Economic Principles I
ECN 4115, Summer 1994
This test consists of multiple-choice questons in part I and short-answer type questions in part II.
Part I, and each questions in part II weighs 25 percent of the test.
Multiple -choice questions.
Choose the most appropriate answer of the following questions:
1) Economic theories:
(a) are useless because they are not based upon laboratory
(b) which are true for individual economic units are never true
for the economy as a whole.
(c) are generalizations based upon a careful observation of
(d) are abstractions and therefore of no application to real
2) In constructing models, economists:
(a) make simplifying assumptions.
(b) include all available information.
(c) must use mathematical equations.
(d) attempt to duplicate the real world.
3) If we say that two variables are directly related, this means
(a) the relationship between the two is purely random.
(b) an increase ID one variable is associated with a decrease in
the other variable.
(c) an increase in one variable is associated with an increase
in the other variable.
(d) the two graph as a downsloping line.
4) An "increase in efficiency" suggests that an economy:
(a) has moved from a point outside of, to a point on, its
production possibilities curve.
(b) has decided to produce more consumer goods and fewer capital
(c) has moved from a point on, to a point inside, its production
(d) is able to get less output from a given amount of inputs.
(e) is able to get more output from a given amount of inputs.
5) The money payments made to owners of land, labor, capital, and
entrepreneurial ability are:
(a) interest, wages, rent, and profits respectively.
(b) rent, wages, dividends, and interest respectively.
(c) rent, profits, wages, and interest respectively.
(d) rent, wages, interest, and profits respectively.
(e) rent, wages, profit, and interest respectively.
6) The production possibilities curve illustrates the basic
(a) the production of more of any one good will in time require
smaller and smaller sacrifices of other goods.
(b) an economy will automatically seek that level of output at
which all of its resources are employed.
(c) if all the resources of an economy are in use, more of one
good can be produced only if less of another good is
(d) an economy's capacity to produce increases in proportion to
its population size.
7) Which of the following would be most likely to shift the
production possibilities curve to the right?
(a) a sudden and substantial expansion of consumer wants
(b) an improvement in the literacy level and general level of
(c) a decline in the size of the population and labor force
(d) shifting resources from butter to gun production
8) The notion of opportunity costs is best defined as:
(a) the monetary price of any productive resource.
(b) the amount of labor that must be used to produce one unit of
(c) the ratio of the prices of imported goods to the prices of
(d) the amount of one product that must be given up to produce
one more unit of another product.
9) The term "laissez faire" suggests that:
(a) land and other natural resources should be privately owned,
but capital should be publicly owned.
(b) land and other natural resources should be publicly owned,
but capital equipment should be privately owned.
(c) government should not interfere with the operation of the
(d) government action is necessary if the economy is to achieve
full employment and full production.
10) Specialization in production is economically beneficial primarily
(a) allows everyone to have a job which they like.
(b) permits the production of a larger output with fixed amounts
(c) facilitates trade by bartering.
(d) guarantees full employment.
11) According to the concept of comparative advantage, a good should
be produced in that region or nation where:
(a) its opportunity cost is greatest.
(b) money is used as a medium of exchange.
(c) its opportunity cost is least.
(d) the terms of trade are maximized.
12) The simple circular flow model shows that:
(a) households are on the demand side of both product and
(b) businesses are on the supply side of both product and
(c) households are on the supply side of the resource market and
on the demand side of the product market.
(d) businesses are on the demand side of the product market and
on the supply side of the resource market.
13) A market:
(a) reflects upsloping demand and downsloping supply curves.
(b) entails the exchange of goods, but not services.
(c) is an institution which brings together buyers and sellers.
(d) always entails face-to-face contact between buyer and seller.
14) The law of demand states that:
(a) price and quantity demanded are inversely related.
(b) the larger the number of buyers in a market, the lower will
be product price.
(c) price and quantity demanded are directly related.
(d) consumers will buy more of a given product at high prices
than they will at low prices.
15) When product prices change, consumers are inclined to purchase
larger amounts of the now cheaper products and less of the now
dearer products. This describes:
(a) the cost effect.
(b) the price effect.
(c) the income effect.
(d) the substitution effect.
(e) none of the above.
16) During the 1970s the price of oil rose dramatically, which in
turn caused the price of coal to increase. This can best be
explained by saying that:
(a) oil and coal are complementary goods and the higher price
for oil increased the demand for coal.
(b) oil and coal are substitute goods and the higher price for
oil increased the demand for coal.
(c) oil and coal are complementary goods and the higher price
for oil decreased the supply of coal.
(d) oil and coal are substitute goods and the higher price for
oil decreased the supply of coal.
17) If two goods are complements:
(a) they are consumed jointly.
(b) an increase in the price of one will reduce the demand for
(c) a decrease in the price of one will increase the demand for
(d) all of the above will be true.
18) The law of supply indicates that:
(a) producers will offer more of a product at high prices than
they will at low prices.
(b) the product supply curve is downsloping.
(c) consumers will purchase less of a good at high prices than
they will at low prices.
(d) producers will offer more of a product at low prices than
they will at high prices.
19) A firm's supply curve is upsloping because:
(a) the expansion of production necessitates the use of
qualitatively inferior inputs.
(b) mass production economies are associated with larger levels
(c) consumers envision a positive relationship between price and
(d) beyond some point the production costs of additional units
of output will rise.
20) If a product is in surplus supply, we can conclude that its price:
(a) is below the equilibrium level.
(b) is above the equilibrium level.
(c) will rise in the near future.
(d) is in equilibrium.
22) A market is in equilibrium:
(a) provided there is no surplus of the product.
(b) at all prices above that shown by the intersection of the
supply and demand curves.
(c) if the mount which producers want to sell is equal to the
mount which consumers want to buy.
(d) whenever the demand curve is downsloping and the supply
curve is upsloping.
23) Which of the following is a shortcoming of the market system?
(a) The production of certain goods might impose costs upon
individuals other than the producers and buyers of those
(b) Certain goods will not be produced because there is no way
of excluding nonpaying ("free-rider") individuals from the
(c) The resulting distribution of personal incomes might be
(d) All of the above are possible shortcomings of the market
24) If a good's production entails substantial spillover benefits and
no spillover costs, then:
(a) too much of the good will be produced unless firms are
(b) 100 much of the good will be produced unless firms are taxed.
(c) too little of the good will be produced unless firms are
(d) too little of the good will be produced unless firms are
25) If the production of a good or service entails rather sizable
spillover benefits, government might correct for the:
(a) under allocation of resources to its production by imposing
an excise tax.
(b) over allocation of resources to its production by imposing an
(c) under allocation of resources to its production by granting a
(d) over allocation of resources to its production by granting a
31) A subsidy:
(a) should be provided when there are external costs.
(b) should be provided when there are external benefits.
(c) should be provided only when a public good is being produced.
(d) is appropriate when firms are guilty of pollution.
Part II : Short answer type questions
1. a) Use demand - supply model to determine equilibrium price and quantity
in the coffee market. Label your graph correctly.
b) If income of consumers change what will happen to equilibrium price
and quantity ? Consider coffee as a normal good.
c) A bad frost in Brazil, a major supplier of coffee, is expected to reduce
coffee supply within next six months. Now use your model to predict
equilibrium quantity and prices.
d) If prices of substitutes for coffee decline, how will affect to demand for
coffee, and its equilibrium prices and quantities ?
e) If p physicians warn coffee drinkers to reduce the amount of coffee
consumed per day, how will prices and quantity change in equilibrium?
2. a)Write the components of GDP according to the expenditure and income approach.
b) Show relationship between GDP and GNP, GDP and NDP
c) Show relationship between GDP and National Income
d) Show relationship between National Income and Personal Income
e) What is the difference between Personal Income and Disposable
3. Give economic reasons for why government should subsidize education and health care.( hint : explain spillover benefits, equilibrium and optimal level of these services with graph).
ANSWER KEY FOR TEST- D:TEST4
CHAPTER:1 QUESTION: 3
CHAPTER:1 QUESTION: 7
CHAPTER:1 QUESTION: 59
CHAPTER:2 QUESTION: 9
CHAPTER:2 QUESTION: 14
CHAPTER:2 QUESTION: 23
CHAPTER:2 QUESTION: 27
CHAPTER:2 QUESTION: 98
CHAPTER:3 QUESTION: 12
CHAPTER:3 QUESTION: 13
CHAPTER:3 QUESTION: 31
CHAPTER:4 QUESTION: 1
CHAPTER:4 QUESTION: 3
CHAPTER:4 QUESTION: 15
CHAPTER:4 QUESTION: 20
CHAPTER:4 QUESTION: 23
CHAPTER:4 QUESTION: 62
CHAPTER:4 QUESTION: 68
CHAPTER:4 QUESTION: 91
CHAPTER:4 QUESTION: 92
CHAPTER:6 QUESTION: 3
CHAPTER:6 QUESTION: 8
CHAPTER:6 QUESTION: 9
CHAPTER:6 QUESTION: 31