Economics for Decision Making
Exam Preparation Guide
Course Introduction
Economics for Decision Making introduces students to the fundamental economic principles and analytical tools that underpin effective decision-making in businesses and organizations. The course covers essential concepts such as scarcity, opportunity cost, supply and demand, market structures, and the role of incentives. Students learn to apply microeconomic and macroeconomic reasoning to evaluate real-world scenarios, identify trade-offs, and assess the impact of various economic factors on organizational choices. Through case studies and practical exercises, the course equips learners with the skills to make informed, data-driven decisions that contribute to organizational goals and respond to changes in the economic environment.
Recommended Textbook
Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson
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558 Verified Questions
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Chapter 1: Economic Models
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Sample Questions
Q1) The Ricardian notion that of diminishing returns implies that
A)as more input is used more output will be made.
B)as more input is used less output will be made.
C)as more input is used the increase in output will increase.
D)as more input is used the increase in output will decrease.
Answer: D
Q2) A major problem that may occur with models that predict the values of economic variables in the future is that
A)researchers are pessimistic about the future.
B)the model may fail to acknowledge that economic actors will change their behavior in response to changing situations.
C)the model may make predictions that conflict with widely held opinions.
D)no one cares about these predictions.
Answer: B
Q3) The Y-intercept of \(Y = 3 X + 8\) is A)3/8.
B)3. C)8.
D)-8/3. Answer: C
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Chapter 2: Utility and Choice
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Sample Questions
Q1) If an individual has a constant MRS of shoes for sneakers of 3/4 (that is,he or she is always willing to give up 3 pairs of sneakers to get 4 pairs of shoes)then,if sneakers and shoes are equally costly,he or she will
A)buy only sneakers.
B)buy only shoes.
C)spend his or her income equally on sneakers and shoes.
D)wear sneakers only 3/4 of the time.
Answer: A
Q2) The X-intercept of the budget constraint represents
A)how much of good Y can be purchased if no good X is purchased and all income is spent.
B)how much of good X can be purchased if no good Y is purchased and all income is spent.
C)total income divided by the price of X.
D)b and c.
Answer: D
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Chapter 3: Demand Curves
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Sample Questions
Q1) With only two goods,if the income effect is in the same direction as the substitution effect then the good is
A)normal
B)inferior but not Giffen
C)Giffen
D)There is not enough information to answer.
Answer: A
Q2) Assume X and Y are the only two goods a person consumes.If after a rise in \(P _ { X }\) the quantity demanded of Y increases,one could say
A)the income effect dominates the substitution effect for Y.
B)the substitution effect dominates the income effect for Y.
C)it is impossible to determine whether the substitution or income effect dominates for Y.
D)None of the above.
Answer: B
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Chapter 4: Uncertainty
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Sample Questions
Q1) Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 99.9%.What must the jackpot be for this to be a fair bet?
A)10
B)100
C)1,000
D)10,000
Q2) With moral hazard,fair insurance contracts are not viable because A)individuals' aversion to risk is reduced.
B)insurance company's administrative costs are increased.
C)individuals fear unscrupulous agents.
D)probabilities of loss are increased over what is expected.
Q3) Continuing with the same vacation-insurance company from the preceding question,is there any vacation-day price that would both strictly increase the family's expected utility (compared to no insurance)and strictly increase the profits of the risk-neutral insurance company?
A)Yes,two days.
B)Yes,three days.
C)Yes,four days.
D)No.
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Page 6
Chapter 5: Game Theory
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Sample Questions
Q1) If the Prisoners' Dilemma is repeated over and over again with the same two players having an indefinite time horizon,
A)the unique equilibrium is to play the Nash equilibrium of Rat each period.
B)players can cooperate on Silent if they are not too patient.
C)players can cooperate on Silent if they are patient enough.
D)players can only cooperate on Silent in the initial stages of the game.
Q2) Two games that differ only in the timing of moves-one simultaneous,the other sequential move-can sometimes have completely different subgame-perfect equilibria. Why?
A)The second mover to choose non-credible threats.
B)The first mover can choose an action that it would deviate from if its action were secret.
C)Subgame-perfect equilibrium cannot be applied to simultaneous games.
D)All of the above.
Q3) The game of Matching Pennies
A)has no Nash equilibrium.
B)has a pure-strategy Nash equilibrium.
C)has a mixed strategy Nash equilibrium.
D)has multiple Nash equilibria.
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Page 7
Chapter 6: Production
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Sample Questions
Q1) Suppose Q = K<sup>a</sup>L<sup>b</sup>,if a + b > 1 the isoquants will be
A)upward sloping.
B)progressively closer together at higher quantities.
C)progressively further apart at higher quantities.
D)equally spaced.
Q2) If production is given by Q = KL,doubling both inputs
A)more than doubles output.
B)exactly doubles output.
C)increases output but does not double it.
D)leaves output unchanged.
Q3) A technical innovation in the production of automobiles by Ford Motor Company's for 1 million cars per year would necessarily
A)shift the "1 million car" isoquant away from the origin.
B)shift the "1 million car" isoquant toward the origin.
C)cause 1 million cars to be produced with more capital and less labor.
D)cause 1 million cars to be produced with more labor and less capital.
Q4) A production function measures how an individual maximizes utility.
A)a firm transforms output into input.
B)a firm transforms inputs into output.
C)a firm minimizes cost.
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Chapter 7: Costs
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Sample Questions
Q1) Suppose a production function is q = K<sup>1/2</sup>L<sup>1/3</sup> and in the short run capital (K)is fixed at 100. If the wage is $10 and the rental rate on capital is $20,the short run average cost is
A) \(\frac { 2,000 } { q } + \frac { q ^ { 2 } } { 100 }\)
B) \(\frac { 200 } { q } + 10 q ^ { 2 }\)
C) \(\frac { 2,000 } { q }\)
D) \(q ^ { 2 }\)
Q2) Suppose a cost function is TC = Aq<sup>3</sup> + bq<sup>2</sup> + cq +d. Then the average variable cost is
A)Aq<sup>2</sup> + bq + cq +d/q
B)Aq<sup>2</sup> + bq + c
C)Aq<sup>3</sup> + bq<sup>2</sup> + cq
D)d
Q3) Suppose MPL = 20 and MPK = 40 and the rental rate on capital is $10. If the level of production is currently efficient,the wage rate must be
A)$10
B)$5
C)$20
D)$40
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Page 9
Chapter 8: Profit Maximization and Supply
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Sample Questions
Q1) Suppose that a firm has to pay a 10% tax on revenue.The profit-maximizing level of output is ?
A)unaffected by the tax.
B)increased because of the tax.
C)decreased because of the tax.
Q2) If an unregulated electric company is a monopolist,faces demand of Q = 10050P,and has a constant marginal cost of 1,the profit-maximizing price is A)0
B)1
C)1.5
D)2
Q3) In general,microeconomic theory assumes that firms attempt to maximize the difference between
A)total revenue and accounting costs.
B)price and marginal cost.
C)total revenues and economic costs.
D)economic costs and average cost.
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Chapter 9: Perfect Competition in a Single Market
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Sample Questions
Q1) Suppose a chemical company is in a perfectly competitive industry and has a short run total cost curve of \(\mathrm { TC } = \frac { 1 } { 3 } \mathrm { q } ^ { 3 } + 5 \mathrm { q } ^ { 2 } + 10 q + 10\) and a short run marginal cost of SMC = q<sup>2</sup> + 10q + 10.At the price of 385,how much will be produced?
A)0
B)3
C)5
D)15
Q2) The short-run market supply curve is
A)the horizontal summation of each firm's short-run supply curve.
B)the vertical summation of each firm's short-run supply curve.
C)the horizontal summation of each firm's short-run average cost curve.
D)the vertical summation of each firm's short-run average cost curve.
Q3) Suppose demand for a good is Q<sub>D</sub>= 100 - P and supply is Q<sub>S</sub> = -20 + P.What is the consumer surplus?
A)200
B)400
C)600
D)800
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Chapter 10: General Equilibrium and Welfare
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Sample Questions
Q1) The slope of the production possibility frontier shows
A)the marginal rate of substitution between the two goods.
B)the relative marginal costs of the two goods.
C)the efficient combination of outputs possible using fixed amounts of input.
D)the relative marginal productivities of the two goods.
Q2) Suppose the Economics Department has a graduation party for its students but as a final test they must show they have learned something about trade.The men are given food when they walk in and the women are given drink.Suppose they have identical preferences where food and drink provide utility U = F D .The contract curve in the Edgeworth box using a representative man and woman would be
A)a right angle connecting the lower left corner with the upper right corner.
B)a curve (not necessarily a line) connecting the lower left corner with the upper right corner.
C)a line connecting the lower left corner with the upper right corner.
D)a right angle connecting the upper left corner with the lower right corner.
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Chapter 11: Monopoly
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Sample Questions
Q1) For the practice of price discrimination to be successful,the monopoly must
A)face an imperfect resale market for its product.
B)face similar demand curves for various markets.
C)have similar costs among markets.
D)have a downward sloping marginal cost curve.
Q2) Consider the same monopoly situation as in the previous question. The deadweight loss associated with this monopoly is
A)966
B)1,058
C)2,484
D)3,680
Q3) Possible benefits of a monopoly include which of the following (choose all that apply)?
A)a savings of fixed costs because only one firm supplies quantity demanded.
B)greater opportunities for research due to long-run positive economic profits.
C)government regulation is more effective because the firm is "too big to fail."
D)goods and services are provided at a lower price than under perfect competition because of a monopoly's decreasing average cost curve.
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Chapter 12: Imperfect Competition
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Sample Questions
Q1) Consider the same market for nonalcoholic beer as in the previous question. Cudweiser's response function is
A)QB = 2,000 - .5QC
B)QB = 1,500 - .5QC
C)QC = 2,000 - .5QB
D)QC = 1,500 - .5QB
Q2) Consider the same market for nonalcoholic beer as in the previous question. How many "units" of beer will Boors produce in the Nash equilibrium?
A)667
B)1,667
C)2,333
D)3,000
Q3) In the Cournot model,each firm assumes that its rival will ____ its output when the firm adjusts its own output.Which word best completes the sentence?
A)increase
B)not change
C)decrease
D)adjust
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Chapter 13: Pricing in Input Markets
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Sample Questions
Q1) When an individual's wage rises,the income effect tends to A)increase hours worked.
B)decrease hours worked.
C)leave hours worked unchanged.
D)it is impossible to predict what will happen to hours worked.
Q2) Suppose Woody Chuck's business is to clear trees for housing developments.Given the constraints of fixed capital,the production function is \(q = .01 \sqrt { L }\) .Suppose Woody Chuck's is one of many firms clearing land and that the market price per cleared lot is $5000.(Note \(M P _ { L } = \frac { .005 } { \sqrt { L } }\) )How many workers will Woody Chuck hire at w = 5?
A)1
B)4
C)16
D)25
Q3) In the study of labor supply,"leisure" refers to A)time spent sleeping.
B)time spent doing absolutely nothing (except breathing).
C)time spent in one's place of residence.
D)time spent that is not spent in market work.
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Page 15
Chapter 14: Capital and Time
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Sample Questions
Q1) Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C<sub>1</sub> and C<sub>2</sub> given their anticipated income on two periods,Y<sub>1 </sub>and Y<sub>2</sub>.The slope is
A)r
B)-r
C)1 + r
D)-(1 + r)
Q2) The two-period budget line for incomes Y1 and Y2 and consumption C1 and C2 can be written as \(C _ { 2 } = Y _ { 1 } ( 1 + r ) + Y _ { 2 } - ( 1 + r ) C _ { 1 }\) ,if the interest rate were to fall the budget line would
A)shift to the left in a parallel fashion
B)shift to the right in a parallel fashion
C)rotate counter-clockwise pivoting on Y1,Y2
D)rotate clockwise pivoting on Y1,Y2
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Chapter 15: Asymmetric Information
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Sample Questions
Q1) Adverse selection arises in insurance markets because
A)insurance buyers have more information than insurance sellers.
B)insurance sellers have more information than insurance buyers.
C)individuals can select which insurance company to patronize.
D)insurance companies can exercise too much control over whom they insure.
Q2) How is it logically possible for a monopolist to get different consumers to purchase different bundles on a menu (such as different sizes of coffee cups),and thereby achieve a form of price discrimination,even if the firm cannot observe the consumers' valuations directly?
A)Different types of consumers have different tradeoffs between money and amounts of the good.
B)The monopolist can use a market-separation strategy.
C)Social norms are powerful deterrents to lying about one's type.
D)This is impossible: if one bundle is preferred by one type,logically it will be preferred by all.
Q3) The principal is distinct from the agent in the principal-agent model because
A)the principal offers the contract to the agent.
B)the principal is fully informed.
C)both a and b.
D)neither a nor b.
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Chapter 16: Externalities and Public Goods
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Sample Questions
Q1) Suppose residents of Toadhop live on the Quabache River,a river prone to flooding.Suppose there are 1000 (type A)people who value flood control more than the 1000 (type B)people. Type A Demand Q<sub>D</sub> = 100 - P
Type B Demand Q<sub>D</sub> = 50 - P
Where Q measures the quality of flood control.If the price of a unit of flood control is $100000 and the citizens of Toadhop gather for a townhall meeting to find the socially optimal level of flood control,and they are successful,how much will each type A individual contribute in total?
A)1875
B)1500
C)875
D)625
Q2) Common property
A)is owned by specific people.
B)is inexhaustible.
C)refers strictly to land resource.
D)refers to goods "owned" by society at large and freely usable by anyone.
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18
Chapter 17: Behavioral Economics
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Sample Questions
Q1) Return to the market for cigarettes from the previous questions. Suppose the government implements the tax you found in the previous question. But suppose the government is making a mistake. The true demand curve is in fact ,and this is not a result of any behavioral bias. Compute the deadweight loss of the government's tax policy.
A)DWL = 0.
B)DWL = 500.
C)DWL = 1,000
D)DWL = 2,500.
Q2) Which of the following weights on utility (over four periods starting with the current one)provide an illustration of hyperbolic discounting that could well lead to inconsistent choices over time?
A)1,.5,.25,.125.
B)1,.25,.0625,.015625.
C)1,.8,.72,.648.
D)1,1,1,1.
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