Econ 103 Practice 1

1. True or False: According to the basic model of competition in a market, firms seek to
maximise
profits
a) True
b) False
2. True or False: Economics cannot claim to be a science since the subject cannot make use of
controlled laboratory experiments to test a theory
a) True
b) False
3. True or False: The following statement is an example of a normative statement: the cost of
fruit
and vegetables should be subsidised by the government to encourage healthy eating
a) True
b) False
4. Individuals and businesses must make choices because
a) They must act rationally
b) Of resource scarcity
c) Of the law of diminishing returns
d) None of the above
5. If a consumer is acting rationally, we mean that
a) They save a proportion of their monthly income rather than spend it all
b) They wont take a job that pays low wages
c) They weigh up the costs and benefits of each choice they make
d) They will always buy the products in the market that are cheapest
6. Allocating scarce products such as cup final tickets by using ballot or a lottery is an example
of
a) The profit motive
b) Rationing
c) Only selling to the highest bidder
d) None of the above
7. In a market-based economy the scarcity of factors of production means that
a) Consumers must inevitably consider the opportunity cost of their choices
b) A country cannot achieve economic growth every year
c) Inflation is inevitable
d) The economy cannot produce on its production possibility frontier
8. Which of the following is not a factor of production as the term is used by economists?
a) Farmland

b) Cash in a bank account

c) Buildings and machinery
d) Labour
9. Which one of the following is best described as a normative statement?
a) A reduction in spending on the NHS will result in some job losses
b) Free health care should be provided to everyone
c) A reduction in health care spending will have most impact on lower income households
d) Extra funding for the NHS may involve some switching of spending from other services such
as education or transport
10. Economics is primarily concerned with the study of
a) Determining how the government should allocate resources
b) How to make more effective use of resources through reducing wants
c) Allocating scarce resources to satisfy competing and unlimited wants
d) How new wants and economic resources are produced by businesses
11. Which one of the following is a positive statement?
a) Income inequality in the UK has increased over the last 30 years
b) The rate of unemployment is too high
c) The national minimum wage rate should be increased to 5 per hour
d) Nurses working in the National Health Service should have a maximum working week of 50
hours per week
12. Choice is important in the basic economic problem because
a) Wants increase with income
b) Scarce economic resources are distributed equally
c) Limited economic resources have many alternative uses
d) High demand leads to higher market prices
13. Which one of the following is a 'normative statement'?
a) Increased spending on new cars will lead to a rise in traffic congestion
b) Prices in a competitive market are likely to be lower than a monopoly
c) Most firms seek to maximise their market share
d) The government should raise taxes on products which harm the environment
14. In economics it is generally assumed that the main objective of firms is to
a) Reduce their prices and satisfy as many consumers as possible
b) Maximise the company share price on the stock market
c) Employ more workers in order to reduce unemployment
d) Maximise total profits
15. Profit is most likely to be an objective of
a) State-owned industries
b) Consumers
c) Governments

d) Entrepreneurs
16. A possible advantage of a planned economy is that:
a) Resources are allocated via the price mechanism
b) There is greater consumer choice of products
c) Identification with the state may be a better work incentive than the profit motive
d) The state can better provide a range of goods for collective consumption
17. Which of the following is a measure of productivity?
a) The total amount of output produced by a business each year
b) Total output divided by total employment of labour
c) The quantity of capital used by a business
d) The percentage increase in employment
18. Which of the following is a positive statement?
a) Direct taxes should be increased to distribute income more fairly
b) The government ought to cut the taxes paid by motorists
c) The distribution of income and wealth is unequal
d) All taxes are bad, but some public services are good
19. Which one of the following is a normative statement?
a) The government should spend more on the health service
b) Building a new hospital involves an opportunity cost
c) The government regards health care as a merit good
d) Some medicinal drugs are ineffective and expensive to supply to patients
20. Opportunity cost is best defined as
a) The cost of a choice measured by the cost of products bought
b) The cost of a choice measured by the next best alternative forgone
c) The cost of a choice measured by the time taken to consume
d) The cost of buying an additional unit of a good or service
21. What are the four main types of factor of production?
a) Land, labour and money
b) Money, entrepreneurship, and factories
c) Labour, cash, capital, and entrepreneurship
d) Land, labour, capital and entrepreneurship
22. A student works for a book shop during the holidays. She is offered the alternative of
being paid 100 per week in cash of choosing 150 worth of books from the shelves. What is the
opportunity cost to the student of choosing the books?
a) 50
b) 150
c) 100
d) The alternative use to which her time could have been put

23. If scarce resources are allocated efficiently then

a) Equal amounts of land, labour and capital have been used in producing a good or service
b) Firms are maximising their sales and profits
c) All consumers have equal amounts of goods and services
d) It is impossible to increase the output of one good without reducing the output of another good
24. The existence of scarcity implies that
a) There are no free goods
b) Only rich households can save
c) Supplies of factors of production cannot be increased
d) Households, firms and governments must make choices
25. The workers in a factory currently earn 240 for a 40 hour week. The management offers
them a choice between either a straight 10 per cent wage increase or an increase in the weekly
wage to 260 along with a reduction in hours from 40 to 39 hours. Disregarding the value of
leisure time, what is the opportunity cost to each worker of opting for the 39 hour week?
a) 4
b) 6
c) 20
d) 24
26. True or False: Combinations of goods and services that lie within the production
possibility curve show an inefficient allocation of scarce resources
a) True
b) False
27. True or False: A fall in the size of the available labour supply, other factors remaining
constant, will cause an outward shift of a production possibility curve
a) True
b) False
28. True or False: A movement along the frontier of a production possibility curve can only
be achieved if the economy successfully reduced unemployment
a) True
b) False
29. The production possibility schedule for vans and lorries is as follows
Vans
Lorries
16
0
15
1
14
2
13
3
11
4
9
5
7
6
0
7

Sweets

The opportunity cost of the second lorry in terms of vans is

a) 1
b) 2
c) 7
d) 14

Mountain Bikes
30. Which economic concept is illustrated by the shape of the production possibility frontier
shown in the diagram above?
a) The law of diminishing returns
b) Economies of scale
c) Economic growth
d) Diseconomies of scale
31. The production possibility curve
a) Shows the amount of two or more goods that a society can produce
b) Is normally drawn as a concave curve rather than a straight line
c) Shows allocations of two or more goods that are allocative efficient
d) All of the above
32. When an economy operates on its production possibility frontier it is
a) Satisfying all the economic wants of consumers
b) Productively efficient

c) Maximising the profits of producers

d) Not producing demerit goods such as cigarettes and other harmful drugs
33. Periods of high unemployment in an economy correspond to
a) Points that lie within the production possibility curve
b) Points that lie on the production possibility curve
c) Points that lie outside the production possibility curve
d) None of the above
34. If the United Kingdom has a comparative advantage in the production of a good, then
a) The UK will usually be a net importer of the good
b) The UK will be required to pay tariffs on imports of the good
c) Fewer resources are required to produce the good in the United Kingdom
d) The relative cost of producing the good is lower in other countries
35. Important sources of comparative advantage in the production of a good or service include
a) Natural endowments of factors of production
b) The quality of human capital
c) Lower unit labour costs
d) All of the above
36. The outward shift of the PPF might have been caused by
a) An increase in the number of capital employed
b) A fall in new capital investment
c) An increase in the number of labour employed
d) Improvements in technology
37. Which of the following would eliminate the need for economics?
a. Wants are limited
b. Needs are limited
c. Resources are unlimited
d. Resources are limited
e. Needs are unlimited
38. The scarcity principle implies that to have more of one thing usually means
a. increasing resources.
b. limiting wants.
c. increasing the need for another.
d. having less of another.
e. none of the above
39. The Cost-Benefit Principle tells people they should take an action if
a. benefits exceed costs.
b. costs exceed benefits.
c. marginal costs exceed marginal benefits.
d. marginal benefits exceed marginal costs.

e. benefits are positive.

40. People who have well-defined goals and try to fulfill them as best they can are known as
a. rational.
b. macroeconomists.
c. microeconomists.
d. maximizers.
e. opportunists.
41. A sunk cost is
a. the value of money sunk into an investment.
b. beyond recovery at the moment a decision must be made.
c. important to consider when conducting cost-benefit analysis.
d. equal to the opportunity cost when the interest rate is zero.
e. the same as a marginal cost.
42. When deciding whether to pursue an activity further, which of the following cost is relevant?
a. sunk costs
b. marginal costs
c. average costs
d. total costs
e. fixed costs
43. Which of the following is a synonym for "marginal" in economics?
a. extra
b. additional
c. one more
d. change
e. all of the above
44. Which of the following topics is most likely to be studied in microeconomics?
a. tax policies
b. the price level
c. national output
d. the auto market
e. the unemployment rate
For the next two questions, refer to the graph below.
45. If each unit costs $12, and you can only buy whole units, what is the optimal quantity to
purchase?
a. 1
b. 2
c. 3
d. 5
e. 6

46. What would price have to equal before 7 units would be purchased?
a. 0
b. 5
c. 10
d. 15
e. 20

47. A theory is
(a) an assumption,
(b) an if-then proposition,
(c) a hypothesis, or
(d) a validated hypothesis.
48. A hypothesis is tested by
(a) the realism of its assumption(s),
(b) the lack of realism of its assumption(s),
(c) its ability to predict accurately an outcome that follows logically from the assumption(s), or
(d) none of the above.
49. The meaning of the word economic is most closely associated with the word
(a) free,
(b) scarce,
(c) unlimited, or
(d) unrestricted.
50. In a free-enterprise economy, the problems of what, how, and for whom are solved by
(a) a planning committee,

(b) the elected representatives of the people,

(c) the price mechanism, or
(d) none of the above.
51. Microeconomic theory studies how a free-enterprise economy determines
(a) the price of goods,
(b) the price of services,
(c) the price of economic resources, or
(d) all of the above.
52. A market
(a) necessarily refers to a meeting place between buyers and sellers,
(b) does not necessarily refer to a meeting place between buyers and sellers,
(c) extends over the entire nation, or
(d) extends over a city.
53. A function refers to
(a) the demand for a commodity,
(b) the supply of a commodity,
(c) the demand and supply of a commodity, service, or resource, or
(d) the relationship between one dependent variable and one or more independent variables.