Economic Analysis
Exam Solutions
Course Introduction
Economic Analysis is a foundational course that explores how individuals, businesses, and governments make decisions about the allocation of scarce resources. The course introduces students to key economic principles, including supply and demand, market structures, consumer behavior, production costs, and the role of incentives. Through the use of theoretical models and real-world case studies, students learn to evaluate economic outcomes, interpret data, and apply analytical tools to assess policy decisions. By the end of the course, students are equipped with the skills to analyze economic problems critically and make informed decisions in a rapidly changing economic environment.
Recommended Textbook
Microeconomics Today The Macro View 17th Edition by Roger LeRoy Miller
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Chapter 1: The Nature of Economics
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Q1) The combination of psychology and economics to determine individual decision making is known as
A)behavioral economics.
B)pyschomics.
C)the rule of thumb.
D)positive analysis.
Answer: A
Q2) An economic model should capture
A)the essential relationships that help to analyze the problem.
B)all possible variables that apply to the problem.
C)only social value related variables.
D)all of the above.
Answer: A
Q3) All of the following are aspects of microeconomics EXCEPT A)monopolies.
B)a firm maximizing profit.
C)a worker choosing one job over another.
D)the average level of prices of all goods and services produced in a country in a year.
Answer: D
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Chapter 2: Scarcity and the World of Trade-Offs
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Sample Questions
Q1) During periods of unemployment
A)the economy operates at a point inside the production possibilities curve.
B)the economy operates at a point outside the production possibilities curve.
C)the production possibilities curve shifts inward.
D)the production possibilities curve shifts outward.
Answer: A
Q2) If Joey goes surfing for four hours instead of earning $10 per hour for those four hours,his opportunity cost is
A)the good time spent surfing.
B)the cost of gasoline used to get to the beach.
C)the travel time to the beach.
D)$40.
Answer: D
Q3) "Economics is the study of how people eliminate scarcity." Do you agree or disagree? Why?
Answer: Disagree.Economics is the study of how people make choices because of scarcity.Scarcity cannot be eliminated because people do not ever have enough of everything to satisfy their every desire.Scarcity is a fact of life for both rich and poor.
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Chapter 3: Demand and Supply
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Sample Questions
Q1) A normal good is one for which
A)demand increases as income increases.
B)demand increases as income decreases.
C)the demand curve is horizontal.
D)demand increases as the price of a substitute increases.
Answer: A
Q2) Assume that coffee and tea are substitutes.Given a downward sloping demand curve for tea,an increase in the price of tea will cause
A)an increase in the demand for coffee.
B)a decrease in the demand for coffee.
C)a leftward shift of the demand curve for tea.
D)a leftward shift in the demand for coffee.
Answer: A
Q3) A given supply curve illustrates
A)the relationship between price and quantity supplied.
B)the effect of a change in resource costs on quantity supplied.
C)the effect of a change in technology on quantity supplied.
D)the relationship between expected future prices and quantity supplied.
Answer: A
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Chapter 3: Extensions of Demand and Supply Analysis
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Q1) A newspaper headline asserts: "Rising Demand Pushes Up Housing Prices." This headline
A)incorrectly implies that the demand for housing can change,whereas in fact only the quantity of housing demanded can change.
B)incorrectly implies that the price of housing will rise when demand increases.
C)incorrectly implies that more housing will be demanded at higher prices.
D)correctly implies that an increase in demand will increase the market clearing price.
Q2) One result of the agriculture price supports cited in the text is that
A)sometimes surplus food is given away.
B)food shortages result in most cases.
C)small farms receive most of the benefits.
D)none of the above.
Q3) If both buyers and sellers expect the price of a commodity to rise in the future,it is likely that the market clearing price ________ and the equilibrium quantity
A)will fall,cannot be predicted
B)will rise,cannot be predicted
C)cannot be predicted,will fall
D)cannot be predicted,will rise
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Chapter 4: Public Spending and Public Choice
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Sample Questions
Q1) Medicare subsides will cause people to
A)consume less medical services than in the absence of the subsidies.
B)consume more medical services than in the absence of the subsidies.
C)consume the same amount medical services as they would if there were no subsidies.
D)be sicker because of inferior care.
Q2) A situation in which the market system allocates too many resources to the production of a given activity is known as
A)market allocation.
B)market failure.
C)market efficiency.
D)market breakdown.
Q3) As a share of total national income,government spending generally has
A)been constant over the last fifty years.
B)increased over the last fifty years.
C)decreased over the last fifty years.
D)increased until ten years ago,and then decreased steadily.
Q4) Explain why an external benefit leads to an under-allocation of resources to the production of a good.
Q5) What is market failure? How can the government correct market failure?
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Chapter 5: Funding the Public Sector
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Sample Questions
Q1) Another name for a "flat-rate tax" in which the same tax rate applies to all income earners is a
A)proportional tax.
B)progressive tax.
C)regressive tax.
D)passive tax.
Q2) The marginal income tax rate is equal to
A)the total tax payment divided by total income.
B)the change in the tax payment divided by the change in income.
C)the average tax payment divided by the total tax payment.
D)the percent of total income that goes to taxes.
Q3) The average tax rate can be calculated by which of the following formulas?
A)The change in taxes due divided by the change in taxable income
B)The change in taxable income divided by the change in taxes due
C)Total taxes due divided by total taxable income
D)Total taxable income divided by total taxes due
Q4) Suppose Jill has earned more income this year as compared to what she did last year.Her income tax has also increased.Does it necessarily mean that the income tax system is progressive? Explain.
Q5) In what way is corporate income subject to double taxation?
Page 8
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Chapter 6: Demand and Supply Elasticity
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Sample Questions
Q1) Compared to the long-run absolute elasticity of demand,the short-run absolute elasticity of demand is
A)smaller.
B)the same.
C)larger.
D)either smaller or larger,depending on other factors.
Q2) If demand is perfectly elastic everywhere along the demand curve,then A)people must be irrational.
B)the demand curve is vertical.
C)the demand curve is a rectangular hyperbola.
D)the demand curve is horizontal.
Q3) The cross-price elasticity of demand of products "M" and "N" is zero.This implies that "M" and "N" are
A)substitute products.
B)complementary products.
C)independent products.
D)unique goods,as the price elasticity of demand for one of them is zero.
Q4) Price elasticity of demand is measured using percentage changes.Why?
Q5) Why is elasticity of demand greater for goods that are a large share of a consumer's budget?
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Chapter 7: Consumer Choice
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Sample Questions
Q1) Economists infer that a consumer receives more utility from one good than another by
A)giving consumers surveys about the utility they receive from the goods.
B)observing the consumer's behavior.
C)the logic of the models used.
D)means of introspection and speculation.
Q2) When Bonnie increases the consumption of Good A and decrease the consumption of Good B,her marginal utility of
A)A falls and the marginal utility of B will increase.
B)both A and B will decrease.
C)A increases and the marginal utility of B will fall.
D)both A and B will increase.
Q3) Refer to the above table.Suppose the price of a movie is $5 and the income of the consumer is $29.What are the quantities demanded of hamburger at prices of $2 and $1 respectively?
A)0; 1
B)2; 4
C)1; 2
D)3; 5
Q4) What are the key properties of indifference curves?
Page 10
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Chapter 8: Rents, profits, and the Financial Environment of Business
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Sample Questions
Q1) If the nominal interest rate is high and rising,a possible cause is
A)increased lending activity.
B)a rising inflation rate.
C)a falling real interest rates.
D)increased government borrowing.
Q2) If the bank advertises 6 percent annual interest rate on a one-year certificate of deposit and you anticipate the rate of inflation to rise to 3 percent during the year,then the real rate of interest on the certificate of deposit is
A)9 percent.
B)6 percent.
C)3 percent.
D)2 percent.
Q3) The person least likely to receive a payment from a corporation in a year of losses is the
A)bank that loaned money to the corporation.
B)bondholder.
C)preferred stockholder.
D)common stockholder.
Q4) Which method of corporate finance is used the most? Why?
11
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Chapter 9: The Firm: Cost and Output Determination
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Sample Questions
Q1) In the above table,which two workers have the same marginal physical product?
A)1 and 2
B)2 and 4
C)1 and 3
D)1 and 4
Q2) What is the difference between average variable costs and average total costs?
Q3) In the above table,what is the average total cost to produce 4 units of output?
A)$30
B)$60
C)$55
D)$20
Q4) Which of the following statements is FALSE?
A)Included in the firm's short-run production function are both fixed and variable inputs.
B)An efficient firm can obtain more output than the production function shows.
C)The production function shows the technical relationship between a firm's inputs and outputs.
D)The production function presents the technically efficient methods of combining inputs to produce output.
Q5) What is the law of diminishing marginal product?
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Chapter 10: Perfect Competition
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Sample Questions
Q1) In the above figure,if price is equal to P<sub>4</sub>,the firm will
A)earn positive economic profits.
B)incur an economic loss.
C)earn zero economic profits.
D)shut down.
Q2) Which of the following is NOT a characteristic of a perfectly competitive industry?
A)There is free entry and exit in the long run.
B)The industry demand curve is downward sloping.
C)Each firm produces the same homogeneous product.
D)Economic profits must be positive in the short run.
Q3) Which is always true at a firm's profit-maximizing rate of production?
A)Total Revenue = Total Costs
B)The total revenue curve lies below the total cost curve.
C)Marginal Revenue > Marginal Cost
D)Marginal Revenue = Marginal Cost
Q4) "A firm should shut down immediately when it earns zero economic profits." Do you agree or disagree? Explain your answer.
Q5) How is the market clearing price established in a perfectly competitive industry?
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Chapter 11: Monopoly
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Sample Questions
Q1) Use the above figure.The profit-maximizing output will be
A) \(\mathrm { Q } _ { 1 }\) .
B) \(\mathrm { Q } _ { 2 }\) .
C) \(\mathrm { Q } _ { 3 }\) .
D)None of the above are correct.
Q2) A monopolist finds the output ( \(Q ^ { * }\) )rate that maximizes profit.It finds the price by
A)taking the height of the marginal revenue curve at output rate Q * .
B)taking the height of the marginal cost curve at output rate Q * .
C)taking the height of the demand curve at output rate Q * .
D)setting price equal to marginal cost.
Q3) Drug companies protect their monopolies over various drugs they develop by utilizing
A)patent protection.
B)low cost production.
C)diseconomies of scale.
D)zero economic profits in the long run.
Q4) What is a monopolist,and what is required for a monopolist to earn profits in the long run?
Q5) Why is price less than marginal revenue for a monopolist?
Page 14
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Chapter 12: Monopolistic Competition
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Sample Questions
Q1) The type of advertising used for a search good is
A)informational advertising.
B)persuasive advertising.
C)search advertising.
D)experience advertising.
Q2) A good example of a monopolistic competitive industry is
A)the U.S.auto industry.
B)the public utility industry.
C)the computer game industry.
D)mining.
Q3) In a monopolistically competitive market,the consumer receives the benefit of A)production at minimum average cost.
B)production where price equals marginal cost.
C)product diversity.
D)allocative efficiency.
Q4) When a telemarketer calls you about a product,this is an example of A)direct marketing.
B)indirect marketing.
C)searching for a good.
D)persuasive marketing.
Page 15
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Chapter 13: Oligopoly and Strategic Behavior
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Sample Questions
Q1) Cooperation that continues as long as the players continue to cooperate is
A)a zero-sum game.
B)a negative-sum game.
C)tit-for-tat strategic behavior.
D)opportunistic behavior.
Q2) Which of the following is true of an oligopoly?
A)They engage in nonprice competition.
B)They do not react to actions of their competitors.
C)Each firm produces a small portion of the total output.
D)Firms do not care what their competitors do.
Q3) Monopolies and oligopolies both erect barriers to entry through the use of
A)price cutting.
B)patents.
C)franchising.
D)advertising.
Q4) If Target were to merge with Wal-Mart,this would be referred to as a(n)
A)horizontal merger.
B)vertical merger.
C)conglomerate merger.
D)anti-competitive merger.
Page 16
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Chapter 14: Regulation and Antitrust Policy in a Globalized Economy
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Sample Questions
Q1) The theory that regulators' behavior will eventually be compromised by the special interests they regulate is known as the
A)capitulation hypothesis.
B)creative hypothesis.
C)captive hypothesis.
D)capture hypothesis.
Q2) What is the difference between product versioning and product bundling? Which of these two business practices have antitrust authorities been more likely to regard to be the form of price discrimination called tie-in sales? Why?
Q3) An unregulated natural monopolist would produce to the point at which
A)P = AC.
B)MR = AC.
C)MR = MC.
D)P = MR.
Q4) The Federal Trade Commission Act,as amended,prohibits
A)horizontal mergers.
B)price-fixing agreements.
C)unfair competitive practices and deceptive acts.
D)price discrimination.
Page 17
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Chapter 15: The Labor Market: Demand, supply and Outsourcing
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Q1) A firm in a competitive input market can
A)hire workers at the going wage.
B)hire additional workers only by raising wages.
C)hire additional workers at lower wages because those who are still unemployed are anxious to work.
D)hire additional workers only after a long search process.
Q2) The demands for labor and other input factors are called
A)derived demands,because the demand for these inputs depends on the demand for goods and services they are employed to produce.
B)developed demands,because the demand for these inputs is developed from an analysis of the costs of advertising products.
C)indirect demands,because the demand for these inputs is indirectly related to the costs of advertising products.
D)reverse demands,because the demand for these inputs varies inversely with the demand for goods and services they are employed to produce.
Q3) Explain what the profit-maximizing combination of resources is for the perfectly competitive firm.
Q4) What is marginal factor cost? How is it related to the supply curve of an input?
Page 18
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Chapter 16: Unions and Labor Market Monopoly Power
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Q1) A closed shop is a business enterprise in which
A)employees cannot belong to a union when they are employed,and cannot join a union and keep working there.
B)employees must join the union to maintain employment.
C)employees must belong to the union before they can be employed.
D)employees cannot belong to the union when they are hired,but may join the union later and keep their jobs.
Q2) The largest labor union in the United States is the
A)National Education Association.
B)International Brotherhood of Teamsters.
C)United Food and Commercial Workers International Union.
D)Service Employees International Union.
Q3) The welders' union at Ajax is on strike.The maintenance union has decided to walk out in support of the welders' union.This is known as
A)a closed shop.
B)a union shop.
C)a sympathy strike.
D)a secondary boycott.
Q4) What can a union do in order to raise the wages of its members ?
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Chapter 17: Income, poverty, and Health Care
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Q1) Which of the following statements is FALSE?
A)The official absolute poverty level in the United States is far above the average income of many countries in the world.
B)In a relative sense,the problem of poverty will always exist.
C)An equal distribution of income would eliminate relative poverty.
D)An equal distribution of income would eliminate absolute poverty.
Q2) Economic discrimination against minorities exists when A)minorities have less education and training than whites.
B)minorities are paid less than whites on average.
C)minorities are paid less than whites with the same education,experience,and training. D)minorities are in different occupations than whites.
Q3) Compared to the distribution of money income,the distribution of wealth is A)about the same.
B)much more equal.
C)much less equal.
D)a little more equal.
Q4) Earnings usually reflect a person's productivity.What are factors that cause differences in productivity across people so that earnings differ too?
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Page 20
Chapter 18: Environmental Economics
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Sample Questions
Q1) A good that has external costs associated with its production will be A)produced at the optimal level.
B)underproduced.
C)overproduced.
D)not produced.
Q2) In order for a voluntary agreement to be reached in general,transaction costs should be A)infinite.
B)high relative to expected marginal benefits of the agreement.
C)low relative to expected marginal benefits of the agreement.
D)determined by the Environmental Protection Agency.
Q3) You enter a classroom,which is littered with newspapers.This is because A)students are too lazy to clean up.
B)maintenance people only clean once a day.
C)it is a way to protest against the tuition rates.
D)students do not pay for littering.
Q4) What are social costs? How do they differ from private costs?
Q5) What are the private costs of driving an automobile? What are the external costs?
Q6) "The optimal level of pollution is zero." Do you agree or disagree? Why?
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Chapter 19: Comparative Advantage and the Open Economy
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Q1) Based on the data in the above table,then if opportunity costs are constant,the opportunity cost of producing movies in the United States is ________,and the opportunity cost of producing movies in Switzerland is ________.
A)2 movies; 2 cuckoo clocks
B)2.5 movies; 0.4 cuckoo clocks
C)0.4 cuckoo clocks; 0.5 cuckoo clocks
D)2.5 cuckoo clocks; 2 cuckoo clocks
Q2) Since World War II,world trade has
A)decreased in importance as nations turn inward due to security concerns.
B)increased,but not as dramatically as annual world real GDP has climbed.
C)risen sharply,outpacing gains in annual world real GDP.
D)increased in relative importance for most nations,but not for the United States.
Q3) The General Agreement on Tariffs and Trade is an international agreement
A)that outlaws all tariffs but permits quotas.
B)to encourage world trade by lowering tariffs and other trade barriers.
C)to encourage world trade by lending resources to developing countries.
D)between the United States and Japan that has never been ratified,resulting in several trade wars with Japan.
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Chapter 20: Exchange Rates and the Balance of Payments
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Q1) An increase in the U.S.interest rate will most likely
A)reduce the attractiveness of investment in the United States.
B)lead to a decrease in the value of the U.S.dollar.
C)lead to an inflow of funds to the United States and an appreciation of the dollar.
D)provide a stimulus to U.S.export industries.
Q2) Refer to the above table.Nation "A" has a balance of trade
A)deficit of 50.
B)surplus of 50.
C)deficit of 10.
D)surplus of 10.
Q3) Which of the following is NOT a deficit item on a country's balance of payments?
A)gold sales to foreigners.
B)imports.
C)a personal gift to a foreign individual.
D)none of the above.
Q4) In foreign exchange markets,who demands dollars and who supplies dollars?
Q5) Explain the three categories of balance of payments transactions.
Q6) What brought about the end of the Bretton Woods Agreement?
Q7) Why does the demand curve for Japanese yen slope down?
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