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Economics Midterm Study Guide

45 Questions
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Midterm Questions

Questions and Answers
  • 1. 
    Economics
    • A. 

      Studies human behavior when scarcity exists and choices must be made

    • B. 

      Provides the only reasonable explanation of how people make decisions

    • C. 

      Is better at showing the way things ought to be than the other social sciences are

    • D. 

      Is the only social science that can explain the existence and behavior of public institutions

  • 2. 
    Macroeconomics is best described as the study of
    • A. 

      The behavior of large firms in the marketplace

    • B. 

      The economic behavior of individual decision makers

    • C. 

      The behavior of the economy as a whole

    • D. 

      The actions and reactions of the rest of the world

  • 3. 
    Which of the following is the best example of a microeconomic topic?
    • A. 

      The impact of aggregate demand on recession.

    • B. 

      The reasons for the increase in the price of a soft drink.

    • C. 

      The effect that money supply has on the interest rate.

    • D. 

      The tradeoff between inflation and unemployment.

  • 4. 
    A model is defined as a:
    • A. 

      Description of all variables affecting a situation.

    • B. 

      Positive analysis of all variables affecting an event.

    • C. 

      Simplified description of reality to understand and predict an economic event.

    • D. 

      Prediction based on historical evidence.

  • 5. 
    Opportunity cost is defined
    • A. 

      Only in terms of money spent

    • B. 

      As the sum of the values of all alternatives not chosen

    • C. 

      As the value of the best alternative not chosen

    • D. 

      As the difference between the benefits of your choice and the costs of your choice

  • 6. 
    If all resources are used efficiently to produce goods and services, a nation will find itself producing
    • A. 

      Inside its production possibilities frontier

    • B. 

      Somewhere on and along its production possibilities frontier

    • C. 

      Outside of its production possibilities frontier

    • D. 

      More of one product with no decrease in the production of any other product

  • 7. 
    Gross Domestic Product (GDP) equals the
    • A. 

      Total output of all goods and services

    • B. 

      Market value of final goods and services produced in a nation in a given year

    • C. 

      Value added to the economy by intermediate goods and services minus original cost

    • D. 

      Production by the rest of the world

  • 8. 
    Which of the following items is included in the calculation of GDP?
    • A. 

      Purchase of 100 shares of General Motors stock.

    • B. 

      Purchase of a used car.

    • C. 

      Purchase of an intermediate good.

    • D. 

      None of the above would be included.

  • 9. 
    All final goods and services that make up GDP can be expressed in the form:
    • A. 

      GDP = C + I - G + X + M.

    • B. 

      GDP = C + I + G + X + M.

    • C. 

      GDP = C + I + G + X - M.

    • D. 

      GDP = C + I + X - M.

  • 10. 
    If real GDP increased by 3 percent, then
    • A. 

      The price level has increased by 3 percent

    • B. 

      Real output/production has increased by 3 percent

    • C. 

      The increase might have been caused by an increase in the price level or output, but we cannot tell for sure

    • D. 

      Government spending increased by 3 percent

  • 11. 
      National income account (billions of   dollars)  
      Personal consumption expenditures (C) $500  
      Government expenditures (G) 50  
      Gross private domestic investment (I) 300  
      Exports (X) 50 
      Imports (M) 100
      As shown in the above exhibit, GDP as calculated by the expenditure approach is
    • A. 

      $500 billion.

    • B. 

      $800 billion.

    • C. 

      $1000 billion.

    • D. 

      $900 billion.

  • 12. 
    In order to demand a good, the buyer must
    • A. 

      Want the good very much

    • B. 

      Be both willing and able to pay for it

    • C. 

      Think that the good has significant utility

    • D. 

      Be aware of the opportunity costs

  • 13. 
    Which of the following is not true regarding a change in quantity demanded?
    • A. 

      A change in quantity demanded is shown by a movement along a given demand curve.

    • B. 

      The demand curve shifts whenever the quantity demanded changes.

    • C. 

      Quantity demanded is the single response to a price change.

    • D. 

      The lower the price of a product, other things constant, the higher the quantity demanded.

  • 14. 
    A demand curve usually has a
    • A. 

      Negative slope because price and quantity demanded are inversely related

    • B. 

      Zero slope because price and quantity demanded are not related

    • C. 

      Positive slope because price and quantity demanded are positively related

    • D. 

      Infinite slope because price and quantity demanded are not related

  • 15. 
    If the price of peanut butter increases, other things constant, demand for jelly will
    • A. 

      Increase because the goods are substitutes

    • B. 

      Decrease because the goods are substitutes

    • C. 

      Decrease because the goods are complements

    • D. 

      Increase because the goods are complements

  • 16. 
    An improvement in a firm's technology that reduces its production costs will result in a (an):
    • A. 

      Rightward shift of the supply curve.

    • B. 

      Increase in supply.

    • C. 

      Increase in quantity supplied at any given price.

    • D. 

      All of the above are true.

  • 17. 
    Economists emphasize the importance of equilibrium in markets because
    • A. 

      Trading in markets can only occur at the equilibrium price and quantity

    • B. 

      The behavior of buyers and sellers will automatically guide the market toward the equilibrium price and quantity

    • C. 

      It represents a compromise between sellers hoping for low prices and buyers searching for high prices

    • D. 

      It is the only price-quantity combination that guarantees that the poorest members of society can purchase the good or service

  • 18. 
    If the tea harvest is very good in a particular year, the supply of tea will be
    • A. 

      Higher, its price will be lower, and demand for coffee will go up

    • B. 

      Higher, its price will be higher, and demand for coffee will go up

    • C. 

      Higher, its price will be higher, and demand for coffee will go down

    • D. 

      Higher, its price will be lower, and demand for coffee will go down

  • 19. 
    Which of the following statements are true?
    • A. 

      Total utility is the satisfaction from the entire consumption of a good.

    • B. 

      Utility measures the satisfaction obtained from a good.

    • C. 

      Marginal utility is the additional satisfaction from consuming the last unit of a good.

    • D. 

      All of the above are true.

  • 20. 
    When the additional satisfaction from a good declines as more of it is consumed, this illustrates the law of
    • A. 

      Declining demand

    • B. 

      Diminishing marginal utility

    • C. 

      Increasing opportunity costs

    • D. 

      Exceptional marginal utility

  • 21. 
    If Stimpson University increases tuition in order to increase its revenue, it will:
    • A. 

      Be successful if demand is elastic.

    • B. 

      Be successful if demand is inelastic.

    • C. 

      Be successful if supply is elastic.

    • D. 

      Be successful if supply is inelastic.

  • 22. 
    If the quantity of concert tickets sold decreases by 10 percent when the price increases by 5 percent, the price elasticity of demand over this range of the demand curve is:
    • A. 

      Price elastic.

    • B. 

      Price inelastic.

    • C. 

      Unit elastic.

    • D. 

      None of the above

  • 23. 
    The short run is a period of time:
    • A. 

      In which the availability of at least one resource is fixed.

    • B. 

      That is long enough to permit changes in the all the firm’s resources.

    • C. 

      In which production occurs within one year.

    • D. 

      In which production occurs within six months.

  • 24. 
    Marginal physical product is
    • A. 

      Equal to the average output of a worker

    • B. 

      The additional utility a consumer gets from the last unit of a product

    • C. 

      The additional output from using one more unit of labor

    • D. 

      Equal to the total product of labor

  • 25. 
    ____ is the situation in which the marginal product of labor is declining as more labor is hired.
    • A. 

      Law of demand

    • B. 

      Diminishing supply

    • C. 

      Diminishing marginal returns

    • D. 

      Returns to scale

  • 26. 
    Marginal cost is the:
    • A. 

      Total cost divided by the quantity produced

    • B. 

      Cost of production that remains constant when the rate of output changes

    • C. 

      Market value of all resources used to produce a good or service

    • D. 

      Increase in the total cost because of a one unit increase in production

  • 27. 
    Which of the following is not necessarily a characteristic of perfect competition?
    • A. 

      Low prices

    • B. 

      A large number of buyers and sellers

    • C. 

      A homogeneous/identical product

    • D. 

      Easy entry and exit

  • 28. 
    Suppose the market for hot pretzels in New York City is perfectly competitive. What is true of demand in this market?
    • A. 

      The demand curve facing each seller is horizontal.

    • B. 

      The demand curve facing each seller is vertical.

    • C. 

      The demand curve facing each seller is downward sloping

    • D. 

      The demand curve facing each seller is upward sloping

  • 29. 
    A perfectly competitive firm is a price taker because:
    • A. 

      It has no control over the selling price of its product

    • B. 

      It has strong market power

    • C. 

      Market demand curve is downward sloping

    • D. 

      Its products are differentiated

  • 30. 
    The golden rule of profit maximization states that any firm maximizes profit by producing where
    • A. 

      Price equals average revenue

    • B. 

      Price equals marginal revenue

    • C. 

      Price equals total revenue

    • D. 

      Marginal cost equals marginal revenue

  • 31. 
    A firm is currently operating where the MC of the last unit produced = $64, and the MR of this unit = $70, i.e. MR > MC. What would you advise this firm to do?
    • A. 

      Shut down.

    • B. 

      Increase output.

    • C. 

      Stay at current output.

    • D. 

      Decrease output

  • 32. 
    A monopolist is
    • A. 

      One of a large number of small firms producing a homogeneous good

    • B. 

      One of a small number of large firms producing a differentiated good

    • C. 

      One of a small number of large firms producing a homogeneous good

    • D. 

      A single seller of a product with no close substitutes

  • 33. 
    Which of the following is true for monopoly?
    • A. 

      The marginal revenue curve lies below the demand curve, i.e. P>MR.

    • B. 

      Marginal revenue equals price.

    • C. 

      Economic profits are zero in the long-run.

    • D. 

      The marginal revenue curve lies above the demand curve

  • 34. 
    Compared to a perfectly competitive firm, a monopolist:
    • A. 

      Charges a higher price and produces a lower output

    • B. 

      Charges a lower price and produces a higher output

    • C. 

      Produces identical amounts of output at the lower price.

    • D. 

      Produces higher amounts of output at an identical price

  • 35. 
    Monopolistic competition is identified by
    • A. 

      Many firms producing a similar but differentiated product.

    • B. 

      One firm producing a unique good.

    • C. 

      A few firms producing a slightly differentiated product

    • D. 

      Many firms selling an identical product

  • 36. 
    Oligopolistic industries consist of
    • A. 

      A few independent firms

    • B. 

      A few mutually interdependent firms

    • C. 

      Many interdependent firms

    • D. 

      Many independent firms

  • 37. 
    A firm hires labor in a labor market. If the wage rate is $44, the firm should hire
    • A. 

      All units of labor whose marginal physical product is 44

    • B. 

      Only units of labor whose marginal revenue product is $44

    • C. 

      All units of labor whose marginal revenue product is greater than or equal to $44

    • D. 

      All units of labor whose marginal revenue product is less than $44

  • 38. 
    As a result of the decline in the demand for beef in the United States, the demand for cattle ranchers has
    • A. 

      Also decreased because the demand for cattle ranchers is a derived demand

    • B. 

      Increased because the demand for cattle ranchers is a derived supply

    • C. 

      Also decreased because the supply of cattle ranchers has increased

    • D. 

      Increased because the supply of cattle ranchers has increased

  • 39. 
    If the MPP of an additional unit of labor is 20 units per hour, the product price is $5 per unit, and the wage rate is $60 per hour, then, (Hint: MRP = MPP X p)
    • A. 

      An additional unit of labor should be employed

    • B. 

      An additional unit of labor should not be employed because it costs more than it is worth

    • C. 

      The employer should lower wages and accept less employment of labor

    • D. 

      Product price must be increased if profits are to be made

  • 40. 
    A minimum wage:
    • A. 

      Is set below the equilibrium wage.

    • B. 

      Causes the quantity supplied of workers to be greater than the quantity demanded

    • C. 

      Creates a shortage of workers.

    • D. 

      Is established by the intersection of labor demand and labor supply.

  • 41. 
    The optimal mix of output is the:
    • A. 

      Combination of outputs demanded by the consumers

    • B. 

      Most desirable combination of output attainable with available resources, technology and social values

    • C. 

      Combination of outputs produced by firms

    • D. 

      Combination of output based on government surveys

  • 42. 
    Market failure occurs when:
    • A. 

      Market prices signal producers to produce the optimal mix of output.

    • B. 

      The economy produces at a point on the production possibilities curve.

    • C. 

      Producers supply the goods that earn the greatest profit.

    • D. 

      An imperfection in the market mechanism prevents an optimal outcome.

  • 43. 
    A public good:
    • A. 

      Can be denied to those who do not pay for it.

    • B. 

      Is one in which consumption by one person does not preclude consumption by another person

    • C. 

      Is always produced by private firms

    • D. 

      Can be consumed by just one person

  • 44. 
    The communal nature of a highway means that no one individual is motivated to pay for it because even those who do not pay for it will still benefit from using it. This is an example of:
    • A. 

      The free rider problem

    • B. 

      Government failure

    • C. 

      Inequity

    • D. 

      A natural monopoly

  • 45. 
    The market produces too few public goods because:
    • A. 

      The link between payment and consumption is broken

    • B. 

      The free-rider dilemma exists

    • C. 

      People are reluctant to pay for what they can get for free

    • D. 

      All of the above