Economic Decision Making
Exam Bank
Course Introduction
Economic Decision Making explores the processes and tools individuals, businesses, and governments use to make choices in allocating limited resources. The course examines foundational principles such as cost-benefit analysis, marginal thinking, and opportunity cost, and applies these concepts to real-life scenarios in both microeconomic and macroeconomic contexts. Students will analyze how factors like incentives, risk, uncertainty, and behavioral biases influence economic choices, gaining practical skills in evaluating trade-offs and making informed decisions. Through case studies and problem-solving exercises, participants will develop the ability to apply economic reasoning to personal, business, and policy decisions.
Recommended Textbook
Microeconomics and Behavior 9th Edition by
Robert H. Frank
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Chapter 1: Thinking Like an Economist
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Sample Questions
Q1) You decide to go skiing this weekend. It costs $50 for transportation, $50 for lodging, $30 for ski lift tickets and you could have earned $100 as a waiter at a job you love so much you would do it as a volunteer. What is the total cost of the ski weekend?
A)$230
B)$130
C)$100
D)$80
Answer: A
Q2) Unbridled self-interest fails to coordinate resource flows most effectively in which of the following cases?
A)The production of bread.
B)The building of a tornado warning siren.
C)The production of cars.
D)The production of haircuts.
Answer: B
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Chapter 2: Supply and Demand
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Sample Questions
Q1) Let supply be given by P = 5Q and demand by P = 19 - 2Q. Suppose we now place a tax of 5 per unit of output on the seller. The new supply curve is:
A)P = 5Q
B)P = 5 + 5Q
C)P = 5Q - 5
D)P = 5Qt5
Answer: B
Q2) If an airline overbooks it pays people who volunteer to leave the overbooked flight. This system is better than drawing randomly from a hat the people who should miss the flight because
A)those with the least to lose are the ones who miss the flight.
B)it gives everyone a chance to get money they hadn't counted on.
C)it is quicker and helps keep the flight on schedule.
D)it is the most equitable way of solving the situation.
Answer: A
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4
Chapter 3: Rational Consumer Choice
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Sample Questions
Q1) If the consumer's budget constraint is given by 10F + 5S = 100 where F is food and S is shelter, how much food can he buy if he purchases 2 units of shelter?
A)10
B)5
C)20
D)9
Answer: D
Q2) If food is on the vertical axis and shelter on the horizontal axis, then the equation for the budget line can be expressed as
A)PsS + PfF = M.
B)PsF + PfS = M.
C)PsS + PfM = S.
D)M/Ps = S.
Answer: A
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Chapter 4: Individual and Market Demand
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Sample Questions
Q1) Your income rises from $1,000 a year to $10,000 and your purchases of beer increase from 10 to 20. What number below most closely approximates your income elasticity over this range?
A)4
B)0.4
C)2.5
D)1
Q2) A demand curve which has unit elasticity is A)horizontal.
B)vertical.
C)linear.
D)concave from above.
Q3) One of the management groups is arguing for a price reduction as a way to sell more gallons and increase income. Is this a good suggestion?
Q4) The demand curve for a Giffin good A)slopes upward.
B)slopes downward.
C)is a straight line.
D)is convex.
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Chapter 5: Applications of Rational Choice and Demand
Theories
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Sample Questions
Q1) When people choose to wait for a kiss that they have won from a favorite movie star, they are clearly
A)exhibiting a negative time preference and anticipation value.
B)exhibiting a positive time preference with anticipation value.
C)exhibiting a zero time preference.
D)irrational by rational choice standards.
Q2) If the government wanted to curb consumption of alcohol by taxing alcohol without hurting consumer's welfare it would
A)raise the tax on alcohol until demand for alcohol became elastic.
B)need to know the substitution effect but not the income effect of a tax hike.
C)need to know the income effect but not the substitution effect of a tax hike.
D)tax until the income effect of the price increase, which would be refunded, is exactly equal to the revenue gained from the tax.
Q3) If $100 today is worth $150 to you in the future, then you exhibit
A)a positive time preference.
B)a negative time preference.
C)a neutral time preference.
D)a negative marginal rate of substitution.
Q4) Describe in words why the consumer price index overestimates inflation.
Page 7
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Chapter 6: The Economics of Information and Choice Under Uncertainty
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Sample Questions
Q1) Adverse selection is the process by which A)"undesirable" members of a particular market are more likely to participate in exchange.
B)"undesirable" members of a particular market are less likely to participate in exchange. C)adversaries communicate negative messages.
D)full-disclosure becomes impossible.
Q2) Evaluate computer database dating services in terms of efficiency. Why have many people avoided these services despite their vast amounts of information? Why might these services become more popular in the future?
Q3) Your bike is worth $100 and if you park it outside at school there is a 25% chance that it will be stolen. Your utility function for money is U = (M)<sup>2</sup>. Assume throughout that the bike value and money are interchangeable since you could sell the bike instantly at its value if necessary. What is the expected value of your bike?
Q4) Using the simple supply and demand model for the information market, show what the full disclosure principle does to the market. Start from an equilibrium point and apply the concept.
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Chapter 7: Departures From Standard Rational Choice
Models With and Without Regret
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Sample Questions
Q1) In this chapter we are told that people's tastes not only can differ but must differ. This is because
A)genetic programming makes it impossible for people to have the same preferences.
B)people with differing tastes can profitably invade any population of similar tastes.
C)homogeneous populations become complacent and lose their vigilant qualities.
D)no two persons could have the same preferences.
Q2) Say one morning you are considering whether to take a taxi cab or riding the train to work. Both mediums would cost you about $4, but you have already paid in advance for the train (since you pay a flat fee at the beginning of the month). If the cab ride would take slightly less time than the train ride, and you are mostly concerned with the time it takes you to get to work, you should:
A)take the train since you already paid for it.
B)take the cab.
C)be indifferent between either modes of transportation.
D)find another way to get to work.
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Chapter 8: Production
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Sample Questions
Q1) (Appendix) In the production function Q = 10L<sup>1/2</sup>K<sup>1/2</sup>, if the inputs are quadrupled, are there economies of scale?
Q2) A fixed input is an input that
A)can never be varied.
B)cannot be varied in the short-run.
C)is fixed only for some quantities of output.
D)can never be moved from one location to the next.
Q3) When the marginal product curve lies below the average product curve,
A)the average product curve must be falling.
B)the total product curve must be falling.
C)the average product curve must be rising.
D)the marginal product curve must be rising.
Q4) A production function for which proportional changes in all inputs leads to a more-than-proportional change in output is said to exhibit
A)diminishing returns.
B)decreasing returns to scale.
C)constant returns to scale.
D)increasing returns to scale.
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Page 10
Chapter 9: Costs
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Sample Questions
Q1) Which statement is false?
A)Short-run cost assumes a fixed capital size, while long-run cost includes all possible capital levels in determining cost.
B)Short-run total cost can never be less than long-run total cost at any given output level.
C)Long-run marginal cost never intersects long-run average cost as long as increasing returns to scale are present.
D)Short run ATC and long run ATC are never equal except at the minimum point on the long run ATC curve.
Q2) The short-run output expansion path is __________ in the relevant area.
A)a ray
B)horizontal
C)U-shaped
D)upward sloping
Q3) The slope of a ray from the origin to a point on the total cost curve is the
A)average fixed cost of producing the corresponding level of output.
B)average total cost of producing the corresponding level of output.
C)marginal cost of producing the corresponding level of output.
D)variable cost of producing the corresponding level of output.
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Page 11
Chapter 10: Perfect Competition
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Sample Questions
Q1) Other things remaining the same, in the long-run as compared to the short-run
A)supply elasticity will increase.
B)supply elasticity will decrease.
C)supply elasticity will remain the same.
D)one cannot tell.
Q2) Joe is self-employed in a store that has a rental value of $500 a month which he pays, but he can vacate the building without giving notice. His other expenses are $100 a month for maintenance. He makes $25,000 a year on net sales (total revenue minus the wholesale cost of the product). If he quit his job and worked the same number of hours elsewhere at a job he liked equally well, he estimates that he could make $20,000 a year. No one else can be hired to work in the store. Suppose that Joe had a long term lease which requires him to pay the rent even if he doesn't operate the store. What should Joe do?
A)Quit immediately.
B)Keep the job permanently.
C)Keep the job until the lease expires.
D)It is impossible to say with the information given in the problem.
Q3) How can a firm stay in business if it makes no economic profit in the long run?
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Chapter 11: Monopoly
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Sample Questions
Q1) If a profit maximizing monopolist sells output for $100, then we know that its marginal revenue is
A)more than $100 if it is a perfect price discriminator.
B)less than $100 if it is a single price monopolist.
C)equal to $100 in all cases.
D)less than $100 if it is a perfect price discriminator.
Q2) A natural monopoly always has
A)a downward sloping long run average cost curve.
B)a downward sloping marginal cost curve.
C)its profit maximization point where price = marginal cost.
D)patent rights.
Q3) A single-price monopolist with a positive marginal cost will maximize profit by producing where
A)demand is price elastic.
B)demand is price inelastic.
C)demand is unit elastic.
D)Any of these may apply.
Q4) Explain why price discrimination solves the welfare loss problem of monopoly, but then describe the downside of solving the welfare loss problem this way.
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Chapter 12: A Game-Theoretic Approach to Strategic Behavior
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Sample Questions
Q1) In evolutionary models, where each individual reproduces in proportion to its average payoff, and if defectors working with cooperators get higher returns than cooperators working together, and if cooperators and defectors look exactly alike, then
A)cooperators are destined for extinction.
B)defectors are destined for extinction.
C)an equilibrium will result with more than half of the population being cooperators.
D)there will be no change in the population proportions from the starting point.
Q2) In game theory, a dominant strategy is one
A)in which the firm gains the greatest competitive advantage.
B)in which the same strategy is chosen by one firm regardless of the anticipated action of the other firm.
C)that produces the greatest comparative advantage.
D)that both firms agree on independently.
Q3) In game theory, a player following a maximum strategy
A)picks the strategy with the best of all the worst possible outcomes.
B)picks the strategy with the highest payoff from all the options.
C)is indifferent to all strategies so a strategy is picked randomly.
D)is altruistic and picks a strategy that maximizes the other players' outcome.
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Chapter 13: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) The basic problem of a shared monopoly from the point of view of those involved is that
A)profits are lower than in the other oligopoly models.
B)the shared output is too high for the high price to be maintained.
C)collusive agreements are difficult to sustain.
D)revenue is lower than in the other oligopoly models.
Q2) Why do increasing returns to scale in an industry make it more likely that the industry will be oligopolistic rather than perfectly competitive?
Q3) In the long run, a monopolistically competitive firm acting according to the Chamberlin model
A)will operate at the minimum point of the average cost curve.
B)will not operate at the minimum point of the average cost curve.
C)will earn positive economic profits.
D)will operate at the minimum point of the marginal cost curve.
Q4) Which of the duopoly models has the lowest overall combined profit level?
A)The Cournot model
B)The Bertrand model
C)The Stackelberg Leader-Follower model
D)The shared monopoly model
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Chapter 14: Labor
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Sample Questions
Q1) The demand for labor curve will be less elastic for the industry than for the firm because
A)if all firms hire more labor, increased output will lower product price and therefore the marginal revenue product curve.
B)if all firms hire more labor, the product price will rise.
C)if all firms hire more labor, diminishing returns will not set in as quickly.
D)industry demand for labor is more elastic than the firm's demand for labor.
Q2) Which of the following labor demand curves will be the least elastic?
A)The long-run demand for labor for an inelastic product
B)The short-run demand for labor for an inelastic product
C)The long-run demand for labor for an elastic product
D)The short-run demand for labor of a firm with L-shaped Isoquants
Q3) The hiring rule for a firm that faces a downward sloping demand curve for its output is to hire that amount of labor for which the wage rate is equal to A)marginal revenue.
B)the price of the good being sold.
C)VMPL.
D)MRPL.
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Chapter 15: Capital
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Sample Questions
Q1) Since the last recession interest rates have been very low. Also it is generally known that we are close to major breakthroughs in solar energy and battery storage technology. How would these two factors impact the price of oil today?
A)Both factors will work to increase the current price of oil.
B)Both factors will work to decrease the price of oil today.
C)The first factor will increase the current price of oil and the second factor would tend to decrease oil prices today.
D)The first factor will decrease the price of oil today and the second factor will tend to increase the present price.
Q2) Risk premium is
A)a payment differential necessary to compensate the investor for having to bear a risk.
B)the additional payment paid by bonds issued by the federal government.
C)the tendency of some investors to incur in high risk.
D)the benefits of buying from a trustworthy institution.
Q3) You have a mortgage that has a nominal interest rate of 7%. The inflation rate is 3.5%. Your real interest rate is _________.
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Chapter 16: Externalities, Property Rights, and the Coase
Theorem
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Sample Questions
Q1) Laws are efficient if they
A)uphold absolute property rights.
B)restrict all undesirable action like polluting.
C)work to equate the marginal benefits and marginal costs of behavior.
D)help maximize total benefits of behavior.
E)impose no costs on citizens.
Q2) According to the text, if diamonds represent a form of conspicuous consumption, then
A)they should be taxed.
B)they should be outlawed.
C)they should be subsidized.
D)they should be given for free.
Q3) Provide an example of a positive externality and explain: 1) why it should be considered a positive externality and 2) what could be done in order to internalize the externality.
Q4) According to Pigou, the best way to deal with a negative externality is to
A)allow both parties to negotiate.
B)assign liability to the party with the highest cost of prevention.
C)assign liability to the party with the lowest cost of prevention.
D)tax it.
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Chapter 17: General Equilibrium and Market Efficiency
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Q1) According to the invisible hand theorem, as stated in the text,
A)non-market forces can prevent the markets from guiding consumers to the contract curve.
B)an equilibrium produced by competitive markets will exhaust all gains from exchange.
C)government interaction is sometimes needed as an invisible hand to lead the economy toward efficiency.
D)even non-competitive markets are able to achieve Pareto efficient outcomes.
Q2) Sketch a typical consumption contract curve in an Edgeworth box for you and she. The two products should be apples and tents. Identify two consumption baskets where you and she are off the contract curve. Label the first point (a) where you value apples much more than she does; label the second point (b) where you value apples much less than she does.
Q3) According to the text, if a policy is designed to move a production process toward efficiency when pollution exists, the best tax is a A)lump sum tax on pollution.
B)progressive income tax.
C)proportional income tax.
D)sales tax.
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19
Chapter 18: Government
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Sample Questions
Q1) Say a public good is provided to two consumers: John and Jill. John's willingness to pay for the good is P = 10 - Q, and Jill's is P = 20 - 2Q. The marginal cost to provide the good are 2Q. Assume the government must pay for providing this good by taxing Jill and John equally to raise the necessary revenue. If the total costs of providing the public good are $25, then
A)both Jill and John would be willing to vote to approve of providing the good.
B)only Jill would be willing to vote to approve of providing the good.
C)only John would be willing to vote to approve of providing the good.
D)neither Jill nor John would be willing to vote to approve of providing the good.
Q2) Each year around July 4 the town of Flagston has a controversy over how big a fireworks display they should have on the holiday. The three citizens have the demand functions for fireworks that are shown here. The cost per firecracker is $18. Elmer has the demand function P = 20 - Q. Ethel's demand equation is P = 12 - .6Q, and Edith has the demand P = 8 - .4Q.
Draw a graph of the individual demand equations and the total community demand for fireworks. Sketch in the marginal cost function as well.
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