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Chapter 1: Introducing Economics

1. In economics the central problem is:

A. scarcity.
B. production.
C. Money
D. Allocation
E. Consumption

2. Indicate below what is NOT a factor of production.

A. Land.
B. Labour.
C. A bank loan.
D. Capital.

3. Macroeconomics deals with

A. the activities of individual units.
B. economic aggregates.
C. the behaviour of the electronics industry.
D. the behaviour of firms.

4. Microeconomics is not concerned with the behaviour of:

A. industries.
B. firms.
C. consumers.
D. aggregate demand.

5. The study of inflation is part of :

A. macroeconomics.
B. microeconomics.
C. normative economics.
D. descriptive economics.

6. Aggregate supply is the total amount:

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 A. of labour supplied by all households.
B. of products produced by a given industry.
C. produced by the government.
D. of goods and services produced in an economy.

7. The total demand for goods and services in an economy is known as:

A. economy-wide demand.
B. gross national product.
C. aggregate demand.
D. national demand.

8. Inflation is:
A. a decrease in the overall price level.
B. an increase in the overall price level.
C. a decrease in the overall level of economic activity.
D. an increase in the overall level of economic activity.

9. A recession is:

A. a period during which aggregate output declines.

B. a period of declining prices.
C. a period of very rapidly declining prices.
D. a period of declining unemployment.

10. Unemployment means that:

A. at the going wage rate, there are people who want to work but cannot find work.
B. there are some people who will not work at the going wage rate.
C. there is excess demand in the labour market.
D. people are not willing to work at the going wage rate.

11. If marginal benefit is greater than marginal cost, a rational choice involves:

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 A. no more of the activity.
B. more or less, depending on the benefits of other activities.
C. less of the activity.
D. more of the activity.

12. A student chooses to study because the marginal benefit is greater than the ________
cost.

A. Marginal
B. Average
C. Expected
D. Total

Chapter 2: Supply and Demand

1. The 'law of demand' implies that:

A. as prices rise, demand decreases.

B. as prices fall, demand increases.
C. as prices rise, quantity demanded increases.
D. as prices fall, quantity demanded increases.

2. The Setrite Corporation produces chairs. An economist working for the firm predicts
that 'if people's incomes rise next year, then the demand for our chairs will increase,
ceteris paribus.' The accuracy of the economist's prediction depends on whether the
chairs Setrite produce:

A. are normal goods.

B. have few substitutes.
C. have many complementary goods.
D. have few complementary goods.

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 3. What effect is working when the price of a good falls and consumers tend to buy it
instead of other goods?

A. The income effect.

B. The ceteris paribus effect.
C. The substitution effect.
D. The diminishing marginal utility effect.

4. The quantity demanded of Pepsi has decreased. The best explanation for this is that:

A. the price of Coca Cola has increased.

B. Pepsi's advertising is not as effective as in the past.
C. Pepsi consumers had an increase in income.
D. the price of Pepsi increased.

5. Demand curves are derived while holding constant:

A. tastes and the price of other goods.

B. income, tastes, and the price of the good.
C. income and tastes.
D. income, tastes, and the price of other goods.

6. When the decrease in the price of one good causes the demand for another good to
decrease, the goods are:

A. substitutes.
B. complements.
C. inferior.
D. normal.

7. Suppose the demand for good Z goes up when the price of good Y goes down. We can
say that goods Z and Y are:

A. unrelated goods.

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 B. perfect substitutes.
C. complements.
D. substitutes.

8. If the demand for coffee decreases as income decreases, coffee is:

A. a substitute good.
B. a complementary good.
C. a normal good.
D. an inferior good.

9. Which of the following will NOT cause a shift in the demand curve for compact discs?

A. A change in the price of pre-recorded cassette tapes.

B. A change in wealth.
C. A change in the price of compact discs.
D. A change in income.

10. Which of the following is consistent with the law of supply?

A. As the price of calculators rise, the quantity supplied of calculators increases, ceteris
paribus.
B. As the price of calculators rise, the supply of calculators increases, ceteris paribus.
C. As the price of calculators falls, the supply of calculators increases, ceteris paribus.
D. As the price of calculators rise, the quantity supplied of calculators decreases, ceteris
paribus.

11. The price of computer chips used in the manufacture of personal computers has fallen.
This will lead to __________ personal computers.

A. an increase in the supply of

B. an increase in the quantity supplied of
C. a decrease in the quantity supplied of
D. a decrease in the supply of

12. When excess demand occurs in an unregulated market, there is a tendency for:

A. price to rise.

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 B. quantity supplied to decrease.
C. price to fall.
D. quantity demanded to increase.

13. Market equilibrium exists when _____________ at the prevailing price.

A. quantity demanded equals quantity supplied

B. quantity supplied is greater than quantity demanded
C. quantity demanded is greater than quantity supplied
D. quantity demanded is less than quantity supplied

14. A movement along the demand curve to the left may be caused by:

A. a rise in the price of inputs.

B. a rise in income.
C. a fall in the number of substitute goods.
D. a decrease in supply.

15. The price elasticity of demand is the:

A. ratio of the percentage change in price to the percentage change in quantity demanded.
B. ratio of the percentage change in quantity demanded to the percentage change in price.
C. ratio of the change in price to the change in quantity demanded.
D. ratio of the change in quantity demanded to the change in price.

16. The price of apples falls by 5% and quantity demanded increases by 6%. This means
that demand is:
A. elastic.
B. inelastic.
C. zero elastic.
D. perfectly elastic.

17. The price of burgers increases by 22% and the quantity of burgers demanded falls by
25%. This indicates that demand for burgers is:elastic.

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 A. inelastic.
B. unitarily elastic.
C. perfectly elastic.
D. elastic.

18. If the cross-price elasticity of demand between two goods is negative, then the two
goods are:

A. normal goods.
B. substitutes.
C. complements.
D. unrelated goods.

19. If the quantity demanded of beef increases by 5% when the price of chicken increases by
20%, the cross-price elasticity of demand between beef and chicken is:

A. -4.
B. 4.
C. -0.25.
D. 0.25.

20. When the market operates without interference, price increases will distribute what is
available to those who are willing and able to pay the most. This process is known as:

A. quantity setting.
B. price fixing.
C. quantity adjustment.
D. price rationing.

Chapter 3: Government Intervention in the Market

1. A price ceiling is:

A. the difference between the initial equilibrium price and the equilibrium price after a
decrease in supply.
B. the minimum price that consumers are willing to pay for a good.
C. a minimum price usually set by government, that sellers must charge for a good.
D. a maximum price usually set by government, that sellers may charge for a good.

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 2. Economists say that there has to be some form of rationing whenever:
A. there are externalities.
B. there is excess demand.
C. merit goods are produced.
D. inflation occurs.

3. It is necessary to ration a good whenever:

A. demand exceeds supply.
B. there is a perfectly inelastic demand for the good.
C. a surplus exists.
D. supply exceeds demand.

4. In a free market system, rationing occurs when there are increases in:

A. demand.
B. supply.
C. price.
D. quantity.

5. If the market price is below the equilibrium price:

A. quantity demanded will equal quantity supplied.
B. quantity demanded will be greater than quantity supplied.
C. quantity demanded will be less than quantity supplied.
D. demand will be less than supply.

6. If a government were to fix a minimum wage for adult workers, economists would
predict:
A. wages in general would fall as employers tried to hold down costs.
B. fewer young workers would be employed.
C. the costs and prices of firms employing cheap labour would increase.
D. there would be more unemployment.

7. Economists use the term 'Black Markets' for situations where:

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 A. illegal substances are sold.
B. transactions are not recorded in the GDP figures.
C. goods are sold at prices above legal or official prices.
D. buyers and/or sellers are not paying taxes as they should.

8. An example of an indirect tax is:

A. income tax.
B. a tax on profits.
C. inheritance tax.
D. VAT.

9. VAT is a good example of which kind of tax?

A. Ad valorem.
B. Direct.
C. Exercise duty.
D. Specific.

10. The government is considering placing a tax on cigarettes to raise revenue to finance
health-care benefits. The demand for cigarettes is price inelastic. Which of the
following statements is TRUE?

A. The tax on cigarettes may not raise as much revenue as anticipated in the years to
come because the demand for cigarettes is likely to become more elastic over time.
B. No tax revenue can be raised in this way because sellers of cigarettes will just lower
their price by the amount of the tax and, therefore, the price of cigarettes to consumers
will not change.
C. his is a very good way to raise revenue, both in the short term and in the long term,
because there are no substitutes for cigarettes.
D. This tax will not raise much revenue either in the short term or the long term since
demand is price inelastic.

11. Tax incidence is the:

A. behaviour of shifting the tax to another party.

B. measure of the impact the tax has on employment and output.

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 C. ultimate distribution of a tax's burden.
D. structure of the tax.

12. Tax shifting:

A. occurs when households can alter their behaviour and do something to avoid paying a
tax.
B. is the ultimate distribution of a tax's burden.
C. is the way in which a tax is structured.
D. occurs when taxes cause prices to increase, but wages to fall.

13. Where a tax can be shifted, the incidence depends on:

A. whether there is perfect or imperfect information.
B. elasticities of demand and supply.
C. who is legally obliged to pay the tax.
D. how many producers there are.

14. Income elasticity of demand is the % change in the quantity demanded divided by the
% change in income. In the UK, which of the following foods has the highest income
elasticity of demand?

A. Milk.
B. Bananas.
C. Lamb.
D. Fresh fish.

15. Arguments used to justify EU support for farmers include:

A. assured supplies of food.
B. to provide food for third world countries.
C. stable prices.
D. both the first and third option.

16. Arguments used against EU support for farmers include that:

A. poor farmers receive very little of the support.

B. EU farmers have not been able to produce enough food.
C. it prevents houses being built in the countryside.
D. the benefits are spread very unevenly between countries.

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 17. In the EU, the threshold price is used to calculate the size of:

A. the co-responsibility levy.

B. the budget stabilisers.
C. deficiency payments.
D. the variable import levy.

18. Farmers in developing countries suffer from the EU support for EU farmers in 2 ways:

A. smaller markets and higher prices.

B. lower prices for inputs and outputs.
C. smaller markets and lower prices.
D. higher prices for inputs and outputs.

19. Set-aside is an EU policy which pays farmers to:

A. sell some of their output for buffer-stocks (intervention).

B. not use some of their land.
C. use traditional methods for buildings, fences and walls.
D. use organic rather than nitrate fertilisers.

20. The MacSharry reforms of the EU farm support policy in 1992 included:

A. small farmers had to agree not to use some of their land.

B. deficiency payments.
C. cuts in intervention prices.
D. direct payments to farmers if they cut their output.

Chapter 4: Background to Demand

1. Constrained choice is relevant for households:

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 A. making labour-supply decisions but not spending decisions.
B. making spending decisions but not labour-supply decisions.
C. making both spending and labour-supply decisions.
D. considered to be 'poor', but not for those who are considered to be 'rich.'

2. Economists use the term utility to mean:

A. the value of a product before it has been advertised.

B. the satisfaction a consumer obtains from a good or service.
C. the contribution a good or service makes to social welfare.
D. any characteristic of a good or service which cannot be measured.

3. Economists use the term marginal utility to mean:

A. total satisfaction gained when consuming a given number of units.

B. additional satisfaction gained by the consumption of one more unit of a good.
C. the process of comparing marginal units of all goods which could be purchased.
D. additional satisfaction gained divided by additional cost of the last unit.

4. The law of diminishing marginal utility states that:

A. total satisfaction will decrease as more units of the good are consumed.
B. the satisfaction from each additional unit of a good consumed will decrease.
C. total utility will become negative.
D. both the first and third option.

5. By consumer surplus, economists mean:

A. the area between the average revenue and marginal revenue curves.
B. the area inside the budget line.
C. the difference between the maximum amount a person is willing to pay for a good and
its market price.
D. household saving Y-T-C.

6. The equation for Anna's demand curve for CDs is Q = 20 - .5P. If the price of a CD is
£18, consumer surplus will be:

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 A. £121.
B. £242.
C. £198.
D. £11.

7. The price of an ice cream cone is £1.50 and you buy three ice cream cones per week.
If the price of an ice cream cone falls to £1.25 and you still buy three ice cream cones
per week, which of the following is TRUE?

A. Both the total and marginal utility of the fourth ice cream cone per week must be
worth less than £1.25 to you.
B. This violates the law of demand because as price falls quantity demanded must
increase.
C. The marginal utility of the fourth ice cream cone per week must be worth less than
£1.25 to you.
D. The total utility of the fourth ice cream cone per week must be worth less than £1.25
to you.

8. Economists have used the idea of diminishing marginal utility to explain why:

A. demand curves slope downwards.

B. demand curves become flatter at lower prices.
C. demand curves are inelastic.
D. both the first and second option.

9. A consumer will buy more units of a good if the value of the good's:

A. total utility is greater than price.

B. marginal utility is greater than price.
C. total utility is less than price.
D. marginal utility is less than price.

10. The diamond-water paradox can be explained by suggesting that the price of a product
is determined by

A. marginal utility.
B. diminishing marginal utility.
C. consumer surplus.

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 D. consumer incomes.

11. A utility-maximising consumer changes their spending for goods X and Y so that:

A. PX (MUX) = PY(MUY)
B. MUX = MUY
C. TUX/PX = TUY/PY
D. MUX/MUY = PX/PY

12. The MUX/MUY is ten and the PX/PY is eight, so the consumer should buy:

A. less X and more Y.

B. more X and less Y.
C. less X and less Y.
D. more X and more Y.

13. Economists define an indifference curve as the set of points:

A. where the consumer is in equilibrium as prices change.

B. which yield the same total utility.
C. where the consumer is in equilibrium as the consumer's income changes.
D. which yield the same marginal utility.

14. Which of the following is a property of an indifference curve?

A. The marginal rate of substitution is constant as you move along an indifference curve.
B. Total utility is greatest where the 45 degree line cuts the indifference curve.
C. Marginal utility is constant as you move along an indifference curve.
D. It is convex to the origin.

15. The limits imposed on household choices by income, wealth, and product prices are
the:

A. assumption of perfect knowledge.

B. preference set.
C. choice set.

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 D. budget constraint.

16. Jane has £500 a week to spend on food and clothing. The price of food is £10 and the
price of clothing is £25. Which of the following pairs of food and clothing are in
Jane's choice set?

A. 20 units of clothing and 50 units of food.

B. 0 units of clothing and 500 units of food.
C. 50 units of clothing and 50 units of food.
D. 10 units of clothing and 25 units of food.

17. If a household's money income is doubled:

A. the budget constraint will shift out parallel to the old one.
B. the budget constraint will shift in and parallel to the old one.
C. the budget constraint will swivel at the Y-intercept.
D. the budget constraint is not affected.

18. The curve that is traced out when we keep indifference curves and the budget line
constant and change the price of good X is:

A. the price-consumption curve for X.

B. the Engel curve.
C. the demand curve for X.
D. the substitution curve.

19. The curve that is traced out when we keep indifference curves constant and move the
budget line parallel to its original position is:

A. the income-demand curve.

B. the Engel curve.
C. the income-consumption curve.
D. the Friedman curve.

20. If the income and substitution effects of a price increase work in the same direction,

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 the good whose price has changed is a:

A. superior good.
B. inferior good.
C. Giffen good.
D. normal good

CHAPTER 5.

1. Profit-maximising firms want to maximize the difference between:

A. total revenue and total cost.

B. marginal revenue and marginal cost.
C. total revenue and marginal cost.
D. marginal revenue and average cost.

2. Which statement is FALSE?

A. Fixed costs are the difference between total costs and total variable costs.
B. There are no fixed costs in the long run.
C. Fixed costs do not depend on the firm's level of output.
D. Fixed costs are zero if the firm is producing nothing.

3. Which of the following is most likely to be a variable cost for a firm?

A. The monthly rent on office space that it leased for a year.

B. The interest payments made on loans.
C. The franchiser's fee that a restaurant must pay to the national restaurant chain.
D. The payroll taxes that are paid on employee wages.

4. The costs that depend on output in the short run are:

A. total variable costs only.

B. both total variable costs and total costs.
C. total fixed cost only.

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 D. total costs only.

5. The short run, as economists use the phrase, is characterised by:

A. at least one fixed factor of production and firms neither leaving nor entering the
industry.
B. a period where the law of diminishing returns does not hold.
C. all inputs being variable.
D. no variable inputs - that is, all of the factors of production are fixed.

6. Diminishing marginal returns implies:

A. increasing marginal costs.

B. decreasing average variable costs.
C. decreasing average fixed costs.
D. decreasing marginal costs.

7. Which of the following is a correct statement about the relationship between average
product (AP) and marginal product (MP)?

A. If AP = MP, then total product is at a maximum.

B. If AP is at a maximum, then MP is also.
C. If TP is declining, then AP is negative.
D. If AP exceeds MP, then AP is falling.

8. If the total product of two workers is 80 and the total product of 3 workers is 90, then
the average product of the third worker is _____ and the marginal product of the third
worker is _______.

A. 10; 30
B. 160; 270
C. 30; 10
D. 10; 3.33

9. Engineers for The All-Terrain Bike Company have determined that a 15% increase in

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 all inputs will cause a 15% increase in output. Assuming that input prices remain
constant, you correctly deduce that such a change will cause _________ as output
increases.

A. average costs to remain constant

B. average costs to decrease
C. average costs to increase
D. marginal costs to increase

10. Suppose Handel's Ice Cream experiences economies of scale up to a certain point and
diseconomies of scale beyond that point. Its long-run average cost curve is most likely
to be:

A. horizontal.
B. upward sloping to the right.
C. U-shaped.
D. downward sloping to the right.

11. Most empirical studies show that firms' cost curves:

A. slope down to the right and then level off.
B. slope up to the right.
C. slope down to the right.
D. are U-shaped.

12. A graph showing all the combinations of capital and labour that can be used to
produce a given amount of output is:

A. an indifference curve.
B. an isocost line.
C. an isoquant.
D. a production function.

13. The rate at which a firm can substitute capital for labour and hold output constant is
the:

A. marginal rate of factor substitution.

B. marginal rate of substitution.

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 C. marginal rate of production.
D. law of diminishing marginal returns.

14. A graph showing all the combinations of capital and labour available for a given total
cost is the:

A. isoquant.
B. isocost line.
C. expenditure set.
D. budget constraint.

15. The formula for average fixed costs is:

A. TFC - q
B. TFC/q
C. q/TFC
D. Dq/DTFC
16. The formula for average variable cost (AVC) is:

A. TVC/q
B. DTVC/Dq
C. q/TVC
D. Dq/DTVC

17. Marginal revenue is:

A. the additional profit the firm earns when it sells an additional unit of output.
B. the difference between total revenue and total costs.
C. the added revenue that a firm takes in when it increases output by one additional unit.
D. the ratio of total revenue to quantity.

18. A firm in a perfectly competitive industry is producing 50 units, its profit-maximising

quantity. Industry price is £2 and total fixed costs and total variable costs are £25 and
£40, respectively. The firm's economic profit is:

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 A. £60.
B. £15.
C. £30.
D. £35.

19. Maximum profit can be shown on a diagram using:

A. the MR and MC curves.

B. the MR and AR curves.
C. the AC and AR curves.
D. the AC and MC curves.

20. A firm will shut down in the short run if:

A. fixed costs exceed revenues.
B. it is suffering a loss.
C. total costs exceed revenues.
D. variable costs exceed revenues.

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