Economics MCQs

1.
The fundamental economic problem faced by all societies is:

a. unemployment
b. inequality
c. poverty
d. scarcity
2. "Capitalism" refers to:

a. the use of markets
b. government ownership of capital goods
c. private ownership of capital goods
d. private ownership of homes & cars
3. There are three fundamental questions every society must answer. Which of the
following is/are one of these questions?
a. What goods and services are to be produced?
b. How are the goods and services to be produced?
c. Who will get the goods and services that are produced?
d. All of the above
4. If you were working full-time now, you could earn $20,000 per year. Instead, you are
working part-time while going to school. In your current part-time job, you earn $5,000
per year. At your school, the annual cost of tuition, books, and other fees is $2,000. The
opportunity cost of completing your education is:
a. $2,000
b. $5,000
c. $17,000
d. $20,000
e. $22,000
5. The bowed shape of the production possibilities curve illustrates:

a. the law of increasing marginal cost
b. that production is inefficient
c. that production is unattainable
d. the demand is relatively inelastic
6. You have taken this quiz and received a grade of 3 out of a possible 10 points (F). You
are allowed to take a second version of this quiz. If you score 7 or more, you can raise your
score to a 7 (C). You will need to study for the second version. In making a rational
decision as to whether or not to retake the test, you should
a. always retake the quiz
b. consider only the marginal benefits from of retaking the quiz (four extra points)
c. consider only the marginal opportunity costs from taking the quiz (the time spent
studying and taking the quiz)
d. consider both the marginal benefits and the marginal opportunity costs of retaking the quiz
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7. The law of demand states that:
a. as the quantity demanded rises, the price rises
b. as the price rises, the quantity demanded rises
c. as the price rises, the quantity demanded falls
d. as supply rises, the demand rises
8. The price elasticity of demand is the:
a. percentage change in quantity demanded divided by the percentage change in price
b. percentage change in price divided by the percentage change in quantity demanded
c. dollar change in quantity demanded divided by the dollar change in price
d. percentage change in quantity demanded divided by the percentage change in quantity
supplied
9. Community Colleges desired to increase revenues. They decided to raise fees paid by
students with Bachelors degrees to $50 per unit because they believed this would result in
greater revenues. But in reality, total revenues fell. Therefore, the demand for Community
College courses by people with Bachelors degrees must have actually been:
a. relatively inelastic
b. unit elastic
c. relatively elastic
d. perfectly elastic
10. The demand for a product would be more inelastic:

a. the greater is the time under consideration
b. the greater is the number of substitutes available to buyers
c. the less expensive is the product in relation to incomes
d. all of the above
Answers: D C D C A D C A C C
1. In the case of agriculture,
a. the demand has shifted to the right more than the supply has shifted to the right
b. the demand has shifted to the right less than the supply has shifted to the right
c. the demand has shifted to the left more than the supply has shifted to the left
d. the demand has shifted to the left less than the supply has shifted to the left
2. The agricultural price support program is an example of

a. a price ceiling
b. a price floor
c. equilibrium pricing
3. If there is a price floor, there will be

a. shortages
b. surpluses
c. equilibrium
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4. If there is a price ceiling, there will be
a. shortages
b. surpluses
c. equilibrium
5. If there is a price ceiling, which of the following is NOT likely to occur?

a. rationing by first-come, first-served
b. black markets
c. gray markets
d. sellers providing goods for free that were formerly not free
6. The goal of a pure market economy is to best meet the desires of

a. consumers
b. companies
c. workers
d. the government
7. In a pure market economy, which of the following is a function of the price?
I. provide information to sellers and buyers , II. provide incentives to sellers and buyers
a. I only
b. II only
c. both I and II
d. neither I nor II
8. In a market system, sellers act in ____________ interest , but this leads to behaviors in
____________ interest.
a. self; self
b. self; society’s
c. society’s; society’s
d. society’s; self
9. The law of diminishing (marginal) returns states that as more of a variable factor is
added to a certain amount of a fixed factor, beyond some point:
a. Total physical product begins to fall
b. The marginal physical product rises
c. The marginal physical product falls
d. The average physical product falls
10. Why is the law of diminishing marginal returns true?

a. specialization and division of labor
b. spreading the average fixed cost
c. limited capital
d. all factors being variable in the long-run
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Answers: B B B A D A C B C C
1. Which of the following is a characteristic of pure monopoly?

a. one seller of the product
b. low barriers to entry
c. close substitute products
d. perfect information
2. In pure monopoly, what is the relation between the price and the marginal revenue?
a. the price is greater than the marginal revenue
b. the price is less than the marginal revenue
c. there is no relation
d. they are equal
3. In order to maximize profits, a monopoly company will produce that quantity at which
the:
a. marginal revenue equals average total cost
b. price equals marginal revenue
c. marginal revenue equals marginal cost
d. total revenue equals total cost
4. Quantity Price Total Cost

1 $100 $ 60
2 95 130
3 90 210
4 85 300
5 80 400
This monopolist should produce:

a. 1
b. 2
c. 3
d. 4
e. 5
5. Compared to the case of perfect competition, a monopolist is more likely to:

a. charge a higher price
b. produce a lower quantity of the product
c. make a greater amount of economic profit
d. all of the above
6. Which of the following is necessary for a natural monopoly?

a. economies of scale
b. a high proportion of the total cost is the cost of capital goods
c. the market is very small
d. all of the above
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7. Which of the following is true about the way by which SDG&E has been regulated by the
PUC?
a. SDG&E has been allowed to earn very high economic profits
b. The profits of SDG&E are calculated as a percent of the value of the capital goods
c. When the demand for electricity would fall, the price of electricity would also fall
d. All of the above
8. Which of the following best defines price discrimination?

a. charging different prices on the basis of race
b. charging different prices for goods with different costs of production
c. charging different prices based on cost-of-service differences
d. selling a certain product of given quality and cost per unit at different prices to different
buyers
9. In order to practice price discrimination, which of the following is needed?

a. some degree of monopoly power
b. an ability to separate the market
c. an ability to prevent reselling
d. all of the above
10. In price discrimination, which section of the market is charged the higher price?
a. the section with the richest people
b. the section with the oldest people
c. the section with the most inelastic demand
d. the section with the most elastic demand
Answers: A A C C D D B D D C
1. Which of the following concepts represents the extra revenue a firm receives from the
services of an additional unit of a factor of production?
a. total revenue
b. marginal physical product
c. marginal revenus product
d. marginal revenue
2. Workers Quantity Produced

1 15
2 28
3 39
4 48
5 55
6 60
This company is a profit-maximizing firm selling in a competitive product market and
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hiring in a competitive labor market. It uses semi-skilled labor to produce dampers used in
office building ventilation systems. Assume that the current market price per damper is
$50 and that the prevailing weekly salary per semi-skilled worker is $550. This company
should employ ______ workers.
a. 2
b. 3
c. 4
d. 5
e. 6
3. The demand for labor is the same as the

a. marginal revenue product
b. marginal physical product
c. marginal cost
d. wage
4. The demand for labor slopes down and to the right because of
a. the law of demand
b. the iron law of wages
c. the law of diminishing marginal returns
d. economies of scale
5. The demand for labor will be more elastic if:

a. there are few substitutes for labor
b. there is a short time under consideration
c. labor is a large percent of the total cost of production
d. the demand for the product is relatively inelastic
e. all of the above
6. Skills that can be transferred to other employers are called:

a. general skills
b. specific skills
c. non-pecuniary skills
d. all of the above
7. Which skills are most likely to be paid for by the employer?

a. General skills
b. Specific skills
c. Educational skills
8. If worker A earns more in wages than worker B, it could be because:

a. The product made by worker A sells for a higher price than that made by worker B
b. Worker A uses more capital per worker than worker B
c. Worker A has more natural ability than worker B
d. All of the above
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9. Skills that embodied in a person are called
a. Human capital
b. Embodied skills
c. Physical capital
d. Experience skills
10. “Treating an individual as typical of a group” is the definition of

a. pure discrimination
b. statistical discrimination
c. human capital
d. specific skills
Answers: C B A C C A B D A B
1. If there are 50 firms in a industry, each selling 2% of the total sales, the concentration
ratio is:
a. 50%
b. 2% €
c. 100%
d. 8%
2. When Daimler Benz, maker of the Mercedes, bought Chrysler, the merger was
a. horizontal
b. vertical
c. conglomerate
Questions 3 through 10 involve the functions of the government in a world of laissez faire.
The functions are the following:
A. Create and Enforce the "Rules"
B. Promote or Maintain Competition
C. Provide Information
D. Provide Public Goods
E. Reduce Negative Externalities (External Costs) through regulations or through taxes
F. Subsidize Positive Externalities (External Benefits)
G. Provide Merit Goods
H. Redistribute Income on the Basis of Need
For each of the following, choose the letter that best describes the function of government.
3. The government provides anti-trust laws.
4. The government subsidizes the building of new stadiums and arenas.
5. The government provides for military defense.
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6. The government has a program of social security to provide a pension for the elderly.
7. The government requires that all gasoline stations post their prices in signs large enough
to be seen by a reasonable person from the street.
8. The government requires people to have a smog control device in their cars.
9. The government makes the beach free for everyone
10. The government makes laws that determine certain behaviors that a corporation must
engage in and other behaviors that a corporation cannot engage in.
Answers: D A B F D H C E G A
1. The largest source of tax revenue for the federal government is:
a. the personal income tax
b. the social security tax
c. the property tax
d. the sales tax
2. When my income was $100,000, I paid $10,000 in taxes. When my income became
$200,000, I paid $40,000 in taxes. My marginal tax rate is:
a. 10%
b. 20%
c. 30%
d. 40%
3. The tax is question #2 is:

a. progressive
b. regressive
c. proportional
4. Which of the following taxes is regressive?

a. the federal income tax
b. the state income tax
c. the sales tax
d. the Medicare tax
5. Assume that there are two goods, A and B. In 1996, Americans produced 10 units of A at
a price of $10 and 20 units of B at a price of $20. In 2002, Americans produced 20 units of
A at a price of $20 and 30 units of B at a price of $30. The Nominal GDP for 2002 is:
a. $100
b. $400
c. $500
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d. $900
e. $1300
6. Using the numbers in question 5, the Real GDP for 2002 is:
a. $400 b. $500 c. $800 d. $900 e. $1,300
7. Which of the following statements is/are true?

a. Business Investment Spending occurs when individuals buy stock in the stock market
b. Productivity is the United States grew very slowly between 1973 and 1996
c. Because of discouraged workers, the official unemployment rate is too high
d. “Full employment” occurs when there is no frictional unemployment
8. Immediately after a trough, we would expect to have a/an

a. peak
b. recession
c. recovery
d. another trough
9. Last week, Martha spent one day cleaning a house. For this, she was paid $50. The rest
of the week, she spent looking for a job. Martha would be classified as
a. employed
b. unemployed
c. not in the labor force
10. John lost his accounting job when Montgomery Wards closed its stores in San Diego.
He looked for a similar job for ten months before finding an accounting job at Sears.
During the month John was unemployed, he was
a. frictionally unemployed
b. seasonally unemployed
c. cyclically unemployed
d. structurally unemployed
Answers: A C A C E C B C A D
1. Assume that there are only two goods: A and B

In the base year, Quantity Price
A 10 $1
B 10 $4
In the current year, Quantity Price
A 20 $ 5
B 25 $20
The Consumer Price Index (CPI) for the current year is:
a. 50
b. 100
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c. 200
d. 500
e. 600
2. Which of the following groups is most hurt by unexpected inflation?

a. workers with cost of living adjustments in their labor contracts
b. homeowners
c. people with large debts to pay for their homes and cars
d. people with large retirement savings held in savings accounts
3. If the nominal interest rate is 5% and the inflation rate is 2%, the real interest rate is:
a. 2%
b. 3%
c. 5%
d. 7%
e. 2 ½%
4. For which of the following reasons might inflation cause Real GDP to grow slower than
it otherwise would?
a. Inflation makes everyone poorer
b. Inflation reduces the value of consumer debt
c. Inflation increases business investment spending
d. Inflation decreases savings in financial form
5. Disposable Income is equal to:

a. National Income c. National Income Minus Taxes
b. Real GDP
c. National Income Minus Taxes
d. National Income Minus Taxes Plus Transfers
6. Assume that Potential Real GDP equals $10,000. National Income is therefore $10,000.
Of this, consumers will pay $2,000 in taxes, save $1,000, and spend $7,000 on consumer
goods. Business Investment spending is $2000. In order to avoid recessions and inflation (to
have equilibrium), the government should have a:
a. balanced budget
b. budget deficit of $1000
c. budget surplus of $1000
d. budget deficit of $2000
7. According to Keynes, when the Great Depression started, the government should have:
a. done nothing
b. decreased the money supply
c. had a large increase in government spending
d. enacted high tariffs, such as the Smoot-Hawley Tariff
8. If the government lowers taxes by $10 billion, the Real GDP will rise by
10
a. more than $10 billion
b. less than $10 billion
c. exactly $10 billion
9. Which of the following is an automatic stabilizer?

a. unemployment benefits
b. spending on education
c. defense spending
d. net interest
10. “Crowding out” means that

a. a government budget deficit lowers interest rates and causes investment spending to rise
b. an increase in marginal tax rates lowers production
c. a government budget deficit raises interest rates and causes investment spending to fall
d. a government budget deficit raises American exports and lowers American imports
Answers: D D B D D C C A A C
1. Which of the following IS a function of money?

a. medium of exchange
b. store of value
c. unit of accounting
d. all of the above
2. Which of the following is a component of M-1?

a. savings deposits
b. credit card
c. checkable deposits
d. gold
3. Which of the following is a NOT component of M-2?

a. small time deposits
b. money market mutual funds
c. stocks
d. checkable deposits
4. Which of the following is true about the Federal Reserve System (Fed)?
a. it is a system of 12 central banks
b. its Board of Governors is elected by a vote of the people
c. its main policy-making body is the FDIC
d. it accepts deposits from the public and makes loans to businesses
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e. all of the above
5. An IOU of the Federal Reserve Bank of San Francisco to Bank of America is called:
a. discounts
b. federal funds
c. reserves
d. collateral
6. Which of the following is the most liquid?

a. a savings account
b. a 6 month CD
c. a home
d. water
7. The monetary base is composed of:

a. gold and silver
b. currency only
c. currency and reserves
d. currency and checkable deposits
8. If the monetary base is increased by $1,000 and the reserve requirement is 10% (1/10),
by how much will the money supply be increased?
a. $100
b. $1,000
c. $5,000
d. $10,000
9. If the Federal Reserve wishes to increase the money supply, it should:

a. raise the reserve requirement
b. raise the discount rate
c. buy Treasury securities in the open market
d. all of the above
10. An increase in the money supply will cause interest rates to

a. rise
b. fall
c. remain unchanged
Answers: D C C A C A C D C B
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Question 1
Resources in an economy:
a) Are always fixed

b) Can never decrease
c) Always increase over time
d) Are limited at any moment in time
Question 2
Human wants are:
a) Always fixed
b) Limited
c) Unlimited
d) Likely to decrease over time
Question 3
The sacrifice involved when you choose a particular course of action is called the:
a) Alternative
b) Opportunity cost
c) Consumer cost
d) Producer cost
Question 4
Which of the following is not one of the basic economic questions?
a) What to produce
b) Who to produce for
c) How to produce
d) How to maximise economic growth
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Question 5
The basic economic problems will not be solved by:
a) Market forces
b) Government intervention
c) A mixture of government intervention and the free market
d) The creation of unlimited resources
Question 6
The free market involves:
a) The free provision of products

b) The subsidising of products by the government
c) Market forces of supply and demand
d) All trade via barter
Question 7
A mixed economy:
a) Has supply but not demand

b) Has demand but not supply
c) Has supply and demand
d) Has market forces and government intervention
Question 8
In a command (planned) economy:
a) The price mechanism acts as an incentive

b) Resources are allocated by market forces
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c) Individual firms make decisions for themselves about what to produce and how to
produce it
d) The The public sector is large
Question 9
The public sector includes:
a) Investors owning companies

b) Government ownership of assets
d) All trade via barter
Question 10
Which of the following is a normative statement in economics?
a) More spending by the government reduces poverty

b) Higher taxes lead to less desire to work
c) The UK economy is growing fast relative to other European Union members
d) The government should concentrate on reducing unemployment
Question 1
Resources in an economy:
Correct Answer:
d) Are limited at any moment in time
Feedback:
Remember that resources are inputs into the production process.
Question 2
Human wants are:
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Correct Answer:
c) Unlimited
Feedback:
Unlimited - we all want as much as we can get. Its resources that are limited.
Question 3
The sacrifice involved when you choose a particular course of action is called the:
Correct Answer:
b) Opportunity cost
Feedback:
The sacrifice involved when you choose a particular course of action is called the opportunity
cost.
Question 4
Which of the following is not one of the basic economic questions?
Correct Answer:
d) How to maximise economic growth
Feedback:
The economic questions focus on what to produce, how, and for whom.
Question 5
The basic economic problems will not be solved by:
Correct Answer:
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d) The creation of unlimited resources
Feedback:
This is impossible!
Question 6
The free market involves:
Correct Answer:
Feedback:
The free market involves market forces of supply and demand and the price mechanism.
Question 7
A mixed economy:
Correct Answer:
d) Has market forces and government intervention
Feedback:
A mixed economy involves the private sector and the public sector; the free market provides
some items and the government provides and regulates others.
Question 8
In a command (planned) economy:
Correct Answer:
d) The public sector is large
Feedback:
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In a command or planned economy the government allocates resources so the public sector is
large.
Question 9
The public sector includes:
Correct Answer:
b) Government ownership of assets
Feedback:
The public sector involves organisations owned by the government.
Question 10
Which of the following is a normative statement in economics?
Correct Answer:
d) The government should concentrate on reducing unemployment
Question 1
If an economy is productively efficient:
a) Everyone is wealthy
b) Resources are unemployed
c) More of one product can only be produced if less of another product is produced
d) The distribution of income is equal
Question 2
Economic growth can be shown by:
a) An inward shift of the production possibility frontier

b) A movement down the production possibility frontier
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c) An outward shift of the production possibility frontier
d) A movement up the production possibility frontier
Question 3
As resources are shifted from one industry to another this can be shown by:
a) An inward shift of the production possibility frontier

b) A movement along the production possibility frontier
d) A outward shift in the demand curve for the products
Question 4
In a free market the combination of products produced will be determined by:
a) Market forces of supply and demand

b) The government
c) The law
d) The public sector
Question 5
If an economy moves from producing 10 units of A and 4 units of B to producing 7 As and 5Bs,
the opportunity cost of the 5th B is:
a) 7As
b) 10As
c) 3As
d) 1A
Question 6
An economy may operate outside the Production Possibility Frontier if:
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a) It is not utilising its resources fully
b) It is being productively efficient
c) It is a mixed economy
d) It is trading with other economies
Question 7
The resources in the economy do not include:
a) Demand
b) Land
c) Labour
d) Capital
Question 8
The resources in an economy are:
a) Constantly increasing
b) Fixed at any moment
c) Constantly decreasing
d) Able to be transferred easily between industries
Question 9
Any combination of products inside the production possibility frontier is:
a) Allocatively inefficient
b) X inefficient
c) Consumer inefficient
d) Productively inefficient
Question 10
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An outward shift of the production possibility frontier may be caused by:
a) An increase in demand
b) More government spending
c) Better training of employees
d) Productive inefficiency
Question 1
If an economy is productively efficient:
Correct Answer:
c) More of one product can only be produced if less of another product is produced
Feedback:
If an economy is productively efficient more of one product can only be produced if less of
another product is produced.
Question 2
Economic growth can be shown by:
Correct Answer:
Feedback:
Economic growth can be shown by an outward shift of the production possibility frontier; this
shows more products can be produced.
Question 3
As resources are shifted from one industry to another this can be shown by:
Correct Answer:
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b) A movement along the production possibility frontier
Feedback:
As resources are shifted from one industry to another this can be shown by a movement along
the production possibility frontier.
Question 4
In a free market the combination of products produced will be determined by:
Correct Answer:
a) Market forces of supply and demand
Feedback:
In a free market the combination of products produced will be determined by market forces of
supply and demand.
Question 5
the opportunity cost of the 5th B is:
Correct Answer:
c) 3As
Feedback:
the opportunity cost of the 5th B is 3As.
Question 6
An economy may operate outside the Production Possibility Frontier if:
Correct Answer:
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d) It is trading with other economies
Feedback:
An economy may operate outside the Production Possibility Frontier if it is trading with other
economies.
Question 7
The resources in the economy do not include:
Correct Answer:
a) Demand
Feedback:
Demand is not a resource.
Question 8
The resources in an economy are:
Correct Answer:
b) Fixed at any moment
Feedback:
The resources in an economy are fixed at any moment but can change over time.
Question 9
Any combination of products inside the production possibility frontier is:
Correct Answer:
d) Productively inefficient
Feedback:
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Any combination of products inside the production possibility frontier is productively inefficient
because more could be produced.
Question 10
An outward shift of the production possibility frontier may be caused by:
Correct Answer:
c) Better training of employees
Feedback:
An outward shift of the production possibility frontier may be caused by better training of
employees because this will make them more productive.
Question 1
Which best describes a demand curve?
a) The quantity consumers would like to buy in an ideal world

b) The quantity consumers are willing to sell
c) The quantity consumers are willing and able to buy at each and every income all other things
unchanged
d) The quantity consumers are willing and able to buy at each and every price all other things
unchanged
Question 2
A fall in price:
a) Will cause an inward shift of demand

b) Will cause an outward shift of supply
c) May be caused by a fall in demand
d) Leads to a higher level of production
Question 3
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Demand for a normal product may shift outwards if:
a) Price decreases
b) The price of a substitute falls
c) The price of a complement rises
d) Income falls
Question 4
According to the law of diminishing utility:
a) Utility is at a maximum with the first unit

b) Increasing units of consumption increase the marginal utility
c) Marginal product will fall as more units are consumed
d) Total utility will rise at a falling rate as more units are consumed
Question 5
If marginal utility is zero:
a) Total utility is zero

b) An additional unit of consumption will decrease total utility
c) An additional unit of consumption will increase total utility
d) Total utility is maximised
Question 6
An increase 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 outwards
d) Shift supply for an inferior product inwards
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Question 7
An increase in the price of a complement for product A would:
a) Shift demand for product A outwards

b) Shift demand for product A inwards
c) Shift supply for product A outwards
d) Shift supply for product A inwards
Question 8
An increase in price all other things unchanged leads to:
a) Shift demand outwards

b) Shift demand inwards
c) A contraction of demand
d) An extension of demand
Question 9
If a product is a Veblen good:
a) Demand is inversely related to income

b) Demand is inversely related to price
c) Demand is directly related to price
d) Demand is inversely related to the price of substitutes
Question 10
If a product is an inferior good:

b) Demand is inversely related to price
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d) Demand is inversely related to the price of substitutes
Question 1
Which best describes a demand curve?
Correct Answer:
d) The quantity consumers are willing and able to buy at each and every price all other things
unchanged
Feedback:
Remember effective demand shows what consumers want and what they can afford at each price all
other things unchanged.
Question 2
A fall in price:
Correct Answer:
c) May be caused by a fall in demand
Feedback:
Remember a movement along a demand curve is due to price changes; changes in other factors shift the
curve.
Question 3
Demand for a normal product may shift outwards if:
Correct Answer:
b) The price of a substitute falls
Feedback:
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Remember a movement along a demand curve is due to price changes; changes in other factors shift the
curve.
Question 4
According to the law of diminishing utility:
Correct Answer:
d) Total utility will rise at a falling rate as more units are consumed
Feedback:
The extra satisfaction from consuming a unit will generally fall as more units are consumed.
Question 5
If marginal utility is zero:
Correct Answer:
d) Total utility is maximised
Feedback:
This means there is no extra utility from consuming another unit.
Question 6
An increase in income should:
Correct Answer:
b) Shift demand for an inferior product inwards
Feedback:
Remember consumers will buy less of an inferior good when they have more income as they switch to
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more luxurious products.
Question 7
An increase in the price of a complement for product A would:
Correct Answer:
b) Shift demand for product A inwards
Feedback:
Remember that complements are purchased together.
Question 8
Correct Answer:
c) A contraction of demand
Feedback:
This is a movement along the demand curve and leads to a fall in the quantity demanded.
Question 9
If a product is a Veblen good:
Correct Answer:
Feedback:
Remember Veblen goods are products of conspicuous consumption.
Question 10
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If a product is an inferior good:
Correct Answer:
Feedback:
With inferior goods less is bought when income increases.
Question 1
Average income increases from &pound20,000 p.a. to &pound22,000 p.a. Quantity demanded per year
increases 5000 to 6000 units. Which of the following is correct?
a) Demand is price inelastic

b) The good is inferior
c) Income elasticity is -2
d) The product is normal
Question 2
The price decreases from &pound2,000 to &pound1,800. Quantity demanded per year increases 5000 to
6000 units. Which of the following is correct?
a) The price elasticity of demand is -2

b) The good is inferior
c) Income elasticity is + 0.5
d) Income elasticity is + 2
Question 3
If the price elasticity of demand is unit then a fall in price:
a) Reduces revenue
30
b) Leaves revenue unchanged
c) Increases revenue
d) Reduces costs
Question 4
If the cross elasticity of demand is -2:
a) The products are substitutes and demand is cross price elastic

b) The products are substitutes and demand is cross price inelastic
c) The products are complements and demand is cross price elastic
d) The products are complements and demand is cross price inelastic
Question 5
The income elasticity is +2 and income increases by 20%. Sales were 5000 units, what will they be
now?
a) 3000
b) 7000
c) 5500
d) 4500
Question 6
The price elasticity of demand is a negative number this means:
a) Demand is price elastic

b) Demand is price inelastic
c) The demand curve is downward sloping
d) An increase in income will reduce the quantity demanded
Question 7
31
Price increases from 10 to 12 pence and the price elasticity of demand is -0.5. The quantity demanded
was 500 units. What will it be now?
a) 550 units
b) 500 units
c) 450 units
d) 490 units
Question 8
If demand is price inelastic:
a) An increase in price must raise profits

b) An increase in price decreases revenue
c) An increase in price increases revenue
d) A decrease in price reduces sales
Question 9
For an inferior good:
a) The price elasticity of demand is negative; the income elasticity of demand is negative
b) The price elasticity of demand is positive; the income elasticity of demand is negative
c) The price elasticity of demand is negative; the income elasticity of demand is positive
d) The price elasticity of demand is positive; the income elasticity of demand is positive
Question 10
For a normal good:
b) The price elasticity of demand is positive; the income elasticity of demand is negative
d) The price elasticity of demand is positive; the income elasticity of demand is positive
32
Question 1
Average income increases from &pound20,000 p.a. to &pound22,000 p.a. Quantity demanded per year
increases 5000 to 6000 units. Which of the following is correct?
Correct Answer:
d) The product is normal
Feedback:
The percentage change in demand is +20%; the percentage change in income is +10%. This means the
product is normal and has an income elasticity of 2.
Question 2
The price decreases from &pound2,000 to &pound1,800. Quantity demanded per year increases 5000 to
6000 units. Which of the following is correct?
Correct Answer:
Feedback:
The percentage change in demand is +20%; the percentage change in price is -10% so the price
elasticity of demand is -2.
Question 3
If the price elasticity of demand is unit then a fall in price:
Correct Answer:
b) Leaves revenue unchanged
Feedback:
This means the percentage change in quantity demanded equals the percentage change in price so price
33
changes will not alter the revenue.
Question 4
If the cross elasticity of demand is -2:
Correct Answer:
c) The products are complements and demand is cross price elastic
Feedback:
This means that e.g. a 10% increase in the price of one product reduces the quantity demanded of
another product by 20%; if the products are complements and the cross price elasticity is elastic.
Question 5
The income elasticity is +2 and income increases by 20%. Sales were 5000 units, what will they be
now?
Correct Answer:
b) 7000
Feedback:
This means that a percentage increase in income will lead to an increase in quantity demanded that is
twice as great; this means sales will increase by 40% to 7000 units.
Question 6
The price elasticity of demand is a negative number this means:
Correct Answer:
c) The demand curve is downward sloping
Feedback:
34
This means that an increase in price leads to a fall in quantity demanded; this means the demand curve
is downward sloping.
Question 7
Price increases from 10 to 12 pence and the price elasticity of demand is -0.5. The quantity demanded
was 500 units. What will it be now?
Correct Answer:
c) 450 units
Feedback:
This means that any given percentage fall in price leads to an increase in quantity demanded that is half
as much; a 20% price increase will reduce the quantity demanded by 10%. This means the quantity
demanded will be 450 units.
Question 8
If demand is price inelastic:
Correct Answer:
c) An increase in price increases revenue
Feedback:
This means that the percentage change in quantity demanded is less than the percentage change in price;
this means a price increase will increase revenue.
Question 9
For an inferior good:
Correct Answer:
35
Feedback:
For an inferior good demand falls as income increases; the quantity demanded falls as price increases;
this means the income elasticity and the price elasticity will both be negative.
Question 10
For a normal good:
Correct Answer:
Feedback:
For a normal good demand increases as income increases and the quantity demanded falls a price
increases.
Question 1
Which best describes a supply curve?
a) The quantity consumers would like to buy in an ideal world

b) The quantity producers are willing and able to sell at each and every price all other things
unchanged
c) The quantity producers are willing and able to sell at each and every income all other things
unchanged
d) The quantity producers are willing and able to sell at each and every point in time all other things
unchanged
Question 2
If a 4% increase in price leads to a increase in the quantity supplied of 8%:
a) Supply is price elastic

b) Supply is income elastic
c) Price elasticity of demand is -2
d) Price elasticity of supply is -2
36
Question 3
Supply is likely to be more price elastic:
a) In the short run rather than the long run

b) If factors of production are relatively immobile between industries
c) If there are very few producers
d) If it is easy to expand output
Question 4
A supply curve that starts at the origin has:
a) A price elasticity of supply greater than one

b) A price elasticity of supply equal to one
c) A price elasticity of supply less than one
d) A positive price elasticity of supply
Question 5
A contraction in supply occurs when:
a) Demand shifts outwards

b) The supply curve shifts inwards
c) The quantity supplied falls when the price falls
d) The supply curve shifts outwards
Question 6
An increase in the costs of production will:
a) Shift demand outwards

b) Shift demand inwards
37
c) Shift supply outwards so more is supplied at each and every price, all other things unchanged
d) Shift supply inwards
Question 7
a) A shift in supply outwards

b) A shift in supply inwards
c) A contraction of supply
d) An extension of supply
Question 8
An increase in productivity should:
a) Lead to a contraction of supply

b) Lead to an expansion of supply
c) Lead to a shift in supply outwards (i.e. more supplied at each and every price)
d) Lead to a higher equilibrium and lower equilibrium quantity
Question 9
An increase in price from 25 pence to 30 pence leads to an increase in the quantity supplied from 40
units to 44 units. The price elasticity of supply is:
a) + 2
b) + 0.5
c) - 2
d) - 0.5
Question 10
The price elasticity of supply is +4. The price increases by 15%. Sales were originally 200 units. What
38
will they be now?
a) 80 units
b) 320 units
c) 60 units
d) 120 units
Question 1
Which best describes a supply curve?
Correct Answer:
b) The quantity producers are willing and able to sell at each and every point in time all other things
unchanged
Feedback:
A supply curve shows the quantity supplied at each and every price all other things unchanged.
Question 2
If a 4% increase in price leads to a increase in the quantity supplied of 8%:
Correct Answer:
Feedback:
This means the quantity supplied changes twice as much as price.
Question 3
Supply is likely to be more price elastic:
Correct Answer:
39
d) If it is easy to expand output
Feedback:
Supply will be more price elastic the bigger the quantity supplied relative to the price change.
Question 4
A supply curve that starts at the origin has:
Correct Answer:
b) A price elasticity of supply equal to one
Feedback:
This means the supply curve has a unit price elastic.
Question 5
A contraction in supply occurs when:
Correct Answer:
c) The quantity supplied falls when the price falls
Feedback:
This occurs when quantity supplied falls with a price fall.
Question 6
An increase in the costs of production will:
Correct Answer:
d) Shift supply inwards
40
Feedback:
This will reduce the quantity supplied at each and every price all other things unchanged.
Question 7
Correct Answer:
d) An extension of supply
Feedback:
An increase in price should lead to an increase in the quantity supplied (an extension of supply).
Question 8
An increase in productivity should:
Correct Answer:
c) Lead to a shift in supply outwards (i.e. more supplied at each and every price)
Feedback:
An increase in productivity should increase the quantity supplied at each and every price all other things
unchanged.
Question 9
An increase in price from 25 pence to 30 pence leads to an increase in the quantity supplied from 40
units to 44 units. The price elasticity of supply is:
Correct Answer:
b) + 0.5
41
Feedback:
Quantity supplied increases 10%; price increases 20%; this means the price elasticity of supply is +0.5.
Question 10
The price elasticity of supply is +4. The price increases by 15%. Sales were originally 200 units. What
will they be now?
Correct Answer:
b) 320 units
Feedback:
The change in quantity supplied will be 4*15%=60%; this means the quantity supplied increases by 120
units.
Question 1
If demand increases in a market this will usually lead to:
a) A higher equilibrium price and output

b) A lower equilibrium price and higher output
c) A lower equilibrium price and output
d) A higher equilibrium price and lower output
Question 2
An increase in income will:
a) Lead to a movement along the demand curve

b) Shift the supply curve
c) Shift the demand curve
d) Lead to an extension of demand
42
Question 3
A reduction in the costs of production will:
a) Lead to a movement along the supply curve

b) Shift the demand curve
c) Shift the supply curve
d) Lead to an extension of supply
Question 4
A shift in supply will have a bigger effect on price than output if demand is:
a) Income elastic
b) Income inelastic
c) Price elastic
d) Price inelastic
Question 5
Assuming a downward sloping demand curve and upward sloping supply curve, a higher equilibrium
price may be caused by:
a) An fall in demand
b) An increase in supply
c) Improvements in production technology
d) An increase in demand
Question 6
If the price was fixed below the equilibrium price there would be:
a) Excess supply
b) Excess demand
43
c) Equilibrium
d) Downward pressure on prices
Question 7
A movement along the demand curve may be caused by:
a) A change in income
b) A change in the number of buyers
c) A change in advertising
d) A shift in supply
Question 8
A subsidy paid to producers:
a) Shifts the supply curve

b) Shifts the demand curve
c) Leads to a contraction in supply
d) Leads to an extension of supply
Question 9
A movement along the supply curve may be caused by:
a) A change in technology
b) A change in the number of producers
c) A shift in demand
d) A change in costs
Question 10
The price mechanism cannot:
44
a) Act as a signal
b) Act as an incentive
c) Act as a rationing device
d) Shift the demand curve
Question 1
If demand increases in a market this will usually lead to:
Correct Answer:
a) A higher equilibrium price and output
Feedback:
An outward shift in demand will lead to a higher price and output.
Question 2
An increase in income will:
Correct Answer:
c) Shift the demand curve
Feedback:
Changes in income shift the demand curve.
Question 3
A reduction in the costs of production will:
Correct Answer:
c) Shift the supply curve
45
Feedback:
A change in cost conditions will affect the supply curve.
Question 4
A shift in supply will have a bigger effect on price than output if demand is:
Correct Answer:
d) Price inelastic
Feedback:
A shift in supply will affect the equilibrium price more than the quantity if demand is steep i.e. price
inelastic.
Question 5
price may be caused by:
Correct Answer:
d) An increase in demand
Feedback:
price may be caused by an increase in demand.
Question 6
If the price was fixed below the equilibrium price there would be:
Correct Answer:
b) Excess demand
46
Feedback:
If the price was fixed too low there would be excess demand.
Question 7
A movement along the demand curve may be caused by:
Correct Answer:
d) A shift in supply
Feedback:
A movement along the demand curve may be caused by a shift in supply.
Question 8
A subsidy paid to producers:
Correct Answer:
a) Shifts the supply curve
Feedback:
A subsidy to producers will reduce their costs and shift the supply curve.
Question 9
A movement along the supply curve may be caused by:
Correct Answer:
c) A shift in demand
Feedback:
A change in demand conditions changes the equilibrium price and leads to a movement along the
47
supply curve.
Question 10
The price mechanism cannot:
Correct Answer:
d) Shift the demand curve
Feedback:
The price mechanism is a signal, incentive and rationing device; changes in price lead to a movement
along the demand curve not a shift in it.
Question 1
Which best describes consumer surplus?
a) The price consumers are willing to pay for a unit

b) The cost of providing a unit
c) The profits made by a firm
d) The difference the price a consumer pays for an item and the price he/she is willing to pay
Question 2
The price mechanism does not act as a:
a) Signal
b) Incentive
c) Rationing device
d) Indicator of income
Question 3
A shift in demand will have more effect on price than quantity if:
48
a) The price elasticity of supply is price inelastic
b) The price elasticity of supply is price elastic
c) The price elasticity of supply is perfectly elastic
d) The price elasticity of supply is infinity
Question 4
a) The price elasticity of supply is + 3

b) The price elasticity of supply is + 0.2
c) The price elasticity of supply is + 2
d) The price elasticity of supply is infinity
Question 5
A shift in supply will have more effect on price than quantity if:

b) The price elasticity of demand is -0.2
c) The price elasticity of demand is -2
d) The price elasticity of demand is infinity
Question 6
A decrease in demand for a product should:
a) Increase equilibrium price and quantity

b) Decrease equilibrium price and quantity
c) Increase equilibrium price and decrease quantity
d) Decrease equilibrium price and increase quantity
49
Question 7
An increase in demand for a product should:

c) Increase equilibrium price and decrease quantity
d) Decrease equilibrium price and increase quantity
Question 8
"Income inequality can be high in the free market and should be reduced." This is an example of what?
a) Judicial economic statement

b) Positive economic statement
c) Formative economic statement
d) Normative economic statement
Question 9
A public good will:
a) Be underprovided in the free market

b) Be overprovided in the free market
c) Not be provided in the free market
d) Has no opportunity cost
Question 10
A positive externality occurs when:
a) The social marginal costs are higher than the private marginal costs
b) A product is not provided in the free market
c) The social marginal cost equals the social marginal benefit
50
d) The social marginal benefits are higher than the private marginal benefits
Question 1
Which best describes consumer surplus?
Correct Answer:
d) The difference the price a consumer pays for an item and the price he/she is willing to pay
Feedback:
Consumer surplus is the difference the price a consumer pays for an item and the price he/she is willing
to pay.
Question 2
The price mechanism does not act as a:
Correct Answer:
d) Indicator of income
Feedback:
The price mechanism does not act as a indicator of income.
Question 3
Correct Answer:
a) The price elasticity of supply is price inelastic
Feedback:
A shift in demand will have more effect on price than quantity if the price elasticity of supply is price
51
inelastic.
Question 4
Correct Answer:
b) The price elasticity of supply is + 0.2
Feedback:
A shift in demand will have more effect on price than quantity if supply is price inelastic e.g. the price
elasticity of supply is + 0.2.
Question 5
A shift in supply will have more effect on price than quantity if:
Correct Answer:
b) The price elasticity of demand is -0.2
Feedback:
A shift in supply will have more effect on price than quantity if the price elasticity of demand is price
inelastic e.g. the price elasticity of demand is -0.2.
Question 6
A decrease in demand for a product should:
Correct Answer:
Feedback:
52
A decrease in demand for a product should decrease equilibrium price and quantity.
Question 7
An increase in demand for a product should:
Correct Answer:
Feedback:
An increase in demand for a product should increase equilibrium price and quantity.
Question 8
"Income inequality can be high in the free market and should be reduced." This is an example of what?
Correct Answer:
d) Normative economic statement
Feedback:
"Income inequality can be high in the free market and should be reduced." This is an example of a
normative economic statement.
Question 9
A public good will:
Correct Answer:
c) Not be provided in the free market
Feedback:
A public good will not be provided in the free market because it is non-excludable and non-
53
diminishable.
Question 10
A positive externality occurs when:
Correct Answer:
d) The social marginal benefits are higher than the private marginal benefits
Feedback:
A positive externality occurs when the social marginal benefits of a product are higher than the private
marginal benefits
Question 1
If the price in a market is fixed by the government below equilibrium:
a) There is excess equilibrium

b) There is excess supply
c) There is excess demand
d) There is equilibrium
Question 2
If the price in a market is fixed by the government above equilibrium:
a) There is excess equilibrium

d) There is equilibrium
Question 3
Merit goods are:
54
a) Not provided in the free market economy
b) Under provided in the free market economy
c) Over provided in the free market economy
d) Provided free
Question 4
Agricultural prices tend to be unstable because:

b) Demand is price elastic
c) Supply is stable
d) Demand and supply are price inelastic
Question 5
When supply increases in an agricultural market farmer's earnings might fall because:

c) The government buys up all the excess production
d) All output must be sold at a maximum price
Question 6
Which of the following is the government most likely to subsidise?
a) Negative externalities
b) Positive externalities
c) Monopolies
d) Oligopolies
55
Question 7
With a positive externality:
a) There is under-consumption in the free market

b) There is over consumption in the free market
c) The government may tax to decrease production
d) Society could be made off if less was produced
Question 8
A public good:
a) Is provided by the government

b) Is free
c) Has the properties of being non-excludable and non-diminishable
d) Has external costs
Question 9
Nationalisation occurs when:
a) The government sells assets to a the private sector

b) The government bans a product
c) The government takes control of an industry
d) The government taxes a product to a raise its price
Question 10
If a maximum price is set below equilibrium there will be:
a) A price fall
b) A price increase
c) Excess supply
56
d) Excess demand
Question 1
If the price in a market is fixed by the government below equilibrium:
Correct Answer:
Feedback:
The quantity demanded will be greater than the quantity supplied.
Question 2
If the price in a market is fixed by the government above equilibrium:
Correct Answer:
Feedback:
The quantity supplied will be greater than the quantity demanded.
Question 3
Merit goods are:
Correct Answer:
b) Under provided in the free market economy
Feedback:
These are products that the government thinks we should have more of.
Question 4
57
Agricultural prices tend to be unstable because:
Correct Answer:
d) Demand and supply are price inelastic
Feedback:
Supply tends to shift a lot with agricultural products and because both supply and demand are price
inelastic will mean the effect is mainly on price.
Question 5
When supply increases in an agricultural market farmer's earnings might fall because:
Correct Answer:
Feedback:
If demand is price inelastic a price fall will reduce total spending and income.
Question 6
Which of the following is the government most likely to subsidise?
Correct Answer:
b) Positive externalities
Feedback:
The government is likely to subsidise positive externalities because the benefits to society exceed the
private benefits.
Question 7
58
With a positive externality:
Correct Answer:
a) There is under-consumption in the free market
Feedback:
The private benefits are less than the social so the free market tends to lead to under-production.
Question 8
A public good:
Correct Answer:
c) Has the properties of being non-excludable and non-diminishable
Feedback:
A public good is non diminishable and non excludable and so has to be provided by the government.
Question 9
Nationalisation occurs when:
Correct Answer:
c) The government takes control of an industry
Feedback:
This occurs when the public sector gets bigger.
Question 10
If a maximum price is set below equilibrium there will be:
59
Correct Answer:
d) Excess demand
Feedback:
This means the quantity demanded will be higher than the quantity supplied because the price is too
low.
Question 1
Which of the following is true?
a) If the marginal cost is greater than the average cost the average cost falls
b) If the marginal cost is greater than the average cost the average cost increases
c) If the marginal cost is positive total costs are maximised
d) If the marginal cost is negative total costs increase at a decreasing rate if output increases
Question 2
According the law of diminishing returns:
a) The marginal product falls as more units of a variable factor are added to a fixed factor
b) Marginal utility falls as more units of a product are consumed
c) The total product falls as more units of a variable factor are added to a fixed factor
d) The marginal product increases as more units of a variable factor are added to a fixed factor
Question 3
The law of diminishing returns assumes:
a) There are no fixed factors of production

b) There are no variable factors of production
c) Utility is maximised when marginal product falls
d) Some factors of production are fixed
60
Question 4
When internal economies of scale occur:
a) Total costs fall

b) Marginal costs increase
c) Average costs fall
d) Revenue falls
Question 5
The first level of output at which the long run average costs are minimised is called:
a) The Minimum Efficient Scale

b) The Minimum External Scale
c) The Maximum External Scale
d) The Maximum Effective Scale
Question 6
The average variable cost curve:
a) Is derived from the average fixed costs

b) Converges with the average cost as output increases
c) Equals the total costs divided by the output
d) Equals revenue minus profits
Question 7
If marginal cost is positive and falling:
a) Total cost is falling

b) Total cost is increasing at a falling rate
61
c) Total cost is falling at a falling rate
d) Total cost is increasing at an increasing rate
Question 8
Total increases from &pound500 to &pound600 when output increases from 20 to 30 units. Fixed costs
are &pound200. Which of the following is true?
a) Marginal cost is &pound20

b) Average cost falls
c) Variable cost rises by &pound100
d) Average fixed cost is &pound10
Question 9
a) Marginal cost is &pound20

b) Average cost rises
d) Average fixed cost was &pound10 originally
Question 10
If marginal product is below average product:
a) The total product will fall

b) The average product will fall
c) Average variable costs will fall
d) Total revenue will fall
Question 1
Which of the following is true?
62
Correct Answer:
b) If the marginal cost is greater than the average cost the average cost increases
Feedback:
The marginal cost measures the extra cost of producing another unit; the average cost measures the cost
per unit. If the marginal cost is greater than the average cost the average cost increases.
Question 2
According the law of diminishing returns:
Correct Answer:
a) The marginal product falls as more units of a variable factor are added to a fixed factor
Feedback:
This occurs when variable factors are added to fixed factors. According to the law of diminishing
returns the marginal product falls as more units of a variable factor are added to a fixed factor.
Question 3
The law of diminishing returns assumes:
Correct Answer:
d) Some factors of production are fixed
Feedback:
This occurs when variable factors are added to fixed factors. It assumes some factors of production are
fixed.
Question 4
When internal economies of scale occur:
63
Correct Answer:
c) Average costs fall
Feedback:
These occur when the unit cost (average costs) falls as the scale of production increases.
Question 5
The first level of output at which the long run average costs are minimised is called:
Correct Answer:
a) The Minimum Efficient Scale
Feedback:
This is the Minimum Efficient Scale.
Question 6
The average variable cost curve:
Correct Answer:
b) Converges with the average cost as output increases
Feedback:
This is the variable cost per unit; when added to the fixed cost per unit this leads to the total cost per
unit. As output increases the average fixed cost falls so the average variable cost and average cost
converge.
Question 7
If marginal cost is positive and falling:
64
Correct Answer:
b) Total cost is increasing at a falling rate
Feedback:
This means the extra cost of a unit is falling; total cost will increase at a decreasing rate.
Question 8
Correct Answer:
Feedback:
The variable costs were &pound300 and rise to &pound400.
Question 9
Correct Answer:
d) Average fixed cost was &pound10 originally
Feedback:
The average costs were &pound2.50 and rise to &pound3.
Question 10
If marginal product is below average product:
65
Correct Answer:
b) The average product will fall
Feedback:
The marginal product is the extra output per factor (e.g. employee); the average product is the output
per factor (e.g. per employee). If marginal product is below average product, the average product will
fall.
Question 1
If the marginal revenue is less than the marginal cost then to profit maximise a firm should:
a) Reduce output
b) Increase output
c) Leave output where it is
d) Increase costs
Question 2
If the price is less than the average costs but higher than the average variable costs:
a) The firm is making a loss and will shut down in the short term
b) The firm is making a profit
c) The firm is making a loss but will continue to produce in the short term
d) The firm is making a loss and is making a negative contribution to fixed costs
Question 3
If firms earn normal profits:
a) They will aim to leave the industry

b) Other firms will join the industry
c) The revenue equals total costs
66
d) No profit is made in accounting terms
Question 4
In the long term a firm will produce provided the revenue covers:
a) Fixed costs
b) Variable costs
c) Total costs
d) Revenue
Question 5
In the short term a firm will produce provided the revenue:
a) Covers fixed costs

b) Covers variable costs
c) Covers total costs
d) Covers revenue
Question 6
The profit per sale is a measure of:
a) Profit
b) Profitability
c) Feasibility
d) Realism
Question 7
The total costs are &pound2000 and 10 units are produced. The marginal cost of an 11th unit is
&pound1300. Which of the following is true?
67
a) The average cost increases from &pound20 to &pound30
b) The total costs for 11 units are &pound700
c) The average cost for 10 units is &pound1300
d) The average cost for 11 units is &pound1300
Question 8
Total revenue equals:
a) Price plus quantity

b) Price multiplied by quantity sold
c) Price divided by the quantity sold
d) Price minus quantity sold
Question 9
If marginal revenue equals marginal cost:
a) No profit is being made

b) Total revenue equals total cost
c) Profits are maximised
d) Producing another unit would increase profits
Question 10
Price equals:
a) Total revenue - quantity

b) Total revenue / quantity sold
c) Total quantity sold * quantity sold
d) Total revenue / total cost
Question 1
68
If the marginal revenue is less than the marginal cost then to profit maximise a firm should:
Correct Answer:
a) Reduce output
Feedback:
If the marginal revenue is less than the marginal cost then to profit maximise a firm should reduce
output.
Question 2
If the price is less than the average costs but higher than the average variable costs:
Correct Answer:
c) The firm is making a loss but will continue to produce in the short term
Feedback:
If the price is less than the average costs but higher than the average variable costs the firm is making a
loss but will continue to produce in the short term because a contribution is being made to the fixed
costs.
Question 3
If firms earn normal profits:
Correct Answer:
c) The revenue equals total costs
Feedback:
If firms earn normal profits the revenue equals total costs.
Question 4
69
In the long term a firm will produce provided the revenue covers:
Correct Answer:
c) Total costs
Feedback:
In the long term a firm will produce provided the revenue covers total costs.
Question 5
In the short term a firm will produce provided the revenue:
Correct Answer:
b) Covers variable costs
Feedback:
In the short term a firm will produce provided the revenue covers variable costs.
Question 6
The profit per sale is a measure of:
Correct Answer:
b) Profitability
Feedback:
The profit per sale is a measure of profitability.
Question 7
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&pound1300. Which of the following is true?
Correct Answer:
a) The average cost increases from &pound20 to &pound30
Feedback:
&pound1300. This means the average cost increases from &pound20 to &pound30.
Question 8
Total revenue equals:
Correct Answer:
c) Price divided by the quantity sold
Feedback:
Total revenue equals price multiplied by quantity sold.
Question 9
If marginal revenue equals marginal cost:
Correct Answer:
c) Profits are maximised
Feedback:
If marginal revenue equals marginal cost profits are maximised because there is no extra profit to be
made.
Question 10
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Price equals:
Correct Answer:
b) Total revenue / quantity sold
Feedback:
Price equals (total revenue / quantity sold).
Question 1
Firms in perfect competition face a:
a) Perfectly elastic demand curve

b) Perfectly inelastic demand curve
c) Perfectly elastic supply curve
d) Perfectly inelastic supply curve
Question 2
In perfect competition:
a) The price equals the marginal revenue

b) The price equals the average variable cost
c) The fixed cost equals the variable costs
d) The price equals the total costs
Question 3
A profit maximising firm in perfect competition produces where:
a) Total revenue is maximised

b) Marginal revenue equals zero
c) Marginal revenue equals marginal cost
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d) Marginal revenue equals average cost
Question 4
a) The products firm offer are very similar

b) Products are heavily differentiated
c) A few firms dominate the market
d) Consumers have limited information
Question 5
In the long run in perfect competition:
a) The price equals the total revenue

b) Firms are allocatively inefficient
c) Firms are productively efficient
d) The price equals total cost
Question 6
a) Short run abnormal profits are competed away by firms leaving the industry
b) Short run abnormal profits are competed away by firms entering the industry
c) Short run abnormal profits are competed away by the government
d) Short run abnormal profits are competed away by greater advertising
Question 7
a) A few firms dominate the industry
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b) Firms are price makers
c) There are many buyers but few sellers
d) There are many buyers and sellers
Question 8
In the short run firms in perfect competition will still produce provided:
a) The price covers average variable cost

b) The price covers variable cost
c) The price covers average fixed cost
d) The price covers fixed costs
Question 9
a) Price = average cost = marginal cost

b) Price = average cost = total cost
c) Price = marginal revenue = total cost
d) Total revenue = total variable cost
Question 10
For a perfectly competitive firm:
a) Price equals marginal revenue

b) Price is greater than marginal revenue
c) Price equals total revenue
d) Price equals total cost
Question 1
Firms in perfect competition face a:
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Correct Answer:
a) Perfectly elastic demand curve
Feedback:
Firms in perfect competition face a perfectly elastic demand curve.
Question 2
Correct Answer:
a) The price equals the marginal revenue
Feedback:
In perfect competition the price equals the marginal revenue (because the firm does not need to lower
the price to sell more).
Question 3
A profit maximising firm in perfect competition produces where:
Correct Answer:
Feedback:
A profit maximising firm in perfect competition produces where marginal revenue equals marginal cost
(this means no extra profit can be made).
Question 4
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Correct Answer:
a) The products firm offer are very similar
Feedback:
In perfect competition the products firm offer are very similar.
Question 5
Correct Answer:
c) Firms are productively efficient
Feedback:
In the long run in perfect competition firms are productively efficient.
Question 6
Correct Answer:
b) Short run abnormal profits are competed away by firms entering the industry
Feedback:
In perfect competition short run abnormal profits are competed away by firms entering the industry.
Question 7
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Correct Answer:
d) There are many buyers and sellers
Feedback:
In perfect competition there are many buyers and sellers.
Question 8
In the short run firms in perfect competition will still produce provided:
Correct Answer:
a) The price covers average variable cost
Feedback:
In the short run firms in perfect competition will still produce provided the price covers average
variable cost. This means a contribution will be made towards fixed costs.
Question 9
Correct Answer:
a) Price = average cost = marginal cost
Feedback:
In the long run in perfect competition price = average cost= marginal cost
Question 10
For a perfectly competitive firm:
Correct Answer:
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a) Price equals marginal revenue
Feedback:
For a perfectly competitive firm price equals marginal revenue.
Question 1
X inefficiency occurs when:
a) The price is greater than the marginal cost

b) The price is greater than the average cost
c) Costs are higher than they could be due to a lack of competitive pressure
d) There are external costs
Question 2
The marginal revenue curve in monopoly:
a) Equals the demand curve

b) Is parallel with the demand curve
c) Lies below and converges with the demand curve
d) Lies below and diverges from the demand curve
Question 3
In monopoly when abnormal profits are made:
a) The price set is greater than the marginal cost

b) The price is less than the average cost
c) The average revenue equals the marginal cost
d) Revenue equals total cost
Question 4
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In monopoly in long run equilibrium:
a) The firm is productively efficient

b) The firm is allocatively inefficient
c) The firm produces where marginal cost is less than marginal revenue
d) The firm produces at the socially optimal level
Question 5
Barriers to entry do not include
a) Patents
b) Internal economies of scale
c) Mobility of resources
d) High investment costs
Question 6
In a monopoly which of the following is not true?
a) Products are differentiated

b) There is freedom of entry and exit into the industry in the long run
c) The firm is a price taker
d) There is one main seller
Question 7
In monopoly which of the following is true?
a) There are many buyers and sellers

b) There is one main buyer
c) There is one main seller
d) The actions of one firm do not affect the market price and quantity
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Question 8
According to Schumpeter:
a) Monopolies are inefficient

b) Monopoly profits act as an incentive for innovation
c) Monopolies are alocatively efficient
d) Monopolies are productively efficient
Question 9
A welfare loss occurs in monopoly where:

b) The price is greater than the marginal benefit
c) The price is greater than the average revenue
d) The price is greater than the marginal revenue
Question 10
In the UK the government:
a) Bans monopolies
b) Fines all monopolies
c) Prevents firms acquiring more than 25% of the market
d) Has the right to investigate monopolies and will assess each one on its own merits
Question 1
X inefficiency occurs when:
Correct Answer:
c) Costs are higher than they could be due to a lack of competitive pressure
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Feedback:
X inefficiency occurs when costs are higher than they could be due to a lack of competitive pressure.
Question 2
The marginal revenue curve in monopoly:
Correct Answer:
d) Lies below and diverges from the demand curve
Feedback:
The marginal revenue curve in monopoly lies below and diverges from the demand curve.
Question 3
In monopoly when abnormal profits are made:
Correct Answer:
a) The price set is greater than the marginal cost
Feedback:
In monopoly when abnormal profits are made the price set is greater than the marginal cost.
Question 4
In monopoly in long run equilibrium:
Correct Answer:
b) The firm is allocatively inefficient
Feedback:
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In monopoly in long run equilibrium the firm is allocatively inefficient.
Question 5
Barriers to entry do not include
Correct Answer:
c) Mobility of resources
Feedback:
Barriers to entry do not include mobility of resources.
Question 6
In a monopoly which of the following is not true?
Correct Answer:
b) There is freedom of entry and exit into the industry in the long run
Feedback:
In a monopoly there is not freedom of entry and exit into the industry in the long run.
Question 7
In monopoly which of the following is true?
Correct Answer:
c) There is one main seller
Feedback:
In monopoly there is one main seller.
Question 8
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According to Schumpeter:
Correct Answer:
b) Monopoly profits act as an incentive for innovation
Feedback:
According to Schumpeter monopoly profits act as an incentive for innovation.
Question 9
A welfare loss occurs in monopoly where:
Correct Answer:
Feedback:
A welfare loss occurs in monopoly where the price is greater than the marginal cost.
Question 10
In the UK the government:
Correct Answer:
d) Has the right to investigate monopolies and will assess each one on its own merits
Feedback:
In the UK the government has the right to investigate monopolies and will assess each one on its own
merits.
Question 1
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If a few firms dominate an industry the market is known as:
a) Monopolistic competition
b) Competitively monopolistic
c) Duopoly
d) Oligopoly
Question 2
In a cartel member firms may be given a fixed amount to produce. This is called a:
a) Limit
b) Factor
c) Quota
d) Quotient
Question 3
In the Kinked Demand Curve theory it is assumed that:
a) An increase in price by the firm is not followed by others

b) An increase in price by the firm is followed by others
c) A decrease in price by the firm is followed by others
d) Firms collude to fix the price
Question 4
The Kinked Demand Curve theory assumes:
a) Firms cooperate
b) Firms act as part of a cartel
c) Firms are competitive
d) Firms are not profit maximisers
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Question 5
In Game Theory:
a) Firms are assumed to act independently

b) Firms are assumed to cooperate with each other
c) Firms collude as part of a cartel
d) Firms consider the actions of others before deciding what to do
Question 6
In the kinked demand curve theory:
a) There is a kink in the marginal cost curve

c) Demand is price elastic
d) Non price competition is likely
Question 7
Firms in oligopoly are likely to:
a) Invest heavily in branding

b) Act independently of other firms
c) Try to differentiate its products
d) Try to be a price maker
Question 8
A model of Game Theory of oligopoly is known as the:
a) Prisoner's Dilemma
b) Monopoly Cell
c) Jailhouse Sentence
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d) Jury Box
Question 9
In cartels:
a) Each individual firm profit maximises

b) There may be an incentive to cheat
c) The industry as a whole is loss making
d) There is no need to police agreements
Question 10
In a cartel:
a) Firms compete against each other

b) Price wars are common
c) Firms use price to win market share from competitors
d) Firms collude
Question 1
If a few firms dominate an industry the market is known as:
Correct Answer:
d) Oligopoly
Feedback:
This is an oligopoly.
Question 2
In a cartel member firms may be given a fixed amount to produce. This is called a:
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Correct Answer:
c) Quota
Feedback:
This is called a quota.
Question 3
In the Kinked Demand Curve theory it is assumed that:
Correct Answer:
c) A decrease in price by the firm is followed by others
Feedback:
In the Kinked Demand Curve model a price cut by one firm is followed by others; a price increase is not
followed.
Question 4
The Kinked Demand Curve theory assumes:
Correct Answer:
c) Firms are competitive
Feedback:
In the Kinked Demand Curve model a price cut by one firm is followed by others; a price increase is not
followed i.e. the firms are competing against each other and nor cooperating.
Question 5
In Game Theory:
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Correct Answer:
d) Firms consider the actions of others before deciding what to do
Feedback:
Game theory takes account of the fact that firms are interdependent.
Question 6
In the kinked demand curve theory:
Correct Answer:
d) Non price competition is likely
Feedback:
In the kinked demand curve theory non price competition is likely.
Question 7
Firms in oligopoly are likely to:
Correct Answer:
a) Invest heavily in branding
Feedback:
Oligopolists often compete using non-price competition.
Question 8
A model of Game Theory of oligopoly is known as the:
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Correct Answer:
a) Prisoner's Dilemma
Feedback:
One model is known as the Prisoner's Dilemma.
Question 9
In cartels:
Correct Answer:
b) There may be an incentive to cheat
Feedback:
Firms are given quotas and set a price; some firms may want to cheat to increase their own profits at the
expense of other firms.
Question 10
In a cartel:
Correct Answer:
d) Firms collude
Feedback:
A cartel occurs when firms collude.
Question 1
In monopolistic competition:
a) Firms face a perfectly elastic demand curve

b) All products are homogeneous
c) Firms make normal profits in the long run
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d) There are barriers to entry to prevent entry
Question 2
a) Demand is perfectly elastic

b) Products are homogeneous
c) Marginal revenue = price
d) The marginal revenue is below the demand curve and diverges
Question 3
In monopolistic competition firms profit maximise where:
a) Marginal revenue = Average revenue

b) Marginal revenue = Marginal cost
c) Marginal revenue = Average cost
d) Marginal revenue = Total cost
Question 4
Which of the following is not one of the four Ps in marketing?
a) Product
b) Price
c) Place
d) Presence
Question 5
Effective branding will tend to make:
a) Demand more price inelastic
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b) Supply more price inelastic
c) Demand more income elastic
d) Supply more income elastic
Question 6
In monopolistic competition if firms are making abnormal profit other firms will enter and:
a) The marginal cost will shift outwards

b) The demand curve will shift inwards
c) The average cost will shift downwards
d) The average variable cost will increase
Question 7
In Porter's five forces model conditions are more favourable for firms within an industry if:
a) Buyer power is high

b) Supplier power is high
c) Entry threat is low
d) Substitute threat is high
Question 8
If a firm takes over a competitor then, according to Porter's 5 forces model,:
a) Buyer power is higher

b) Supplier power is higher
c) Substitute threat is higher
d) Rivalry is lower
Question 9
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In marketing "USP" stands for:
a) Unique Selling Proposition

b) Underlying Sales Pitch
c) Unit Sales Point
d) Under Sales Procedure
Question 10
a) There are few sellers

b) There are few buyers
c) There is one seller
d) There are many sellers
Question 1
Correct Answer:
c) Firms make normal profits in the long run
Feedback:
Firms will make normal profits in the long run due to the entry and exit of other firms.
Question 2
Correct Answer:
d) The marginal revenue is below the demand curve and diverges
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Feedback:
Marginal revenue diverges from demand; to sell more the price is lowered on the last unit and all the
ones before.
Question 3
In monopolistic competition firms profit maximise where:
Correct Answer:
b) Marginal revenue = Marginal cost
Feedback:
All profit maximisers produce where marginal revenue = marginal cost i.e. no extra profit can be made.
Question 4
Which of the following is not one of the four Ps in marketing?
Correct Answer:
d) Presence
Feedback:
The four Ps are price, place, product and promotion.
Question 5
Effective branding will tend to make:
Correct Answer:
a) Demand more price inelastic
Feedback:
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Effective branding should make demand less sensitive to price.
Question 6
In monopolistic competition if firms are making abnormal profit other firms will enter and:
Correct Answer:
b) The demand curve will shift inwards
Feedback:
This will shift each firm's demand curve inwards until only normal profits are made.
Question 7
In Porter's five forces model conditions are more favourable for firms within an industry if:
Correct Answer:
c) Entry threat is low
Feedback:
A low entry threat means existing firms are protected from competition.
Question 8
If a firm takes over a competitor then, according to Porter's 5 forces model,:
Correct Answer:
d) Rivalry is lower
Feedback:
Rivalry is lower as one has been taken over.
Question 9
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In marketing "USP" stands for:
Correct Answer:
a) Unique Selling Proposition
Feedback:
A Unique Selling Proposition differentiates one product from another.
Question 10
Correct Answer:
d) There are many sellers
Feedback:
There are many sellers with differentiated products.
Question 1
Barriers to entry:
a) Do not exist in monopoly

b) Cannot exist in oligopoly
c) Do not exist in monopolistic competition
d) Do exist in perfect competition
Question 2
Which best describes price discrimination?
a) Charging different prices for different products
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b) Charging the same prices for different products
c) Charging the same prices for the same products
d) Charging different prices for the same products
Question 3
For a firm operating in two markets and price discriminating the profit maximising condition is:
a) Marginal revenue in A = Price B

b) Marginal revenue in A = Marginal revenue B = Price A = Price B
c) Marginal revenue in A = Marginal revenue B = Marginal cost
d) Marginal revenue in A = Marginal revenue B = Average cost
Question 4
If the price elasticity of demand for a product in market A is -0.2 and in market B is -3 a price
discriminator will charge:
a) The higher price in market A

b) The higher price in market B
c) The same price in both markets
d) Cannot tell which price will be higher
Question 5
In perfect price discrimination:
a) Consumer surplus is maximised

b) Produce surplus is zero
c) Community surplus is maximised
d) Consumer surplus is zero
Question 6
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A benefit to consumers of price discrimination is that:
a) Some products are produced that would not otherwise be produced

b) Producer surplus increases
c) Consumer surplus decreases
d) Firms' profits increase
Question 7
a) The demand curve is the marginal cost curve

b) The average revenue equals the average cost
c) The marginal cost is the average cost curve
d) The demand curve is the marginal revenue
Question 8
In price discrimination abnormal profits are made if:
a) Average revenue is greater than average variable cost

b) Average revenue is greater than average cost
c) Average revenue is greater than marginal revenue
d) Average revenue is greater than average fixed cost
Question 9
Barriers to entry:
a) Enable abnormal profits to be made in the long run

b) Enable losses to be made in the long run
c) Enable abnormal profits to be made in the short run only
d) Occur in perfect competition
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Question 10
If the price elasticity is -0.3 this means:
a) Demand is upward sloping

b) Demand is price elastic
c) A price fall would increase revenue
d) Demand is price inelastic
Question 1
Barriers to entry:
Correct Answer:
d) Do exist in perfect competition
Feedback:
Barriers to entry enable abnormal profits to be made in the long run; they do not exist in perfect
competition.
Question 2
Which best describes price discrimination?
Correct Answer:
d) Charging different prices for the same products
Feedback:
Charging different prices for the same products.
Question 3
For a firm operating in two markets and price discriminating the profit maximising condition is:
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Correct Answer:
c) Marginal revenue in A = Marginal revenue B = Marginal cost
Feedback:
To profit maximise the marginal revenues must be equal and marginal revenue must equal marginal
cost.
Question 4
If the price elasticity of demand for a product in market A is -0.2 and in market B is -3 a price
discriminator will charge:
Correct Answer:
a) The higher price in market A
Feedback:
Market A is more price inelastic and so the higher price will be charged.
Question 5
Correct Answer:
d) Consumer surplus is zero
Feedback:
Perfect price discrimination means a different price is charged for every unit and consumer surplus is
removed.
Question 6
A benefit to consumers of price discrimination is that:
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Correct Answer:
a) Some products are produced that would not otherwise be produced
Feedback:
Price discrimination can increase a firm's profits and mean some products can be made available that
would not otherwise be produced.
Question 7
Correct Answer:
d) The demand curve is the marginal revenue
Feedback:
The price charged for each unit is the extra revenue gained because the price does not need to be
reduced on the previous units.
Question 8
In price discrimination abnormal profits are made if:
Correct Answer:
b) Average revenue is greater than average cost
Feedback:
Abnormal profits occur if the average revenue is greater than the average cost.
Question 9
Barriers to entry:
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Correct Answer:
a) Enable abnormal profits to be made in the long run
Feedback:
Barriers to entry allow abnormal profits to be made in the long run.
Question 10
If the price elasticity is -0.3 this means:
Correct Answer:
d) Demand is price inelastic
Feedback:
The percentage change in demand is less than the percentage change in price; the percentage change in
quantity demanded changes 0.3 times the percentage change in price.
Question 1
If one car company takes over another car company this is an example of which type of integration?
a) Vertical
b) Horizontal
c) Conglomerate
d) Literal
Question 2
If a car company takes over a clothes business this is an example of which type of integration?
a) Vertical
b) Horizontal
c) Conglomerate
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d) Literal
Question 3
Horizontal integration may lead to internal economies of scale. Which of the following is not a type of
internal economy of scale?
a) Purchasing
b) Technical
c) Financial
d) Safety
Question 4
Acquisition and merger are examples of:
a) Internal growth
b) External growth
c) Organic growth
d) Underlying growth
Question 5
Unfair competition does not include:
a) Price cutting
b) Predatory pricing
c) Cartels
d) Price fixing
Question 6
If firms join together to set prices and quantities this is known as what?
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a) Interaction
b) Conglomerate
c) Collusion
d) Integration
Question 7
In the Ansoff matrix a strategy focusing on new products and new markets is known as:
a) New product development

b) Diversification
c) Market development
d) Market penetration
Question 8
A monopoly in the UK can be investigated if it has a market share of:
a) 100%
b) 10% or over
c) 25% or over
d) 33% or over
Question 9
Anti-competitive behaviour in the UK can lead to fines of up to:
a) 10% of profits
b) 10% of turnover
c) 10% of costs
d) 25% of market share
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Question 10
An example of backward vertical integration is:
a) A supermarket buying a farm

b) A supermarket buying another supermarket
c) A supermarket buying an insurance company
d) A supermarket buying a car rental business
Question 1
If one car company takes over another car company this is an example of which type of integration?
Correct Answer:
b) Horizontal
Feedback:
This is an example of horizontal integration.
Question 2
If a car company takes over a clothes business this is an example of which type of integration?
Correct Answer:
c) Conglomerate
Feedback:
This is an example of conglomerate integration.
Question 3
Horizontal integration may lead to internal economies of scale. Which of the following is not a type of
internal economy of scale?
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Correct Answer:
d) Safety
Feedback:
Safety is not an economy of scale.
Question 4
Acquisition and merger are examples of:
Correct Answer:
b) External growth
Feedback:
These are examples of external growth.
Question 5
Unfair competition does not include:
Correct Answer:
a) Price cutting
Feedback:
Cutting price is fair competition.
Question 6
If firms join together to set prices and quantities this is known as what?
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Correct Answer:
c) Collusion
Feedback:
Firms working together to set price is known as collusion.
Question 7
In the Ansoff matrix a strategy focusing on new products and new markets is known as:
Correct Answer:
b) Diversification
Feedback:
Offering new products in new markets is known as diversification.
Question 8
A monopoly in the UK can be investigated if it has a market share of:
Correct Answer:
c) 25% or over
Feedback:
A monopoly can be investigated if it has over 25% of the market share.
Question 9
Anti-competitive behaviour in the UK can lead to fines of up to:
Correct Answer:
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b) 10% of turnover
Feedback:
Firms can be fined up to 10% of turnover.
Question 10
An example of backward vertical integration is:
Correct Answer:
a) A supermarket buying a farm
Feedback:
This occurs when a firms integrates with another business in the same industry but at a stage nearer the
suppliers.
Question 1
To maximise sales revenue a firm should produce where:
a) Marginal cost is zero

b) Marginal revenue is maximised
c) Marginal revenue is zero
d) Marginal revenue equals marginal cost
Question 2
To maximise growth without making a loss a firm should produce the highest output where:
a) Average revenue equals marginal cost

b) Average revenue equals average cost
d) Average cost equals marginal cost
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Question 3
Profit is measured by:
a) Revenue - fixed costs

b) Fixed cost + revenue
c) Revenue - sales
d) Revenue - total costs
Question 4
When marginal revenue equals marginal cost:
a) Total revenue equals total cost

b) There is the biggest positive difference between total revenue and total cost
c) There is the biggest negative difference between total revenue and total cost
d) Profits are zero
Question 5
To be allocatively efficient a firm must produce where:
a) The total cost equals demand

b) The average revenue equals the marginal revenue
c) The price equals the average cost
d) The price equals the marginal cost
Question 6
To be productively efficient a firm must produce where:
a) Marginal costs are maximised

b) Marginal costs are minimised
c) Average costs are minimised
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d) Average revenue is maximised
Question 7
Normal profit occurs when:
a) Average revenue equals average variable cost

b) Marginal revenue equals marginal cost
c) Average revenue equals marginal cost
d) Average revenue equals average cost
Question 8
If the marginal revenue is positive:
a) Selling another unit will increase total revenue

b) Selling another unit will increase profits
c) Selling another unit will increase costs
d) Selling another unit will increase average revenue
Question 9
Companies in the private sector are owned by:
a) The government
b) Shareholders
c) Employees
d) The community
Question 10
An independent assessment of the impact of firm's activities on society is called a:
a) Financial audit
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b) Balance sheet
c) Profit and loss account
d) Social audit
Question 1
To maximise sales revenue a firm should produce where:
Correct Answer:
c) Marginal revenue is zero
Feedback:
To maximise sales revenue a firm should produce where marginal revenue is zero.
Question 2
To maximise growth without making a loss a firm should produce the highest output where:
Correct Answer:
b) Average revenue equals average cost
Feedback:
To maximise growth without making a loss a firm should produce the highest output where average
revenue equals average cost.
Question 3
Profit is measured by:
Correct Answer:
d) Revenue - total costs
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Feedback:
Profit is measured by: revenue - total costs.
Question 4
When marginal revenue equals marginal cost:
Correct Answer:
b) There is the biggest positive difference between total revenue and total cost
Feedback:
When marginal revenue equals marginal cost profits are maximised and so there is the biggest positive
difference between total revenue and total cost.
Question 5
To be allocatively efficient a firm must produce where:
Correct Answer:
d) The price equals the marginal cost
Feedback:
To be allocatively efficient a firm must produce where the price equals the marginal cost.
Question 6
To be productively efficient a firm must produce where:
Correct Answer:
c) Average costs are minimised
Feedback:
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To be productively efficient a firm must produce where average costs are minimised.
Question 7
Normal profit occurs when:
Correct Answer:
d) Average revenue equals average cost
Feedback:
Normal profit occurs when average revenue equals average cost.
Question 8
If the marginal revenue is positive:
Correct Answer:
a) Selling another unit will increase total revenue
Feedback:
If the marginal revenue is positive selling another unit will increase total revenue.
Question 9
Companies in the private sector are owned by:
Correct Answer:
b) Shareholders
Feedback:
Companies in the private sector are owned by shareholders.
Question 10
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An independent assessment of the impact of firm's activities on society is called a:
Correct Answer:
d) Social audit
Feedback:
This is called a social audit.
Question 1
An increase in the wage rate:
a) Will usually lead to more people employed

b) Will decrease total earnings if the demand for labour is wage elastic
c) Is illegal in a free market
d) Will cause a shift in the demand for labour
Question 2
The Marginal Revenue Product is likely to be wage inelastic if:
a) Labour costs are a high percentage of total costs

b) Demand for the final product is price inelastic
c) It is relatively easy to substitute capital for labour
d) There are many substitutes for the final product
Question 3
A fall in demand for labour is likely to lead to:
a) A lower equilibrium wage and lower quantity of labour

b) A lower equilibrium wage and higher quantity of labour
c) A higher equilibrium wage and higher quantity of labour
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d) A higher equilibrium wage and lower quantity of labour
Question 4
A decrease in the supply of labour is likely to lead to:
a) A lower equilibrium wage and lower quantity of labour

b) A lower equilibrium wage and higher quantity of labour
c) A higher equilibrium wage and higher quantity of labour
d) A higher equilibrium wage and lower quantity of labour
Question 5
The Marginal Revenue Product is:
a) Upward sloping due to the law of demand

b) Upward sloping due to the law of marginal utility
c) Downward sloping due to the law of diminishing returns
d) Downward sloping due to the law of supply
Question 6
Demand for labour is more likely to be wage inelastic if:
a) Wages are a small proportion of total costs

b) Demand for the final product is price elastic
c) It is easy to replace labour
d) Capital is a good substitute for labour
Question 7
A profit maximising firm will employ labour up to the point where:
a) Marginal revenue = marginal product
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b) Marginal cost = marginal product
c) Marginal revenue product = average cost of labour
d) Marginal revenue product = marginal cost of labour
Question 8
In a perfectly competitive labour market firms are wage takers and the marginal cost of labour equals:
a) The average cost of labour

b) The marginal product
c) The marginal revenue
d) The total cost of labour
Question 9
If employees cannot accept a job because of the costs of moving this is known as:
a) Occupational immobility
b) Cyclical unemployment
c) Structural immobility
d) Geographical immobility
Question 10
If the minimum wage is set above the equilibrium wage rate, then other things unchanged:
a) There will be equilibrium in the labour market

b) There will excess demand in the labour market
c) There will be excess supply in the labour market
d) More people will be employed
Question 1
Which of the following is a macroeconomic issue?
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a) The price of houses in Oxford
b) The wage rate for plumbers in London
c) Your decision to work or stay at home
d) The level of unemployment in the UK
Question 2
What is meant by an objective?
a) A policy
b) A way of reaching a target
c) A target
d) A strategy
Question 3
Which of the following is not involved with fiscal policy?
a) Income tax
b) National insurance
c) VAT
d) Interest rates
Question 4
Which does the government not control directly?
a) Spending on health
b) Spending on defence
c) Firms' investment decisions
d) Spending on education
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Question 5
Which of the following is not a macroeconomic issue?
a) Unemployment
b) Inflation
c) The wages paid to footballers
d) Economic growth
Question 6
Which of the following can the government not use directly to control the economy?
a) Pay rates within the private sector

b) Pay rates in the public sector
c) Investment in education
d) Benefits available for the unemployed and sick
Question 7
Which of the following is a policy instrument as opposed to a government objective?
a) Lower interest rates

b) A better balance of trade position
c) Faster economic growth
d) Lower unemployment
Question 8
Which of the following is a possible government objective as opposed to a policy?

b) Lower taxation rates
c) Lower government spending
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d) Lower inflation
Question 9
Which of the following is not likely to be a government objective?
a) Increasing employment
b) Increasing economic growth
c) Increasing government spending
d) Increasing the level of exports
Question 10
"Reducing inflation is a more important objective than economic growth" is an example of:
a) Normative economics
b) Positive economics
c) Objective economics
d) Reality economics
Question 1
Which of the following is a macroeconomic issue?
Correct Answer:
d) The level of unemployment in the UK
Feedback:
Macroeconomics examines issues that affect the whole economy such as UK unemployment.
Question 2
What is meant by an objective?
118
Correct Answer:
c) A target
Feedback:
This is a target.
Question 3
Which of the following is not involved with fiscal policy?
Correct Answer:
d) Interest rates
Feedback:
Fiscal policy relates to policies involving government spending and taxation not interest rates.
Question 4
Which does the government not control directly?
Correct Answer:
c) Firms' investment decisions
Feedback:
The government's policies will influence a firm's investment decision but will not usually affect it
directly.
Question 5
Which of the following is not a macroeconomic issue?
119
Correct Answer:
c) The wages paid to footballers
Feedback:
The wages paid to footballers are a micro-economic issue because they relate to one market not the
whole economy.
Question 6
Which of the following can the government not use directly to control the economy?
Correct Answer:
a) Pay rates within the private sector
Feedback:
The government cannot directly control pay rates within the private sector.
Question 7
Which of the following is a policy instrument as opposed to a government objective?
Correct Answer:
Feedback:
Changing the interest rate is one way of trying to influence the economy and achieve an objective; it is a
policy instrument not an objective in itself.
Question 8
Which of the following is a possible government objective as opposed to a policy?
120
Correct Answer:
d) Lower inflation
Feedback:
Lower inflation is an objective; interest rates, taxation rates and government spending are ways of
achieving objectives.
Question 9
Which of the following is not likely to be a government objective?
Correct Answer:
c) Increasing government spending
Feedback:
Increasing government spending is not an objective in itself although it may be necessary to achieve its
objectives.
Question 10
"Reducing inflation is a more important objective than economic growth" is an example of:
Correct Answer:
a) Normative economics
Feedback:
This is a matter of opinion so is normative economics.
Question 1
Injections:
a) Decrease aggregate demand

b) Always equal savings
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c) Always equal national income
d) Include investment and export spending
Question 2
An increase in national income is:
a) Likely to increase exports

b) Likely to decrease savings
c) Likely to decrease investment
d) Likely to increase spending on imports
Question 3
An increase in national income is likely to:
a) Decrease tax receipts

b) Worsen the balance of trade
c) Automatically cause an increase in government spending
d) Cause an increase in injections into the economy
Question 4
A significant increase in the government budget deficit is likely to:
a) Reduce injections into the economy

b) Reduce national income
c) Move the economy away from full employment
d) Boost aggregate demand
Question 5
If injections are greater than withdrawals:
122
a) National income will increase
b) National income will decrease
c) National income will stay in equilibrium
d) Prices will fall
Question 6
Injections are:
a) Assumed to be exogeneous
b) Assumed to be a function of national income
c) Decrease aggregate demand
d) Decrease the investment into an economy
Question 7
For equilibrium in an open four sector economy:
a) Actual injections = actual withdrawals

b) Planned injections = planned withdrawals
c) Savings = investment
d) Government spending = tax revenue
Question 8
A deflationary policy could include:
a) Increasing injections
b) Reducing taxation rates
c) Reducing interest rates
d) Reducing government spending
123
Question 9
A reflationary policy:
a) Increases aggregate supply

b) Increases aggregate demand
c) Decreases the price level
d) Increases full employment
Question 10
Which of the following is an injection into the economy?
a) Investment
b) Savings
c) Taxation
d) Import spending
Question 1
Injections:
Correct Answer:
d) Include investment and export spending
Feedback:
Injections are investment, export spending, and government spending.
Question 2
An increase in national income is:
Correct Answer:
124
d) Likely to increase spending on imports
Feedback:
Higher levels of national income increase withdrawals such as savings, import spending and taxation
revenue.
Question 3
An increase in national income is likely to:
Correct Answer:
b) Worsen the balance of trade
Feedback:
With more income there is likely to be more spending on imports, worsening the trade position.
Question 4
A significant increase in the government budget deficit is likely to:
Correct Answer:
d) Boost aggregate demand
Feedback:
A significant increase in the government budget deficit is likely to boost aggregate demand.
Question 5
If injections are greater than withdrawals:
Correct Answer:
a) National income will increase
125
Feedback:
With higher levels of planned injections than withdrawals this means aggregate demand is high which
will increase national income.
Question 6
Injections are:
Correct Answer:
a) Assumed to be exogeneous
Feedback:
Injections are investment, export spending and government spending; they increase the level of demand.
Question 7
For equilibrium in an open four sector economy:
Correct Answer:
b) Planned injections = planned withdrawals
Feedback:
For equilibrium planned withdrawals must equal planned injections.
Question 8
A deflationary policy could include:
Correct Answer:
d) Reducing government spending
Feedback:
126
A deflationary policy reduces the level of aggregate demand e.g. a reduction in government spending.
Question 9
A reflationary policy:
Correct Answer:
b) Increases aggregate demand
Feedback:
A reflationary policy increases aggregate demand.
Question 10
Which of the following is an injection into the economy?
Correct Answer:
a) Investment
Feedback:
Injections are investment, government spending and export spending.
Question 1
Gross National Product equals:
a) Net National Product adjusted for inflation

b) Gross Domestic Product adjusted for inflation
c) Gross Domestic Product plus net property income from abroad
d) Net National Product plus net property income from abroad
Question 2
127
Net National Product equals:
a) Gross National Product adjusted for inflation

b) Gross Domestic Product adjusted for inflation
d) Gross National Product minus depreciation
Question 3
The standard of living is often measured by:
a) Real GDP per capita

b) Real GDP
c) Real GDP * population
d) Real GDP plus depreciation
Question 4
In a recession:
a) Unemployment is likely to be low

b) Prices are likely to increase
c) Growth is negative
d) Growth is slow
Question 5
In a boom:
a) Surpluses are likely to occur

b) Prices are likely to fall
c) Supply will increase immediately to match demand
d) Shortages may occur
128
Question 6
GDP plus net property income from abroad equals what?
a) GNP
b) NNP
c) Depreciation
d) Real GDP
Question 7
To adjust GDP from market prices to factor cost:
a) Add indirect taxes

b) Subtract subsidies
c) Deduct indirect taxes and subsidies
d) Deduct indirect taxes and add subsidies
Question 8
To adjust from Gross National Product to Net National Product:
a) Deduct depreciation
b) Deduct indirect taxes
c) Deduct subsidies
d) Add inflation
Question 9
In a recession a government:
a) Is likely to want to increase demand in the economy

b) Is likely to want to decrease demand in the economy
c) Is likely to want to stabilise demand in the economy
129
d) Is likely to want to increase supply in the economy
Question 10
A higher GDP per capita may not mean that the quality of life has really improved because:
a) It measures wealth not income

b) It measures Gross Domestic Product
c) It does not measure the quality of the items produced
d) It is only measured every five years
Question 1
Gross National Product equals:
Correct Answer:
Feedback:
Gross National Product equals Gross Domestic Product plus net property income from abroad.
Question 2
Net National Product equals:
Correct Answer:
d) Gross National Product minus depreciation
Feedback:
Net National Product equals Gross National Product minus depreciation.
Question 3
130
The standard of living is often measured by:
Correct Answer:
a) Real GDP per capita
Feedback:
This shows the income per person adjusted for inflation.
Question 4
In a recession:
Correct Answer:
c) Growth is negative
Feedback:
In a recession there is negative growth in the economy.
Question 5
In a boom:
Correct Answer:
d) Shortages may occur
Feedback:
Shortages may occur with increases in demand.
Question 6
GDP plus net property income from abroad equals what?
131
Correct Answer:
a) GNP
Feedback:
This equals the Gross National Product rather than the Gross Domestic Product.
Question 7
To adjust GDP from market prices to factor cost:
Correct Answer:
d) Deduct indirect taxes and add subsidies
Feedback:
Indirect taxes need to be removed and subsidies added back on.
Question 8
To adjust from Gross National Product to Net National Product:
Correct Answer:
a) Deduct depreciation
Feedback:
Depreciation needs to be deducted.
Question 9
In a recession a government:
132
Correct Answer:
a) Is likely to want to increase demand in the economy
Feedback:
In a recession a government will want to increase demand.
Question 10
A higher GDP per capita may not mean that the quality of life has really improved because:
Correct Answer:
d) It is only measured every five years
Feedback:
It measures the income generated but not the quality of the products; items may be better quality but
cheaper to produce so GDP would fall.
Question 1
Economic growth can be measured by:
a) The CPI
b) The CBI
c) GDP
d) MPC
Question 2
In a boom:
a) Unemployment is likely to fall

b) Prices are likely to fall
c) Demand is likely to fall
d) Imports are likely to grow
133
Question 3
In a recession, GDP:
a) Grows negatively
b) Grows slowly
c) Grows by 0%
d) Grows rapidly
Question 4
If labour productivity per week is 200 units and there are 5 employees what is the total output?
a) 40 units
b) 195 units
c) 1000 units
d) 200 units
Question 5
Labour productivity measures:
a) The output per worker

b) The output per machine
c) Total output
d) Marginal output
Question 6
Potential growth measures:
a) The growth of the fastest economy in the world

b) The fastest growth an economy has ever achieved
134
c) The present rate of growth of an economy
d) The rate of growth that could be achieved if resources were fully employed
Question 7
Economic growth can be seen by an outward shift of:
a) The Production Possibility Frontier

b) The Gross Domestic Barrier
c) The Marginal Consumption Frontier
d) The Minimum Efficient Scale
Question 8
The socially optimal rate of growth is:
a) Zero
b) Negative
c) Where the marginal social benefit = the marginal social cost
d) Total social costs are minimised
Question 9
To anticipate what the economy is going to do next the government will look at:
a) Lagging indicators
b) Flashing indicators
c) Coincidental indicators
d) Leading indicators
Question 10
When an economy first begins to grow more slowly:
135
a) GDP increases
b) Inflation is likely to increase
c) Stock levels are likely to increase
d) Investment in equipment is likely to increase
Question 1
Economic growth can be measured by:
Correct Answer:
c) GDP
Feedback:
Economic growth is usually measured by GDP.
Question 2
In a boom:
Correct Answer:
a) Unemployment is likely to fall
Feedback:
In a boom the economy is growing relatively fast and so unemployment is likely to fall.
Question 3
In a recession, GDP:
Correct Answer:
a) Grows negatively
136
Feedback:
In a recession the economy is shrinking.
Question 4
If labour productivity per week is 200 units and there are 5 employees what is the total output?
Correct Answer:
c) 1000 units
Feedback:
Each employee is producing 200 units so the total output is 1000 units.
Question 5
Labour productivity measures:
Correct Answer:
a) The output per worker
Feedback:
This measures the output per worker.
Question 6
Potential growth measures:
Correct Answer:
d) The rate of growth that could be achieved if resources were fully employed
Feedback:
137
This measures the rate of growth that could be achieved if resources were fully employed.
Question 7
Economic growth can be seen by an outward shift of:
Correct Answer:
a) The Production Possibility Frontier
Feedback:
Economic growth can be seen by an outward shift of the production possibility frontier.
Question 8
The socially optimal rate of growth is:
Correct Answer:
c) Where the marginal social benefit = the marginal social cost
Feedback:
The socially optimal growth rate will be where the marginal social benefit = the marginal social cost.
Question 9
To anticipate what the economy is going to do next the government will look at:
Correct Answer:
d) Leading indicators
Feedback:
The government will look at leading indicators to gain some idea of what is likely to happen next.
Question 10
138
When an economy first begins to grow more slowly:
Correct Answer:
c) Stock levels are likely to increase
Feedback:
At first firms are likely to carry on producing at the old level so stocks increase.
Question 1
A shift in aggregate supply is likely to:
a) Reduce the general price level and reduce national income

b) Reduce the general price level and increase national income
c) Increase the general price level and reduce national income
d) Increase the general price level and increase national income
Question 2
Aggregate demand will increase if:
a) Consumption falls
b) Investment falls
c) Exports fall
d) Imports fall
Question 3
An increase in aggregate demand will have most effect on prices if:
a) Aggregate supply is price inelastic

b) Aggregate supply is price elastic
c) Aggregate supply has a unitary price elasticity
139
d) Aggregate demand is price inelastic
Question 4
Which of the following would increase aggregate demand?
a) Increased saving
b) Increasing import spending
c) Increased taxation revenue
d) Increased investment
Question 5
Which of the following would decrease aggregate demand?
a) Increased consumption
b) Increasing export revenue
Question 6
Improved training of employees would:
a) Shift aggregate supply to the right

b) Shift aggregate supply to the left
c) Shift aggregate demand to the right
d) Shift aggregate demand to the left
Question 7
Increased unemployment benefits and less incentive to work would:
140
Question 8
Increased levels of consumption:

Question 9
Increased levels of spending on imports:

Question 10
An increase in aggregate demand if aggregate supply is totally inelastic will:
a) Increase price but not output

b) Increase output but not price
c) Increase output and price
d) Decrease output and price
Question 1
A shift in aggregate supply is likely to:
141
Correct Answer:
b) Reduce the general price level and increase national income
Feedback:
A shift in aggregate supply is likely to reduce the general price level and increase national income.
Question 2
Aggregate demand will increase if:
Correct Answer:
d) Imports fall
Feedback:
Aggregate demand will increase if imports fall; with less spending on imports there is more spending in
the UK.
Question 3
An increase in aggregate demand will have most effect on prices if:
Correct Answer:
a) Aggregate supply is price inelastic
Feedback:
An increase in aggregate demand will have most effect on prices if aggregate supply is price inelastic.
Question 4
Which of the following would increase aggregate demand?
142
Correct Answer:
Feedback:
An increase in investment will increase aggregate demand.
Question 5
Which of the following would decrease aggregate demand?
Correct Answer:
Feedback:
An increase in taxation revenue will increase withdrawals and reduce aggregate demand.
Question 6
Improved training of employees would:
Correct Answer:
Feedback:
Improved training of employees would increase productivity and should increase the aggregate supply.
Question 7
Increased unemployment benefits and less incentive to work would:
Correct Answer:
143
Feedback:
Increased unemployment benefits and less incentive to work lead to less people working and reduce
aggregate supply.
Question 8
Increased levels of consumption:
Correct Answer:
Feedback:
Increased levels of consumption should increase aggregate demand and shift this to the right.
Question 9
Increased levels of spending on imports:
Correct Answer:
Feedback:
Increased levels of spending on imports leads to less spending in the UK and reduces domestic demand.
Question 10
An increase in aggregate demand if aggregate supply is totally inelastic will:
Correct Answer:
a) Increase price but not output
144
Feedback:
An increase in aggregate demand if aggregate supply is totally inelastic will increase prices but not
change output.
Question 1
If the marginal propensity to consume on domestic products is 0.9 the size of the multiplier is:
a) 10
b) 1
c) 9
d) 0.1
Question 2
An increase in the marginal propensity to consume will:
a) Increase the size of the multiplier

b) Increase the marginal propensity to save
c) Decrease national income
d) Reduce injections into the economy
Question 3
If the Keynesian consumption function is C = 10 + 0.8 Yd then when disposable income is £1000, total
consumption is what?
a) 0.8
b) 800
c) 810
d) 0.81
Question 4
If the Keynesian consumption function is C = 10 + 0.8 Yd then when disposable income is £1000, the
145
marginal propensity to consume is what?
a) 0.8
b) 800
c) 810
d) 0.81
Question 5
average propensity to consume is what?
a) 0.8
b) 800
c) 810
d) 0.81
Question 6
As income increases:
a) The average propensity to consume gets nearer in value to the marginal propensity to consume
b) The average propensity to consume diverges in value from the marginal propensity to consume
c) The average propensity to consume falls
d) The average propensity to consume always approaches 0
Question 7
An increase in consumption at any given level of income is likely to lead to:
a) A fall in savings
b) An increase in exports
c) A fall in taxation revenue
d) A decrease in import spending
146
Question 8
Lower interest rates are likely to:
a) Decrease consumption
b) Increase cost of borrowing
c) Encourage saving
d) Increase spending
Question 9
Friedman's theory of consumption focuses on:
a) Past income
b) Current income
c) Disposable income
d) Permanent income
Question 10
The marginal propensity to consume is equal to:
a) Total spending / total consumption

b) Total consumption / total income
c) Change in consumption / change in income
d) Change in consumption / change in savings
Question 1
If the marginal propensity to consume on domestic products is 0.9 the size of the multiplier is:
Correct Answer:
147
a) 10
Feedback:
The multiplier is (1/1-mpc) so if the mpc is 0.1 the multiplier is 10.
Question 2
An increase in the marginal propensity to consume will:
Correct Answer:
a) Increase the size of the multiplier
Feedback:
An increase in the marginal propensity to consume will increase the size of the multiplier.
Question 3
consumption is what?
Correct Answer:
c) 810
Feedback:
consumption = 10 + 0.8(1000) = 810
Question 4
marginal propensity to consume is what?
Correct Answer:
148
a) 0.8
Feedback:
marginal propensity to consumer is 0.8.
Question 5
average propensity to consume is what?
Correct Answer:
d) 0.81
Feedback:
average propensity to consume = 810/1000=0.81
Question 6
As income increases:
Correct Answer:
a) The average propensity to consume gets nearer in value to the marginal propensity to consume
Feedback:
As income increases the average propensity to consume gets nearer in value to the marginal propensity
to consume.
Question 7
An increase in consumption at any given level of income is likely to lead to:
149
Correct Answer:
a) A fall in savings
Feedback:
An increase in consumption at any given level of income is likely to lead to a fall in savings.
Question 8
Lower interest rates are likely to:
Correct Answer:
d) Increase spending
Feedback:
Lower interest rates are likely to encourage borrowing and therefore lead to more spending.
Question 9
Friedman's theory of consumption focuses on:
Correct Answer:
d) Permanent income
Feedback:
Friedman's theory of consumption focuses on permanent income rather than current income.
Question 10
The marginal propensity to consume is equal to:
Correct Answer:
150
c) Change in consumption / change in income
Feedback:
Change in consumption / change in income
Question 1
An increase in investment is most likely to be caused by:

b) Lower national income
c) A decrease in the marginal propensity to consume
d) An increase in withdrawals
Question 2
An outward shift in the Marginal Efficiency of Capital should:
a) Decrease consumption
b) Increase aggregate demand
c) Reduce aggregate supply
d) Slow economic growth
Question 3
An increase in interest rates:
a) Is likely to reduce savings

b) Is likely to reduce the external value of the currency
c) Leads to a shift in the MEC schedule
d) Leads to a movement along the MEC schedule
Question 4
151
The accelerator assumes:
a) The marginal propensity to consume is constant

b) The economy is at full employment
c) There is a constant relationship between net investment and the rate of change of output
d) The multiplier is constant
Question 5
Investment depends mainly on:
a) Past levels of income

b) Future expected profits
c) Present national income levels
d) Historic data
Question 6
A profit maximising firm will invest up to the level of investment where:
a) The cost of borrowing equals the marginal efficiency of capital

b) The cost of borrowing is greater than the marginal efficiency of capital
c) The cost of borrowing is less than the marginal efficiency of capital
d) The cost of borrowing equals the marginal propensity to consume
Question 7
Investment is:
a) An injection that increases aggregate demand

b) A withdrawal that increases aggregate demand
c) An injection that decreases aggregate demand
d) A withdrawal that decreases aggregate demand
152
Question 8
Investment is an unstable element of aggregate demand because is depends heavily on:
a) Government policy
b) Expectations
c) National income
d) Historic trends
Question 9
If an increase in investment leads to a bigger increase in national income this is called the:
a) Accelerator
b) Aggregate demand
c) Monetarism
d) Multiplier
Question 10
The difference between gross investment and net investment is:
a) Depreciation
b) Acceleration
c) Deceleration
d) Capital investment
Question 1
An increase in investment is most likely to be caused by:
Correct Answer:
153
Feedback:
Lower interest rates make it cheaper to borrow and therefore is likely to increase investment.
Question 2
An outward shift in the Marginal Efficiency of Capital should:
Correct Answer:
b) Increase aggregate demand
Feedback:
If the MEC shifts outwards then investment should increases because the expected returns are higher;
this should boost aggregate demand.
Question 3
An increase in interest rates:
Correct Answer:
d) Leads to a movement along the MEC schedule
Feedback:
Higher interest rates increase the cost of borrowing and should decrease the amount of investment.
Question 4
The accelerator assumes:
Correct Answer:
c) There is a constant relationship between net investment and the rate of change of output
Feedback:
154
The accelerator assumes there is a constant relationship between net investment and the rate of change
of output.
Question 5
Investment depends mainly on:
Correct Answer:
b) Future expected profits
Feedback:
Investment depends heavily on expectations of future returns.
Question 6
A profit maximising firm will invest up to the level of investment where:
Correct Answer:
a) The cost of borrowing equals the marginal efficiency of capital
Feedback:
A firm will invest if the expected return on an investment is greater than the cost of borrowing;
investment will continue up to the point where the rate of return equals the costs of borrowing.
Question 7
Investment is:
Correct Answer:
a) An injection that increases aggregate demand
Feedback:
155
Investment is an injection that increases aggregate demand.
Question 8
Investment is an unstable element of aggregate demand because is depends heavily on:
Correct Answer:
b) Expectations
Feedback:
Investment is relatively unstable because it depends heavily on expectations.
Question 9
If an increase in investment leads to a bigger increase in national income this is called the:
Correct Answer:
d) Multiplier
Feedback:
This is the multiplier.
Question 10
The difference between gross investment and net investment is:
Correct Answer:
a) Depreciation
Feedback:
The difference between gross and net investment is depreciation.
156
Question 1
An expansionist fiscal policy could include:

b) Increased lending by the banks
c) An increase in corporation tax
d) An increase in discretionary government spending
Question 2
If the economy grows the government's budget position will automatically:
a) Worsen
b) Improve
c) Stay the same
d) Increase with inflation
Question 3
Fiscal drag occurs when:
a) Tax bands do not increase with inflation

b) Tax rates move inversely with inflation
c) Government spending falls to reduce aggregate demand
d) Tax bands increase with inflation
Question 4
If the marginal rate of tax is 40% and consumers' income increase from &pound10,000 to
&pound12,000:
a) The amount of tax paid will increase by &pound4,800

b) The amount of tax paid will increase by &pound4,000
c) The amount of tax paid will increase by &pound800
157
d) The total tax paid will be &pound4,800
Question 5
Imagine there is no tax on income up to &pound10000; after that, there is a tax of 50%. What is the
average tax rate on an income of &pound20000?
a) &pound5000
b) 20%
c) 25%
d) &pound10,000
Question 6
The marginal rate of tax paid is:
a) The total tax paid / total income

b) Total income / total tax paid
c) Change in the tax paid / change in income
d) Change in income / change in tax paid
Question 7
In a regressive tax system:
a) The amount of tax paid increases with income

b) The marginal rate of tax decreases with more income
c) The average rate of tax falls as income increases
d) The average rate of tax is constant as income increases
Question 8
The Public Sector Net Cash Requirement (PSNCR) is:
158
a) A measure of the country's trade position
b) A measure of the country's budget position
c) A measure of the country's total debt
d) A measure of the government's monetary stance
Question 9
A government might use tax to:
a) Discourage consumption of positive externalities

b) Discourage consumption of public goods
c) Discourage consumption of merit goods
d) Discourage consumption of negative externalities
Question 10
As an economy grows:
a) The government's budget position should automatically improve

b) The government's budget position should automatically worsen
c) This will have no effect on the government's budget position
d) This will reduce the government's tax revenue
Question 1
An expansionist fiscal policy could include:
Correct Answer:
d) An increase in discretionary government spending
Feedback:
This is when government spending increases and/or tax rates are decreased.
Question 2
159
If the economy grows the government's budget position will automatically:
Correct Answer:
b) Improve
Feedback:
With more income and spending tax revenue should increase improving the budget position.
Question 3
Fiscal drag occurs when:
Correct Answer:
a) Tax bands do not increase with inflation
Feedback:
This occurs when tax bands do not increase with inflation.
Question 4
If the marginal rate of tax is 40% and consumers' income increase from &pound10,000 to
&pound12,000:
Correct Answer:
c) The amount of tax paid will increase by &pound800
Feedback:
The extra tax paid is &pound800 (= 40%*&pound2000).
Question 5
Imagine there is no tax on income up to &pound10000; after that, there is a tax of 50%. What is the
160
average tax rate on an income of &pound20000?
Correct Answer:
c) 25%
Feedback:
The total tax paid is &pound5000; this means that the average tax is 25% (&pound5000 out of
&pound20,000).
Question 6
The marginal rate of tax paid is:
Correct Answer:
c) Change in the tax paid / change in income
Feedback:
Change in the tax paid / change in income
Question 7
In a regressive tax system:
Correct Answer:
b) The marginal rate of tax decreases with more income
Feedback:
In a regressive tax system the marginal rate of tax falls as income increases.
Question 8
The Public Sector Net Cash Requirement (PSNCR) is:
161
Correct Answer:
b) A measure of the country's budget position
Feedback:
This is a measure of the country's budget position.
Question 9
A government might use tax to:
Correct Answer:
d) Discourage consumption of negative externalities
Feedback:
A government might use tax to reduce consumption of negative externalities and move the market
nearer to the socially optimal output.
Question 10
As an economy grows:
Correct Answer:
a) The government's budget position should automatically improve
Feedback:
With growth in the economy income from tax should increase whilst soending in benefits should
decrease.
Question 1
If people are made unemployed because of a fall in aggregate demand this is known as:
a) Frictional unemployment
162
b) Seasonal unemployment
c) Cyclical unemployment
d) Structural unemployment
Question 2
Supply side policies are most appropriate to cure:
a) Involuntary unemployment
b) Cyclical unemployment
c) Voluntary unemployment
d) A fall in aggregate demand
Question 3
The natural rate of unemployment is likely to fall if:
a) Unemployment benefits increase

b) Income tax increases
c) More training is available for the unemployed
d) Geographical immobility increases
Question 4
If the real wage is too high in the labour market:
a) The quantity demanded of labour is higher than the quantity supplied

b) The quantity demanded of labour equals the quantity supplied
c) The quantity demanded of labour is lower than the quantity supplied
d) It will automatically adjust in the short run to bring about equilibrium
Question 5
163
If there is cyclical unemployment in the economy the government might:
a) Increase interest rates

b) Encourage savings
c) Cut taxes
d) Reduce government spending
Question 6
Occupational immobility of labour occurs if:
a) People lack information

b) People do not want to work
c) People do not have the right skills to work
d) People cannot afford to move location
Question 7
Which of the following is not a supply side measure?
a) Increased training
b) Providing more information
c) Helping individuals to move location to find work
d) Increasing spending on existing industries
Question 8
Reducing involuntary unemployment:
a) Helps the economy move on to the Production Possibility Frontier

b) Helps shift the economy's Production Possibility Frontier outwards
c) Helps the economy move along its Production Possibility Frontier
d) Helps the economy move inside the Production Possibility Frontier
164
Question 9
Less demand in the economy may increase unemployment; this may lead to less spending which may
reduce demand further. This is called:
a) The upward accelerator

b) The downward multiplier
c) The upward PPF
d) The downward mpc
Question 10
To reduce cyclical unemployment the government might:
a) Increase the budget surplus

b) Increase the balance of payments deficit
c) Reduce interest rates
d) Reduce government expenditure
Question 1
If people are made unemployed because of a fall in aggregate demand this is known as:
Correct Answer:
c) Cyclical unemployment
Feedback:
This is cyclical unemployment.
Question 2
Supply side policies are most appropriate to cure:
165
Correct Answer:
c) Voluntary unemployment
Feedback:
Supply side policies can be used to reduce the level of voluntary unemployment.
Question 3
The natural rate of unemployment is likely to fall if:
Correct Answer:
c) More training is available for the unemployed
Feedback:
Supply side measures can be used to reduce the natural rate of unemployment. In this case training
enables more employees to accept jobs thereby reducing the natural rate of unemployment.
Question 4
If the real wage is too high in the labour market:
Correct Answer:
c) The quantity demanded of labour is lower than the quantity supplied
Feedback:
A real wage above equilibrium will lead to excess supply.
Question 5
If there is cyclical unemployment in the economy the government might:
Correct Answer:
166
c) Cut taxes
Feedback:
To reduce cyclical unemployment the government may try to boost aggregate demand.
Question 6
Occupational immobility of labour occurs if:
Correct Answer:
c) People do not have the right skills to work
Feedback:
Occupational mobility refers to the ability of people to move between jobs; this depends on skills and
information.
Question 7
Which of the following is not a supply side measure?
Correct Answer:
d) Increasing spending on existing industries
Feedback:
Supply side measures focus on enabling or encouraging more people to work.
Question 8
Reducing involuntary unemployment:
Correct Answer:
a) Helps the economy move on to the Production Possibility Frontier
167
Feedback:
Reducing involuntary unemployment will move the economy towards to Production Possibility
Frontier.
Question 9
Less demand in the economy may increase unemployment; this may lead to less spending which may
reduce demand further. This is called:
Correct Answer:
b) The downward multiplier
Feedback:
More unemployment can lead to less spending and a multiplier effect bringing the level of national
income down.
Question 10
To reduce cyclical unemployment the government might:
Correct Answer:
c) Reduce interest rates
Feedback:
Low interest rates might encourage more spending and reduce cyclical unemployment.
168

Economics MCQs

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Economics MCQs

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1.

The fundamental economic problem faced by all societies is:

2. "Capitalism" refers to:

5. The bowed shape of the production possibilities curve illustrates:

10. The demand for a product would be more inelastic:

2. The agricultural price support program is an example of

3. If there is a price floor, there will be

5. If there is a price ceiling, which of the following is NOT likely to occur?

6. The goal of a pure market economy is to best meet the desires of

7. In a pure market economy, which of the following is a function of the price?

10. Why is the law of diminishing marginal returns true?

1. Which of the following is a characteristic of pure monopoly?

4. Quantity Price Total Cost

This monopolist should produce:

5. Compared to the case of perfect competition, a monopolist is more likely to:

6. Which of the following is necessary for a natural monopoly?

8. Which of the following best defines price discrimination?

9. In order to practice price discrimination, which of the following is needed?

2. Workers Quantity Produced

This company is a profit-maximizing firm selling in a competitive product market and

3. The demand for labor is the same as the

5. The demand for labor will be more elastic if:

6. Skills that can be transferred to other employers are called:

7. Which skills are most likely to be paid for by the employer?

8. If worker A earns more in wages than worker B, it could be because:

10. “Treating an individual as typical of a group” is the definition of

3. The government provides anti-trust laws.

4. The government subsidizes the building of new stadiums and arenas.

5. The government provides for military defense.

9. The government makes the beach free for everyone

3. The tax is question #2 is:

4. Which of the following taxes is regressive?

7. Which of the following statements is/are true?

8. Immediately after a trough, we would expect to have a/an

1. Assume that there are only two goods: A and B

2. Which of the following groups is most hurt by unexpected inflation?

5. Disposable Income is equal to:

9. Which of the following is an automatic stabilizer?

10. “Crowding out” means that

1. Which of the following IS a function of money?

2. Which of the following is a component of M-1?

3. Which of the following is a NOT component of M-2?

6. Which of the following is the most liquid?

7. The monetary base is composed of:

9. If the Federal Reserve wishes to increase the money supply, it should:

10. An increase in the money supply will cause interest rates to

a) Are always fixed

Human wants are:

Which of the following is not one of the basic economic questions?

The basic economic problems will not be solved by:

The free market involves:

a) The free provision of products

a) Has supply but not demand

In a command (planned) economy:

a) The price mechanism acts as an incentive

The public sector includes:

a) Investors owning companies

Which of the following is a normative statement in economics?

a) More spending by the government reduces poverty

d) Are limited at any moment in time

Remember that resources are inputs into the production process.

Human wants are:

Which of the following is not one of the basic economic questions?