Economics Multiple Choice Questions
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Questions and Answers

When the competitive market is using its resources efficiently, the

  • Total amount of consumer surplus is maximized.
  • Total amount of producer surplus is maximized.
  • Sum of the total amount of consumer surplus plus the total amount of producer surplus are maximized. (correct)
  • Sum of the total amount of consumer surplus plus the total amount of producer surplus equals zero.
  • None of the above are true.

    • A pizza you order in a restaurant is a private good that is ____ in consumption.

  • Nonexcludable and rival
  • Excludable and rival (correct)
  • Nonexcludable and nonrival
  • Excludable and nonrival

    • Which of the following statements describes a market that is monopolistically competitive?

  • Many firms compete by making similar but slightly different products. (correct)
  • The products produced by the firms are identical.
  • There is a small number of large firms.
  • The product produced by one firm has no close substitutes.
  • There are significant barriers to enter.

    • The signalling function of education implies that

    <p>education helps firms to distinguish low-ability from high-ability workers.</p> Signup and view all the answers

    A tax on sales levied on the producer will be divided so that:

    <p>the sellers pay the full amount if demand is perfectly elastic.</p> Signup and view all the answers

    An externality is defined as

    <p>a cost or benefit that arises from production and falls on someone other than the producer, or a cost or benefit that arises from consumption and falls on someone other than the consumer.</p> Signup and view all the answers

    All producers of chocolate have decided to add a costly ingredient to their chocolate. This ingredient gives more taste to chocolate and, as a result, consumers decide that they like chocolate more than before. What happens now if it costs more to produce and consumers like it better?

    <p>The supply curve shifts leftward and the demand curve shifts rightward.</p> Signup and view all the answers

    A binding minimum wage:

    <p>Is a price floor that results in a surplus of low-skilled labor</p> Signup and view all the answers

    The opportunity cost of ______ in terms of bikes is:

    <p>computers</p> Signup and view all the answers

    Consider again the total production possibilities for Germany and France from question 9. We can say that:

    <p>Germany has a comparative advantage in computers, France has a comparative in bikes</p> Signup and view all the answers

    Pizza and hamburgers are substitutes for consumers. A fall in the price of a pizza:

    <p>Lowers the price of a hamburger and increases the quantity of hamburgers</p> Signup and view all the answers

    The supply and demand curves for a good in a perfectly competitive market are S₁ and D₁. This good generates a negative externality in production and a positive externality in consumption. Which intersection A, B, C, D or E could represent the socially optimal equilibrium?

    <p>Intersection D</p> Signup and view all the answers

    Suppose that the demand for train tickets is given by P=100-2Q. Then demand is unitary elastic at the point

    <p>Q=25</p> Signup and view all the answers

    Consider the market for bananas. The original equilibrium quantity of bananas is 300. The government then imposes a tax on banana suppliers. At the new equilibrium, the price paid by buyers has risen by €3 and the price received by sellers fell by €2 (compared to the original equilibrium price). The government collects €1000 as revenue from the tax. What is the deadweight loss of this tax?

    <p>€250</p> Signup and view all the answers

    An industry that is dominated by a few firms that recognize their interdependence is

    <p>an oligopoly.</p> Signup and view all the answers

    What is the Nash Equilibrium in the previous game?

    <p>Firm A markets its new product and firm B does not market its new product.</p> Signup and view all the answers

    Long run equilibrium under monopolistic competition requires that

    <p>the demand curve be tangent to the average cost curve.</p> Signup and view all the answers

    If the marginal social benefit received from a good is less than the marginal social cost of production,

    <p>a decrease in production will improve society's well-being.</p> Signup and view all the answers

    Homer likes to eat donuts. Each month he spends $40 on donuts, regardless of the price. His price elasticity of demand for donuts is:

    <p>zero</p> Signup and view all the answers

    Suppose that the demand curve is : QD = 50 – 2P and the supply curve is Qs = 3P. Suppose that the government imposes a price floor of €12 a unit. Which of the following statements is true?

    <p>There is a surplus of 22 units.</p> Signup and view all the answers

    Bart purchased a second hand bike for €25. One month later, someone offered him €100 for the bike. Bart refused. One can conclude that Bart's consumer's surplus from the bike is:

    <p>At least €75</p> Signup and view all the answers

    Suppose that the average product of labor is greater than the marginal product of labor. Which of the following statements is true?

    <p>The average product of labor is decreasing as labor increases.</p> Signup and view all the answers

    Suppose that a company doubles the quantity of all inputs in the production process. This leads to an increase in output from 5000 to 10000. This is an example of

    <p>Constant returns to scale</p> Signup and view all the answers

    If a good is a public good,

    <p>no one can be excluded from enjoying its benefits.</p> Signup and view all the answers

    Which statement about perfect competition is true?

    <p>If price is less than marginal cost, the perfectly competitive firm should lower its price and decrease output.</p> Signup and view all the answers

    Germany and France produce 2 goods (computers and bikes) The following table shows the total production possibilities for both countries. Germany France Computers 5 10 Bikes 20 8 The opportunity cost of computers in terms of bikes is:

    <p>4 in Germany and 1.25 in France</p> Signup and view all the answers

    The supply and demand curves for a good in a perfectly competitive market are S₁ and D₁. This good generates a negative externality in production and a positive externality in consumption. Which intersection A, B, C, D or E could represent the socially optimal equilibrium?

    [Diagram]

    <p>Intersection C</p> Signup and view all the answers

    A price-discriminating firm will adjust prices so that customers with more ______ demand pay ______ than customers with ______ elastic demand.

    <p>elastic; less than; less</p> Signup and view all the answers

    Because of large R&D costs, pharmaceutical companies typically face high fixed costs when developing new drugs. The marginal cost of producing a drug after development is very low, often close to zero. When these companies set their price and output to maximize profit, patients pay a ______ price for a ______ quantity of the drug than in socially optimal.

    <p>higher; larger</p> Signup and view all the answers

    When the marginal benefit of an activity is equal to the marginal cost of the activity, the decision maker should do _____ of the activity.

    <p>that exact amount</p> Signup and view all the answers

    Instant noodles are an inferior good. Hence, a decrease in people's incomes

    <p>shifts the demand curve for instant noodles leftward.</p> Signup and view all the answers

    Which of the following is an example of a positive statement?

    <p>A 10% increase in income leads to a 5% increase in the consumption of pizza.</p> Signup and view all the answers

    A society consists of only two people: Bert and Ernie. Bert has an income of €10000 and Ernie has an income of €30000. What is the Gini index in this society?

    <p>0.5</p> Signup and view all the answers

    A teacher decides to stop working and focus full-time on household production (raising his children, cleaning the house, cooking,...). The opportunity cost of this decision depends on:

    <p>the wage of this teacher on the labor market</p> Signup and view all the answers

    Because of excellent weather conditions, the supply of cacao beans on the world market has increased. Cacao beans are used as an input in the production of chocolate. At the same time, a new study shows that chocolate has positive effects on the development of the brain of young children. What happens now on the market for chocolate?

    <p>The supply and demand curves both shift rightward.</p> Signup and view all the answers

    If marginal costs of production are less than marginal benefits of production,

    <p>more of the good should be produced.</p> Signup and view all the answers

    Suppose the price elasticity of supply for a product is zero. This means that:

    <p>The firm makes the same amount of the product even if the price changes.</p> Signup and view all the answers

    Firm A and firm B are the only two firms in the market. Both firms can decide to market or not market their new product. The following pay-off matrix shows the profits of both firms in this simultaneous game. Firm A Market Don't market Firm A: 100 Firm A: 0 Market Firm B: 100 Firm B: 400 Firm B Firm A: 400 Firm A: 0 Don't market Firm B: 0 Firm B: 0 What is the Nash Equilibrium in the previous game?

    <p>Firm A does not market its new a product and firm B does not market its new product.</p> Signup and view all the answers

    Study Notes

    Economics Multiple Choice Questions

    • Question 1: Efficient resource allocation in a competitive market maximizes the sum of consumer and producer surplus.

    • Question 2: A pizza ordered in a restaurant is an excludable and rival good, meaning people can be prevented from consuming it (excludable) and its consumption by one person prevents another person from consuming it (rival).

    • Question 3: Monopolistic competition is characterized by many firms selling slightly differentiated products, with relatively easy entry into the market.

    • Question 4: The signaling function of education helps firms differentiate between high- and low-ability workers. Education increases human capital.

    • Question 5: A tax on a producer is fully borne by the buyers if the supply is perfectly inelastic.

    • Question 6: An externality is a cost or benefit that affects a third party not directly involved in a transaction.

    • Question 7: If a costly ingredient improves the taste of chocolate and consumers desire it more, the demand curve shifts rightward and the equilibrium price is likely to increase.

    • Question 8: A minimum wage that's above the market equilibrium rate results in a surplus of low-skilled labor.

    • Question 9: Germany's opportunity cost for computers in terms of bikes is 4, and France's opportunity cost is 0.8.

    • Question 10: Germany has a comparative advantage in computers and France in bikes.

    • Question 11: A decrease in the price of pizza will likely lead to a decrease in the price of hamburgers and an increase in hamburger quantity, as they are substitutes.

    • Question 12: The socially optimal equilibrium in a market with negative production and positive consumption externalities would be at the intersection point where the socially optimal supply(S2) and demand(D2) curves intersect.

    • Question 13: Price-discriminating firms set higher prices for customers with less elastic demand.

    • Question 14: Pharmaceutical companies often charge higher prices and sell smaller quantities than in a socially optimal situation due to high fixed costs.

    • Question 15: Maximizing benefit and minimizing cost lead to choosing an activity level where marginal benefit equals the marginal cost.

    • Question 16: A decrease in people's incomes will likely result in a leftward shift of the demand curve for inferior goods like instant noodles.

    • Question 17: A statement that describes a relationship or a positive/negative correlation that can be tested is a positive statement, not a normative one which is based on value judgments. Example: "A 10% increase in income will lead to a 5% increase in pizza consumption" is a positive statement.

    • Question 18: The Gini index measures income inequality in a population.

    • Question 19: The opportunity cost of a teacher deciding to stop working and focus on home production depends on factors such as the opportunity cost and wage in the current labor market and the satisfaction or benefits perceived.

    • Question 20: Increased supply and heightened demand for chocolate will likely result in a drop in the equilibrium price.

    • Question 21: If marginal costs of production are less than marginal benefits, then production should increase.

    • Question 22: A price elasticity of supply of zero implies that supply is perfectly inelastic – quantity supplied remains the same regardless of price changes.

    • Question 23: When a good creates negative production and negative consumption externalities, the socially optimal equilibrium, where social costs equal social benefits, is represented at a point of production possibility frontiers, left of the current equilibrium point.

    • Question 24: Demand becomes unitary elastic at the point where price is equal to quantity multiplied by 2.

    • Question 25: In this situation, the deadweight loss of the tax can be calculated, but insufficient information is provided for a precise calculation.

    • Question 26: Oligopolies are markets dominated by a few large firms that often recognize their interdependence.

    • Question 27: A Nash equilibrium in a simultaneous game occurs when each player's strategy is the best response to the other player's strategy, so neither player would want to deviate unilaterally.

    • Question 28: Long-run equilibrium in monopolistic competition requires that the firms' demand curve be tangent to the average cost curve.

    • Question 29: When the marginal benefit (e.g., added social benefit) is lower than the marginal cost, it's typically better to produce less, as it's not creating enough added benefit given the added cost.

    • Question 30: Homer's price elasticity of demand for donuts is zero because he spends a fixed amount, regardless of the price.

    • Question 31: A price floor of €12 results in a surplus of 10 units in a market.

    • Question 32: Bart's consumer surplus is at least €75 since he was offered €100 for the bike.

    • Question 33: If average product of labor is greater than marginal product of labor, then average product of labor is decreasing as labor increased.

    • Question 34: A doubling of all inputs resulting in double the output implies constant returns to scale.

    • Question 35: A public good is one that cannot be excluded from consumption, and one person's consumption does not prevent another's consumption, for example, access to a non-toll road.

    • Question 36: Germany's opportunity cost to produce one computer is 8 bikes, and France's opportunity cost of one computer is 1.6 bikes.

    • Question 37: Germany has a comparative advantage in producing computers, and France in producing bikes.

    • Question 38: The marginal revenue of a monopolist is less than the good's price because of the downward-sloping demand curve for the monopolist.

    • Question 39: An increase in income will lead to a leftward shift of the demand curve for instant noodles as instant noodles are an inferior good.

    • Question 40: A progressive income tax system will likely lead to a larger Gini index because it reduces income inequality.

    • Question 41: When demand is inelastic, an increase in price will increase total revenue. When demand is elastic, an increase in price will decrease total revenue. Unitary elastic demand means that changes in price have no impact on total revenue.

    • Question 42: The optimal level of pollution occurs where marginal social benefit equals marginal social cost.

    • Question 43: If an increase in fixed costs raises average total cost above the demand curve, the monopolist will likely go out of business.

    • Question 44: If consumers believe there are few substitutes, demand is relatively inelastic.

    • Question 45: A price ceiling that's below the equilibrium price is binding and creates a shortage.

    • Question 46: Two vases will be sold, and the consumer surplus will be €55.

    • Question 47: A monopolist maximizes profits where marginal revenue equals marginal cost.

    • Question 48: If marginal cost < marginal revenue, a monopolist can increase profits by increasing production.

    • Question 49: Monopolists respond to increased demand by increasing price and increasing output.

    • Question 50: Comparative advantage is the result of outward shifts of production possibility frontiers as it is linked more to opportunity costs.

    • Question 51: Efficiency occurs when all resources are utilized in a manner to produce goods and services most valued by consumers where the producers can produce at the lowest cost possible.

    • Question 52: Constant returns to scale implies that doubling all inputs doubles the output.

    • Question 53: In perfect competition, if the price is equal to average total cost (P=ATC), firms earn zero economic profit and operate at the minimum point on their average total cost curve in the long run.

    • Question 54: Consumer surplus is the difference between the willingness to pay and the actual price paid.

    • Question 55: If a license fee increases, the monopolist should reduce output and keep the price constant to maximize profits.

    • Question 56: The production function Q = 3K^0.6L^0.5 has decreasing returns to scale.

    • Question 57: A common resource, like clean air, is non-rivalrous and non-excludable.

    • Question 58: Congestion on a non-toll road signifies that the road lacks the ability to exclude excessive use from individuals, and is a common resource.

    • Question 59: Free riding is possible when goods are nonexcludable and non-rivalrous.

    • Question 60: A quota above equilibrium likely leads to missed mutually beneficial trades due to excess supply.

    • Question 61: The constant ratio of input implies the firm has constant returns to scale.

    • Question 62: In equilibrium, lemons might be sold for €1000 and good cars for €4600, and all used cars won't be necessarily sold.

    • Question 63: Point F can be reached using additional technology or more efficient production, leading to an outward shift of the PPF curve.

    • Question 64: One-year demand for gasoline is more elastic than monthly demand, and supply of cars this year will be more price-elastic than a given week.

    • Question 65: In a perfectly competitive market, the price is equal to the marginal revenue for each firm, and price is equal to the marginal revenue of the firm.

    • Question 66: Linear demand curves have higher price elasticity in parts of the curve where the slope is flatter and lower price elasticity where the slope is steeper.

    • Question 67: If price is above market equilibrium, there will be a surplus of the good, leading to lower prices.

    • Question 68: A tax burden falls more heavily on the side of the market that is less responsive to price changes, e.g., where demand is relatively inelastic, or the supply is.

    • Question 69: Alex has a comparative advantage in producing sun hats, and Emma has a comparative advantage in producing umbrellas.

    • Question 70: Perfect price discrimination eliminates the deadweight loss as the firm captures all consumer surplus.

    • Question 71: There are two Nash equilibrium outcomes in two simultaneous games. Firm 1 should not lower prices.

    • Question 72: The long-run equilibrium in perfect competition occurs when firms operate at the minimum of their average total cost curves and earn zero economic profit.

    • Question 73: In monopolistic competitors, firms have some market power and are associated with a downward-sloping demand curve, unlike perfectly competitive firms.

    • Question 74: Comparative advantage is not the same as outward shifts of production possibility frontiers, but rather is linked more to opportunity costs.

    • Question 75: Increases in the demand for watches will occur with advances in technology or a decrease in the price of watches.

    • Question 76: Sellers who possess more product-specific information than buyers regarding products deliberately sell lower-quality products for higher profit.

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