Economic Analysis
Exam Practice Tests
Course Introduction
Economic Analysis explores the foundational principles and methodologies used to understand how individuals, firms, and governments make decisions about allocating scarce resources. The course covers fundamental concepts of microeconomics and macroeconomics, including demand and supply, market equilibrium, consumer behavior, production and costs, market structures, and the analysis of economic policy impacts. Students will develop the analytical tools necessary to assess how economic incentives and constraints influence decision-making processes, and will learn to apply quantitative and qualitative techniques for solving real-world economic problems in various contexts.
Recommended Textbook
Microeconomics 1st Canadian Edition by B.
Douglas Bernheim
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) Questions that involve value judgments are
A) Positive questions
B) Normative questions
C) Not relevant to microeconomics
D) Objective
Answer: B
Q2) A society's institutions
A) Include the laws and customs that determine the allocation of resources
B) Have no effect on people's abilities to make decisions
C) Are irrelevant when studying an economy
D) Are not related to the control of society's resources
Answer: A
Q3) assume that people are motivated by
A) Human sacrifice
B) Material self-interest
C) Altruism
D) Property rights
Answer: B
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3
Chapter 2: Supply and Demand3
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Sample Questions
Q1) An increase in the price of a good is shown by a
A) Movement up and to the left along the supply curve
B) Movement down and to the right along the supply curve
C) Movement up and to the right along the supply curve
D) Movement down and to the left along the supply curve
Answer: C
Q2) The ______ the demand curve,the _____ responsive is the amount demanded to price.
A) Steeper; less
B) Steeper; more
C) Flatter; less
D) Higher; less
Answer: A
Q3) Refer to Table 2.2,which presents hypothetical data on cross-price elasticity of demand estimates.Which goods are the best substitutes?
A) Coke and Pepsi
B) Hard Liquor and Beer
C) Beef and Chicken
D) Cheese and Butter
Answer: A
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Chapter 3: Balancing Benefits and Costs
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Sample Questions
Q1) Marginal benefits and marginal costs
A) Capture the way total benefits and total costs change as the amount of an activity changes just a little bit
B) Are constant, regardless of the amount of an activity that is pursued
C) Tend to increase as a decision maker does more of an activity
D) Tend to increase as a decision maker does less of an activity
Answer: A
Q2) Which of the following statements is true?
A) Neither sunk costs nor the sinking of a cost will affect a decision maker's best choice
B) Both sunk costs and the sinking of a cost will affect a decision maker's best choice
C) Sunk costs will affect a decision maker's best choice, but the sinking of a cost will not
D) Sunk costs will not affect a decision maker's best choice, but the sinking of a cost will affect their choice
Answer: D
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5
Chapter 4: Principles and Preferences
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Sample Questions
Q1) Harriet enjoys watching both American Idol and Desperate Housewives on television.Her preferences correspond to the utility function U(A,D)= 2A + 4ÖD,where A stands for the number of hours she watches American Idol and D is the number of hours she watches Desperate Housewives.
a)How would Harriet rank the following alternatives: 4 hours of American Idol and 2 hours of Desperate Housewives,2 hours of American Idol and 4 hours of Desperate Housewives and 3 hours of American Idol and 3 hours of Desperate Housewives?
b)Suppose that one week,Desperate Housewives is not shown,but there is a two-hour American Idol special (instead of the usual one-hour program).Is Harriet better off or worse off? Explain.
c)Would Harriet's preferences change if her utility function was expressed as U(A,D)= 2A + 4ÖD + 6? Why or why not?
Q2) Higher rates of substitution are indicated by _______ _______ values of the marginal rate of substitution.
A) Small negative
B) Large negative
C) Small positive
D) Large positive
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Chapter 5: Constraints, Choices, and Demand
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Sample Questions
Q1) If the income-consumption path slopes down,then
A) Both goods are inferior
B) Both goods are normal
C) One good is normal and the other good is inferior
D) We can't tell anything about whether the goods are normal or inferior
Q2) An affordable consumption bundle is an interior choice if
A) It lies below the budget line
B) For each good, there are affordable bundles containing a little bit more of that good and a little bit less of the other good
C) For each good, there are no other affordable bundles containing a little bit more of that good and a little bit less of the other good
D) It exhausts the consumer's income
Q3) A curve that describes the relationship between income and the amount of a good consumed (holding the consumer's preferences and all other prices fixed)is called
A) A price-consumption curve
B) The Engel curve
C) An income-consumption curve
D) A budget line
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Chapter 6: Rom Demand to Welfare
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Sample Questions
Q1) The amount of money received in a particular period adjusted for changes in purchasing power is called
A) Nominal income
B) Real income
C) A cost-of-living index
D) Consumer surplus
Q2) Which of the following statements about the income effect of a price change is NOT true?
A) It affects consumption by removing compensation
B) It always involves a parallel shift in the budget line
C) It isolates the influence of a change in relative prices
D) It reflects the fact that a price change affects a consumer's purchasing power
Q3) For what type of good do the substitution and income effects work in opposite directions?
A) Normal goods
B) Inferior goods
C) Giffen goods
D) The substitution and income effects never work in opposite directions
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8
Chapter 7: Technology and Production
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Sample Questions
Q1) Suppose a firm uses both labour (L)and capital (K)and its long-run production function is given by the expression Q = F(L,K)= 2LÖ(L + K).The firm currently uses 10 units of capital.Complete the following table:
Q2) The long run refers to a period of time over which
A) The firm can change its level of output
B) Only one input is fixed
C) Production technology increases
D) All inputs are variable
Q3) For the Cobb-Douglas production function F(L,K)= AL<sup>a</sup>K<sup>b</sup>,a technical change that increases the productivity of capital would be represented by
A) An increase in the value of a
B) An increase in the value of b
C) Values of a and b for which b > a
D) An increase in the value of A
Q4) A firm's _______ summarizes all of its possible methods of producing its output.
A) Production technology
B) Efficient production frontier
C) Production function
D) Production possibilities curve
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Chapter 8: Cost
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Sample Questions
Q1) Refer to Figure 8.4.What is the average fixed cost of producing 80 units of output?
A) $100
B) $280
C) $4.75
D) $380
Q2) Suppose a firm's technology is represented by the Cobb-Douglas production function F(L,K)= 5LK.The wage rate is $50 and the rental rate of capital is $10.What is the least-cost combination to produce 100 units of output?
Q3) Refer to Table 8.1.Assume the wage rate is $10 and the firm has $1,000 in unavoidable fixed cost.What is the average cost of producing 65 units of output?
A) $40
B) $15.38
C) $0.50
D) $16
Q4) Using a graph,explain the relationship between average cost and marginal cost.
Q5) Suppose a firm's technology is represented by the function Q = F(L,K)= 5L<sup>.25</sup>K<sup>.75</sup>.Does this firm experience economies of scale,diseconomies of scale or neither?
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Chapter 9: Rofit Maximization
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Sample Questions
Q1) Given a demand function of D(P)= 500 - 10P,what is it's inverse demand function?
A) D(P) = 50 - P
B) P(Q) = 50P
C) P(Q) = 50 - Q/10
D) P(Q) = 500 - 10Q
Q2) What type of cost has NO impact on determining the profit-maximizing sales quantity?
A) Avoidable fixed costs
B) Sunk fixed costs
C) Variable costs
D) Average variable costs
Q3) The Law of Supply ______ holds for price-taking firms.
A) Always
B) Usually
C) Occasionally
D) Never
Q4) Define producer surplus.Using a graph,illustrate producer surplus for a firm with an avoidable fixed cost.Why is it convenient to focus on producer surplus when analyzing policy changes?
Q5) Using a graph,explain why the law of supply holds for a competitive firm.
Page 11
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Chapter 10: Choices Involving Time
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Sample Questions
Q1) When the interest rate rises,saving becomes ______ rewarding and borrowing becomes ______ costly.
A) Less, less
B) Less, more
C) More, less
D) More, more
Q2) Which statement about the Life Cycle Hypothesis is NOT true?
A) It describes the choices of consumers who live for a long time
B) It separates consumers' earnings into two stages
C) It assumes that people prefer instability
D) It assumes that people prefer a higher standard of living to a lower standard of living
Q3) Suppose you make a $5,000 investment that will return $3,000 in year 2 and another $3,500 in year 4.With an interest rate of 4.5%,what is the NPV of this project?
A) $247.34
B) $682.15
C) $1,500.00
D) $2,162.50
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12
Chapter 11: Choices Involving Risk
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Sample Questions
Q1) Brandon's risk premium given the information in problem 29 is
A) 66.31
B) 0.19
C) 33.16
D) 3.20
Q2) Refer to Figure g.Lily's benefit function (dashed)is more concave than Millie's benefit function (dotted).Lily
A) Is more risk averse than Millie
B) Is less risk averse than Millie
C) Has a smaller risk premium than Millie
D) Has a larger certainty equivalent than Millie
Q3) Dean's expected payoff from investing in Pretty Kitty Grooming only based upon the information given in problem 48 is
A) $500
B) $2,000
C) $1,000
D) $1,500
Q4) Explain why a risk averse individual will purchase full insure if a policy is actually fair,but only partially insure or not insure at all,if it is not.
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Chapter 12: Choices Involving Strategy
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Sample Questions
Q1) Refer to Figure d.The payoff matrix below illustrates a game played by Travis and Darren.Travis has two choices,north and south,while Darren's choices are east and west.Travis's payoffs are shown in the lower right-hand corner of each cell and Darren's are in the upper left-hand corner.For Darren,east is
A) The best response
B) The dominant strategy
C) Is weakly dominated
D) Dominated
Q2) Refer to Figure a.Given the game described in problem 9,what is Charlie's dominant strategy?
A) Rock
B) Paper
C) Scissors
D) He does not have one
Q3) Refer to Figure a.What is the Nash equilibrium in problem 9?
A) Charlie rock, Joe rock
B) Charlie rock, Joe paper
C) Charlie paper, Joe scissors
D) There is not one
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Page 14
Chapter 13: Behavioral Economics
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Sample Questions
Q1) The gambler's fallacy
A) Is the belief that if an event has ever occurred, it is less likely to repeat
B) Is the belief that once an event has occurred, it is less likely to repeat
C) Is the belief that once an event has occurred several times in a row, it is more likely to repeat
D) Is the belief that if an event has never occurred, it is more likely to occur
Q2) Choices made in the ultimatum game suggest
A) That in social situations, emotions such as anger and indignation influence economic decisions
B) That in social situations, emotions such as anger and indignation do not influence economic situations
C) That individuals are influenced by individual motives
D) Social inefficiency
Q3) Suppose Hillary was offered the following choices: 1.Win $10 for sure or 2.Win $20,000 with odds of 1 in 2,000; otherwise win nothing.If Hillary is risk loving she will choose
A) Option 1
B) Option 2
C) She is indifferent between the two
D) Both with equal probability
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Page 15
Chapter 14: Equilibrium and Efficiency
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Sample Questions
Q1) Properties of long-run competitive equilibrium with free entry include
A) The equilibrium price must equal the minimum MC
B) Firms must earn positive profits
C) Active firms must produce at their efficient scale of production
D) All of these
Q2) Aggregate surplus
A) Equals consumers' total willingness to pay for a good less firms' total avoidable cost of production
B) Equals consumers' total willingness to pay for a good plus firms' total avoidable cost of production
C) Captures the net benefit created by the production and consumption of the good D) A and C
Q3) Transactions costs are absent when
A) Sellers can easily communicate their prices
B) Buyers can easily locate suppliers and learn their prices
C) Buyers and sellers can arrange transactions without significant obstacles
D) All of these
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Chapter 15: Market Intervention
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Sample Questions
Q1) A production quota program
A) Imposes limits on the price that individual firms can charge
B) Is a way to raise prices without causing the overproduction that occurs under a price support program
C) Places limitations on demand
D) Is a way to lower prices without causing the overproduction that occurs under a price support program
Q2) A voluntary production reduction program
A) Offers firms incentives to reduce their production voluntarily
B) Forces firms to reduce their production
C) Offers firms incentives to increase their production voluntarily
D) Forces firms to increase their production
Q3) A voluntary production reduction program
A) Offers firms incentives to reduce their production voluntarily
B) Includes payments to producers to reduce production
C) Attempts to limit supply
D) All of these
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Chapter 16: General Equilibrium, Efficiency, and Equity
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Sample Questions
Q1) In an exchange economy
A) People produce goods, but do not own or trade them
B) People own and trade goods, but no production takes place
C) People produce, own and trade goods
D) People trade goods, but do not own them or produce them
Q2) A point along the production possibility frontier is
A) Inefficient
B) Impossible
C) Efficient
D) Inefficient and Impossible
Q3) The first welfare theorem
A) Tells us that, in a general equilibrium with imperfect competition, the allocation of resources is Pareto efficient
B) Clarifies how the "invisible hand" of the market guides people toward privatly desirable choices
C) Tells us that a general equilibrium with perfect competition is not Pareto efficient
D) Tells us that, in a general equilibrium with perfect competition, the allocation of resources is Pareto efficient
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Chapter 17: Monopoly
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Q1) The pass through rate
A) Is always greater than one in a perfectly competitive market
B) Is never greater than one in a perfectly competitive market
C) Is always greater than one for a monopolist
D) Is always less than one for a monopolist
Q2) A firm's Lerner Index
A) Is the amount by which its price exceeds its marginal cost, expressed as a percentage of its price
B) Is the amount by which its marginal cost exceeds its average cost
C) Is the amount by which its average cost exceeds its marginal cost
D) Is the value of its profit
Q3) Discuss the difference between first-best and second-best price regulation.In your answer,you should address why governments regulate markets and the difficulties faced when doing so.
Q4) A firm has market power
A) When it can profitably charge any price of it's choosing
B) When it is characterized as a price taker
C) When it can profitably charge a price that is above its marginal cost
D) Only when it is the sole firm producing in a market
Q5) Explain the difference between a monopoly and a monophony.
Page 19
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Chapter 18: Pricing Policies
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Q1) Price discrimination is based on self-selection
A) When a firm can distinguish consumers with a high versus low willingness to pay
B) When a firm offers a menu of alternatives, designed so that different customers will make different choices based on their willingness to pay
C) When a monopolist knows perfectly the customer's willingness to pay for each unit its sells and can charge a different price for each unit
D) When a firm cannot distinguish consumers with a high versus low willingness to pay
Q2) Bundling
A) Is the practice of selling a single product in bulk at a reduced per unit price
B) Is the practice of selling several products together as a package
C) Is the practice of selling the same good to different types of consumers at different prices
D) Is the practice of selling different goods to different types of consumers at different prices
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Chapter 19: Oligopoly
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Sample Questions
Q1) A market with two sellers is called a
A) Monopoly
B) Perfectly competitive market
C) Duopoly
D) Triopoly
Q2) Define the Bertrand model and its assumptions.Explain why the model predicts the perfectly competitive outcome despite the number of sellers.Discuss the limitations of the model.
Q3) A strategic precommitment occurs when a firm
A) Commits to some actions before rivals take theirs, with the aim of increasing its future competitive profit
B) Commits to some actions after rivals take theirs, with the aim of increasing its future competitive profit
C) Commits to some actions before rivals take theirs purely by accident
D) Commits to some actions after rivals take theirs because there are no other options
Q4) Compare and contrast the Bertrand and Cournot models of oligopoly.Your discussion should include assumptions made,goals of the firms and the resulting outcomes.
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21
Chapter 20: Externalities and Public Goods
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Q1) The median voter is
A) The voter who has the median income policy among all voters
B) The voter who has the median policy among all voters
C) The voter who has the average policy among all voters
D) The voter who has the mean policy among all voters
Q2) A public good
A) Is a good that is nonrival
B) Is a good that is nonexcludable
C) Is often provided by the government
D) All of these
Q3) A common property resource is
A) A resource that only one person can use
B) A resource that anyone can use for a fixed fee
C) A resource that more than one person is free to use without payment
D) A resource that only one person can use free of charge
Q4) Explain ways in which the government can remedy an externality.
Q5) Why might bargaining break down when parties negotiate to remedy a market failure and its associated externality?
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