Principles of Economics Question Paper

PRINCIPLES OF ECONOMICS Question Paper - 2008
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PRINCIPLES OF ECONOMICS
all questions carry equal marks(20 per ques)
Q1.(a)if demand function is given by Qd=50-0.5P and supply function is Qs=-10 + P, then find
out
equilibrium price and equilibrium quantity?
(b)of two intersecting straight line demand curves, show that the steeper has lower elasticity?
(c)what is the relationship between the short run and long run consumer demand curve of a
durable good?
Q2.(a)What shall be shape of the indifference curves:

(i) if two goods perfect substitutes?
(ii) if two goods perfect complements?
(iii) if one of the goods is absolute necessity?
draw diagrams to support your answer?
(b).show that the

price effect=substitution effect+income effect for:
(i)normal good
(ii)giffen good
Q3.What is the relationship between short run average cost curve(SRAC) and long run average
cost curve(LRAC)? how does improvement in the level of technology affect the cost curves?
Q4.show the equilibrium position of a firm in short run in perfect competion indicating its
equilibrium price/output and super-normal profits. what will happen to industry's SS curves, if
many firms join the industry? show the long run equilibrium of the firm in question?
Q5.Show the profit maximizing equilibrium of a monopoly firm. how does a monopoly
maximize its profits by selling in different markets?
Q6.What are the assumptions of the theory of monopolistic competition? how does a firm in
monopolistic competition achieve equilibrium in SR and LR? Show the excess capacity of the
firm. is long run equilibrium inefficient?
Q7.Analytically explain three situations in which market system fails to allocate resources
efficiently. what kind and quantum of taxes you would propose on (i) house owners/households,
(ii) industrial units to abate the pollution in the river flowing around the city?
Q8.Explain the concept of economic rent. why does the SS curve of labour bend backward
beyond a particular wage rate?
Q9.Why is the protection of industries considered crucial in a developing economy? briefly

describe the role played by GATT. WTO in global commercial policies?
Q10.Write short notes on any two of the following:

(i) production possibility boundary.
(ii)public goods.
(iii)entry barriers.
(iv)law of variable proportions.
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Economics Question Bank Economy Quiz solved Economics Test

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MANAGERIAL ECONOMICS. Sample Test Multiple Choice Questions MCQ
economics review questions and economics interview questions
1. The basic difference between imperative and indicative planning is that ?
(a) it is easier to achieve targets in imperative type of planning
(b) in the case of imperative planning, all economic activities belong to public sector, while in
the other type they belong to the private sector.
(c) in the case of the imperative planning, the market mechanism is entirely replaced by a
command hierarchy, while in the case of indicative planning, it is looked upon as a way to
improve the functioning of the market system
(d) in the case of indicative planning, there is no need to nationalize any industry
2. The principal reason why national economic planning is still being pursued in spite of
embracing a market economy since 1991 is that
(a) The vast quantity of capital already deployed in the public sector needs to be nurtured.
(b) The market economy is mainly confined to industry and commerce, and central planning in
agriculture is necessary.
(c) It is a constitutional requirement.
(d) Five Year Plans can continue to provide a long-term perspective to the economy in market
friendly fashions.
3. The type of planning experimented between 1978 and 1980 is known as
(a) Rolling Plan
(b) Annual Plan
(c) Indicative Plan
(d) Collective Plan
4 Narasimhan report relates to the restructuring of
(a)sick industries
(b) sales tax
(c)income tax
(d) banks
5. Which of the following organizations functions as an apex institution for the agencies engaged
in the economic development of Scheduled Castes and Scheduled Tribes?
(a) National Research Development Corporation
(b) National Institute of Rural Development
(c) National Scheduled Castes and Scheduled Tribes Finance and Development Corporation
(d) National Bank For Agriculture and Rural
Development
6. Rural Development Programmes are related to
(a) Self employment
(b) giving jobs to the poorer graduates
(c) poverty alleviation in states
(d) None of these
7. When was the Cooperative Societies Act first passed in India?
(a) 1900
(b) 1902
(c) 1904
(d) 1906
8. Sarvodaya aimed at ?
(a) classless society
(b) economic revolution
(c) upliftment of weaker sections
(d) upliftment of all, irrespective of their status
9. „Utility‟ in economics means the capacity to
(a) provide comforts
(b) earn an income
(c) satisfy human wants
(4) satisfy human motives
10. Debt service ratio implies ratio between
(a) import and debt
(b) export and principal plus and payment on debt
(c) domestic saving and import
(4)domestic saving and export
11. Saving is a function of
(a)investment
(b) income
(c) export
(d) improvement in productivity
12. A deflator is a technique of ?
(a) adjusting for changes in price level
(b) adjusting for change in commodity
(c) accounting for higher increase of GNP
(d) accounting for decline of GNP
13. Credit is a
(a)Stock concept
(b) Flow concept
(c) Stock flow concept
(4) None of these
14, The concept of Joint Sector implies association
between
(a) Small and large industries
(b) State and Central Govt enterprises
(c) Indian and multinational companies
(d) Public sector and private sector industries
15. Which of the following is the correct description of the term „tainted shares‟?
(a) The shares purchased by NRIs
(b) The shares which were involved in the case of securities scam
(c) The shares whose price falls by mote than 20 points in a day
(d) The shares the price of which falls continuously for seven days
16. A loan bearing low rate of interest is known as
(a)Hard loan
(b) Soft loan
(c) Capital loan
(d)Real loan
17. White goods are

(a) basic raw materials
(b) cosmetic articles
(c) goods imported from the western countries
(d) durable consumption goods
18. Sellers market denotes a situation where
(a) commodities are available at competitive
rates
(b)demand exceeds supply
(c)supply exceeds demand
(d) supply and demand are evenly balanced.
19. „Mixed Economy‟ means
(a) co-existence of small scale and large scale industries
(b) co-existence of the rich and the poor
(c) co-existence of private and public sector
(d) assigning equal importance to both agriculture and heavy industries
20. Which of the following best defines the term „Letter of Credit‟ as used frequently in bank
transactions?
(a) An order from a bank to another bank abroad authorizes the payment of a particular amount
to a person named in the letter
(b) An unconditional undertaking given by a bank ensuring the payment of a particular amount
to the drawee at a given date
(c) Letter by a bank to a person stating the terms and conditions of the loan sanctioned to him by
the bank
(d) Statement showing outstanding deposits and credits of a hank for a particular period
21, Unemployment which occurs when workers move from one job to another job is known as
(a) Seasonal unemployment
(b) Frictional unemployment
(c) Cyclical unemployment
(d) Technological unemployment
22. GNP (Gross National Product) is the money value of
(a) final goods and services produced annually in the economy
(b) annual service generation in the economy
(c) tangible goods available in the economy
(d) tangible goods produced annually in the
economy
23. Development means economic growth plus
(a)inflation
(b) deflation
(c)price stability
(d) social change
24. A Multinational is ?
(a) a company operating in several countries
(b) a company having share holders from more than one country
(c) a company which does charitable work in poor countries
(d) a company that operates only in those countries that do not have import restrictions
25. „Take off stage‟ in an economy means
(a) steady growth begins
(b) economy is stagnant
(c) economy is about to collapse
(d) all controls are removed
26. „A formal evaluation of an individual‟s or company‟s credit history and capability of
repaying obligations‟ is known as
(a)Amortization
(b) Net Asset Value
(c) Credit rating
(d) Cash Credit
27. The balance of payment comprises
(a) official settlement account
(b) a current account of goods and services
(c) a capital account of financial assets
(d) All the above
28. The State‟s action under which a creditor‟s right to take action against a debtor for realization
of debt – money is kept under suspension for a specified period is called.
(a)Rationalization
(b)Ceiling
(c)Embargo
(d) Moratorium
29. Equilibrium price is that price which
(a) maximizes producers profit
(b) equates consumers and producers surplus
(c) maximizes consumer‟s satisfaction
equates supply and demand
30. „Capital goods‟ refer to goods which

(a) serve as a source of raising further capital
(b) help in the further production of goods
(c) directly go into the satisfaction of human wants
(d) find multiple uses
Answers :
1B
2D
3A
4D
5C
6C
7C
8D
9C
10B
11B
12A
13B
14D
15B
16B
17D
18B
19C
20C
21B
22A
23D
24A
25A
26C
27D
28D
29D
30B
1. “An Enquiry into the Nature and Causes of Wealth of Nations” is the book of economist—
(A) Adam Smith
(B) Marshall
(C) Robbins
(D) None of above
Ans : (A)
2. “Economics is the Science of Wealth” who gave this definition ?

(A) J. K. Mehta
(B) Marshall
(C) Adam Smith
(D) Robbins
Ans : (C)
3. “Economics is what economists do.” It has been supported by—

(A) Richard Jones
(B) Comte
(C) Gunnar Myrdal
(D) All of the above
Ans : (D)
4. “Human Welfare is the subject of Economics.” This statement is associated with the name of which of
the economists ?
(A) Marshall
(B) Pigou
(C) Penson
Ans : (D)
5. Who has given scarcity definition of economics ?

(A) Adam Smith
(B) Marshall
(C) Robbins
(D) Robertson
Ans : (C)
6. “Economics is a science” the basis of this statement is—

(A) Relation between cause and effect
(B) Use of deductive method and inductive method for the formations of laws
(C) Experiments
Ans : (D)
7. Characteristics of economic laws are—

(A) Mere statements of economic tendencies
(B) Less certain
(C) Hypothetical
Ans : (D)
8. Which theory is generally included under micro economics ?

(A) Price Theory
(B) Income Theory
(C) Employment Theory
(D) None of the above
Ans : (A)
9. Whose opinions have revolutionised the scope of macro economics ?

(A) Adam Smith
(B) J.B. Say
(C) J.M. Keynes
Ans : (C)
10. Which of the following is an economic activity ?

(A) Teaching of a teacher in the school
(B) To teach son at home
(C) To serve her child by mother
(D) To play football by a student
Ans : (A)
11. Passive factor of production is—

(A) Only land
(B) Only capital
(C) Both land and capital
(D) Neither land nor capital
Ans : (C)
12. Under law of demand—

(A) Price of commodity is an independent variable
(B) Quantity demanded is a dependent variable
(C) Reciprocal relationship is found between price and quantity demanded
Ans : (D)
13. For inferior commodities, income effect is—

(A) Zero
(B) Negative
(C) Infinite
(D) Positive
Ans : (B)
14. When total utility becomes maximum, then marginal utility will be—
(A) Minimum
(B) Average
(C) Zero
(D) Negative
Ans : (C)
15. Utility means—

(A) Power to satisfy a want
(B) Usefulness
(C) Willingness of a person
(D) Harmfulness
Ans : (A)
16. Marginal utility is equal to average utility at that time when average utility is—
(A) Increasing
(B) Maximum
(C) Falling
(D) Minimum
Ans : (B)
17. At point of satiety, marginal utility is—

(A) Zero
(B) Positive
(C) Maximum
(D) Negative
Ans : (A)
18. Which of the following is the second law of Gossen ?

(A) Law of equi-marginal utility
(B) Law of equi-product
(C) Theory of indifference curve
(D) Law of diminishing marginal utility
Ans : (A)
19. Total utility of a commodity is measured by which price of that commodity ?

(A) Value in use
(B) Value in exchange
(C) Both of above
(D) None of above
Ans : (A)
20. According to Marshall, the basis of consumer surplus is—

(A) Law of diminishing marginal utility
(B) Law of equi-marginal utility
(C) Law of proportions
Ans : (A)
21. Which commodity can be called as Giffen commodity ?

(A) Inferior commodity
(B) Superior commodity
(C) Any of above
Ans : (A)
22. The price of a commodity is determined where—

(A) Demand supply
(B) Demand supply
(C) Demand = supply
Ans : (C)
23. In perfect competition, the demand for a commodity is—

(A) Elastic
(B) Perfectly elastic
(C) Inelastic
(D) Perfectly inelastic
Ans : (B)
24. Which condition is not found in perfect competition ?

(A) Many buyers and sellers
(B) Perfect knowledge about market conditions
(C) Product differentiation
(D) Perfect factor-mobility
Ans : (C)
25. In which market, a firm cannot determine price ?

(A) Perfect competition
(B) Monopoly
(C) Monopolistic competition
(D) Oligopoly
Ans : (A)
What is demand?
It is desire from consumers for a particular good/service/commodity.
The demand curve...
The demand curve shows the quantity demanded by consumers at each price of a good/service.
Price and demand are inversely related i.e. as price increases the quantity demand decreases.
This describes the demand curve is downward sloping.
There are two reasons one must know for why price and demand have an inverse relationship.
1. The real income effect

As the price of a good/service increases it will eat a bigger chunk of the consumers income
making them feel poorer so there are only a few people who are rich enough not to feel this
impact. Also, the purchasing power has decreased (and all this means is that only a few people
can afford expensive goods and services as they have the financial power.)
2. The substitution effect-
This is that in our economy there is a lot of competition which keep prices low which is good for
consumers. This means that there are many alternatives to the particular product you are looking
for. For example if you wanted to buy window cleaning spray and saw it was £5.99 that may be
relatively expensive for you so you might go into another shop and buy a different brand or
similar cleaning product which will be cheaper therefore as the price of a good increases the
demand decreases as consumers' will switch to alternatives.
Important key term:
Demand schedule : This is a table showing quantity demanded by consumers at each price level.
This is table used to draw a demand curve.
What about s hifts?

Well a shift in the demand curve will only exist if a non-price determinant changes and the
quantity demanded by consumers changes at every price.
In the demand curve above we can see that the demand for shares has decreased and this can be
for several reasons.
Why does the demand curve shift?

1. Tastes - social trends and fashion changes and this affects the demand for a good, For example
at one point cassettes were very popular but as soon as CDs came the fashion changed to
listening to CDs. The demand for cassette tapes decreased.
2. Income - If income increases then people have more purchasing power so the demand at every
price level will increase. Vice versa if incomes suddenly decreased than the demand would
decrease as people do not have a strong purchasing power.
3. Price of substitutes - substitutes as we mentioned before are alternatives. So if these decrease

people are likely too buy more of them as their consumer surplus increases. This means that the
good itself will incur a reduction in demand. For example if Pantene Pro-V hairspray became
cheaper the demand for L'oreal hairspray would decrease because people would switch to the
pantene Pro-V hairspray.
4.The price of complements - these are goods which complement each other i.e. go with each
other. For example tea and milk. If the price of complement increases then the demand
decreases. So for example if the price of milk rises then the demand for tea will decrease as
people may switch tcheapero other cheaper alternative like black coffee or herbal tea,
5. Expectation of future price change - this doesn't tend to be as big as other factors. But in
markets such as the housing industry or the share it has a big impact. If for example houses were
supposed to increase prices in the future then the demand for houses will increase because people
will wan to buy as they know they can sell it at a later date for a profit.
6. Population increase/migration- If there are more people then the demand for a product is likely
to be be bigger. The two main ways in which a population can change are (i) population increase/
decrease through baby boom or increased availability of contraception and (ii) migration - this
means people moving in and out of a country.
7. Distribution of income - This is by far the most interesting one. this suggest if the government
increased taxes or benefits to the poor then demand for necessities will increase as that is what
poor people will demand and the demand for luxuries will decrease as rich people loose some of
their purchasing power for it,
Quiz:
1. Demand for a normal product may cause the demand curve to shift outwards if...
a) price increases
b) price decreases
c)the price of a substitute falls
d) the price of a substitute rises.
2.A decrease in income should:

a) Shift demand for an inferior product outwards
b) Shift demand for an inferior product inwards
c) Shift supply for an inferior product inwards
d) Shift supply for an inferior product outwards
ANSWERS!
1) D- The demand curve will only shift outwards because of non-price factors such as the price of
substitutes. If the price of substitutes increases then people are more likely to switch and buy this
product. For example; orange juice and apple juice are close substitutes and if the price of apple juice
goes people more people will be attracted to buy orange juice.
2) A - if income decreases then the quantity demand of an inferior will increase as they have an inverse
relationship. Supply is not affected by the income elasticity of a product.
A complementary good is a material or product that can be used in association with another
good, with this joint usage often helping to create additional demand for both of the goods
involved. Typically, this dual use of the two goods provides additional utility and satisfaction for
the consumer, making it advantageous to continue purchasing both goods over the long term.
One of the benefits associated with the production of a complementary good is that demand will
normally increase in conjunction with the demand for the associated material or product.
The concept of a complementary good is different from that of a substitute good. In ter ms of
substitutes, the focus is on replacing the use of one product with a different one that is able to fill
the same needs and wants. In this scenario, there is no need for a companion product to increase
the demand, just the desire to take away market share from the competitor and generate
additional sales for the substitute product. By contrast, a complementary good is often designed
to encourage greater consumption of that associated product, a strategy that ultimately means
more sales and greater profits for both of the goods involved.
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One of the easiest ways to understand what is meant by a complementary good is to think in
terms of products that are often used together in order to create greater customer satisfaction. For
example, jelly may be considered a complementary good for peanut butter, since the
combination is widely popular in a number of cultures and settings. In like manner, potato salad
may be considered complementary to the purchase of fried chicken, since the two are often
viewed as being ideal fare for a picnic. Gasoline may be considered a complementary good to the
use of a car, since the gasoline makes it possible to enjoy a greater degree of utility from
ownership of the vehicle.
In many instances, the profitability of a complementary good is directly associated with the
popularity of the associated good. As long as the demand is high for the associated good, there is
a good chance that the complementary good will also enjoy brisk sales and produce revenue for
the manufacturer. Should the demand for the associated good begin to wane, it is not uncommon
for the sales of the complementary good to also suffer, unless the manufacturer can convince
consumers that the product can also be used in conjunction with some other good that is
currently enjoying widespread popularity.
Complementary Goods
Complementary goods are those that are often used together, such as motor vehicles and
gasoline or DVDs and DVD players.
Complementary Illustration
When the price of one good declines (or increases) and the demand for a related good
increases (or decreases), then the two goods are considered complementary. For example,
if the price of computers increases and the demand for software declines, computers and
software can be considered complementary.
Substitute Goods
Substitutes are goods that are used in place of each other. Examples include CDs and
digital music files, such as MP3s or ice cream and frozen yogurt.
Substitute Illustration
If a price increase for one good leads to an increase in demand for a related good, then
the two goods are considered substitutes. An increase in beef prices, for example,
followed by higher demand for chicken or pork, indicates that chicken or pork represent
substitutes for beef.
Read more: Difference Between Complementary or Substitute in Economics | eHow.com

http://www.ehow.com/facts_5607033_difference-between-complementary-substitute-
economics.html#ixzz1fJ0hNH5P
What is `a competitive market`?

A market is where or when buyers or sellers meet to trade or exchange products.
This is the basic characteristics of all markets:
- A physical place where, some mechanism whereby, buyers and sellers can meet or contact each
other.
- A willingness to trade or exchange or trade goods and services.
A Sub-market is a recognised or distinguishable part of a market. It is also known as market

segment.
Demand
Demand is the quantity of a product that consumers are able and willing to purchase at various
prices over a period of time.
Some may confuse wants and demand and think it is the same thing. Wants is the same as
Notional demand, which means the desire for a product. Demand is the same as Effective
demand, which is the willingness and ability to buy a product.
In addition to the definition of demand two other points have to be maid:
- Ceteris paribus – which means other things remain the same. In other words, any changes in
quantity demanded are due to the changes in the price of the product alone.
- The quantity demanded must be time related (one day, week, month or year?).
Relationship between price and quantity demanded

There is an inverse relationship between the price of a product and the quantity demanded. This
means that, when lower the price, the more that will be demanded or the higher the price, the less
that will be demanded.
The demand curve

The demand curve shows the relationship between the quantity demanded and the price of a
product.
The data from which a demand curve is derived is taken id known as a demand schedule.
Basically, this is a data set that shows how much of a product will be demanded over a range of
prices.
In the diagram below we see the market demand curve for June holidays to Ibiza.
Points to note from the diagram are that firstly, there is a normal inverse relationship between
price and quantity demanded (price of holiday fall, quantity demanded increase). Secondly, the
relationship is linear (straight demand curve). Thirdly, the relationship only applies for holidays
that are taken in June. By using this we can for example find out how many holidays will be
demanded at 200$(B/D). A shift like this is called a move ment along the demand curve.
Consumer surplus
Cons umer surplus is the extra amount that a consumer is willing to pay for a product above the
price that is actually paid.
Below is an example of how consumer surplus can be shown under the demand curve.
The consumer surplus is the grey area in the chart above. In other words, the producer surplus is
the area above the market price and below the demand curve. We also see that a change in price
also causes the consumer surplus to change.
Calculation of total expenditure and total revenue

The formula for calculating total expenditure and total revenue is:
Total expenditure = price x quantity demanded
Other factors affecting demand

There are three non-price factors recognised by economists as influencing the demand for most
types of product. These are consumer income, the prices of other products and tastes and fashion.
Cons umer income:
More specifically consumer income is divided into real dis posable income and disposable
income. Real disposable income is income after taxes on income have been deducted and state
benefits. Disposable income is income after taxes on income have been deducted and state
benefits have been added.
It is most usual for demand for a product to increase if consumer income increases; such
products are called normal goods. However, in some cases, the relationship between income and
demand is inverse, which means that when income rises, demand falls. These products are called
inferior goods. An example of this could be when income rises for a person he buys more
expensive brands instead of the cheaper alternatives.
The price of other products:
A product usually has a substitute and/or a complement. A substitute is a competing good,

which means that for example when the price of the product in question increases, which causes
the demand to decrease, may cause the demand for the substitute to increase. A complement is a
good for which there is joint demand. This means that for example, if the demand for the product
increases it may cause the demand for the complement to increase as well. Complements can be
for example steel and trains or bread and butter.
Tastes and fashion:
Peoples taste change often. For example advertisement may cause you to buy another product.
A change in demand due to a change in non-price factors

Change in demand is where a change in a non-price factor (such as consumer income, price of
other products and tastes and fashion) leads to an increase or decrease in demand for a product.
Demand curve shift to the right if:
- consumer income increase
- price of substitutes rise
- price of complements fall
- positive change in tastes and fashion
Demand curve shift to the left if:
- consumer income falls
- price of substitutes rise
- price of complements rise
- negative change in tastes and fashion
Supply
Supply is the quantity of a product that producers are willing and able to provide at different
market prices over a period of time.
Economists assume that the behaviour of suppliers is governed by the consistent need to
maximise profit. Profit is the difference between the total revenue (sales revenue) of a producer
and total cost.
Relationship between price and quantity supplied

When prices increases the quantity supplied also increase (and vice versa), as producers always
seek to maximise profits.
The supply curve

The supply curve show the relationship between the quantity supplied and the price of a
product.
The data from which a supply curve is derived is taken from what is known as the supply
schedule. This is a data set, which shows how much a product is likely to be supplied over a
range of prices.
In the diagram below we see the market supply curve for holidays to Ibiza in June.
Points to note from this figure are that firstly, there is a positive relationship between price and
quantity supplied (price increases, quantity increases). Secondly, the relationship is linear. It is
possible to find out for example holidays will be supplied at a certain price.
Producer surplus
Producer surplus is the difference between the price a producer is willing to accept and what is
actually paid.
Below we see how a producer surplus could look like.

The consumer surplus is in the grey area above. In other words, the consumer surplus is in the
area between the market price and the demand curve.
Other factors affecting supply

Cost of production:
There are many things that affect the cost of production. The most obvious change is a change in
the cost of factors of production.
Size and nature of the industry:
Competitive industries such as food production, very minor increases in cost can have a big
impact on supply. In other markets, for example, where there is a strong brand or few producers,
price competition is likely to be less important. Any cost increase can actually be passed on to
consumers, because they will still most likely continue to buy the product.
Government Policy:
Governments can affect the supply of products in many ways. For example, many producers are
subject to some form of indirect taxation such as Value added tax (VAT). Any increase in
taxation will have to be passed on to consumers through increased prices; the increased prices
will affect the willingness of producers to supply.
Other factors:
Other factors that affect the production are for example change in agriculture and unexpected
health scares.
A change in supply due to a change in non-price factors
A change in supply occurs when a change in non-price influence leads to an increase or

decrease in the willingness of a producer to supply a product.
The supply curve may shift to the right if:
- raw material costs fall
- labour efficiency improves
- there is reduction in the rate of indirect taxation
- there is a positive technological advance
- any other positive factor
The supply curve may shift to the right if:
- cost of raw material increase
- labour cost increase
- there is an increase in the rate of indirect taxation
- there is a failed technological advance
- any other negative factor
How prices are determined

Price is the amount of money that is paid for a given amount of a particular good or service.
The equilibrium price is where the demand and supply are equal. It is sometimes referred to as
the clearing price.
In practise, markets are unstable and not always in equilibrium. When this happens, the market is
said to be in disequilibrium. In other words, demand and supply are not equal.
When supply is greater demand, the price will fall because the producer will have unsold units
left. This is called a surplus (an excess of supply over demand).
When demand is greater than supply, price will rise because there is not enough goods or
services to meet the consumers demand. This is called a shortage (an excess of demand over
supply).
The P represents the price equilibrium and the Q represents the quantity equilibrium. Demand
and supply curve may shift, which also causes the equilibrium to change.
For example a shift in the demand curve to the left (from D to D1) will cause both a decrease in
the price of the product and the quantity supplied (new eq. is where S and D1 crosses). If the
demand shifts to the right, the opposite would happen (increase in price and quantity supplied).
If the supply curve shift to the left (from S to S1) will cause an increase in price and a decrease
in quantity supplied (new eq. is where D and S1 crosses). If the supply curve shift to the right the
opposite will happen (decrease in price and increase in quantity).
The supply and demand curve may also shift simultaneous, which means the both shift the same
direction at the same time. As a result of this the price will remain the same but, the quantity
changes.
Elasticity
Elasticity is the extent to which buyers and sellers respond to a change in the market conditions.
Price elasticity of demand

Price elasticity of de mand (PED) is the responsiveness of the quantity demanded to a change in
the price of the product.
PED =
%change in quantity de manded
%change in price
Outcomes:
PED is 0, which means demand is perfectly inelastic. In other words, the demand for a product
will not respond to a change in price.
PED is between 0 and 1, which means demand is inelastic. In other words, the demand for a
product will not respond much to a change in price.
PED is more than 1, which means demand is elastic. In other words, the demand for a product
response quite a lot to a change in price.
Income elasticity of demand
Income elasticity of de mand (YED) is the responsiveness of demand to a change in income
YED =
% change in income
Outcomes:
YED is less than 1 means the demand is income inelastic. Income inelastic is goods for which a
change in income produces a less than proportionate change in demand.
YED is more than 1 means the demand is income elastic. Income elastic is goods for which a
change in income produces a greater proportionate change in demand.
YED is positive means that it is a normal good.
YED is negative means that it is an inferior good.
Cross elasticity of demand

Cross elasticity of demand (XED) is the responsiveness of demand for one product in relation
to a change in the price of another product.
XED =

%change in price
Outcomes:
XED is positive means two goods are substitutes.
XED is negative means two goods are complements.
XED equals zero means there is no particular relationship.
Price elasticity of supply

Price elasticity of supply (PES) is the responsiveness of the quantity supplied to a change in the
price of the product.
PES =
%change in quantity supplied
% change in price
Outcomes:
PES is between 0 and 1 means the supply is inelastic.
PES is greater than 1 means the supply is elastic.
Allocate efficiency
Efficiency is where the best use of resources is made for the benefit of consumers.
Allocative efficiency is achieved in a market where consumer satisfaction is maximised. Scarce

resources are used to produce those goods and services that consumers actually demand. To
achieve this, the quantity supplied must be equal to the quantity that is demanded. In other
words, the market must function at the equilibrium position.
lasticity of demand measures the responsiveness of demand to a change in another factor, usually
product price or consumer income. If there is a relatively small change in demand as the factor
changes, demand is inelastic. If there is a relatively large change in demand as the factor changes
then demand is elastic. If demand changes at the same rate as price there is unitary elasticity.
Demand basics explained
Dec 28th
Posted by admin in demand

761 comments
Demand is the quantity of a good or service which consumers are willing and able to purchase at
a particular price in a fixed period of time.
The law of demand states that as price increases demand will decrease (demand varies inversely
with price). This is because of the law of diminishing marginal utility which states each extra
unit (the marginal unit) of a good or service consumed will give less satisfaction (utility) than the
one before it. Therefore consumers will only be willing to pay less for it. It is for this reason that
a normal demand curve slopes downwards from left to right.
There are two other reasons why a normal demand curve slopes downwards from left to right.
The income effect means that as the price of a good or service increases, consumers will have to
spend a larger proportion of income on each unit and so not be able to afford the same quantity.
The substitution effect means as the price of a good or service increases, rival products become
more attractive.
Demand curves can change in two ways. An increase in the price of a good is the ONLY thing
that will cause a movement along a demand curve. This is known as an extension in demand if
price decreases and a contraction on demand if price increases. Note again this is the only way
the quantity demanded will move along a curve. If price changes we talk about a change in
quantity demanded.
There can also be a shift in demand. This is when the entire demand curve moves to the left or
right in the diagram. If demand increases (instead of quantity demanded as above) then the entire
curve will shift to the right. If demand decreases the curve will shift to the left. Remember: left is
less and right is more. A shift in demand is a result in one of the factors affecting demand rather
than price.
Normal demand may shift because:
Real incomes have increased so consumers can afford to buy more

The price of a subsitiute or complementary good has changed making the original good more or
less attractive
The product may be advertised
The population has become larger or smaller
There is more credit available to consumers so they can borrow to buy what they couldn’t
otherwise afford
Normal demand curves slope downward from left to right but some demand curves slope
upwards from left to right. For example consumers may demand more of a luxury good at a
higher price because they attach prestige or value to the high price. Demand for speculative
goods may also increase as price increases as investors hope the good will keep on increasing in
value.
Why are PPCs sometimes curves and sometimes straight lines?
Dec 28th
Posted by admin in production possibility curve
1,040 comments
A PPC is always a curve if there are diminishing marginal returns.
Diminishing marginal returns means that as firms switch raw materials from the first production
process to a second, the extra output of the second process becomes successivley smaller. This is
because different raw materials or factors of production are better suited to different production
processes.
For example, if you were to choose between growing wheat or rearing cattle on an area of land,
some sections of the land may be more suitable for growing crops and provide lots of wheat
compared to other sections. As the land owner switches more and more land to growing wheat,
he must use less and less suitable sections of land that provide a smaller and smaller yield of
wheat from the same sized area. Hence the PPC curves!
If the PPC is a straight line, the land is equally suitable for both cattle and crops so each and
every unit of land will yield the same quantity of crops and accomodate the same number of
cattle.
What does ceteris paribus mean?
Dec 28th
Posted by admin in the basics
815 comments
This is a latin phrase that literally means „all other things being equal‟.
Economists use this phrase when they are dealing with a theory that involves several
interconnected factors, each of which can vary. Since they are interconnected, if one factor is
changed this will have an effect on at least some of the other factors. However an economist will
only be concerned with changing one factor at a time to see what the effects of this are on
everything else. This is so the economist can be absolutely sure it was the factor they themselves
changed that caused the effect and not something else.
Does this make sense? Maybe an example will help….
Imagine the market for any old product. Of course it will have an equilibrium price. This price
will depend on lots and lots of interconnected factors. For example the level of demand, level of
supply, price of raw materials and many more things.
An economist might want to analyse the effect of a change in the price of raw materials for the
firms in this market. The economist must only change this one factor and keep everything else
constant. For example the economist must not also change the level of demand. This is so he or
she can be sure it is the effect of a change in the price of raw materials that has caused the effect
now shown.
I hope this makes sense! Please remember ceteris paribus cannot exist in the real world but can
make theoretical economic analysis a little bit easier.
Production possibility curve opportunity cost
Dec 26th
1,016 comments
A PPC is also effective at illustrating opportunity cost. A choice must be made about the quantity
of good X to produce and the quantity of good Y to produce.In this example if we want to make
more of good Y, increasing production from 50 to 75 units, we must sacrifice 50 units of good X.
In general, you can use PPC diagrams to help you
answer many exam questions, not just direct questions about the PPC itself, for example they can
be used to describe the economy during recessions or booms.
Production possibility curve expansion
Dec 26th
1,008 comments
This second PPC represents an economic growth. The possible production capability of the
economy has actually expanded so even higher quantities of both goods can be produced. This
may be as a result of new technology allowing production to become more efficient or an
increase in resources, for example a boom in the size of the population. If the curve shifts to the
right this is an expansion in capacity. If the curve shifts to the left this is a contraction in
capacity.
Monday, 1 August 2011
FREE MARKET ECONOMY

This is specially for IGCSE grade 8.
This will help you to understand FREE MARKET ECONOMY .............
Features
All resources are privately owned by people and firms.
Profit is the main motive of all businesses.
There is no government interference in the business activities.
Producers are free to produce what they want, how much they want and for whom they want to
produce.
Consumers are free to choose.
Prices are decided by the Price mechanism i.e. the demand and supply of the good/service.
Advantages
Free market responds quickly to the people’s wants: Thus, firms will produce what people want
because it is more profitable whereas anything which is not demanded will be taken out of
production.
Wide Variety of goods and services: There will be wide variety of goods and services available
in the market to suit everybody’s taste.
Efficient use of resources encouraged: Profit being the sole motive, will drive the firms to
produce goods and services at lower cost and more efficiently. This will lead to firms using latest
technology to produce at lower costs.
Disadvantages
Unemployment: Businesses in the market economy will only employ those factors of production
which will be profitable and thus we may find a lot of unemployment as more machines and less
labour will be used to cut cost.
Certain goods and services may not be provided: There may be certain goods which might not
be provided for by the Market economy. Those which people might want to use but don’t want
to pay may not be available because the firms may not find it profitable to produce. For
example, Public goods, such as, street lighting.
Consumption of harmful goods may be encouraged: Free market economy might find it
profitable to provide goods which are in demand and ignore the fact that they might be harmful
for the society.
Ignore Social cost: In the desire to maximise profits businesses might not consider the social
effects of their actions.
Posted by Indrajeet Acharjee at 02:34 2 comments
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Friday, 15 July 2011
Functions of stock exchange
Stock Exchange
It is an organized market for the sale and purchase of securities such as shares, stocks and
bonds. Stock exchanges are like markets where buyers and sellers of shares, stocks and bond
meet. These are known as secondary market. Once shares are issued by companies, these can
again be bought or sold through a Stock exchange.
Role of Stock exchanges

Stock exchanges have multiple roles in the economy, this may include the following:
Raising capital for businesses
The Stock Exchange provides companies with the facility to raise capital for expansion through
selling shares to the investing public.
Mobilizing savings for investment
When people draw their savings and invest in shares, it leads to a more rational allocation of
resources because funds, which could have been consumed, or kept in idle deposits with
banks, are mobilized and redirected to promote business activity with benefits for several
economic sectors such as agriculture, commerce and industry, resulting in a stronger economic
growth and higher productivity levels and firms.
Facilitating company growth
Companies view acquisitions as an opportunity to expand product lines, increase distribution

channels, hedge against volatility, increase its market share, or acquire other necessary
business assets. A takeover bid or a merger agreement through the stock market is one of
the simplest and most common ways for a company to grow by acquisition or fusion.
Redistribution of wealth
Stocks exchanges do not exist to redistribute wealth. However, both casual and professional
stock investors, through dividends and stock price increases that may result in capital ga ins, will
share in the wealth of profitable businesses.
Corporate governance
By having a wide and varied scope of owners, companies generally tend to improve on their
management standards and efficiency in order to satisfy the demands of these shareholders
and the more stringent rules for public corporations imposed by public stock exchanges and the
government.
Creating investment opportunities for small investors
As opposed to other businesses that require huge capital outlay, investing in shares is open to
both the large and small stock investors because a person buys the number of shares they can
afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares
of the same companies as large investors.
Government capital-raising for development projects
Governments at various levels may decide to borrow money in order to finance infrastructure
projects such as sewage and water treatment works or housing estates by selling another
category of securities known as bonds. These bonds can be raised through the Stock Exchange
whereby members of the public buy them, thus loaning money to the government.
Barometer of the economy
At the stock exchange, share prices rise and fall depending, largely, on market forces. Share
prices tend to rise or remain stable when companies and the economy in general show signs of
stability and growth. An economic recession, depression, or financial crisis could eventually lead
to a stock market crash. Therefore the movement of share prices and in general of the stock
indexes can be an indicator of the general trend in the economy.
CO401- Economics Complete Solved Spring 2009 past Paper
MIDTERM EXAMINATION
Spring 2010
ECO401- Economics (Session - 6)
Ref No: 1374601
Time: 60 min
Marks: 48
Student Info
StudentID:
Center:
ExamDate:
http://www.allvupastpapers.blogspot.com/
Question No: 1 ( Marks: 1 ) - Please choose one
If pen and ink are complements, then an increase in the price of pen will cause:
► An increase in the price of ink.

► Less ink to be demanded at each price.
► A decrease in the demand for pen.
► A rightward shift in the demand curve for ink.
A good for which income and quantity de manded are inversely related is known as:
► Infe rior good.

► Complementary good.
► Normal good.
► None of the given options.
At the equilibrium price:
► There will be a shortage.

► The re will be neithe r a shortage nor a surplus.
► There will be a surplus.
► There are forces that cause the price to change.
A market is said to be in equilibrium whe n:

► Demand equals output.
► There is downward pressure on price.
► The amount consume rs wish to buy at the current price equals the amount
producers wis h to sell at that price.
► All buyers are able to find sellers willing to sell to them at the current price.
We know that the de mand for a product is elastic:

► When price rises, total revenue rises.
► When price rises, total revenue falls.
► When income rises, quantity demanded rises.
► When income falls, quantity demanded rises.

Which of the following is regarded as a general determinant of price elasticity of de mand?
► Nature of the good (luxury versus necessity).
► Availability of close substitutes.
► Share of consumer's budget and passage of time.
► All of the given options.
As more of a good is consume d, then total utility typically:

► Increases at a decreasing rate.
► Decreases as long as marginal utility is negative.
► Decreases as long as marginal utility is positive.
► Is negative as long as marginal utility is decreasing.

Which of the following is the term that economists use to describe how consumers rank
different goods and services?
► Satisfaction index.
► Goodness.
► Utility.
The extra value that consume rs receive above what they pay for that good is called:
► Producer surplus.
► Utility.
► Marginal utility.
► Consume r surplus.
A risk-averse individual has:
► A diminishing marginal utility of income.

► An increasing marginal utility of risk.
► An increasing marginal utility of income.
► A diminishing marginal utility of risk.
As long as all prices remain constant, an increase in money income results in:
► An increase in the slope of the budget line.

► A decrease in the slope of the budget line.
► An increase in the intercept of the budget line.
► A decrease in the intercept of the budget line.

Assume leisure is a normal good. If income effect equals substitution effect then a wage
rate increase will lead a person to:
http://www.vustudents.net
► Increase hours of work.
► Decrease hours of work.
► Not change hours of work.
The budget line is the boundary between:

► Preferred and non preferred consumption combinations.
► Affordable and unaffordable consumption combinations.
► Income and expenditure.
► One point on a budget line.
An isoquant curve shows:
► All the alternative combinations of two inputs that yield the same maximum total
product.
► All the alternative combinations of two products that can be produced by using a given
set of inputs fully and in the best possible way.
► All the alternative combinations of two products among which a producer is indifferent
because they yield the same profit.
A pe rfectly competitive firm maximizes profit by finding the level of production at which:
► Price = Marginal Cost.
► Price = Average Total Cost.
► Average Total Cost = Marginal Cost.
► Price < Marginal Cost.

Compared to the equilibrium price and quantity sold in a competitive market, a
monopolist will charge a ______________ price and sell a ______________ quantity.
► Higher; larger.
► Lower; larger.
► Higher; s maller.
► Lower; smaller.
For the monopolist shown below, the profit maximizing level of output is :
► Q1.
► Q2.
► Q3.
► Q4.
A market with fe w entry barriers and with many firms that sell differentiated products is:
► Purely competitive.
► A monopoly.
► Monopolistically competitive.
► Oligopolistic.
If the income elasticity of de mand is 1/2, the good is:
► A luxury.
► A normal good (but not a luxury).
► An inferior good.
► A Giffen good.

Which of the following is NOT a factor of production?
► Labour.
► Land.
► Capital.
► Investment.

Unde r monopoly, whe n the demand curve is downward sloping, marginal revenue is:
► Equal to price.
► Equal to average cost.
► Less than price.
► More than price.

Production possibilities curve will shift downward if there is:
► Immigration of skilled workers into the nation.
► An increase in the size of the working-age population.
► A decrease in the size of the working-age population.
► Increased production of capital goods.

Production possibilities curve will shift upward if the re is:
► A reduction in unemployment.
► An increase in the production of capital goods.
► A reduction in discrimination.

Which of the following occur whe n an isocost line is just tangent to an isoquant?
► Output is being produced at minimum cost.
► Output is not being produced at minimum cost.
► The two products are being produced at the medium input cost to the firm.
► The two products are being produced at the highest input cost to the firm.

Which of the following is TRUE about L-shaped isoquant?
► It indicates that the firm could s witch from one output to another costlessly.
► It indicates that the firm could not switch from one output to another.
► It indicates that capital and labor cannot be substituted for each other in production.
► It is impossible.

Suppose that 90 units of output are produced by using 15 units of labor. Which of the
following is TRUE in this context?
► The marginal product of labor is 6.
► The total product of labor is 1/6.
► The average product of labor is 6.
The following table shows a firm’s total product of labor. What is the marginal product of
labor between second and third unit of labor?
Table
Quantity Total
of Labor Product
1 0
2 100
3 230
► 100 units
► 130 units
► 110 units
► 230 units
Question No: 28 ( Marks: 1 ) http://www.vustudents.net - Please choose one

What will happen to the isocost line if the price of both goods decreases proportionality?
► It shifts farther away from the origin of the graph.
► It shift inward.
► It shifts outward.

What will happen if current output is more than the profit-maximizing output?
► The next unit produced will increase profit.
► The next unit produced will decrease revenue more than it increases cost.
► The next unit produced will decrease cost more than it increases revenue.
► The next unit produced will increase revenue without increasing cost.
A price maker is:

► A firm that accepts different prices from different customers.
► A monopolistically competitive firm.
► An oligoplistic firm.
► A firm that can individually influence the market price.
A reduced price may be offered if you buy two t-shirts instead of just one. This is an
example of
► Perfect competition.
► First-degree price discrimination.
► Monopoly.
► Second-degree price discrimination.
In cartels, there are a small number of sellers and usually involve

► Heterogeneous products.
► Large competition.
► Homogeneous products.
► Less demand in market.
If the curre nt market price is set above the market clearing level then which of the
following will happen:
► There will be downward pressure on the current market price.

► There will be upward pressure on the current market price.
► There will be lower production during the next time period.
► The re will be a surplus to accumulate.
If an increase in price increases the total revenue then:

► Demand is elastic.
► Demand is inelastic.
► Supply is elastic.
► Supply is inelastic.
Question No: 35 ( Marks: 3 )
What will be the role of fims in case of maximin strategy and maximax strategy regarding
profit?
A. In the above figure, total product of labour curves are drawn for three differe nt cases.
Identify what do the curves (a), (b) and (c) show about marginal product of labour.
B. What is the relationship between marginal product of labor curve and total product of
labor curve?
(Marks: 3+2)

Fill in the missing figures in the table given below:
Q P=AR TR MR
1 9
2 8
3 7
4 6
5 5
CO401- Economics Complete Solved Midterm Paper
MIDTERM EXAMINATION
Spring 2009
An individual whose attitude towards risk is known as:
► Risk averse.
► Risk loving.
► Risk neutral.
► None of the given options
The concept of a risk premium applies to a person that is:

► Risk averse.
► Risk neutral.
► Risk loving.

A normative economic statement:
► Is a statement of fact.
► Is a hypothesis used to test economic theory.
► Is a statement of what ought to be, not what is.
► Is a statement of what will occur if certain assumptions are true.
Economics is different from other social sciences because it is primarily concerned with the
study of ________, it is similar to other social sciences because they are all concerned with the
study of ________.
► Limited resources, market behavior.

► Scarcity, human behavior.
► Social behavior, limited resources.
► Biological behavior, scarcity.

Because of the relationship between a perfectly competitive firm's demand curve and its
marginal revenue curve, the profit maximization condition for the firm can be written as:
► P = MR.
► P = AVC.
► AR = MR.
► P = MC.

A welfare loss occurs in monopoly where:
► The price is greater than the marginal cost.

► The price is greater than the marginal benefit.
► The price is greater than the average revenue.
► The price is greater than the marginal revenue.
The "perfect information" assumption of perfect competition includes all of the following
EXCEPT:
► Consumers know their preferences.
► Consumers know their income levels.
► Consumers know the prices available.
► Consume rs can anticipate price changes.

In figure given above, the marginal utility of income is:
► Increasing as income increases.

► Constant for all levels of income.
► Diminishes as income increases.
A consultant for Mattel (the producer of Barbie) reports that their long run a verage cost curve is
decreasing. In other words, he is saying that:
► The firm has increasing returns to scale and the law of diminishing marginal productivity
does not apply to this firm.
► The firm has decreasing returns to scale and the law of diminishing marginal productivity
does not apply to this firm.
► The firm has increasing returns to scale but the law of diminis hing marginal
productivity may still apply to this firm.
► The firm has decreasing returns to scale but nonetheless the law of diminishing marginal
productivity may still apply to this firm.

If the cross price elasticity of demand between two goods X and Y is positive; it means that
goods are:
► Independent.
► Complements.
► Substitutes.
► Inferior.

A demand schedule is best described as:
► A nume rical tabulation of the quantity de manded of a good at diffe rent prices,
ceteris paribus.
► A graphical representation of the law of demand.
► A systematic listing of all the variables that might conceivably bring about a change in
demand.
► A symbolic representation of the law of demand: P,Q and Q, P.
Which of the following best expresses the law of demand?
► A higher price reduces demand.

► A lower price reduces demand.
► A higher price reduces quantity demanded.
► A lower price shifts the demand curve to the right.

Which of the following would most likely shift the production possibilities curve for a nation
outward?
► An increase in the production of consumer goods.
The primary use of the kinked-demand curve is to explain price rigidity in:
► Oligopoly.
► Monopoly.
► Perfect competition.
► Monopolistic competition.
A monopolistically competitive firm in short run equilibrium:
► Will make negative profit (lose money).

► Will make zero profit (break-even).
► Will make positive profit.
► Any of the given are possible.

A market with few entry barriers and with many firms that sell differentiated products is:
► Purely competitive.
► A monopoly.
► Monopolistically competitive.
► Oligopolistic.
The maximum price that a consumer is willing to pay for a good is called:
► The reservation price.

► The market price.
► The first-degree price.
► The block price.
Third-degree price discrimination involves:
► Charging each consumer the same two part tariff.

► Charging lower prices the greater the quantity purchased.
► The use of increasing block rate pricing.
► Charging different prices to different groups based upon diffe rences in elasticity of
demand.

A tennis pro charges $15 per hour for tennis lessons for children and $30 per hour for tennis
lessons for adults. The tennis pro is practicing:

► Third-degree price discrimination.

An electric power company uses block pricing for electricity sales. Block pricing is an example
of:

► Third-degree price discrimination.
► Block pricing is not a type of price discrimination.
A firm never operates:
► At the minimum of its average total cost curve.

► At the minimum of its average variable cost curve.
► On the downward-sloping portion of its average total cost curve.
► On the downward-sloping portion of its average variable cost curve.

Marginal profit is equal to:
► Marginal revenue minus marginal cost.
► Marginal revenue plus marginal cost.
► Marginal cost minus marginal revenue.
► Marginal revenue times marginal cost.

If current output is less than the profit- maximizing output then which of the following must be
TRUE?
► Total revenue is less than total cost.
► Average revenue is less than average cost.
► Marginal revenue is less than marginal cost.
► Marginal revenue is greater than marginal cost.

At the profit- maximizing level of output, what is TRUE of the total revenue (TR) and total cost
(TC) curves?
► They must intersect with TC cutting TR from below.
► They must intersect with TC cutting TR from above.
► They must be tangent to each other.
► They must have the same slope.
The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q.
What is the average total cost?
► 5Q.
► 5.
► 5 + (200/Q).
Reference Q.No. 23

In order for a taxicab to be operated in New York City, it must have a medallion on its hood.
Medallions are expensive but can be resold and are therefore an example of:
► A fixed cost.
► A variable cost.
► An implicit cost.
► An opportunity cost.

Costs determine all of the following EXCEPT:
► Demand for a product.

► Firm's behaviour.
► How firms should expand?
► Firm's profitability.
The rate at which a firm can substitute capital for labour and hold output constant is the:
► Law of diminishing marginal returns.

► Marginal rate of substitution.
► Marginal rate of factor substitution.
► Marginal rate of production.
If a simultaneous and equal percentage decrease in the use of all physical inputs leads to a larger
percentage decrease in physical output, a firm‟s production function is said to exhibit:
► Decreasing returns to scale.

► Constant returns to scale.
► Increasing returns to scale.
► Diseconomies of scale.

At any given point on an indifference curve, the absolute value of the s lope equals:
► Unity--otherwise there would be no indifference.

► The marginal rate of substitution.
► The consumer‟s marginal utility.

Aslam spends all of his money on racquetballs and food. What would happen to Aslam‟s budget
line if his income increased by 10 percent holding prices constant?
► It would shift inward.

► It would rotate about the axis for food.
► It would rotate about the axis for racquetballs.
► It would shift outward.
According to the utility model of consumer demand, the law of diminishing marginal utility
indicates that the demand curve is:
► Vertical.
► U-shaped.
► Upward-sloping.
► Downward-sloping.
Cross-price elasticity measures whether:
► Goods are normal or inferior.
► Two goods are substitutes or comple ments.
► Demand is elastic or inelastic.
► Supply is steeper than demand or vice versa.

Which of the following will be TRUE if demand is inelastic?
► The coefficient of elasticity is greater than one.
► The percentage change in quantity demanded is same as the percentage change in the
price.
► An increase in price will increase total revenue.
Suppose your local public golf course increases the greens fees for using the course. If the
demand for golf is relatively inelastic, you would expect:
► A decrease in total revenue received by the course.

► An increase in total revenue received by the course.
► No change in total revenue received by the course.
► An increase in the amount of golf played on the course.

Aslam decides to stay at home and study for his exam rather than going out with his friends to a
movie. His dilemma is an example of:
► The economic perspective.

► Marginal analysis.
► Allocative efficiency.
► Opportunity cost.
Government authorities have managed to reduce the unemployment rate from 8% to 4% in a
hypothetical economy. As a result:
► The economy's production possibilities curve will shift outward.

► The economy's production possibilities curve will become steeper.
► The economy will move downward along its production possibilities curve.
► The economy will move from a point inside to a point closer to its production
possibilities curve.

Land is best described as:
► Produced factors of production.

► "Organizational" resources.
► Physical and mental abilities of people.
► "Naturally" occurring resources.

In pure capitalism, the role of government is best described as:
► Significant.
► Extensive.
► Nonexistent.
► Limited.
Microeconomics is the branch of economics that deals with which of the following topics?
► The behavior of individual consumers.

► Unemployment and interest rates.
► The behavior of individual firms and investors.
► The behavior of individual consumers and behavior of individual firms and
investors.

A. Define “Law of supply” and explain it with a schedule and diagram.
B. What are the factors which cause the shift in market supply curve?
(Marks: 6+4)
ANSWER: LAW OF SUPPLY: It states that as the price goes up the quantity supplied also goes
up and when price falls quantity supplied also falls.
Schedule for Supply:
Price (Rs.) Quantity supplied
5 100
4 95
3 80
2 60
1 40
Factors Causing Shift in Supply Curve:
There are various factors causing shift in market supply curve which are as
follows:
Factors Effect on Direction of Equilibrium Equilibrium

changing supply Shift in supply Price quantity
supply
Increase in Increase Rightward Decrease Increase
number of shift
suppliers
Decrease in Decrease Leftward shift Increase Decrease
number of
suppliers
Improved Increase Rightward Decrease Increase
technology shift
Declined Decrease Leftward shift Increase Decrease
technology
Increase in Decrease Leftward shift Increase Decrease
future price
Decrease in Increase Rightward Decrease Increase
future price shift
Increase in Decrease Leftward shift Increase Decrease
resources'
price
Decrease in Increase Rightward Decrease Increase
resources' shift
price
omplete Solved Midterm ECO401- Economics VU Paper
MIDTERM EXAMINATION
Fall 2009
Time: 60 min
Marks: 50
Land is best described as:
► Produced factors of production.

► "Organizational" resources.
► Physical and mental abilities of people.
► "Naturally" occurring resources.

While moving from left to right, the typical production possibilities curve has:
► An increasingly steep negative slope.

► A decreasingly steep negative slope.
► An increasingly steep positive slope.
► A constant and negative slope.

When government sets the price of a good and that price is above the equilibrium price, the
result will be:
► A surplus of the good.
► A shortage of the good.
► An equilibrium.
If pen and ink are complements, then an increase in the price of pen will cause:
► An increase in the price of ink.

► Less ink to be demanded at each price.
► A decrease in the demand for pen.
► A rightward shift in the demand curve for ink.

An increase in supply is shown by:
► Shifting the supply curve to the left.
► Shifting the supply curve to the right.
► Upward movement along the supply curve.
► Downward movement along the supply curve.
Reference
When an industry's raw material costs increase, other things remaining the same:
► The supply curve shifts to the right.
► Output increases regardless of the market price and the supply curve shifts upward.
► Output decreases and the market price also decrease.
► The supply curve shifts to the left.

Sugar can be refined from sugar beets. When the price of those beets falls:
► The demand curve for sugar would shift right.
► The demand curve for sugar would shift left.
► The supply curve for sugar would shift right.
► The supply curve for sugar would shift left.
The price elasticity of demand measures the responsiveness of quantity demanded to:
► Quantity demanded.
► Quantity supplied.
► Price.
► Output.

Since the fish that are caught each day go bad very quickly, the daily catch will be offered for
sale no matter what price it brings. As a result, we know that:
► The daily supply curve for fish slopes upward.
► The daily supply curve for fish is perfectly inelastic.
► The daily supply curve for fish is perfectly elastic.
In order to calculate the price elasticity of supply, you need to know:
► Two prices and two quantities supplied.

► The slope of the supply curve.
► The equilibrium price and quantity in the market.
► The quantity s upplied at two diffe rent prices, all else equal.
Suppose the first four units of an output produced incur corresponding total costs of 50, 150,
300, and 500. The marginal cost of the second unit of output is:
► 50.
► 100
► 150.
► 200.

Law of diminishing marginal utility indicates that the slope of the marginal utility curve is:
► Horizontal.
► Vertical.
► Negative.
► Positive.

Assume that the total utilities for the fifth and sixth units of a good consumed are 83 and 97,
respectively. The marginal utility for the sixth unit is:
► -14.
► 14.
► 83.
► 97.

Suppose that the price of a pizza is $10 and price of a jeans is $30. If ratio of marginal utility of
pizza to marginal utility of jeans is 1/4 then to maximize total utility, a consumer should:
► Buy more pizzas and fewer jeans.

► Buy fewe r pizzas and more jeans.
► Continue to buy the same quantities of pizza and jeans.
► Spend more time consuming pizza.
Which of the following is NOT an assumption of ordinal utility analysis?
► Consumers are consistent in their preferences.

► Consume rs can measure the total utility received from any given basket of good.
► Consumers are non-satiated with respect to the goods they confront.
► All of the given options are true.

Assume leisure is a normal good. If income effect equals substitution effect then a wage rate
increase will lead a person to:
► Increase hours of work.

► Decrease hours of work.
► Not change hours of work.

Ali initially leased one-room space and started a small day care centre with only 4 children and
one staff member. But he found that the cost per child is very high. He wants to expand the
centre. Which of the following will happen when Ali expand the centre?
► Economies of scale.
► Diseconomies of scale.
► Decreasing returns to the labor inputs.
► Increasing returns to the labor inputs.

A graph showing all the combinations of capital and labour available for a given total cost is the:
► Budget constraint.
► Expenditure set.
► Isoquant.
► Isocost.
An isoquant curve shows:
► All the alternative combinations of two inputs that yield the same maximum total
product.
► All the alternative combinations of two products that can be produced by using a given
set of inputs fully and in the best possible way.
► All the alternative combinations of two products among which a producer is indifferent
because they yield the same profit.

L-shaped isoquant:
► Indicate that capital and labor cannot be substituted for each other in production.
► Is impossible.
► Indicate that the firm could switch from one output to another costlessly.
► Indicate that the firm could not switch from one output to another.
Costs determine all of the following EXCEPT:
► Demand for a product.

► Firm's behaviour.
► How firms should expand?
► Firm's profitability.

Total costs are the sum of:
► Marginal costs and variable costs.
► Fixed costs and variable costs.
► Fixed costs and marginal costs.
► Average variable costs and marginal costs.
To find the profit maximizing level of output, a firm finds the output level where:
► Price equals marginal cost.
► Marginal revenue and average total cost.
► Price equals marginal revenue.

The good produced by a monopoly:
► Has perfect substitutes.

► Has no substitutes at all.
► Has no close substitutes.
► Can be easily duplicated.

A perfectly competitive firm maximizes profit by finding the level of production at which:
► Price = Marginal Cost.

► Price = Average Total Cost.
► Average Total Cost = Marginal Cost.
► Price < Marginal Cost.
The monopolist has no supply curve because:
► The quantity supplied at any particular price depends on the monopolist's demand
curve.
► The monopolist's marginal cost curve changes considerably over time.
► The relationship between price and quantity depends on both marginal cost and average
cost.
► Although there is only a single seller at the current price, it is impossible to know how
many sellers would be in the market at higher prices.

In monopoly, which of the following is TRUE at the output level, where price = marginal cost?
► The monopolist is maximizing profit.

► The monopolist is not maximizing profit and should increase output.
► The monopolist is not maximizing profit and should decrease output.
► The monopolist is earning a positive profit.

Following are the disadvantages of monopoly EXCEPT:
► Monopolists earn higher profits.
► Monopolists produce high quality goods at higher prices.
► Most of the “surplus” (producer + consumer surplus) accrues to mo nopolists.
► Monopolists do not pay sufficient attention to increasing efficiency.

When a firm charges each customer the maximum price that the customer is willing to pay, the
firm:
► Engages in a discrete pricing strategy.

► Charges the average reservation price.
► Engages in second-degree price discrimination.
► Engages in first-degree price discrimination.
Third-degree price discrimination involves:
► Charging each consumer the same two part tariff.

► Charging lower prices the greater the quantity purchased.
► The use of increasing block rate pricing.
► Charging diffe rent prices to different groups based upon differences in elasticity of
demand.
Which of the following is true in long run equilibrium for a firm in a monopolistic competitive
industry?
► The demand curve is tangent to marginal cost curve.

► The de mand curve is tangent to average cost curve.
► The marginal cost curve is tangent to average cost curve.
► The demand curve is tangent to marginal revenue curve.
Which of the following would most likely shift the production possibilities curve for a nation
outward?
► An increase in the production of consumer goods.
A demand schedule is best described as:
► A nume rical tabulation of the quantity de manded of a good at diffe rent prices,
ceteris paribus.
► A graphical representation of the law of demand.
► A systematic listing of all the variables that might conceivably bring about a change in
demand.
► A symbolic representation of the law of demand: P,Q and Q, P.

A partial explanation for the inverse relationship between price and quantity demanded is that a:
► Lower price shifts the supply curve to the left.

► Higher price shifts the demand curve to the left.
► Lower price shifts the demand curve to the right.
► Higher price reduces the real incomes of buyers.
The total utility curve for a risk neutral person will be:
► Straight line.
► Convex.
► Concave.
In figure given above, the marginal utility of income is:
► Increasing as income increases.

► Constant for all levels of income.
► Diminishes as income increases.

A welfare loss occurs in monopoly where:
► The price is greater than the marginal cost.

► The price is greater than the marginal benefit.
► The price is greater than the average revenue.
► The price is greater than the marginal revenue.
Which of the following is NOT a factor of production?
► Labour.
► Land.
► Capital.
► Investment.

Which of the following does NOT refer to macroeconomics?
► The study of the aggregate level of economic activity.

► The study of the economic behavior of individual decision-making units such as
consume rs, resource owners, and business firms.
► The study of the cause of unemployment.
► The study of the cause of inflation.

Demand is elastic when the elasticity of demand is:
► Greater than 0 but less than 1.
► Greater than 1.
► Less than 0.
► Equal to 1.

A. Differentiate between risk and uncertainty.
B. What would the risk neutral person, risk averse person and risk loving person do in the
following cases?
o If Odds Ratio > 1
o If Odds Ratio = 1
o If Odds Ratio < 1
C. You toss a coin, if head comes, you are given Rs. 200 and if tail comes, you have to pay Rs.
200. Will you play this game or not? Give your answer with brief explanation.
(Marks: 3+3+4)
Answers : A)
Risk and Uncertainty : Risk is when an outcome may or may not occur but its probability is
known while uncertainty is when an outcome may or may not occur but its probability is not
known.
Answers : B)
1) For risk neutral person
o If Odds Ratio > 1, then he will definitely buy

o If Odds Ratio = 1, then he will be indifferent
o If Odds Ratio < 1, then he might not buy as OR < 1
2) For risk averse person
o If Odds Ratio > 1, then in this case as well he might decide not to buy.
o If Odds Ratio = 1, then he will definitely not buy
o If Odds Ratio < 1, then he will definitely not buy
3) For risk loving person

o If Odds Ratio = 1, then he will definitely buy
o If Odds Ratio < 1, then in this case as well he might decide to buy.
Answers : C)
The tossing of a coin and the probability of a head appearing is 50% i.e. the odds of success are
fair. So the option of OR < 1 and OR > 1 is not there. The only possibility is OR = 1 which
means that the chances are not that bad. Now it depends on the fact that whether I am a risk
averse, risk neutral or risk loving person. In case of fair odds both risk loving and risk neutral
person might decide to play. So I will play this game as the amount of money involved is not that
much and as far as my perception of it is concerned the marginal benefit of gaining 200 Rs is
perceived by me as more than the marginal cost of losing the 200 Rs. So I would definitely play
this game. Moreover the excitement of winning might overshadow my rational judgement and I
would definitely decide to play by being carried away by excitement.
Elastic supply means relatively small changes in price causes
relatively larger changes in quantity supplied. An elastic supply
has a value greater than one (the negative value is ignored).
Inelastic supply means relatively large changes in price causes

relatively smaller changes in quantity supplied. An inelastic
supply has a value of elasticity less than one (the negative value
is ignored).
The principle of equi marginal utility states that a person will

derive a maximum level of Total Utility from consuming a
particular bundle of goods when the utility derived from the last
dollar spent on each good is the same OR the ratio of marginal
utility to price of all the commodities should be equal to each
other.
MUa = MUb = MUc = …………….
Pa Pb PC
Optimal point of consumption is that point where consumer

surplus becomes zero. Consumer surplus is the difference
between the price that consumer wants to pay and the price that
he actually pays i.e. CS= Marginal Utility - Price. If marginal
utility is greater than price, consumption will increase causing
Marginal Utility to fall until it equals price, and vice versa.
Rational choice is the optimal choice. Consumers can decide
about the rational decision by using cost and benefit
analysis. Rational choice is a choice where individuals try to make
the most efficient decisions possible in an environment of scarce
resources. As people want to maximize their utility with limited
resources, this is a rational choice for consumers.
Supply of food varies from time to time and according to the
demand. Daily market supply of food like vegetables and fruits is
fixed because these are perishable goods and go bad at the day
end. However, foods like wheat and rice etc can be stored for
some time period so its supply is not fixed and may vary
according to the market demand.
In price floor, the government sets the minimum price to
support a desired commodity or service in a society. At price
floor, buyers are in equilibrium, but sellers are not. Sellers would
like to sell more quantity, but buyers are not willing to buy all
that quantity. To prevent the adjustment process from causing
price to fall, government may buy the surplus.
In price ceiling, the government sets the maximum price limit

to ensure that prices don’t rise above that limit. Due to imposition
of this limit, buyers want to buy more but sellers do not like the
ceiling price so they don’t provide the required supply in the
market. Because buyers cannot buy as much as they would like
at the legal price, buyers will be out of equilibrium.Equilibrium
can take place if market forces of demand and supply works and
push the price upward but it does not work due to government
intervention.
For quizzes :
o When there is increase in income, demand for inferior goods

will decrease and demand curve will shift leftward.
o When there is decrease in price of substitute, demand will
decrease and demand curve will shift leftward.
o When there is increase in income, demand for inferior goods
will decrease and demand curve will shift leftward.
o When there is decrease in price of substitute, demand will
decrease and demand curve will shift leftward.
DIAMOND-WATER PARADOX is in the context of marginal

utility. Water and diamond are very different in value. Water is
extremely used thing while diamonds are not much used. The
price of diamond is very high while the price of water is very low.
Since water is used widely so it’s marginal utility is very low. And
diamonds are used very rarely so its marginal utility is very high.
On supply side, water is abundant so has low value and diamond
is scarce so has very high value.
Water is a necessity, human beings cannot even survive without
water, whereas diamonds are luxurious good not necessity. Yet
water had a very small price, and diamonds have very large
price.
For most people, water is sufficiently abundant whereas

diamonds are in much more restricted supply that’s why water is
cheap and diamonds are expensive.
Risk Hedging means technique to avoid the risk.

Example: Insurance companies operate under the principle of
law of large numbers. An insurance company collects the
premium from the people. They also diversify the risk.
In the presence of asymmetric information, an insurance

company has to contend with the problems of adverse
selection (people who want to buy insurance are also the most
risky customers; an ex-ante problem) and moral hazard (once a
person is insured his behavior might become more rash; an ex-
post problem).
Ex-ante concept
It is a neo-Latin word which means "before the event.
Ex-post concept
It is a Latin word which means "after the fact".
There are two sides: demand side and supply side.

According to supply side, the value of a good is determined by
the labor content that is used to produce the good.
According to demand side, the value of a good is determined by
its marginal utility.
Normal goods:
If the price of good falls, the consumer’s purchasing power
increases, income effect reinforces the substitution effect.
Giffen goods:
If the price of good falls, the consumer’s purchasing power
increases. But if the income effect for an inferior good is
sufficiently strong, the consumer will buy less of the good when it
becomes less expensive.
There are no hard and fast examples of normal goods, inferior
goods and Giffen goods. It depends on the consumer’s taste and
preferences. One thing might be normal for one person but
inferior for another person. For example, wine may be normal for
non Muslims but inferior for Muslims. Some people prefer mutton
so it is a normal good for them or might be they consider chicken
as inferior good. So it all depends on consumer’s tastes. Giffen
good is also a category of inferior good.
The Income Consumption Curve (ICC)

The income consumption curve (ICC) can be used to derive the
Engel Curve, which shows the relationship between income and
quantity demanded.
Price Consumption Curve (PCC)

The price consumption curve (PCC) traces out the optimal choice
of consumption at different prices. The PCC can be used to derive
the demand curve, which shows the relationship between price &
quantity demanded.
MPP = APP , APP does not change

MPP > APP , APP upward
MPP < APP , APP down
This is the relationship between Average Physical Product
and Marginal Physical Product. If you see the graph of
Average Physical Product and Marginal Physical Product
then you will find that:
• If the marginal physical product equals the average physical
product, the average physical product will not change.
• If the marginal physical product is above the average
physical product, the average physical product will rise.
• If the marginal physical product is below the average
physical product, the average physical product will fall………(end)
Isocost or Budget Line

The concept of isocost is similar to the budget line developed in
indifference curve analysis. It is a line, which captures all the
different combinations of inputs that the firm can afford to hire.
Isoquant is the combination of inputs that provide the same

level of output.
The slope of an isoquant is called marginal rate of technical
substitution (MRTS). MRTS is the amount of one factor, e.g.
capital, that can be replaced by a one unit increase in the other
factor e.g. labor, if output is to be held constant.
Marginal cost is the change in total cost resulting from a change

in the quantity of output produced by a firm.
Economies of scale arise when firms become bigger and bigger
then their costs per unit of output fall. This could be because of
larger more efficient plants, financial economies, more efficient
specialized labour, bulk discounts on purchases etc.
Diseconomies of scale are the forces that cause larger firms to

produce goods and services at increased per-unit costs.
If output increases by that same proportional change then there
are constant returns to scale. If output increases by less than
that proportional change, there are decreasing returns to scale. If
output increases by more than that proportion, there are
increasing returns to scale.
Average total cost (ATC) is total cost per unit of output, it can
be found by dividing total cost (TC) by the quantity of output (Q).
ATC = TC/Q
Average variable cost (AVC)

AVC is an economics term to describe the total cost a firm can
vary (labor, etc.) divided by the total units of output.
AVC = TVC/Q
Price taker:
A firm that does not have the ability to influence market price is
a price-taker. In perfect competition, the firm is price taker.
There are large number of buyers and sellers and firm can not
influence on the market price. Price is set by the forces of
demand and supply.
Price maker:
A firm that influences the market price by how much it produces
can be called a price-maker orprice-setter. In Monopoly, firm is
price maker. A monopoly or a firm within monopolistic
competition that has the power to influence the price it charges
as the good it produces does not have perfect substitutes. A
monopoly is a price maker as it holds a large amount of power
over the price it charges.
Total Revenue & Total Cost approach

According to this approach, profit is maximized at that point
where the difference between total revenue & total cost is
maximum.
Marginal Revenue & Marginal Cost APPROACH

According to this approach, profit is maximized at the point where
MC=MR.
If there is decrease in demand, there will be leftward /

downward shift in demand curve.
If there is increase in demand, there will be rightward /
upward / outward shift in demand curve.
For convenience, just remember that rightward shift for
increase in demand and supply and leftward shift for
decrease in demand and supply.
Profit Maximization:
Firms are interested in profit maximization. Profit is the
difference between total revenue & total cost. Higher the
difference, higher is the level of profit. There are two approaches
of profit maximization. One is Total Revenue and Total Cost
approach and the other is Marginal Revenue and Marginal Cost
approach.
Production Possibility Frontier (PPF):

A production possibility frontier (PPF) is a graph or curve that
shows the maximum level of output that can efficiently be
produced with limited productive resources.
The law of demand states that if the price of a certain

commodity rises, its quantity demanded will go down, and vice-
versa.
The condition for consumer's equilibrium is expressed as

…..Consumer's equilibrium occurs at the point where budget
line is tangent to the indifference curve.
Law of Diminishing Marginal Utility

This law states that as more of a good is consumed, eventually
each additional unit of the good provides less additional utility
and marginal utility derived from the consumption of good
decreases.
Substitution effect of a price change is negative in case of

normal goods. If price of a good increases then consumers moves
towards its substitutes and consume those substitutes goods and
will reduce the quantity of that goods whose price rose. So
substitution effect is also negative.
Income effect / real Income effect of a price change is negative

in case of normal goods. If price of any good increases, real
income of consumer falls and he will consume less of that good.
Since as price increases, real income decreases, purchasing
power of consumers decreases so income effect of a price change
is negative for normal goods.
The term is Budget deficit. It is a situation when

government expenditures are greater than the revenues.
Law of Diminishing Marginal Utility

This law states that as more of a good is consumed, eventually
each additional unit of the good provides less additional utility
and marginal utility derived from the consumption of good
decreases.
The law of diminishing marginal utility helps explains the negative
slope of the demand curve and the law of demand. Marginal
utility curve is negatively sloped.
For example the initial cup of tea in the morning meets a large
need and provides a large amount of satisfaction (utility). But as
we consume another cup of tea, the satisfaction derived from the
2nd cup will be less than the 1stcup and so on.
For two goods x and y the concave shape of PPF shows the
increasing opportunity cost.
1. What effect is working when the price of a good falls and

consumers tend to buy it instead of other goods?
A. the substitution effect.
B. the ceteris paribus effect.
C. the total price effect.
D. the income effect.
2:- 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. Perfect substitutes.
B. Unrelated goods.
C. Complements.
D. Substitutes.
3:-If the demand for coffee decreases as income decreases,
coffee is
A. a normal good.
B. a complementary good.
C. An inferior good.
D. a substitute good.
4:-When the decrease in the price of one good causes the
demand for another good to decrease, the goods are
A. Complements.
B. Normal.
C. Inferior.
D. Substitutes.
5:- The price of apples falls by 5% and quantity demanded
increases by 6%. Demand for apples is:
A. Inelastic.
B. Perfectly inelastic.
C. Elastic.
D. Perfectly elastic.
6:- The price of bread increases by 22% and the quantity of

bread demanded falls by 25%. This indicates that demand for
bread is
A. Elastic.
B. Inelastic.
C. unitarily elastic
D. perfectly elastic
Question:-
what are sources of inefficiency in monopolistic competition?
what is the effect of the fact that price exceeds marginal
cost, Excess Capacity and Product Diversity on this
efficiency?
Answer:
There are two sources of inefficiency in monopolistic competition:
1. At its optimum output, monopolistic competitive firm charges a
price that exceeds marginal costs. The monopolistic competitive
firm maximizes profits where Marginal Revenue = Marginal Cost.
Since the monopolistic competitive firm’s demand curve is
downward sloping, this means that the firm is charging a price
that exceeds marginal costs.
2. Monopolistic competitive firm operate with excess capacity. It
means that the firm's profit maximizing output is less than the
output associated with minimum average cost.
Due to the fact that price exceeds marginal cost, there will be
excess capacity.
Price elasticity of demand is:-

Ratio of the percentage change in quantity demanded to the
percentage change in price.
Risk is when an outcome may or may not occur but its

probability is known while
Uncertainty is when an outcome may or may not occur but its
probability is not known.
( 'ceteris paribus' meaning 'all else equal )
Opportunity cost: what we forgo, or give up, when we make a
choice or a decision
Question:-If the income elasticity of demand is 1/2, the good An
inferior good or luxury good?
Answer:-If the sign of income elasticity of demand is positive,
the good is normal and if sign is negative, the good is inferior.
Price floor results in excess supply or surplus of the product.
If cross price elasticity is positive then the goods are
considered as substitutes.
Quantity demand will decrease as price increase. Demand curve
will remains constant.
Will Costs determine Firm's behavior ?? yes
The term ex-ante means "before the event” e.g. in the

financial world, the ex-ante return is the expected return of an
investment portfolio. Ex-post means “after the fact”
An explicit collusion is a formal, usually secret, collusion
agreement among competing firms in an industry designed to
control the market, raise the market price, and otherwise act
like a monopoly. Explicit collusion is also known as overt
collusion. The distinguishing feature of explicit collusion is a
formal agreement whereas no formal explicit agreement is
involved in tacit collusion.
Explicit collusion usually occurs in oligopolistic firms whereas
tacit collusion is best understood in the context of a duopoly
and the concept of Game Theory (namely, Nash Equilibrium).
Similarities of oligopoly with other market structures:
Oligopoly is similar to monopoly in the sense that there are

a small number of firms (about 2-20) in the market and as such
barriers to entry exist. It is similar to perfect competition in the
sense that firms compete with each other which may result in
prices very similar to those that would obtain under perfect
competition. It is similar to monopolistic competition since there
is a possibility of having differentiated products.
Difference of oligopoly with other market structures:
It is different with other market structures because there are few

participants in this type of market, each Oligopolist is aware of
the actions of the others. The decisions of one firm influence the
other firms. This causes Oligopolistic markets and industries to be
at the highest risk for collusion. It is not possible to identify any
single equilibrium in oligopoly. Reason for that is the firms are
interdependent.
At any point on the indifference curve, the slope is equal to the

marginal rate of substitution.
if the income elasticity of demand is 1/2, the good is ? Normal good.
Price discrimination is the practice of charging different

prices from different people for the same product.
QUESTION:does an income consumption curve another name for income demand curve?
ANS:Yes.Income consumption curve is a curve that
shows the relationship between income and demand.
Normally as income rises, so demand rises also, but it
can happen, as in the case of low value goods, that
when income rises demand falls as purchasers switch
to higher-priced products.
Preference, Transitivity, Completeness and Convexity all are
the properties of indifference curve.
QUESTION:when the firm doesnt produce any output , is total
cost zero?
ANS: Total cost = Fixed cost + Variable cost
Total cost will not be zero in case of no output produced, because
fixed cost always exist whether output produced or not. Variable
cost will be zero if output is zero.
QUES:
for a shoe manufacturer which cost is fixed and which is variable?
cost of leather
fee paid to advertising agency
wear and tear on machinery?
ANS:
Cost of leather = Variable cost
Fee paid to advertising agency = Variable cost
Wear and tear on machinery = Depreciation
cateris paribus means other things being remaining the same.
A rational person will always select on the basis of marginal

benefit is greater than marginal cost.
Monopolists typically produce fewer goods and sell them at a

higher price than under perfect competition, resulting in
abnormal and sustained profit.
change in total revenue divided by one unit change in output is

called marginal revenue.
The indifference curves are convex to the origin. This is

due to the concept of the diminishing marginal rate of
substitution between the two goods. If we consider indifference
map, the higher indifference curve shows higher level of utility
or satisfaction.
Negatively correlated means negative relationship.
Uncorrelated means no relationship.
A duopoly refers to a market condition in which two

companies have control over the market while producing
similar product. Duopoly is similar to monopolies in which only
one company controls the market and oligopolies in which more
than two companies are allowed to trade in the market.
Relationship between APP and MPP
• If the marginal physical product equals the average physical

product, the average physical product will not change.
• If the marginal physical product is above the average

physical product, the average physical product will rise.
• If the marginal physical product is below the average

physical product, the average physical product will fall.
The slope is defined as: Rise / Run.

Rise = Vertical distance between any two points on the line.
Run = Horizontal distance between any two points on the line.
Curve is the graphical representation of tables / schedules. If

demand schedule is represented graphically, it is known as
demand curve. The slope of demand curve is negative or
downward.
Oligopoly
In this market structure, there are a small number of
firms (about 2-20) in the market and there are also barriers to
entry.
A monopolist can make super normal, profits even in long

run because there is no easy entry fo other firms as in the
case of perfect competition therefore a monopolist can
maintain her high price even in the long run.
Monopoly is the market structure where there is single seller. A
monopolist has the ability to influence the market price. He is a
price maker.
Super normal profit:-Profit = Revenue – cost.

Super normal profit is the profit where the positive difference
between revenue and cost is maximum. Firm earns super normal
profits in short run where revenue is greater than the cost,
in long run it earns normal profit where revenue is equal to cost.
Super normal profit is only possible in the short run not in the
long run. An industry is earning super normal profit in the short
run. Due to the attraction of this super normal profit, other new
firms enter in the market. These new firms also produce
products; supply of the product increases in the market, so the
price goes down, profit squeezes and profit share is divided
among all the firms so profit share of each firm reduces, so each
firm earns normal profit in the long run.
Ques: if the price of houses and the number of houses purchased

both rise over the course of the year then what will be effect on
demand demand curve, supply and house construction costs?
Ans: It means that demand of houses has increased. People want
to purchase houses irrespective of the increase in prices.
Qu. if there are only two goods A and B,if more of good A is
always preferred to less, and if less of good B is always preferred
to more, then what happens to Indifference curves of both?
Ans: Indifference curve will be downward sloping and convex to
the origin.
Elastic demand means relatively small changes in price causes

relatively larger changes in quantity demanded. An elastic
demand has a value greater than one (the negative value is
ignored).
Inelastic demand means relatively large changes in price

causes relatively smaller changes in quantity demanded. An
inelastic demand has a value of elasticity less than one (the
negative value is ignored).
Question: A person with a diminishing marginal utility of income

what is he said?
Ans: The degree of risk aversion increases as your income level
falls, due to diminishing marginal utility of income.
Income effect of a price change is negative in case of normal

goods. If price of any good increases, real income of consumer
falls and he will consume less of that good. Since as price
increases, real income decreases, purchasing power of consumers
decreases so income effect of a price change is negati ve for
normal goods.
In elasticity, minus sign is ignored. We just see the value which

is greater than 1 is elastic and which is less than 1 is inelastic.
If elasticity is 3 which is greater than 1, it is elastic. If elasticity
is 0.3 which is less than 1, it is said to be inelastic.

Why the monopolists produce lower quantities at higher
prices compared to perfectly competitive firms?
Ans:
1) Large initial fixed cost is involved
2) Product differentiation or drabd loyalty
3) Monopolistic controls the supply of key factors of production

Write down any five situations in which cartel can
survive?
Ans:
1) Cartel can survive when number of firms is small.
2) When the collusion is tacit or hidden not explicit.
3) The products are homogeneous.
4) Industry is sable
5) There is opening among the firms regarding their
production process.
6) Government’s strictness in implementing antitrust law.

Differentiate between external economies of scale and
external diseconomies of scale with the help of examples.
Ans:
External economies: These are the benefits which are accured

to any firm in the presence of other firms. For example setting of
credit information bureaus by bank , advertising by industry such
as rival industry.
Discovery of new techniques.
This type of economy occurs when an industry is heavily
concentrated in a particular area.
Economies is available to all firms for example construction of
roads
External diseconomies of scale :

These are the forces which causes the large firms to produce
goods and services at increased per unit costs.
This type of scale occurs when an industry grows larger and
shortage of skilled laor taking place and shortage of raw
materials are the types of external diseconomies.
When a firm become large then supervision of workers become
difficult and problem is created for management is taking place
which cause adverse effect on efficiency.
Risk loving is the person who wants to take the risk.
Risk averse is a person who avoids taking the risk.
Risk neutral is a person that is indifferent about taking the risk or

not taking the risk.
Question:- What would the risk neutral person, risk averse
person and risk loving person do in the following cases?
o If Odds Ratio > 1
o If Odds Ratio = 1
o If Odds Ratio < 1
Answer:-
1) For risk neutral person

o If Odds Ratio = 1, then he will be indifferent
o If Odds Ratio < 1, then he might not buy as OR < 1
2) For risk averse person
o If Odds Ratio > 1, then in this case as well he might decide

not to buy.
o If Odds Ratio = 1, then he will definitely not buy
o If Odds Ratio < 1, then he will definitely not buy
3) For risk loving person

o If Odds Ratio = 1, then he will definitely buy
If Odds Ratio < 1, then in this case as well he might decide to
buy.
Question :-
C. You toss a coin, if head comes, you are given Rs. 200 and if
tail comes, you have to pay Rs. 200. Will you play this game or
not? Give your answer with brief explanation
Answer:-
The tossing of a coin and the probability of a head appearing is
50% i.e. the odds of success are fair. So the option of OR < 1
and OR > 1 is not there. The only possibility is OR = 1 which
means that the chances are not that bad. Now it depends on the
fact that whether I am a risk averse, risk neutral or risk loving
person. In case of fair odds both risk loving and risk neutral
person might decide to play. So I will play this game as the
amount of money involved is not that much and as far as my
perception of it is concerned the marginal benefit of gaining 200
Rs is perceived by me as more than the marginal cost of losing
the 200 Rs. So I would definitely play this game. Moreover the
excitement of winning might overshadow my rational judgement
and I would definitely decide to play by being carried away by
excitement.
CHAPTER 1
1. Economics may best be defined as:
A) the interaction between macro and micro considerations.
B) the study of the behavior of people and institutions in the production, distribution, and
consumption of scarce goods.
C) the empirical testing of value judgments through the use of induction and deduction.
D) the use of policy to refute facts and hypotheses.
Ans: B
2. The study of economics is primarily concerned with:

A) keeping private businesses from losing money.
B) demonstrating that capitalistic economies are superior to socialistic economies.
C) choices which are made in seeking to use scarce resources efficiently.
D) determining the most equitable distribution of society's output.
Ans: C
3. You should decide to go to a movie:

A) if the marginal cost of the movie exceeds its marginal benefit.
B) if the marginal benefit of the movie exceeds its marginal cost.
C) if your income will allow you to buy a ticket.
D) because movies are inherently good products.
Ans: B
4. Studying economics:
A) helps one become a better-informed citizen and voter.
B) is detrimental to good citizenship because economics emphasizes individualism.
C) is a waste of time since we all participate in the economy whether we understand it
or not.
D) is important because economics is the "science of ea rning money."
Ans: A
5. Economic theories:
A) are useless because they are not based upon laboratory experimentation.
B) which are true for individual economic units are never true for the economy as a
whole.
C) are generalizations based upon a careful observation of facts.
D) are abstractions and therefore of no application to real situations.
Ans: C
6. The term "ceteris paribus" means:
A) that if event A precedes event B, A has caused B.
B) that economics deals with facts, not values.
C) other things equal.
D) prosperity inevitably follows recession.
Ans: C
7. Macroeconomics can best be described as the:

A) analysis of how a consumer tries to spend income.
B) study of the large aggregates of the economy or the economy as a whole.
C) analysis of how firms attempt to maximize their profits.
D) study of how supply and demand determine prices in individual markets.
Ans: B
8. Microeconomics is concerned with:

A) the aggregate or total levels of income, employment, and output.
B) a detailed examination of specific economic units which comprise the economic
system.
C) the concealing of detailed information about specific segments of the economy.
D) the establishing of an overall view of the operation of the economic system.
Ans: B
9. A normative statement is one which:

A) is based on the law of averages.
B) pertains only to microeconomics.
C) pertains only to macroeconomics.
D) is based upon value judgments.
Ans: D
10. A positive statement is one which is:

A) derived by induction.
B) derived by deduction.
C) subjective and is based on a value judgment.
D) objective and is based on facts.
Ans: D
CHAPTER 2
1. The study of economics exists because:
A) government interferes with the efficient allocation of scarce resources.
B) resources are scarce in relation to human material wants.
C) the market system is an obstacle to the efficient use of plentiful resources to satisfy
constrained wants.
D) resources are overly abundant as compared to wants; thus, an allocation problem
exists.
Ans: B
2. The scarcity problem:
A) persists only because countries have failed to achieve continuous full employment.
B) persists because material wants exceed available productive resources.
C) has been solved in all industrialized nations.
D) has been eliminated in affluent societies such as the United States and Canada.
Ans: B
A) free gifts of nature.

B) consumption goods.
C) units of money capital.
D) factors of production.
Ans: D
http://groups.google.com/group/ vuZs
4. Which of the following will not entail an outward shift of the production possibilities curve?
A) an upgrading of the quality of a nation's human resources
B) the reduction of unemployment
C) an increase in the quantity of a society's labor force
D) the improvement of a society's technological knowledge
Ans: B
5. A production possibilities curve illustrates:

A) scarcity.
B) market prices.
C) consumer preferences.
D) the distribution of inc ome.
Ans: A
6. Assume an economy is operating at some point on its production possibilities curve whic h shows
civilian and military goods. If the output of military goods is increased, the output of civilian goods:
A) will remain unchanged.
B) may be either increased or decreas ed.
C) must be decreased.
D) must also be increas ed.
Ans: C
7. The typical production possibilities curve is:

A) an upsloping line which is concave to the origin.
B) a downsloping line which is convex to the origin.
C) a downsloping line which is concave to the origin.
D) a straight upsloping line.
Ans: C
8. The concept of opportunity cost:

A) is irrelevant in socialistic economies because of central planning.
B) suggests that the use of resources in any particular line of production means that alternative outputs
must be forgone.
C) is irrelevant if the production possibilities curve is shifting to the right.
D) suggests that insatiable wants can be fulfilled.
Ans: B
9. The marginal benefit curve is:

A) upsloping because of increasing marginal opportunity costs.
B) upsloping because successive units of a specific product yield less and less extra utility.
C) downsloping bec ause of increasing marginal opportunity costs.
D) downsloping bec ause successive units of a specific product yield less and less extra utility.
Ans: D
10. The term "laissez faire" suggests that:

A) land and other natural resources should be privately owned, but capital should be publicly owned.
B) land and other natural resources should be publicly owned, but capit al equipment should be privately
owned.
C) government should not interfere wit h the operation of the economy.
D) government action is necessary if the economy is to achieve full employment and full production.
Ans: C
11. The simple circular flow model shows that:

A) households are on the demand side of both product and resource markets.
B) businesses are on the supply side of bot h product and resource markets.
C) households are on the supply side of the resource market and on the demand side of the p roduct
market.
D) businesses are on the demand side of the product market and on the supply side of the resource
market.
Ans: C
12. Households and businesses are:

A) both buyers in the resource market.
B) both suppliers in the product market.
C) suppliers in the resource and product markets respectively.
D) suppliers in the product and resource markets respectively.
Ans: C
CHAPTER 3
1. A market:
A) reflects upsloping demand and downsloping supply curves.
B) entails the exchange of goods, but not services.
C) is an institution which brings together buyers and sellers.
D) always entails face-to-face contact between buyer and seller.
Ans: C
2. The demand curve shows the relationship between:

A) money income and quantity demanded.
B) price and production costs.
C) price and quantity demanded.
D) consumer tastes and the quantity demanded.
Ans: C
3. A demand curve:
A) shows the relationship between price and quantity demanded.
B) indicates the quantity demanded at each price in a series of prices.
C) graphs as a downsloping line.
D) has all of the above characteristics.
Ans: D
4. "When the price of a product rises, consumers shift their purchases to other products
whose prices are now relatively lower." This statement describes:
A) an inferior good.
B) the rationing function of prices.
C) the substitution effect.
D) the income effect.
Ans: C
5. One reason why the quantity of a good demanded increases when its price falls is
that the:
A) price decline shifts the supply curve to the left.
B) lower price shifts the demand curve to the left.
C) lower price shifts the demand curve to the right.
D) lower price increases the real incomes of buyers, enabling them to buy more.
Ans: D
6. A rightward shift in the demand curve for product C might be caused by:
A) an increase in income if C is a normal good.
B) a decrease in income if C is an inferior good.
C) an increase in the price of a product which is a close substitute for C.
D) a decrease in the price of a product which is complementary to C.
E) any one or more of the above.
Ans: E
7. Video cassette recorders and video cassettes are:

A) complementary goods.
B) substitute goods.
C) independent goods.
D) inferior goods.
Ans: A
8. If the price of K declines, the demand curve for the complementary product J will:
A) shift to the left.
B) decrease.
C) shift to the right.
D) remain unchanged.
Ans: C
9. If X is a normal good, a rise in money income will shift the:

A) supply curve for X to the left.
B) supply curve for X to the right.
C) demand curve for X to the left.
D) demand curve for X to the right.
Ans: D
10. A normal good is defined as one:
A) whose amount demanded will increase as its price decreases.
B) whose amount demanded will increase as its price increases.
C) whose demand curve will shift leftward as incomes rise.
D) the consumption of which varies directly with incomes.
Ans: D
11. An increase in the price of product A will:

A) reduce the demand for resources used in the production of A.
B) increase the demand for complementary product C.
C) increase the demand for substitute product B.
D) reduce the demand for substitute product B.
Ans: C
12. An "increase in the quantity demanded" means that:

A) given supply, the price of the product can be expected to decline.
B) price has declined and consumers therefore want to purchase more of the product.
C) the demand curve has shifted to the right.
D) the demand curve has shifted to the left.
Ans: B
13. The law of supply:

A) reflects the amounts which producers will want to offer at each price in a series of
prices.
B) is reflected in an upsloping supply curve.
C) shows that the relationship between price and quantity supplied is positive.
D) is reflected in all of the above.
Ans: D
14. An improvement in production technology will:

A) increase equilibrium price.
B) shift the supply curve to the left.
C) shift the supply curve to the right.
D) shift the demand curve to the left.
Ans: C
15. Assume product A is an input in the production of product B. In turn product B is a

complement to product C. We can expect a decrease in the price of A to:
A) increase the supply of B and increase the demand for C.
B) decrease the supply of B and increase the demand for C.
C) decrease the supply of B and decrease the demand for C.
D) increase the supply of B and decrease the demand for C.
Ans: A
16. A market is in equilibrium:
A) provided there is no surplus of the product.
B) at all prices above that shown by the intersection of the supply and demand curves.
C) if the amount producers want to sell is equal to the amount consumers want to buy.
D) whenever the demand curve is downsloping and the supply curve is ups loping.
Ans: C
17. If there is a shortage of product X:

A) fewer resources will be allocated to the production of this good.
B) the price of the product will rise.
C) the price of the product will decline.
D) the supply curve will shift to the left and the demand curve to the right, eliminating
the shortage.
E) the supply curve will shift to the right and the demand curve to the left, eliminating the
shortage.
Ans: B
18. Assuming competitive markets with typical supply and demand curves, which of the
following statements is correct?
A) An increase in supply with a decrease in demand will result in an increase in price.
B) An increase in supply with no change in demand will result in an increase in price.
C) An increase in supply with no change in demand will result in a decline in sales.
D) An increase in demand with no change in supply will result in an increase in sales.
Ans: D
CHAPTER 7
1. A nation's gross domestic product (GDP):
A) is the dollar value of the total output produced within the borders of the nation.
B) is the dollar value of the total output produced by its citizens, regardless of where
they are living.
C) can be found by summing C + In + S + Xn.
D) is always some amount less than its C + Ig + G + Xn.
Ans: A
2. Which of the following is a final good or service?

A) diesel fuel bought for a delivery truck
B) fertilizer purchased by a farm supplier
C) a haircut
D) Chevrolet windows purchased by a General Motors assembly plant
Ans: C
3. Net exports are:

A) that portion of consumption and investment goods sent to other countries.
B) exports plus imports.
C) exports less imports.
D) imports less exports.
Ans: C
4. Economists define investment to include:

A) any increase in business inventories.
B) the addition of cash to a savings account.
C) the purchase of common or preferred stock.
D) the purchase of any durable good, for example, an automobile or a refrigerator.
Ans: A
5. Transfer payments are:

A) excluded when calculating GDP because they only reflect inflation.
B) excluded when calculating GDP because they do not reflect current production.
C) included when calculating GDP because they are a category of investment
spending.
D) included when calculating GDP because they increase the spending of recipients.
Ans: B
6. The ZZZ Corporation issued $25 million in new common stock in 1998. It used $18
million of the proceeds to replace obsolete equipment in its factory and $7 million to
repay bank loans. As a result, investment:
A) of $7 million has occurred.
B) of $25 million has occurred.
C) of $18 million has occurred.
D) has not occurred.
Ans: C
7. Consumption of fixed capital (depreciation) can be determined by:

A) adding indirect business taxes to NDP.
B) subtracting NDP from GDP.
C) subtracting net investment from GDP.
D) adding net investment to gross investment.
Ans: B
8. "Value added" refers to:

A) any increase in GDP which has been adjusted for adverse environmental effects.
B) the excess of gross investment over net investment.
C) the difference between the value of a firm's output and the value of the inputs it has
purchased from others.
D) the portion of any increase in GDP which is caused by inflation as opposed to an
increase in real output.
Ans: C
9. Assume a manufacturer of stereo speakers purchases $40 worth of components for

each speaker. The completed speaker sells for $70. The value added by the
manufacturer for each speaker is:
A) $110.
B) $30.
C) $40.
D) $70.
Ans: B
10. The total income earned in any year by U.S. resource suppliers is measured by:
A) DI.
B) NI.
C) PI.
D) GDP.
Ans: B
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11. Suppose nominal GDP was $360 billion in 1985 and $450 billion in 1995. The
appropriate price index (1985 = 100) was 120 in 1985 and 125 in 1995. It can be
concluded that between 1985 and 1995 real GDP:
A) increased by about $60 billion.
B) decreased by about $32 billion.
C) increased by about $100 billion.
D) increased by about $117 billion.
Ans: A
CHAPTER 8
1. The immediate determinant of the volume of output and employme nt is the:
A) composition of consumer spending.
B) ratio of public goods to private goods production.
C) level of total spending.
D) size of the labor force.
Ans: C
2. The phase of the business cycle in which real domestic output declines is called:
A) the peak.
B) a recovery.
C) a recession.
D) the trough.
Ans: C
3. The production of durable goods varies more than the production of nondurable
goods because:
A) durables purchases are nonpostponable and the producers of durables are
competitive.
B) durables purchases are postponable and producers of durables are competitive.
C) nondurables purchases are postponable and the producers of nondurables are
competitive.
D) durables purchases are postponable and producers of durables have monopoly
power.
Ans: D
4. A recession is a period in which:
A) cost-push inflation is present.
B) nominal domestic output falls.
C) demand-pull inflation is present.
D) real domestic output falls.
Ans: D
5. To be officially unemployed a person must:

A) be in the labor force.
B) be 21 years of age or older.
C) have just lost a job.
D) be waiting to be called back from a layoff.
Ans: A
6. The natural rate of unemployment is:

A) higher than the full-employment rate of unemployment.
B) lower than the full-employment rate of unemployment.
C) that rate of unemployment occurring when the economy is at its potential output.
D) found by dividing total unemployment by the size of the labor force.
Ans: C
7. Assuming the total population is 100 million, the civilian labor force is 50 million, and
47 million workers are unemployed, the unemployment rate:
A) is 3 percent.
B) is 6 percent.
C) is 7 percent.
D) is 9 percent.
E) cannot be determined from the information given.
Ans: B
8. Cyclical unemployment is a consequence of:

A) a deficiency of aggregate spending.
B) the decreasing relative importance of goods and the increasing relative importance of
services in our economy.
C) the everyday dynamics of a free labor market.
D) technological change.
Ans: A
9. Structural unemployment:
A) is also known as frictional unemployment.
B) is the main component of cyclical unemployment.
C) is said to occur when people are waiting to be called back to previous jobs.
D) may involve a locational mismatch between unemployed workers and job openings.
Ans: D
10. Okun's law:

A) measures the tradeoff between the rate of inflation and the rate of unemployment.
B) indicates the number of years it will take for a constant rate of inflation to cause the
price level to double.
C) quantifies the relationship between nominal and real incomes.
D) shows the relationship between the unemployment rate and the size of the GDP
gap.
Ans: D
11. The consumer price index was 140.3 in 1992 and 144.5 in 1993. Therefore, the rate
of inflation in 1993 was about:
A) 6.7 percent.
B) 3.0 percent.
C) 1.2 percent.
D) 13.6 percent.
Ans: B
12. Given the annual rate of inflation, the "rule of 70" allows one to:
A) determine whether the inflation is demand-pull or cost-push.
B) calculate the accompanying rate of unemployment.
C) determine when the value of a real asset will approach zero.
D) calculate the number of years required for the price level to double.
Ans: D
13. Cost-push inflation:

A) is caused by excessive total spending.
B) shifts the nation's production possibilities curve leftward.
C) moves the economy inward from its production possibilities curve.
D) is a mixed blessing because it has positive effects on real output and employment.
Ans: C
CHAPTER 9
1. The view that the market system will ensure full employment is associated with:
A) Keynesian economics.
B) GDP gap analysis.
C) classical economics.
D) the aggregate expenditures model.
Ans: C
2. Say's law indicates that:

A) a stable, inflexible interest rate will guarantee perpetual full employment.
B) falling prices will decrease the purchasing power of a declining level of total money
demand.
C) supply creates its own demand.
D) those prices which rise most during prosperity are likely to fall least during
depression.
Ans: C
3. The most important determinant of consumer spending is:
A) the level of household debt.
B) consumer expectations.
C) the stock of wealth.
D) the level of income.
Ans: D
4. With an MPS of .4, the MPC will be:

A) 1.0 minus .4.
B) .4 minus 1.0.
C) the reciprocal of the MPS.
D) .4.
Ans: A
5. As disposable income goes up the:

A) APC falls.
B) APS falls.
C) volume of consumption declines absolutely.
D) volume of investment can be expected to diminish.
Ans: A
6. Which of the following is correct?

A) APC + APS = 1.
B) APC + MPS = 1.
C) APS + MPC = 1.
D) APS + MPS = 1.
Ans: A
7. Which one of the following will cause a movement down along an economy's
consumption schedule?
A) an increase in stock prices
B) a decrease in stock prices
C) an increase in consumer indebtedness
D) a decrease in disposable income
Ans: D
8. At the point where the consumption schedule intersects the 45 -degree line:
A) the MPC is 1.00.
B) the APC is 1.00.
C) saving is equal to consumption.
D) the economy is in equilibrium.
Ans: B
9. (Advanced analysis) If the equation for the consumption schedule is C = 20 + 0.8Y ,

where C is consumption and Y is disposable income, then the average propensity to
consume is 1 when disposable income is:
A) $80.
B) $100.
C) $120.
D) $160.
Ans: B

A) MPC + MPS = APC + APS
B) APC + MPS = APS + MPC
C) APC + MPC = APS + MPS
D) APC - APS = MPC - MPS
Ans: A
11. As aggregate income decreases, the APC:

A) and APS will both increase.
B) will decrease, but the APS will increase.
C) will increase, but the APS will decrease.
D) and APS will both decrease.
Ans: C
12. The relationship between the real interest rate and investment is shown by the:
A) investment-demand schedule.
B) consumption of fixed capital schedule.
C) saving schedule.
D) aggregate supply curve.
Ans: A
13. Investment and saving are, respectively:

A) income and wealth.
B) stocks and flows.
C) injections and leakages.
D) leakages and injections.
Ans: C
CHAPETR 10
1. The multiplier effect means that:
A) consumption is typically several times as large as saving.
B) a small change in consumption demand can cause a much larger increase in
investment.
C) a small increase in investment can cause national income to change by a larger
amount.
D) a small decline in the MPC can cause equilibrium GDP to rise by several times that
amount.
Ans: C
2. The multiplier may be calculated as:
A) 1/(MPS + MPC)
B) MPC/MPS
C) 1/(1 - MPC)
D) 1 - MPC = MPS
Ans: C
3. If the MPS is only half as large as the MPC, the multiplier:

A) is 2.
B) is 3.
C) is 4.
D) cannot be determined from the information given.
Ans: B
4. The multiplier effect:

A) reduces the MPC.
B) magnifies small changes in spending into larger changes in output and income.
C) promotes stability of the general price level.
D) lessens upswings and downswings in business activity.
Ans: B
5. If the MPC is .6, the multiplier will be:

A) 4.0.
B) 6.0.
C) 2.5.
D) 1.67.
Ans: C
6. The multiplier effect indicates that:

A) a decline in the interest rate will cause a proportionately larger increase in
investment.
B) a change in aggregate expenditures will change aggregate income by a larger
amount.
C) a change in aggregate expenditures will increase aggregate income by the same
amount.
D) a small increase in total income will generate a large change in aggregate
expenditures.
Ans: B
7. If a $200 billion increase in investment spending creates $200 billion of new income
in the first round of the multiplier process and $160 billion in the second round, the
multiplier in the economy is:
A) 4.
B) 5.
C) 3.33.
D) 2.5.
Ans: B
8. Suppose that the level of GDP increased by $100 billion in an economy where the
marginal propensity to consume is 0.5. Aggregate expenditures must have increased
by:
A) $100 billion.
B) $50 billion.
C) $500 billion.
D) $5 billion.
Ans: B
9. At the equilibrium GDP for an open economy:

A) net exports may be either positive or negative.
B) imports will always exceed exports.
C) exports will always exceed imports.
D) exports and imports will be equal.
Ans: A
10. If the multiplier in an economy is 5, a $20 billion increase in net exports will:
A) increase GDP by $100 billion.
B) reduce GDP by $20 billion.
C) decrease GDP by $100 billion.
D) increase GDP by $20 billion.
Ans: A
11. In a mixed open economy the equilibrium level of GDP exists where:
A) Ca + Ig + Xn intersects the 45-degree line.
B) Ca + Ig = Sa + T + X .
C) Ca + Ig + Xn + G = GDP.
D) Ca + Ig + Xn = Sa + T .
Ans: C
12. The multiplier associated with a change in government purchases is:

A) always equal to 1.
B) smaller than that associated with an equal change in taxes.
C) the same as that associated with a change in investment.
D) less than that associated with a change in investment.
E) greater than that associated with a change in investment.
Ans: C
ECO401 Economics Solved MCQs Bank2
CHAPTER 11
1. The aggregate demand curve is:
A) vertical if full employment exists.
B) horizontal when there is considerable unemployment in the economy.
C) downsloping because of the interest-rate, wealth or real balances, and foreign
purchases effects.
D) downsloping because production costs decrease as real output increases.
Ans: C
2. The interest-rate and real balances effects are important because they help explain:
A) rightward and leftward shifts of the aggregate demand curve.
B) why demand-management policy cannot be used effectively to curb stagflation.
C) the shape of the aggregate demand curve.
D) the shape of the aggregate supply curve.
Ans: C
3. The determinants of aggregate demand:

A) explain why the aggregate demand curve is downsloping.
B) explain shifts in the aggregate demand curve.
C) demonstrate why real output and the price level are inversely related.
D) include input prices and resource productivity.
Ans: B
4. Which one of the following would not shift the aggregate demand curve?
A) a change in the price level
B) depreciation of the international value of the dollar
C) a decline in the interest rate at each possible price level
D) an increase in personal income tax rates
Ans: A
5. All else equal, an increase in imports will shift the aggregate expenditures curve:
A) upward and the aggregate demand curve rightward.
B) upward and the aggregate demand curve leftward.
C) downward and the aggregate demand curve rightward.
D) downward and the aggregate demand curve leftward.
Ans: D
6. The aggregate supply curve:

A) shows the various amounts of real output which businesses will produce at each
price level.
B) is downsloping because real purchasing power increases as the price level falls.
C) contains a vertical range where real output is variable and the price level is constant.
D) is explained by the interest rate, wealth, and foreign purchases effects.
Ans: A
7. Other things equal, an improvement in productivity will:

A) shift the aggregate demand curve to the left.
B) shift the aggregate supply curve to the left.
C) shift the aggregate supply curve to the right.
D) increase the price level.
Ans: C
8. Productivity measures:
A) real output per unit of input.
B) per unit production costs.
C) the changes in real wealth caused by price level changes.
D) the amount of capital goods used per worker.
Ans: A
9. The equilibrium price level and level of real output occur where:
A) real output is at its highest possible level.
B) exports equal imports.
C) the price level is at its lowest level.
D) the aggregate demand and supply curves intersect.
Ans: D
CHAPTER 12
1. Discretionary fiscal policy refers to:
A) any change in government spending or taxes which destabilizes the economy.
B) the authority which the President has to change personal income tax rates.
C) changes in taxes and government expenditures made by Congress to stabilize the
economy.
D) the changes in taxes and transfers which occur as GDP changes.
Ans: C
2. "Discretionary" fiscal policy is so named because it:

A) is undertaken at the option of the nation's central bank.
B) occurs automatically as the nation's level of GDP changes.
C) involves specific changes in T and G undertaken expressly for stabilization purposes
at the option of Congress.
D) is invoked secretly by the Council of Economic Advisors.
Ans: C
3. If the MPS in an economy is .1, government could shift the aggregate demand curve
rightward by $40 billion by:
A) increasing government spending by $4 billion.
B) increasing government spending by $40 billion.
C) decreasing taxes by $4 billion.
D) increasing taxes by $4 billion.
Ans: A
4. Assume that aggregate demand in the economy is excessive, causing demand-pull

inflation. Which of the following would be most in accord with appropriate government
fiscal policy?
A) an increase in Federal income tax rates
B) an increase in the size of income tax exemptions for each dependent
C) passage of legislation providing for the construction of 8,000 new post office
buildings
D) an increase in soil conservation subsidies to farmers
Ans: A
5. An appropriate fiscal policy for a severe recession is:

A) a decrease in government spending.
B) a decrease in tax rates.
C) appreciation of the dollar.
D) an increase in interest rates.
Ans: B
6. Which of the following represents the most expansionary fiscal policy?

A) a $10 billion tax cut
B) a $10 billion increase in government spending
C) a $10 billion tax increase
D) a $10 billion decrease in government spending
Ans: B
7. Which of the following fiscal actions would be the most effective in curbing inflation?
A) incurring a budget deficit by borrowing from the public
B) incurring a budget surplus which is used to retire debt held by commercial banks
C) incurring a budget surplus and impounding that surplus
D) incurring a budget surplus which is used to retire debt held by the public
Ans: C
8. If the economy has a full-employment budget surplus, this means that:

A) the public sector is exerting an expansionary impact upon the economy.
B) tax revenues would exceed government expenditures if full employment were
achieved.
C) the actual budget is necessarily also in surplus.
D) the economy is actually operating at full employment.
Ans: B
Chapter 13
1. If you are estimating your total expenses for school next semester, you are using
money primarily as:
A) a medium of exchange.
B) a store of value.
C) a unit of account.
D) an economic investment.
Ans: C
2. A $200 price tag on a cashmere sweater in a department store window is an example

of money functioning as a:
A) unit of account.
B) standard of deferred payments.
C) store of value.
D) medium of exchange.
Ans: A
3. When we say that money serves as a unit of account, we mean that it is:
A) away to keep some of our wealth in a readily spendable form for future use.
B) a means of payment.
C) a monetary unit for measuring and comparing the relative values of goods.
D) declared as legal tender by the government.
Ans: C
4. Fiat money is:

A) composed only of demand deposits.
B) money because the government asserts that it is.
C) money which is "resting" in a commercial bank vault.
D) money which can be redeemed for an intrinsically valuable commodity such as gold.
Ans: B
5. The value of money varies:

A) inversely with the price level.
B) directly with the volume of employment. C) directly with the price le vel.
D) directly with the interest rate.
Ans: A
6. In defining money as M1 economists exclude time deposits because:
A) the intrinsic value of time deposits is nil.
B) the purchasing power of time deposits is much less stable than that of demand deposits and currency.
C) they are not directly or immediately a medium of exchange.
D) they are not recognized by the Federal government as legal tender.
Ans: C
7. Which of the following is not part of the M2 money supply?

A) money market mutual fund balances
B) money market deposit accounts
C) currency
D) large ($100,000 or more) time deposits
Ans: D
8.Checkable deposits are:

A) included in M1.
B) not included in either Ml or M2.
C) considered to be a near money.
D) also called time deposits.
Ans: A
9. The asset demand for money:

A) is unrelat ed to bot h the interest rate and the level of GDP.
B) varies inversely with the rate of interest.
C) varies inversely with the level of real GDP.
D) varies directly with the level of nominal GDP.
E) varies directly with the rate of interest.
Ans: B
10. The opportunity cost of holding money:

A) is zero because money is not an economic resource.
B) varies inversely with the interest rate.
C) varies directly with the interest rate.
D) varies inversely with the level of ec onomic activity.
Ans: C
11. (Advanced analysis) Assume the equation for the total demand for money is L = 0.4Y + 80 - 4 i, where
L is the amount of money demanded, Y is gross domestic product, and i is the interest rate. If gross
domestic product is $200 and the interest rate is 10 (percent ), what amount of money will society want to
hold?
A) $200
B) $120
C) $320
D) $160
Ans: B
12. Which of the following statements is correct?

A) Interest rates and bond prices vary directly.
B) Interest rates and bond prices vary inversely.
C) Interest rates and bond prices are unrelated.
D) Interest rates and bond prices vary directly during inflations and inversely during recessions.
Ans: B
13. When the money market is in equilibrium:

A) the quantity of money demanded equals the quantity of money supplied.
B) the interest rate is neither increasing nor decreasing.
C) bond prices are stable.
D) all of the above hold true.
Ans: D
17. The twelve Federal Res erve Banks:

A) act as fiscal agents for the Federal government.
B) provide for the collection of checks.
C) hold the deposits of commercial banks.
D) do all of the above.
Ans: D
CHAPTER 14
1. Which of the following statements is not correct?
A) The actual reserves of a commercial bank equal its excess plus its required
reserves.
B) A bank's assets plus its net worth equal its liabilities.
C) When borrowers repay bank loans, the supply of money is reduced.
D) A single commercial bank can safely lend an amount equal to its excess reserves.
Ans: B
2. A bank which has assets of $85 billion and a net worth of $10 billion must have:
A) liabilities of $75 billion.
B) excess reserves of $10 billion.
C) liabilities of $10 billion.
D) excess reserves of $75 billion.
Ans: A
3. The reserves of a commercial bank consist of:

A) the amount of money market funds it holds.
B) deposits at the Federal Reserve Bank and vault cash.
C) government bonds which the bank holds.
D) the bank's net worth.
Ans: B
4. The ABC Commercial Bank has $5,000 in excess reserves and the reserve ratio is 30
percent. The bank must have:
A) $90,000 in outstanding loans and $35,000 in reserves.
B) $90,000 in demand deposit liabilities and $32,000 in reserves.
C) $20,000 in demand deposit liabilities and $10,000 in reserves.
D) $90,000 in demand deposit liabilities and $35,000 in reserves.
Ans: B
5. Suppose a commercial bank has demand deposits of $100,000 and the lega l reserve
ratio is 10 percent. If the bank's required and excess reserves are equal, then its actual
reserves:
A) are $30,000.
B) are $10,000.
C) are $20,000.
D) cannot be determined from the given information.
Ans: C
6. A reserve requirement of 20 percent means a bank must have $1000 of reserves if its
demand deposits are:
A) $100.
B) $1,000.
C) $5,000.
D) $12,000.
Ans: C
7. Suppose that a bank's actual reserves are $5 million, its demand deposits are $5
million, and its excess reserves are $3 million. The reserve requirement must be:
A) 40 percent.
B) 20 percent.
C) 10 percent.
D) 5 percent.
Ans: A
8. When a bank loan is repaid the supply of money:

A) is constant, but its composition will have changed.
B) is decreased.
C) is increased.
D) may either increase or decrease.
Ans: B
9. The amount of reserves which a commercial bank is required to hold is equal to:
A) the amount of its demand deposits.
B) the sum of its demand deposits and time deposits.
C) its demand deposits multiplied by the required reserve ratio.
D) none of the above.
Ans: C
10. Which of the following would reduce the money supply?

A) Commercial banks use excess reserves to buy government bonds from the public.
B) Commercial banks loan out excess reserves.
C) Commercial banks sell government bonds to the public.
D) A check clears from Bank A to Bank B.
Ans: C
11. The Federal funds market is the market in which:

A) banks borrow from the Federal Reserve Banks.
B) U.S. securities are bought and sold.
C) banks borrow reserves from one another on an overnight basis.
D) Federal Reserve Banks borrow from one another.
Ans: C
12. If we let m equal the maximum number of new dollars which can be created for a
single dollar of excess reserves and R equal the required reser ve ratio, then we can say
that for the banking system:
A) m = R - 1.
B) R = m/1.
C) R = m - 1.
D) m = 1/R.
Ans: D
13. If the reserve ratio is 15 percent and commercial bankers decide to hold additional
excess reserves equal to 5 percent of any newly acquired demand deposits, then the
relevant monetary multiplier for the banking system will be:
A) 31/2.
B) 4.
C) 5.
D) 10.
Ans: C
14. If the reserve ratio were 100 percent, the value of the monetary multiplier would be:
A) 0.
B) 1.
C) 10.
D) 100.
Ans: B
CHAPTER 15
1. Which of the following is an asset on the consolidated balance sheet of the Federal
Reserve Banks?
A) loans to commercial banks
B) Federal Reserve Notes in circulation
C) Treasury deposits
D) reserves of commercial banks
Ans: A
2. Reserves must be deposited in the Federal Reserve Banks by:

A) only commercial banks which are members of the Federal Reserve System.
B) all depository institutions, that is, all commercial banks and thrift institutions.
C) state chartered commercial banks only.
D) federally chartered commercial banks only.
Ans: B
3. The Federal Reserve Banks buy government securities from commercial banks. As a
result, the demand deposits:
A) of commercial banks are unchanged, but their reserves increase.
B) and reserves of commercial banks both decrease.
C) of commercial banks are unchanged, but their reserves decrease.
D) and reserves of commercial banks are both unchanged.
Ans: A
5. The monetary authorities can change the money supply by:

A) changing bank reserves through the sale or purchase of government securities.
B) changing the quantities of required and excess reserves by altering the legal reserve
ratio.
C) changing the discount rate so as to encourage or discourage commercial banks in
borrowing from the central banks.
D) doing all of the above.
Ans: D
6. "Open-market operations" refers to:

A) purchases of stocks in the New York Stock Exchange.
B) the purchase or sale of government securities by the Fed.
C) central bank lending to commercial banks.
D) the specifying of margin requirements on stock purchases.
Ans: B
7. The Federal Reserve System regulates the money supply primarily by:
A) controlling the production of coins at the United States mint.
B) altering the reserve requirements of commercial banks and thereby the ability of
banks to make loans.
C) altering the reserves of commercial banks, largely through sales and purchases of
government bonds.
D) restricting the issuance of Federal Reserve Notes because paper money is the
largest portion of the money supply.
Ans: C
8. An increase in the reserve ratio:

A) increases the size of the spending income multiplier.
B) decreases the size of the spending income multiplier.
C) increases the size of the monetary multiplier.
D) decreases the size of the monetary multiplier.
Ans: D
9. Assume the economy is operating at less than full employment. An easy money
policy will cause interest rates to ________. which will ___________ investment
spending.
A) decrease; decrease
B) decrease; increase
C) increase; increase
D) increase; decrease
Ans: B
10. An increase in the money supply will:

A) lower interest rates and lower the equilibrium GDP.
B) lower interest rates and increase the equilibrium GDP.
C) increase interest rates and increase the equilibrium GDP.
D) increase interest rates and lower the equilibrium GDP.
Ans: B
11. The sale of government bonds by the Federal Reserve Banks to commercial banks
will:
A) increase aggregate supply.
B) decrease aggregate supply.
C) increase aggregate demand.
D) decrease aggregate demand.
Ans: D
12. To reduce the Federal funds rate, the Fed can:

A) buy government bonds from the public.
B) increase the discount rate.
C) increase the prime interest rate.
D) sell government bonds to commercial banks.
Ans: A
CHAPTER 20
1. The income and substitution effects explain why:
A) the elasticity of demand can be unity.
B) product demand curves are downsloping.
C) product supply curves are upsloping.
D) equilibrium is always achieved in a competitive market.
2. The price elasticity of demand coefficient indicates:

A) buyer responsiveness to price changes.
B) the extent to which a demand curve shifts as incomes change.
C) the slope of the demand curve.
D) how far business executives can stretch their fixed costs.
3. The demand for a product is inelastic with respect to price if:

A) consumers are largely unresponsive to a per unit price change.
B) the elasticity coefficient is greater than 1.
C) a drop in price is accompanied by a decrease in the quantity demanded.
D) a drop in price is accompanied by an increase in the quantity demanded.
4. Suppose that as the price of Y falls from $2.00 to $1.90 the quantity of Y demanded
increases from 110 to 118. Then the price elasticity of demand is:
A) 4.00.
B) 2.09.
C) 1.37.
D) 3.94.
5. If the demand for product X is inelastic, a 4 percent increase in the price of X will:
A) decrease the quantity of X demanded by more than 4 percent.
B) decrease the quantity of X demanded by less than 4 percent.
C) increase the quantity of X demanded by more than 4 percent.
D) increase the quantity of X demanded by less than 4 percent.
6. A perfectly inelastic demand schedule:

A) rises upward and to the right, but has a constant slope.
B) can be represented by a line parallel to the vertical axis.
C) cannot be shown on a two-dimensional graph.
D) can be represented by a line parallel to the horizontal axis.
7. Suppose Aiyanna's pizzeria currently faces a linear demand curve and is charging a
very high price per pizza and doing very little business. Aiyanna now decides to lower
pizza prices by 5 percent per week for an indefinite period of time. We can expect that
each successive week:
A) demand will become more price elastic.
B) price elasticity of demand will not change as price is lowered.
C) demand will become less price elastic.
D) the elasticity of supply will increase.
8. For a linear demand curve:

A) elasticity is constant along the curve.
B) elasticity is unity at every point on the curve.
C) demand is elastic at low prices.
D) demand is elastic at high prices.
9. If a demand for a product is elastic, the value of the price elasticity coefficient is:
A) zero.
B) greater than one.
C) equal to one.
D) less than one.
10. Suppose the price of local cable TV service increased from $16.20 to $19.80 and as
a result the number of cable subscribers decreased from 224,000 to 176,000. Along this
portion of the demand curve, price elasticity of demand is:
A) 0.8.
B) 1.2.
C) 1.6.
D) 8.0
11. Moving upward on a downward -sloping straight-line demand curve, we find that
price elasticity:
A) is constant.
B) increases continuously.
C) decreases continuously.
D) may either increase or decrease.
12. Which of the following statements is not correct?

A) If the relative change in price is greater than the relative change in the quantity
demanded associated with it, demand is inelastic.
B) In the range of prices in which demand is elastic, total revenue will diminish as price
decreases.
C) Total revenue will not change if price varies within a range where the elasticity
coefficient is unity.
D) Demand tends to be elastic at high prices and inelastic at low prices.
13. Suppose the price elasticity of demand for bread is 0.20. If the price of bread falls by
10 percent, the quantity demanded will increase by:
A) 2 percent and total expenditures on bread will rise.
B) 2 percent and total expenditures on bread will fall.
C) 20 percent and total expenditures on bread will fall.
D) 20 percent and total expenditures on bread will rise.
14. If the demand for farm products is price inelastic, a good harvest will cause farm
revenues to:
A) increase.
B) decrease.
C) be unchanged.
D) either increase or decrease, depending on what happens to supply.
15. If a price reduction reduces a firm's total revenue:

A) the demand for the product is inelastic in this price range.
B) the product is an inferior good.
C) in this price range the elasticity coefficient of demand is greater than 1.
D) this price decline will increase the firm's profits.
Answer Key: Chapter 20

1. B
2. A
3. A
4. C
5. B
6. B
7. C
8. D
9. B
10. B
11. B
12. B
13. B
14. B
15. A
CHAPTER 21
1. Which of the following is correct? When the price of normal good Z falls:
A) both income and substitution effects cause the consumer to buy more.
B) both income and substitution effects cause the consumer to buy less.
C) the income effect causes the consumer to buy less, but the substitution effect causes
her to buy more.
D) the income effect causes the consumer to buy more, but the substitution effect
causes her to buy less.
2. The first Pepsi yields Craig 18 units of utility and the second yields him an additional
12 units of utility. His total utility from three Pepsis is 38 units of utility. The marginal
utility of the third Pepsi:
A) is 26 units of utility.
B) is 6 units of utility.
C) is 8 units of utility.
D) 38 utils.
3. The "substitution effect" indicates that:

A) a decline in money income will cause the consumer to buy more inferior goods and
fewer superior goods.
B) consumer equilibrium can only be achieved when the consumer is buying substitute
goods.
C) when the price of a product falls, the lower price will induce the consumer to buy
more of that product at the expense of other products.
D) when the price of a product falls, a consumer will be able to buy more of it with a
specific money income.
4. A product has utility if it:

A) takes more and more resources to produce successive units of it.
B) violates the law of demand.
C) satisfies consumer wants.
D) is useful.
5. The law of diminishing marginal utility states that:

A) total utility is maximized when consumers obtain the same amount of utility per unit
of each product consumed.
B) beyond some point additional units of a product will yield less and less extra
satisfaction to a consumer.
C) price must be lowered to induce firms to supply more of a product.
D) it will take larger and larger amounts of resources beyond some point to produce
successive units of a product.
6. Marginal utility is the:

A) sensitivity of consumer purchases of a good to changes in the price of that good.
B) change in total utility realized by consuming one more unit of a good.
C) change in total utility realized by consuming another unit of a good divided by the
change in the price of that good.
D) total utility associated with the consumption of a certain number of units of a good
divided by the number of units consumed.
7. Where total utility is at a maximum, marginal utility is:

A) negative.
B) positive and increasing.
C) zero.
D) positive but decreasing.
8. Which of the following statements is correct?

A) Utility and usefulness are synonymous.
B) The marginal utility derived from successive units of a product tends to be similar for
all consumers.
C) Because utility is not measurable, the utility-maximizing rule provides no useful
insights as to consumer behavior.
D) A product may yield utility, but not be functionally useful.
9. Suppose that MUx/Px exceeds MUy/Py. To maximize utility the consumer who is
spending all her money income should buy:
A) less of X only if its price rises.
B) more of Y only if its price rises.
C) more of Y and less of X.
D) more of X and less of Y.
10. If a rational consumer is in equilibrium, which of the following conditions will hold
true?
A) MUa = MUb = MUc = ... = MUn.
B) The marginal utility of each good purchased will be zero.
C) The marginal utility of the last dollar spent on each good purchased will be the
same.
D) The total utility obtained from each good purchased will be the same.

A) increase the marginal utility per dollar spent on A.
B) decrease the marginal utility per dollar spent on A.
C) not affect the marginal utility per dollar spent on A.
D) cause utility-maximizing consumers to buy more of A.
12. The diamond-water paradox arises because:

A) essential goods may be cheap while nonessential goods may be expensive.
B) the marginal utility of certain products increases, rather than diminishes.
C) essential goods are always higher priced than nonessential goods.
D) we sometimes fail to use money as a standard of value.
13. The utility-maximizing rule:

A) is inconsistent with the law of demand.
B) implies a perfectly elastic demand curve.
C) implies a leftward shifting demand curve.
D) is consistent with the law of demand.

1. A
2. C
3. C
4. C
5. B
6. B
7. C
8. D
9. D
10. C
11. B
12. A
13. D
CHAPTER 22
1. Which of the following constitutes an implicit cost to the Johnston Manufacturing
Company?
A) payments of wages to its office workers
B) rent paid for the use of equipment owned by the Schultz Machinery Company
C) depreciation charges on company-owned equipment
D) economic profits resulting from current production
2. Costs to an economist:
A) consist only of explicit costs.
B) may or may not involve monetary outlays.
C) never reflect monetary outlays.
D) always reflect monetary outlays.
3. Implicit costs are:

A) regarded as costs by accountants but not by economists.
B) payments which a firm makes to other firms or individuals who supply resources to
it.
C) nonexpenditure costs.
D) costs which vary proportionately with outp ut.
4. Suppose that a business incurred implicit costs of $200,000 and explicit costs of $1
million in a specific year. If the firm sold 4,000 units of its output at $300 per unit, its
accounting profits were:
A) $100,000 and its economic profits were zero.
B) $200,000 and its economic profits were zero.
C) $100,000 and its economic profits were $100,000.
D) zero and its economic loss was $200,000.
5. The basic difference between the "short run" and the "long run" is that:
A) all costs are fixed in the short run, but all costs are variable in the long run.
B) the law of diminishing returns applies in the long run, but not in the short run.
C) at least one resource is fixed in the short run, while all resources are variable in the
long run.
D) economies of scale may be present in the short run, but not in the long run.
6. The law of diminishing returns indicates that:

A) as extra units of a variable resource are added to a fixed resource, marginal product
will decline beyond some point.
B) because of economies and diseconomies of scale a competitive firm's long -run
average total cost curve will be U-shaped.
C) the demand for goods produced by purely competitive industries is downsloping.
D) beyond some point the extra utility derived from additional units of a product will yield
the consumer smaller and smaller extra amounts of satisfaction.
7. Marginal product:
A) diminishes at all levels of production.
B) may initially increase, then diminish, but never become negative.
C) may initially increase, then diminish, and ultimately become negative.
D) is always less than average product.
8. "If a variable input is added to some fixed input, beyond some point the resulting
extra output will decline." This statement describes:
A) economies and diseconomies of scale.
B) X-inefficiency.
C) the law of diminishing returns.
D) the law of diminishing marginal utility.
9. The total output of a firm will be at a maximum where:

A) MP is at a maximum.
B) AP is at a minimum.
C) MP is zero.
D) AP is at a maximum.
10. Fixed cost is:

A) the cost of producing one more unit of capital, say, machinery.
B) any cost which does not change when the firm changes its output.
C) average cost multiplied by the firm's output.
D) usually zero in the short run
11. Marginal cost is the:

A) rate of change in total fixed cost which results from producing one more unit of
output.
B) change in total cost which results from producing one more unit of output.
C) change in average variable cost which results from producing one more unit of
output.
D) change in average total cost which results from producing one more unit of output.
12. When average fixed costs are falling:

A) average total cost must be falling.
B) average variable cost may be either rising or fa lling.
C) marginal cost must be falling.
D) average variable costs must be rising.
13. Assume that in the short run a firm is producing 100 units of output, has average
total costs of $200, and average variable costs of $150. The firm's total fixed costs are:
A) $5,000.
B) $500.
C) $.50.
D) $50.
14. Other things equal, if the prices of a firm's variable inputs were to fall:
A) one could not predict how unit costs of production would be affected.
B) marginal cost, average variable cost, and average fixed cost would all fall.
C) marginal cost, average variable cost, and average total cost would all fall.
D) average variable cost would fall, but marginal cost would be unchanged.
15. In comparing the changes in TVC and TC associated with an additional unit of
output, we find that:
A) no generalization about the changes in TC and TVC can be made.
B) the changes in TC and TVC are equal.
C) the change in TC is greater than the change in TVC.
D) the change in TVC is greater than the change in TC.

1. D
2. B
3. C
4. B
5. C
6. A
7. C
8. C
9. C
10. B
11. B
12. B
13. A
14. C
15. B
CHAPTER 23
1. Which of the following industries most closely approximates pure competition?
A) agriculture
B) farm implements
C) clothing
D) steel
2. In which of the following industry structures is the entry of new firms the most
difficult?
A) pure monopoly
B) oligopoly
C) monopolistic competition
D) pure competition
3. An industry comprised of a very large number of sellers producing a standardized

product is known as:
A) monopolistic competition
B) oligopoly
C) pure monopoly
D) pure competition
4. A purely competitive seller is:

A) both a "price maker" and a "price taker."
B) neither a "price maker" nor a "price taker."
C) a "price taker."
D) a "price maker."
5. The demand schedule or curve confronted by the individual purely competitive firm
is:
A) relatively elastic, that is, the elasticity coefficient is greater than unity.
B) perfectly elastic.
C) relatively inelastic, that is, the elasticity coefficient is less than unity.
D) perfectly inelastic.
6. If a firm in a purely competitive industry is confronted with an equilibrium price of $5,

its marginal revenue:
A) may be either greater or less than $5.
B) will also be $5.
C) will be less than $5.
D) will be greater than $5.
7. For a purely competitive firm total revenue:

A) is price times quantity sold.
B) increases by a constant absolute amount as output expands.
C) graphs as a straight upsloping line from the origin.
8. A purely competitive seller's average revenue curve coincides with:

A) its marginal revenue curve only.
B) its demand curve only.
C) both its demand and marginal revenue curves.
D) neither its demand nor its marginal revenue curve.
9. A competitive firm in the short run can determine the profit-maximizing (or loss-
minimizing) output by equating:
A) price and average total cost.
B) price and average fixed cost.
C) marginal revenue and marginal cost.
D) price and marginal revenue.
10. A firm reaches a break-even point (normal profit position) where:

A) marginal revenue cuts the horizontal axis.
B) marginal cost intersects the average variable cost curve.
C) total revenue equals total variable cost.
D) total revenue and total cost are equal.
11. When a firm is maximizing profit it will necessarily be:

A) maximizing profit per unit of output.
B) maximizing the difference between total revenue and total cost.
C) minimizing total cost.
D) maximizing total revenue.
12. Assume the XYZ Corporation is producing 20 units of output. It is selling this output
in a purely competitive market at $10 per unit. Its total fixed costs are $100 and its
average variable cost is $3 at 20 units of output. This corporation:
A) should close down in the short run.
B) is maximizing its profits.
C) is realizing a loss of $60.
D) is realizing an economic profit of $40.
13. Suppose you find that the price of your product is less than minimum AVC. You
should:
A) minimize your losses by producing where P = MC.
B) maximize your profits by producing where P = MC.
C) close down because, by producing, your losses will exceed your total fixed costs.
D) close down because total revenue exceeds total variable cost.
14. In the short run a purely competitive firm will always make an economic profit if:
A) P = ATC.
B) P > AVC.
C) P = MC.
D) P > ATC.
15. A firm finds that at its MR = MC output, its TC = $1000, TVC = $800, TFC = $200,
and total revenue is $900. This firm should:
A) shut down in the short run.
B) produce because the resulting loss is less than its TFC.
C) produce because it will realize an economic profit.
D) liquidate its assets and go out of business.

1. A
2. A
3. D
4. C
5. B
6. B
7. D
8. C
9. C
10. D
11. B
12. D
13. C
14. D
15. B
CHAPTER 24
1. Pure monopoly means:
A) any market in which the demand curve to the firm is downsloping.
B) a standardized product being produced by many firms.
C) a single firm producing a product for which there are no close substitutes.
D) a large number of firms producing a differentiated product.
2. Pure monopolists may earn economic profits in the long run because:
A) of advertising.
B) marginal revenue is constant as sales increase.
C) of barriers to entry.
D) of rising average fixed costs.
3. Which of the following is a characteristic of pure monopoly?

A) close substitute products
B) barriers to entry
C) the absence of market power
D) "price taking"
4. A natural monopoly occurs when:

A) long-run average costs decline continuously through the range of demand.
B) a firm owns or controls some resource essential to production.
C) long-run average costs rise continuously as output is increased.
D) economies of scale are obtained at relatively low levels of output.
5. What do economies of scale, the ownership of essential raw materials, and patents
have in common?
A) They must all be present before price discrimination can be practiced.
B) They are all barriers to entry.
C) They all help explain why a monopolist's demand and marginal revenue curves
coincide.
D) They all help explain why the long-run average cost curve is U-shaped.
6. If a nondiscriminating imperfectly competitive firm is selling its 100th unit of output for
$35, its marginal revenue:
A) may be either greater or less than $35.
B) will also be $35.
C) will be less than $35.
D) will be greater than $35.
7. For an imperfectly competitive firm:

A) total revenue is a straight, upsloping line because a firm's sales are independent of
product price.
B) the marginal revenue curve lies above the demand curve because any reduction in
price applies to all units sold.
C) the marginal revenue curve lies below the demand curve because any reduction in
price applies to all units sold.
D) the marginal revenue curve lies below the demand curve because any reduction in
price applies only to the extra unit sold.
8. A monopolistic firm has a sales schedule such that it can sell 10 prefabricated
garages per week at $10,000 each, but if it restricts its output to 9 per week it can sell
these at $11,000 each. The marginal revenue of the tenth unit of sales per week is:
A) -$1,000.
B) $9,000.
C) $10,000.
D) $1,000.
9. With respect to the pure monopolist's demand curve it can be said that:
A) the stronger the barriers to entry, the more elastic is the monopolist's demand curve.
B) price exceeds marginal revenue at all outputs greater than 1.
C) demand is perfectly inelastic.
D) marginal revenue equals price at all outputs.
10. Because the monopolist's demand curve is downsloping:

A) MR will equal price.
B) price must be lowered to sell more output.
C) the elasticity coefficient will increase as price is lowered.
D) its supply curve will also be downsloping.
11. When total revenue is increasing:

A) marginal revenue may be either positive or negative.
B) the demand curve is relatively inelastic.
C) marginal revenue is positive.
D) marginal revenue is negative.
12. For a pure monopolist marginal revenue is less than price because:
A) the monopolist's demand curve is perfectly elastic.
B) the monopolist's demand curve is perfectly inelastic.
C) when a monopolist lowers price to sell more output, the lower price applies to all
units sold.
D) the monopolist's total revenue curve is linear and slopes upward to the right.
13. If a pure monopolist is operating in a range of output where demand is elastic:

A) it cannot possibly be maximizing profits.
B) marginal revenue will be positive but declining.
C) marginal revenue will be positive and rising.
D) total revenue will be declining.
14. A nondiscriminating pure monopolist finds that it can sell its fiftieth unit of output for
$50. We can surmise that the marginal:
A) cost of the fiftieth unit is also $50.
B) revenue of the fiftieth unit is also $50.
C) revenue of the fiftieth unit is less than $50.
D) revenue of the fiftieth unit is greater than $50.
15. The MR = MC rule:

A) applies only to pure competition.
B) applies only to pure monopoly.
C) does not apply to pure monopoly because price exceeds marginal revenue.
D) applies both to pure monopoly and pure competition.

1. C
2. C
3. B
4. A
5. B
6. C
7. C
8. D
9. B
10. B
11. C
12. C
13. B
14. C
15. D
CHAPTER 25
1. Monopolistic competition is characterized by a:
A) few dominant firms and low entry barriers.
B) large number of firms and substantial entry barriers.
C) large number of firms and low entry barriers.
D) few dominant firms and substantial entry barriers.
2. Monopolistic competition resembles pure competition because:

A) both industries emphasize nonprice competition.
B) in both instances firms will operate at the minimum point on their long-run average
total cost curves.
C) both industries entail the production of differentiated products.
D) barriers to entry are either weak or nonexistent.
3. Nonprice competition refers to:

A) competition between products of different industries, for example, competition
between aluminum and steel in the manufacture of automobile parts.
B) price increases by a firm which are ignored by its rivals.
C) advertising, product promotion, and changes in the real or perceived characteristics
of a product.
D) reductions in production costs which are not reflected in price reductions.
4. Economic analysis of a monopolistically competitive industry is more complicated

than that of pure competition because:
A) the number of firms in the industry is larger.
B) monopolistically competitive firms cannot realize an economic profit in the long run.
C) of product differentiation and consequent product promotion activities.
D) monopolistically competitive producers are mutually interdependent in their pricing
strategies.
5. Monopolistically competitive and purely competitive industries are similar in that:

A) both are assured of short-run economic profits.
B) both produce differentiated products.
C) the demand curves facing individual firms are perfectly elastic in both industries.
D) there are few, if any, barriers to entry.
6. The monopolistically competitive seller's demand curve will become more elastic the:
A) more significant the barriers to entering the industry.
B) greater the degree of product differentiation.
C) larger the number of competitors.
D) smaller the number of competitors.
7. The price elasticity of a monopolistically competitive firm's demand curve varies:

A) inversely with the number of competitors and the degree of product differentiation.
B) directly with the number of competitors and the degree of product differentiation.
C) directly with the number of competitors, but inversely with the degree of product
differentiation.
D) inversely with the number of competitors, but directly with the degree of product
differentiation.
8. In long-run equilibrium a monopolistically competitive firm's price will:

A) be less than both MC and ATC.
B) exceed ATC, but equal MC.
C) exceed MC, but equal ATC.
D) exceed both MC and ATC.
9. The term "oligopoly" indicates:

A) a one-firm industry.
B) many producers of a differentiated product.
C) a few firms producing either a differentiated or a homogeneous product.
D) an industry whose four-firm concentration ratio is low.
10. Barriers to entry in oligopolistic i ndustries may consist of:

A) economies of scale.
B) patents.
C) ownership of essential resources.
D) all of the above.
11. Oligopolistic industries:

A) are characterized by a relatively large number of small sellers.
B) may produce either standardi zed or differentiated products.
C) always produce differentiated products.
D) always produce standardized products.
12. Prices are likely to be least flexible:

A) in oligopoly.
B) in monopolistic competition.
C) where product demand is inelastic.
D) in pure competition.
13. Concentration ratios:

A) may overstate the degree of competition because they ignore imported products.
B) may overstate the degree of competition because interindustry competition is
ignored.
C) may understate the degree of competition because they ignore imported products.
D) provide detailed insights as to the price and output behavior of firms which comprise
the various industries.
14. Assume six firms comprising an industry have market shares of 30, 30, 10, 10, 10,
and 10 percent. The Herfindahl Index for this industry:
A) is 2,525.
B) is 1,600.
C) is 2,200.
D) is 80.
15. Game theory can be used to demonstrate:

A) that oligopolistic firms are mutually interdependent.
B) that independent pricing will lead to low-price policies.
C) that oligopolists can increase their profits through collusion.
D) all of the above.
16. The kinked-demand curve of an oligopolist is based on the assumption that:

A) competitors will follow a price cut but ignore a price increase.
B) competitors will match both price cuts and price increases.
C) competitors will ignore a price cut but follow a price increase.
D) there is no product differentiation.
17. The kinked-demand curve model of oligopoly is useful in explaining:

A) the way that collusion works.
B) why oligopolistic prices and outputs are extremely sensitive to changes in marginal
cost.
C) why oligopolistic prices might change only infrequently.
D) the process by which oligopolists merge with one another.
18. If competing oligopolists completely ignore oligopolist X's price changes, then X's:
A) demand curve will be less elastic than if the other oligopolists matched X's price
changes.
B) demand curve will be more elastic than if the other oligopolists matched X's price
changes.
C) marginal revenue curve will have a vertical gap.
D) demand and marginal revenue curves will coincide.
19. The kinked-demand curve model of oligopoly:

A) assumes a firm's rivals will ignore a price cut but match a price increase.
B) embodies the possibility that changes in unit costs will have no effect upon
equilibrium price and output.
C) assumes a firm's rivals will match any price change it may initiate.
D) assumes a firm's rivals will ignore any price change it may initiate.
20. A kink may exist in an oligopolist's demand curve because:

A) products are differentiated.
B) an abrupt change in price elasticity occurs.
C) the firm will ignore price cuts by rivals, but will match their price increases.
D) there is a gap in marginal costs.

1. C
2. D
3. C
4. C
5. D
6. C
7. C
8. C
9. C
10. D
11. B
12. A
13. C
14. C
15. D
16. A
17. C
18. B
19. B
20. B
CHAPTER 1
1. Economics may best be defi ned as:
A) the interaction between macro and micro considerations.
B) the study of the behavior of people and institutions in the production, distribution, and
consumption of scarce goods.
C) the empirical testing of value judgments through the use of induction and deduction.
D) the use of policy to refute facts and hypotheses.
Ans: B
2. The study of economics is primarily concerned with:

A) keeping private businesses from losing money.
B) demonstrating that capitalistic economies are superior to socialistic economies.
C) choices which are made in seeking to use scarce resources efficiently.
D) determining the most equitable distribution of society's output.
Ans: C
3. You should decide to go to a movie:

A) if the marginal cost of the movie exceeds its marginal benefit.
B) if the marginal benefit of the movie exceeds its marginal cost.
C) if your income will allow you to buy a ticket.
D) because movies are inherently good products.
Ans: B
4. Studying economics:
A) helps one become a better-informed citizen and voter.
B) is detrimental to good citizenship because economics emphasizes individualism.
C) is a waste of time since we all participate in the economy whether we understand it
or not.
D) is important because economics is the "science of earning money."
Ans: A
5. Economic theories:
A) are useless because they are not based upon laboratory experimentation.
B) which are true for individual economic units are never true for the economy as a
whole.
C) are generalizations based upon a careful observation of facts.
D) are abstractions and therefore of no application to real situations.
Ans: C
6. The term "ceteris paribus" means:
A) that if event A precedes event B, A has caused B.
B) that economics deals with facts, not values.
C) other things equal.
D) prosperity inevitably follows recession.
Ans: C
7. Macroeconomics can best be described as the:

A) analysis of how a consumer tries to spend income.
B) study of the large aggregates of the economy or the economy as a whole.
C) analysis of how firms attempt to maximize their profits.
D) study of how supply and demand determine prices in individual markets.
Ans: B
8. Microeconomics is concerned with:

A) the aggregate or total levels of income, employment, and output.
B) a detailed exami nation of specific economic units which comprise the economic
system.
C) the concealing of detailed information about specific segments of the economy.
D) the establishing of an overall view of the operation of the economic system.
Ans: B
9. A normative statement is one which:

A) is based on the law of averages.
B) pertains only to microeconomics.
C) pertains only to macroeconomics.
D) is based upon value judgments.
Ans: D
10. A positive statement is one which is:

A) derived by induction.
B) derived by deduction.
C) subjective and is based on a value judgment.
D) objective and is based on facts.
Ans: D
CHAPTER 2
1. The study of economics exists because:
A) government interferes with the efficient allocation of scarce resources.
B) resources are scarce in relation to human material wants.
C) the market system is an obstacle to the efficient use of plentiful resources to satisfy
constrained wants.
D) resources are overly abundant as compared to wants; thus, an allocation problem
exists.
Ans: B
2. The scarcity problem:
A) persists only because countries have failed to achieve continuous full employment.
B) persists because material wants exceed available productive resources.
C) has been solved in all industrialized nations.
D) has been eliminated in affluent societies such as the United States and Canada.
Ans: B
A) free gifts of nature.

B) consumption goods.
C) units of money capital.
D) factors of production.
Ans: D
4. Which of the following will not entail an outward shift of the production possibilities curve?
A) an upgrading of the quality of a nation's human resources
B) the reduction of unemployment
C) an increase in the quantity of a society's labor force
D) the improvement of a society's technological knowledge
Ans: B
5. A production possibilities curve illustrates:

A) scarcity.
B) market prices.
C) consumer preferences.
D) the distribution of inc ome.
Ans: A
6. Assume an economy is operating at some point on its production possibilities curve whic h shows
civilian and military goods. If the output of military goods is increased, the output of civilian goods:
A) will remain unchanged.
B) may be either increased or decreas ed.
C) must be decreased.
D) must also be increas ed.
Ans: C
7. The typical production possibilities curve is:

A) an upsloping line which is concave to the origin.
B) a downsloping line which is convex to the origin.
C) a downsloping line which is concave to the origin.
D) a straight upsloping line.
Ans: C
8. The concept of opportunity cost:

A) is irrelevant in socialistic economies because of central planning.
B) suggests that the use of resources in any particular line of production means that alternative outputs
must be forgone.
C) is irrelevant if the production possibilities curve is shifting to the right.
D) suggests that insatiable wants can be fulfilled.
Ans: B
9. The marginal benefit curve is:

A) upsloping because of increasing margin al opportunity costs.
B) upsloping because successive units of a specific product yield less and less extra utility.
C) downsloping bec ause of increasing marginal opportunity costs.
D) downsloping bec ause successive units of a specific product yield les s and less extra utility.
Ans: D
10. The term "laissez faire" suggests that:

A) land and other natural resources should be privately owned, but capital should be publicly owned.
B) land and other natural resources should be publicly owned, but capital equipment should be privately
owned.
C) government should not interfere wit h the operation of the economy.
D) government action is necessary if the economy is to achieve full employment and full production.
Ans: C
11. The simple circular flow model sho ws that:

A) households are on the demand side of both product and resource markets.
B) businesses are on the supply side of bot h product and resource markets.
C) households are on the supply side of the resource market and on the demand side of the prod uct
market.
D) businesses are on the demand side of the product market and on the supply side of the resource
market.
Ans: C
12. Households and businesses are:

A) both buyers in the resource market.
B) both suppliers in the product market.
C) suppliers in the resource and product markets respectively.
D) suppliers in the product and resource markets respectively.
Ans: C
CHAPTER 3
1. A market:
A) reflects upsloping demand and downsloping supply curves.
B) entails the exchange of goods, but not services.
C) is an institution which brings together buyers and sellers.
D) always entails face-to-face contact between buyer and seller.
Ans: C
2. The demand curve shows the relationship between:

A) money income and quantity demanded.
B) price and production costs.
C) price and quantity demanded.
D) consumer tastes and the quantity demanded.
Ans: C
3. A demand curve:
A) shows the relationship between price and quantity demanded.
B) indicates the quantity demanded at each price in a series of prices.
C) graphs as a downsloping line.
Ans: D
4. "When the price of a product rises, consumers shift their purchases to other products
whose prices are now relatively lower." This statement describes:
A) an inferior good.
B) the rationing function of prices.
C) the substitution effect.
D) the income effect.
Ans: C
5. One reason why the quantity of a good demanded increases when its price falls is
that the:
A) price decline shifts the supply curve to the left.
B) lower price shifts the demand curve to the left.
C) lower price shifts the demand curve to the right.
D) lower price increases the real incomes of buyers, enabling them to buy more.
Ans: D
6. A rightward shift in the demand curve for product C might be caused by:
A) an increase in income if C is a normal good.
B) a decrease in income if C is an inferior good.
C) an increase in the price of a product which is a close substitute for C.
D) a decrease in the price of a product which is complementary to C.
E) any one or more of the above.
Ans: E
7. Video cassette recorders and video cassettes are:

A) complementary goods.
B) substitute goods.
C) independent goods.
D) inferior goods.
Ans: A
8. If the price of K declines, the demand curve for the complementary product J will:
A) shift to the left.
B) decrease.
C) shift to the right.
D) remain unchanged.
Ans: C
9. If X is a normal good, a rise in money income will shift the:

A) supply curve for X to the left.
B) supply curve for X to the right.
C) demand curve for X to the left.
D) demand curve for X to the right.
Ans: D
10. A normal good is defined as one:
A) whose amount demanded will increase as its price decreases.
B) whose amount demanded will increase as its price increases.
C) whose demand curve will shift leftward as incomes rise.
D) the consumption of which varies directly with incomes.
Ans: D

A) reduce the demand for resources used in the production of A.
B) increase the demand for complementary product C.
C) increase the demand for substitute product B.
D) reduce the demand for substitute product B.
Ans: C
12. An "increase in the quantity demanded" means that:

A) given supply, the price of the product can be e xpected to decline.
B) price has declined and consumers therefore want to purchase more of the product.
C) the demand curve has shifted to the right.
D) the demand curve has shifted to the left.
Ans: B
13. The law of supply:

A) reflects the amounts which producers will want to offer at each price in a series of
prices.
B) is reflected in an upsloping supply curve.
C) shows that the relationship between price and quantity supplied is positive.
D) is reflected in all of the above.
Ans: D
14. An improvement in production technology will:

A) increase equilibrium price.
B) shift the supply curve to the left.
C) shift the supply curve to the right.
D) shift the demand curve to the left.
Ans: C
15. Assume product A is an input in the production of product B. In turn product B is a

complement to product C. We can expect a decrease in the price of A to:
A) increase the supply of B and increase the demand for C.
B) decrease the supply of B and increase the demand for C.
C) decrease the supply of B and decrease the demand for C.
D) increase the supply of B and decrease the demand for C.
Ans: A
16. A market is in equilibrium:
A) provided there is no surplus of the product.
B) at all prices above that shown by the intersection of the supply and demand curves.
C) if the amount producers want to sell is equal to the amount consumers want to buy.
D) whenever the demand curve is downsloping and the supply curve is upsloping.
Ans: C
17. If there is a shortage of product X:

A) fewer resources will be allocated to the production of this good.
B) the price of the product will rise.
C) the price of the product will decline.
D) the supply curve will shift to the left and the demand curve to the right, eliminating
the shortage.
E) the supply curve will shift to the right and the demand curve to the left, eliminating the
shortage.
Ans: B
18. Assuming competitive markets with typical supply and demand curves, which of the
following statements is correct?
A) An increase in supply with a decrease in demand will result in an increase in price.
B) An increase in supply with no change in demand will result in an increase in price.
C) An increase in supply with no change in demand will result in a decline in sales.
D) An increase in demand with no change in supply will result in an increase in sales.
Ans: D
CHAPTER 7
1. A nation's gross domestic product (GDP):
A) is the dollar value of the total output produced within the borders of the nation.
B) is the dollar value of the total output produced by its citizens, regardless of where
they are living.
C) can be found by summing C + In + S + Xn.
D) is always some amount less than its C + Ig + G + Xn.
Ans: A
2. Which of the following is a final good or service?

A) diesel fuel bought for a delivery truck
B) fertilizer purchased by a farm supplier
C) a haircut
D) Chevrolet windows purchased by a General Motors assembly plant
Ans: C
3. Net exports are:

A) that portion of consumption and investment goods sent to other countries.
B) exports plus imports.
C) exports less imports.
D) imports less exports.
Ans: C
4. Economists define investment to include:

A) any increase in business inventories.
B) the addition of cash to a savings account.
C) the purchase of common or preferred stock.
D) the purchase of any durable good, for example, an automobile or a refrigerator.
Ans: A
5. Transfer payments are:

A) excluded when calculating GDP because they only reflect inflatio n.
B) excluded when calculating GDP because they do not reflect current production.
C) included when calculating GDP because they are a category of investment
spending.
D) included when calculating GDP because they increase the spending of recipients.
Ans: B
6. The ZZZ Corporation issued $25 million in new common stock in 1998. It used $18
million of the proceeds to replace obsolete equipment in its factory and $7 million to
repay bank loans. As a result, investment:
A) of $7 million has occurred.
B) of $25 million has occurred.
C) of $18 million has occurred.
D) has not occurred.
Ans: C
7. Consumption of fixed capital (depreciation) can be determined by:

A) adding indirect business taxes to NDP.
B) subtracting NDP from GDP.
C) subtracting net investment from GDP.
D) adding net investment to gross investment.
Ans: B
8. "Value added" refers to:

A) any increase in GDP which has been adjusted for adverse environmental effects.
B) the excess of gross investment over net investment.
C) the difference between the value of a firm's output and the value of the inputs it has
purchased from others.
D) the portion of any increase in GDP which is caused by inflation as opposed to an
increase in real output.
Ans: C
9. Assume a manufacturer of stereo speakers purchases $40 worth of components for

each speaker. The completed speaker sells for $70. The value added by the
manufacturer for each speaker is:
A) $110.
B) $30.
C) $40.
D) $70.
Ans: B
10. The total income earned in any year by U.S. resource suppliers is measured by:
A) DI.
B) NI.
C) PI.
D) GDP.
Ans: B
vuzs
11. Suppose nominal GDP was $360 billion in 1985 and $450 billion in 1995. The
appropriate price index (1985 = 100) was 120 in 1985 and 125 in 1995. It can be
concluded that between 1985 and 1995 real GDP:
A) increased by about $60 billion.
B) decreased by about $32 billion.
C) increased by about $100 billion.
D) increased by about $117 billion.
Ans: A
CHAPTER 8
1. The immediate determinant of the volume of output and employment is the:
A) composition of consumer spending.
B) ratio of public goods to private goods production.
C) level of total spending.
D) size of the labor force.
Ans: C
2. The phase of the business cycle in which real domestic output declines is called:
A) the peak.
B) a recovery.
C) a recession.
D) the trough.
Ans: C
3. The production of durable goods varies more than the production of nondurable
goods because:
A) durables purchases are nonpostponable and the producers of durables are
competitive.
B) durables purchases are postponable and producers of durables are competitive.
C) nondurables purchases are postponable and the producers of nondurables are
competitive.
D) durables purchases are postponable and producers of durables have monopoly
power.
Ans: D
4. A recession is a period in which:
A) cost-push inflation is present.
B) nominal domestic output falls.
C) demand-pull inflation is present.
D) real domestic output falls.
Ans: D
5. To be officially unemployed a person must:

A) be in the labor force.
B) be 21 years of age or older.
C) have just lost a job.
D) be waiting to be called back from a layoff.
Ans: A
6. The natural rate of unemployment is:

A) higher than the full-employment rate of unemployment.
B) lower than the full-employment rate of unemployment.
C) that rate of unemployment occurring when the economy is at its potential output.
D) found by dividing total unemployment by the size of the labor force.
Ans: C
7. Assuming the total population is 100 million, the civilian labor force is 50 million, and
47 million workers are unemployed, the unemployment rate:
A) is 3 percent.
B) is 6 percent.
C) is 7 percent.
D) is 9 percent.
Ans: B
8. Cyclical unemployment is a consequence of:

A) a deficiency of aggregate spending.
B) the decreasing relative importance of goods and the increasing relative importance of
services in our economy.
C) the everyday dynamics of a free labor market.
D) technological change.
Ans: A
9. Structural unemployment:
A) is also known as frictional unemployment.
B) is the main component of cyclical unemployment.
C) is said to occur when people are waiting to be called back to previous jobs.
D) may involve a locational mismatch between unemployed workers and job openings.
Ans: D
10. Okun's law:

A) measures the tradeoff between the rate of inflation and the rate of unemployment.
B) indicates the number of years it will take for a constant rate of inflation to cause the
price level to double.
C) quantifies the relationship between nominal and real incomes.
D) shows the relationship between the unemployment rate and the size of the GDP
gap.
Ans: D
11. The consumer price index was 140.3 in 1992 and 144.5 in 1993. Therefore, the rate
of inflation in 1993 was about:
A) 6.7 percent.
B) 3.0 percent.
C) 1.2 percent.
D) 13.6 percent.
Ans: B
12. Given the annual rate of inflation, the "rule of 70" allows one to:
A) determine whether the inflation is demand-pull or cost-push.
B) calculate the accompanying rate of unemployment.
C) determine when the value of a real asset will approach zero.
D) calculate the number of years required for the price level to double.
Ans: D
13. Cost-push inflation:

A) is caused by excessive total spending.
B) shifts the nation's production possibilities curve leftward.
C) moves the economy inward from its production possibilities curve.
D) is a mixed blessing because it has positive effects on real output and employment.
Ans: C
CHAPTER 9
1. The view that the market system will ensure full employment is associated with:
A) Keynesian economics.
B) GDP gap analysis.
C) classical economics.
D) the aggregate expenditures model.
Ans: C
2. Say's law indicates that:

A) a stable, inflexible interest rate will guarantee perpetual full employment.
B) falling prices will decrease the purchasing power of a declining level of total money
demand.
C) supply creates its own demand.
D) those prices which rise most during prosperity are likely to fall least during
depression.
Ans: C
3. The most important determinant of consumer spending is:
A) the level of household debt.
B) consumer expectations.
C) the stock of wealth.
D) the level of income.
Ans: D
4. With an MPS of .4, the MPC will be:

A) 1.0 minus .4.
B) .4 minus 1.0.
C) the reciprocal of the MPS.
D) .4.
Ans: A
5. As disposable income goes up the:

A) APC falls.
B) APS falls.
C) volume of consumption declines absolutely.
D) volume of investment can be expected to diminish.
Ans: A

A) APC + APS = 1.
B) APC + MPS = 1.
C) APS + MPC = 1.
D) APS + MPS = 1.
Ans: A
7. Which one of the following will cause a movement down along an economy's
consumption schedule?
A) an increase in stock prices
B) a decrease in stock prices
C) an increase in consumer indebtedness
D) a decrease in disposable income
Ans: D
8. At the point where the consumption schedule intersects the 45 -degree line:
A) the MPC is 1.00.
B) the APC is 1.00.
C) saving is equal to consumption.
D) the economy is in equilibrium.
Ans: B
9. (Advanced analysis) If the equation for the consumption schedule is C = 20 + 0.8Y ,

where C is consumption and Y is disposable income, then the average propensity to
consume is 1 when disposable income is:
A) $80.
B) $100.
C) $120.
D) $160.
Ans: B

A) MPC + MPS = APC + APS
B) APC + MPS = APS + MPC
C) APC + MPC = APS + MPS
D) APC - APS = MPC - MPS
Ans: A
11. As aggregate income decreases, the APC:

A) and APS will both increase.
B) will decrease, but the APS will increase.
C) will increase, but the APS will decrease.
D) and APS will both decrease.
Ans: C
12. The relationship between the real interest rate and investment is shown by the:
A) investment-demand schedule.
B) consumption of fixed capital schedule.
C) saving schedule.
D) aggregate supply curve.
Ans: A
13. Investment and saving are, respectively:

A) income and wealth.
B) stocks and flows.
C) injections and leakages.
D) leakages and injections.
Ans: C
CHAPETR 10
1. The multiplier effect means that:
A) consumption is typically several times as large as saving.
B) a small change in consumption demand can cause a much larger increase in
investment.
C) a small increase in investment can cause national income to change by a larger
amount.
D) a small decline in the MPC can cause equilibrium GDP to rise by several times that
amount.
Ans: C
2. The multiplier may be calculated as:
A) 1/(MPS + MPC)
B) MPC/MPS
C) 1/(1 - MPC)
D) 1 - MPC = MPS
Ans: C
3. If the MPS is only half as large as the MPC, the multiplier:

A) is 2.
B) is 3.
C) is 4.
D) cannot be determined from the information given.
Ans: B
4. The multiplier effect:

A) reduces the MPC.
B) magnifies small changes in spending into larger changes in output and income.
C) promotes stability of the general price level.
D) lessens upswings and downswings in business activity.
Ans: B
5. If the MPC is .6, the multiplier will be:

A) 4.0.
B) 6.0.
C) 2.5.
D) 1.67.
Ans: C
6. The multiplier effect indicates that:

A) a decline in the interest rate will cause a proportionately larger increase in
investment.
B) a change in aggregate expenditures will change aggregate income by a larger
amount.
C) a change in aggregate expenditures will increase aggregate income by the same
amount.
D) a small increase in total income will generate a large change in aggregate
expenditures.
Ans: B
7. If a $200 billion increase in investment spending creates $200 billion of new income
in the first round of the multiplier process and $160 billion in the second round, the
multiplier in the economy is:
A) 4.
B) 5.
C) 3.33.
D) 2.5.
Ans: B
8. Suppose that the level of GDP increased by $100 billion in an economy where the
marginal propensity to consume is 0.5. Aggregate expenditures must have increased
by:
A) $100 billion.
B) $50 billion.
C) $500 billion.
D) $5 billion.
Ans: B
9. At the equilibrium GDP for an open economy:

A) net exports may be either positive or negative.
B) imports will always exceed exports.
C) exports will always exceed imports.
D) exports and imports will be equal.
Ans: A
10. If the multiplier in an economy is 5, a $20 billion increase in net exports will:
A) increase GDP by $100 billion.
B) reduce GDP by $20 billion.
C) decrease GDP by $100 billion.
D) increase GDP by $20 billion.
Ans: A
11. In a mixed open economy the equilibrium level of GDP exists where:
A) Ca + Ig + Xn intersects the 45-degree line.
B) Ca + Ig = Sa + T + X .
C) Ca + Ig + Xn + G = GDP.
D) Ca + Ig + Xn = Sa + T .
Ans: C
12. The multiplier associated with a change in government purchases is:

A) always equal to 1.
B) smaller than that associated with an equal change in taxes.
C) the same as that associated with a change in investment.
D) less than that associated with a change in investment.
E) greater than that associated with a change in investment.
Ans: C

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PRINCIPLES OF ECONOMICS Question Paper - 2008

Q2.(a)What shall be shape of the indifference curves:

(b).show that the

Q9.Why is the protection of industries considered crucial in a developing economy? briefly

Q10.Write short notes on any two of the following:

Economics Question Bank Economy Quiz solved Economics Test

Economics Question Bank Economy Quiz solved Economics Test

17. White goods are

30. „Capital goods‟ refer to goods which

2. “Economics is the Science of Wealth” who gave this definition ?

3. “Economics is what economists do.” It has been supported by—

5. Who has given scarcity definition of economics ?

6. “Economics is a science” the basis of this statement is—

7. Characteristics of economic laws are—

8. Which theory is generally included under micro economics ?

9. Whose opinions have revolutionised the scope of macro economics ?

10. Which of the following is an economic activity ?

11. Passive factor of production is—

12. Under law of demand—

13. For inferior commodities, income effect is—

15. Utility means—

17. At point of satiety, marginal utility is—

18. Which of the following is the second law of Gossen ?

19. Total utility of a commodity is measured by which price of that commodity ?

20. According to Marshall, the basis of consumer surplus is—

21. Which commodity can be called as Giffen commodity ?

22. The price of a commodity is determined where—

23. In perfect competition, the demand for a commodity is—

24. Which condition is not found in perfect competition ?

25. In which market, a firm cannot determine price ?

The demand curve...

1. The real income effect

2. The substitution effect-

Important key term:

What about s hifts?

Why does the demand curve shift?

3. Price of substitutes - substitutes as we mentioned before are alternatives. So if these decrease

2.A decrease in income should:

Read more: Difference Between Complementary or Substitute in Economics | eHow.com

What is `a competitive market`?

- A willingness to trade or exchange or trade goods and services.

A Sub-market is a recognised or distinguishable part of a market. It is also known as market

In addition to the definition of demand two other points have to be maid:

Relationship between price and quantity demanded

The demand curve

Calculation of total expenditure and total revenue

Total expenditure = price x quantity demanded

Other factors affecting demand

Cons umer income:

The price of other products:

A product usually has a substitute and/or a complement. A substitute is a competing good,

Tastes and fashion:

A change in demand due to a change in non-price factors

Demand curve shift to the right if:

- consumer income increase

- price of substitutes rise

- price of complements fall

- positive change in tastes and fashion

Demand curve shift to the left if:

- consumer income falls