output will increase.
D)Its marginal cost and average variable costs will increase.
Page 11
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Chapter 10: Using the Competitive Model
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Sample Questions
Q1) What is meant by consumer surplus?
A)It is the total quantity of a good bought by a consumer divided by the price paid.
B)It is a measure of an individual consumer's utility from the consumption of a good.
C)It is the difference between a consumer's maximum willingness to pay and the price.
D)It is a measure of the total benefit to consumers from the purchase of a good.
Q2) Given that sale of crack cocaine for a positive price is completely banned in certain parts of the world,why is it that there is a thriving black market for this illegal drug? Explain with the help of demand and supply curves.
Q3) An excise tax imposed on junk food reduces consumer surplus by $50,producer surplus by $80,and results in tax revenue of $40 for the government.What is the welfare effect of this tax?
A)A net loss of $10
B)A net gain of $40
C)A net loss of $90
D)A net loss of $130
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Chapter 11: Monopoly
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Sample Questions
Q1) Which of the following statements correctly identifies the relationship between marginal revenue and price elasticity of demand?
A)When price elasticity of demand is infinite,marginal revenue is greater than price.
B)When price elasticity of demand is equal to one,marginal revenue is zero.
C)When price elasticity of demand is more than one,marginal revenue is negative.
D)When price elasticity of demand is less than one,marginal revenue is positive.
Q2) _____ would not be considered a barrier to entry in a market.
A)An absolute cost advantage
B)A copyright
C)A low Lerner index
D)A high level of product differentiation
Q3) In response to a rightward shift in the demand for a commodity,a monopoly firm that is producing at the profit-maximizing level of output will:
A)decrease price and output.
B)decrease output and increase price.
C)increase price but maintain the level of output.
D)increase output and price.
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Chapter 12: Product Pricing With Monopoly Power
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Sample Questions
Q1) We would expect price discrimination to be most successful in the market for:
A)haircuts.
B)DVD's.
C)cars.
D)jeans.
Q2) Which of the following price discrimination strategies allows a monopolist to distribute a product/service most efficiently between two periods of time?
A)Predatory pricing
B)Peak-load pricing
C)Block pricing
D)Two-part tariff
Q3) The strategy of charging different prices to different customers,for the same product,based on the differences in their demand elasticities is referred to as:
A)predatory pricing.
B)price skimming.
C)arbitrage.
D)price discrimination.
Q4) Why is it difficult to implement first-degree price discrimination?
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Page 14
Chapter 13: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) The Stackelberg model is different from the Cournot model because:
A)the Stackelberg model assumes that firms compete by varying their prices while the Cournot model assumes that firms compete by varying their output.
B)the Stackelberg model assumes that one firm selects its output on the basis of the other firm's reaction curve while the Cournot model assumes that both firms take each other's output as given.
C)the Stackelberg model assumes that both firms try to predict each other's reaction curves while the Cournot model assumes that the level of output of both firms is fixed.
D)the Stackelberg model assumes that one firm dominates the market through its market share while the Cournot model assumes that all firms are small relative to the market.
Q2) Monopolistically competitive firms _____.
A)earn positive economic profit both in the short run and the long run
B)suffer an economic loss in the long run
C)earn positive economic profit in the long run
D)earn zero economic profit in the long run
Q3) What is a cartel and why are cartels considered to be inherently unstable?
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Page 15
Chapter 14: Game Theory and the Economics of Information
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Sample Questions
Q1) A repeated game is a game:
A)that is played simultaneously by different sets of players.
B)that is played more than once,but under different rules each time.
C)that is played more than once,by the same set of players.
D)that is played by a different set of players each time.
Q2) Bella,a dentist,purchases a new sedan worth $25,000 after comparing the prices quoted by the different car dealers.She incurs a total transportation cost of $100 while visiting the different showrooms and loses fees worth $500 for spending four business hours away from the dental clinic.What will be the full price of the sedan?
A)$25,500
B)$25,400
C)$25,600
D)$25,100
Q3) For which of the following commodities will the benefit from search be the highest?
A)Washing machines
B)Real estate
C)Apparels
D)Books
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Chapter 15: Using Noncompetitive Market Models
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Sample Questions
Q1) Refco is company that manufactures parts of a car engine for two major car manufacturers.It decides to shut down an assembly line that produces parts that are specially tailored for one of the car manufacturers.The other manufacturer then increases its order for parts made by Refco.In this example,Refco was practicing a
A)loss leader strategy
B)price gouging strategy
C)commitment strategy
D)cost plus pricing strategy
Q2) Refer to Figure 15-2.Since there is a positive deadweight loss from monopoly,which of the following statements must be true?
A)The gain in producer surplus should not exceed $450.
B)The loss in total surplus should be lesser than or equal to $300.
C)The loss in consumer surplus should not exceed $600.
D)The gain in total surplus should exceed the loss in consumer surplus.
Q3) Refer to Table 15-3.What is the highest payoff from Abbott's dominated strategy?
A)$100
B)$115
C)$107
D)$60
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Chapter 16: Employment and Pricing of Inputs
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Q1) When the input supply curve confronting an individual firm is the same as the market supply of the input,one can conclude that:
A)the firm is a monopsony in the input market.
B)the firm is one of many buyers of the input.
C)the firm does not have any monopoly power in the input market.
D)the input is used in many different industries.
Q2) Two inputs,labor and capital,are considered complements if:
A)a fall in the price of labor leads to a fall in the price of capital.
B)they can replace each other in the production process.
C)a fall in the price of labor leads to an increase in the price of capital.
D)increasing the quantity of labor increases the marginal product of capital.
Q3) Given the same demand and cost functions,which of the following is true of a monopsony input market as compared to a competitive input market?
A)The employment of inputs is lower in a monopsony market
B)The employment of inputs is the same in both markets.
C)The price paid for inputs is higher in a monopsony market.
D)The price paid for inputs is the same in both markets.
Q4) Using calculus,show the profit-maximizing employment of inputs for a perfectly competitive firm.
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Chapter 17: Wages, Rent, Interest, and Profit
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Sample Questions
Q1) Economic rent accrues to:
A)owners of monopsony firms.
B)owners of monopoly firms
C)consumers in competitive markets.
D)suppliers in input markets.
Q2) What does the height of the demand curve in a labor market represent?
A)The value of output produced by an incremental worker
B)The increase in revenue from the sale of an additional unit of output
C)The marginal cost of hiring an additional worker
D)The payment made to an individual worker
Q3) Suppose leisure is shown on the horizontal axis and weekly income is shown on the vertical axis,an increase in the wage rate will cause the budget line to:
A)become steeper.
B)shift inward toward the origin.
C)shift outward away from the origin.
D)become flatter.
Q4) Using a graph,explain the welfare effects of an effectively organized union in the labor market.
Q5) How can the presence of a union in a labor market be beneficial?
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Chapter 18: Using Input Market Analysis
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Sample Questions
Q1) What determines who bears the burden of the social security tax?
Q2) Which of the following defines an efficiency wage?
A)It is the equilibrium wage rate in the labor market where the demand for labor exactly matches the supply of labor.
B)It is an above-market wage which increases the firms' profits by increasing the productivity of all factors of production.
C)It is an above-market wage which increases the firms' profits by lowering the costs of searching for,selecting,and training new workers.
D)It is a below-market wage which increases the employment opportunities in an economy and reduces overall poverty.
Q3) Which of the following factors hinders the success of a cartel agreement between input buyers?
A)Government intervention in the input market
B)Presence of a small number of firms in different input industries
C)The use of a variety of inputs in the production of a good by firms
D)The low demand for the final product in the output market
Q4) Explain how you would investigate whether wage differences are due to discrimination.
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Page 20
Chapter 19: General Equilibrium Analysis and Economic Efficiency
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Q1) Which of the following is true of general equilibrium analysis?
A)It is useful for analyzing markets when changes are initiated in one market and repercussions are almost nonexistent.
B)It considers the impact of a change in government policy on a market in isolation.
C)It is useful for analyzing markets when changes are initiated in one market but they affect prices and output in other markets.
D)It is useful for analyzing market conditions when there is no mutual interdependence among markets.
Q2) Which of the following can be considered as a feedback effect of an increase in the price of butter?
A)A decrease in the demand for margarine
B)An increase in the demand for margarine
C)An increase in the demand for butter
D)A decrease in the price of margarine
Q3) According to Hayek,can there ever be an objectively defined efficient outcome other than what currently exists? Explain.
Q4) Explain why economic efficiency cannot be achieved under certain circumstances.
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Chapter 20: Public Goods and Externalities
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Q1) The cost imposed by an economic activity on others,who are not directly involved in the transaction,is referred to as:
A)a sunk cost.
B)an implicit cost.
C)an external cost.
D)resource overutilization.
Q2) A _____ gives the inventor the right to make a new product or use a new process typically for 17 years.
A)service mark
B)brand name
C)patent
D)trade mark
Q3) Perfect competition in an industry ensures:
A)both production and output efficiency.
B)production efficiency but not necessarily output efficiency.
C)output efficiency but not necessarily production efficiency.
D)external benefits but not external costs.
Q4) Explain with the help of a suitable real life example how common resources are depleted if property rights are not ensured?
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