Chapter (2) MCQs

1. A household can supplement its income in some given time period by

I. using past savings
II. decreasing consumption expenditure
III. borrowing against future income
Which of the following is correct?
a. I only
b. I and III only*
c. II only
d. I, II and III
2. If the following equation referred to the current behaviour of a household
MUa⁄Pa > MUb⁄Pb
What change in consumption would be required to achieve maximum utility from the
consumption of the two goods?
a. An increase in consumption of good b thereby raising the total utility of b
b. An increase in consumption of good a and a decrease in consumption of good b
thereby decreasing MUa and increasing MUb*
c. A decrease in the consumption of good a thereby lowering Pa until the ratios were
equal
d. Spending equal amounts on both goods, assuming their prices are equal, will cause
the ratios to be equal
3. Which of the following represents the Law of Diminishing Marginal Utility

a. A only
b. B only
c. C only*
d. D only
4. Which of the following identifies an ‘inferior’ good?
a. When the price decreases less is purchased
b. When real income increases less is purchased*
c. When the price increases more is purchased
d. When real income increases the substitution effect is positive
5. You are in a fishmongers about to buy salmon and tuna steaks to barbecue for dinner
when your daughter contacts you on your mobile to inform you there will be 4 more for
dinner. At the same time the fishmonger announces that the tuna steaks are now half
price. You decide to forego the salmon steaks – all will have tuna. Compared to your
initial position before the mobile call and fishmonger’s cut price deal on tuna which of the
following describes what has occurred to your demand curve for tuna? There has been
a. a shift to the right of and a movement along your demand curve*
b. a shift to the left of but no movement along your demand curve
c. a shift to the left of and a movement along your demand curve
d. a shift to the right of but no movement along your demand curve

Page 1 of 32
6. You are in a fishmongers about to buy salmon and tuna steaks to barbecue for dinner
when your daughter contacts you on your mobile to inform you there will be 4 more for
dinner. At the same time the fishmonger announces that the tuna steaks are now half
price. You decide to forego the salmon steaks – all will have tuna. Which of the following
diagrams represents what is happening to your demand curve for salmon where D1 is the
initial demand curve, i.e. before the guests’ arrival and the price reduction in tuna and D2
is the demand curve after those events.

a. A only
b. B only
c. C only
d. D only*
7. The price charged by a famous surgeon in Southern California for facial cosmetic surgery
is $20k. At this price he discovered he had more business than he could handle and decided
to increase his price to $25k. No one cancelled and the demand for his services remained
unaltered. It can be concluded that
I. between the prices of $20k and $25k the demand curve for the surgeon’s services is
price inelastic
II. total revenue on all points on the demand curve for the surgeon’s services is
constant
Which of the following is correct?
a. I only*
b. II only
c. Both I and II
d. Neither I nor II
8. In an attempt to increase revenue the Secretary of the University has recommended that
student fees be increased. The President of the student body has argued that the
University, if it wishes to increase revenue, should decrease, rather than increase,
student fees. It can be inferred from the opinions of the Secretary and President that
they
I. disagree about whether the demand curve for the University’s education is
responsive to prices (fees)
II. disagree about the price (fee) elasticity of the demand curve for the University
places
Which of the following is correct?
a. I only
b. II only*
c. Both I and II
d. Neither I nor II

Page 2 of 32
9. The data below were collected in a London survey which was commissioned by retailers
anxious to discover how demand was likely to change for their products in light of the
significant increases in earned income caused by the sustained boom.
Which of the following identifies correctly the values for income elasticity for DH, FC, MU
and WW taken in order?

a. > 1, < 0, < 1, 0

b. < 1, > 1, 0, > 1
c. > 1, < 0, 0, 1*
d. <1, 0, > 1, 0
10. The driving forces of a market economy are
I. consumers attempting to maximise utility
II. firms attempting to maximise profit
III. government taxing households and firms to provide specified goods
Which of the following is correct?
a. I only
b. II only
c. I and II only*
d. I, II and III only
11. A household allocates its budget on three goods, X, Y and Z, the price per unit of each
being $2.00, $4.00 and $8.00 respectively. If the household is maximising satisfaction from
the way it allocates its budget among X, Y and Z it follows that the satisfaction from the
last unit of
I. Y consumed is ½ of the satisfaction from the last unit of X consumed
II. Y consumed is twice the satisfaction from the last unit of Z consumed
Which of the following is correct?
a. I only
b. II only
c. Both I and II
d. Neither I nor II*
12. A household is in equilibrium consuming only goods, x and y, i.e. maximising utility subject
to a budget constraint. The price of good x falls and simultaneously the budget is
increased. Assuming the household continues to consume only x and y what will happen to
their purchases?
a. The quantity of x purchased will increase, the quantity of y purchased may increase,
remain constant or decrease*
b. The quantity of x purchased will increase, the quantity of y purchased will increase
c. The quantity of y purchased will decrease, the quantity of x purchased may
increase, remain constant or decrease
d. The quantity of y purchased may increase remain constant or decrease, the
quantity of x purchased may increase, remain constant or decrease.
13. What is meant by the statement ‘The substitution effect is always negative’?
a. Less of some goods is purchased as incomes rise
b. Increases in the price of a good always lead to the substitution of relatively less
expensive goods*
c. At the price of zero on a linear demand curve price elasticity of demand is zero
d. If households start purchasing inferior goods their changes in income must have
been negative

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14. A household allocates daily income of $100 on a selection of goods and services.
In scenario 1 daily income increases by 10%; prices of goods and services remain constant.
In scenario 2 daily income remains constant; prices of goods and services decrease by 10%.
Comparing scenarios 1 and 2 which of the following is correct?
a. The household would be better off in scenario 1
b. The household would be better off in scenario 2*
c. The household would be indifferent between scenarios 1 and 2
d. There is insufficient information to tell in which scenario the household would be
better off
15. The differences between an individual demand curve and a market demand curve for a
good are
I. the dependent and independent variables are reversed
II. the former is price inelastic, the latter price elastic
Which of the following is correct?
a. I only
b. II only
c. Both I and II
d. Neither I nor II*
16. Which of the following is the formula for price elasticity of demand?
a. ∆Q⁄∆P
b. ∆Q⁄Q⁄∆P
c. ∆Q⁄Q⁄∆P⁄P *
d. Q⁄P
17. In the demand curve below

I. P4 × 3 = P3 × 4
II. P2 × 6 = P1 × 12
Which of the following is correct?
a. I only
b. II only
c. Both I and II*
d. Neither I nor II

Page 4 of 32
18. In the demand curve below

I. at point P112, the price elasticity of demand is zero

II. at point P43 the price elasticity of demand is infinite
Which of the following is correct?
a. I only
b. II only
c. Both I and II
d. Neither I nor II*
19. It is a well known fact that cigarette smoking has a higher incidence in low income
households than in high income households. It is also a well known fact that despite the
‘high’ price of cigarettes the demand is price inelastic. It can be deduced from the above
statements that reducing taxes on cigarettes would
I. increase the real income of the ‘poor’ relative to the ‘rich’
II. accepting the principle of consumer sovereignty, make the poor better off
III. increase sales of cigarettes with the proportional increase in the quantity demanded
being greater that the proportional decrease in price
Which of the following is correct?
a. I only
b. I and II only*
c. III only
d. I, II and III

Page 5 of 32
 Chapter (3) MCQs
1. The concept used to reveal the responsiveness of demand for a product to a change in the
price of that product is termed:
a. price elasticity of supply
b. price elasticity of demand*
c. cross elasticity of demand
d. income elasticity of demand
e. none of the above
2. If a small percentage drop in the price of a good leads to a large percentage increase in
the quantity of that good demanded then:
a. demand is inelastic
b. demand is elastic*
c. demand is unit elasticity
d. demand is perfectly inelastic
e. demand is perfectly elastic
3. If a 10% increase in price leads to a 4% reduction in the quantity of a good demanded then
the price elasticity of demand is:
a. -0.4*
b. - 0.6
c. - 2.5
d. - 4.0
e. - 10.0
4. If a demand curve is horizontal it indicates that:
a. income elasticity of demand is zero
b. price elasticity of demand is infinity*
c. price elasticity of demand is zero
d. price elasticity of demand is between zero and one
e. none of the above
5. The revenue obtained from the sale of a good will fall if:
a. income increases and the good is a normal good
b. price increases and demand is inelastic
c. price increases and demand is elastic*
d. price falls and demand is elastic
e. income falls and the good is an inferior good
6. A rise in the price of product Y from A50 to A54 has resulted in the demand for product X
increasing from 100 to 104 units per month. The cross elasticity of demand is:
a. 0.2
b. 0.5*
c. 1.0
d. 2.0
e. 2.4
7. If the cross elasticity of demand between two goods X and Y is positive then:
a. the two goods are substitutes*
b. the two goods are complements
c. the demand for the two goods is price inelastic
d. the demand for the two goods is price inelastic
e. none of the above
8. A 5% increase in income leads to an increase in the quantity demanded from 24 units per
week to 27 units per week. The income elasticity of demand is:
a. 1.0
b. 1.5
c. 2.0
d. 2.5*
e. 3.0

Page 6 of 32
9. If the demand curve for a product is perfectly inelastic then the incidence of a tax on that
product falls:
a. totally on the supplier
b. equally on the buyer and seller
c. totally on the buyer*
d. mostly on the supplier
e. none of the above
10. If marginal utility of a good is equal to zero then:
a. total utility will also be zero
b. the good gives no utility
c. the good is worth nothing
d. the consumer is in equilibrium
e. total utility is at a maximum*
11. In terms of the figure below, a shift of the budget line from AB to AC is brought about by:

a. a reduction in the price of good Y

b. an increase in the price of good Y
c. a reduction in the price of good X*
d. an increase in the price of good X
e. none of the above
12. In terms of indifference curve analysis, consumer equilibrium is the point at which:
a. the indifference curve is tangential to the budget line*
b. it is outside and to the right of the budget line
c. it is inside and to the left of the budget line
d. the indifference curve cuts the budget line
e. it is on the highest indifference curve given on the indifference map
13. In terms of a Giffen good:
a. the income effect is negative but does not outweigh the substitution effect
b. the income effect is negative and outweighs the substitution effect*
c. there is no income effect
d. the income effect is positive, reinforcing the substitution effect
e. none of the above

Page 7 of 32
14. In terms of the figure below, consumer equilibrium is at point:

a. A
b. B
c. C*
d. D
e. E

Chapter (4) MCQs

1. The long-run supply curve of a competitive industry is found by adding
I. the long-run marginal cost curves of all firms in the industry.
II. the long-run marginal cost curves above the average cost curves of all firms in the
industry.
III. the long-run average cost curves of all firms in the industry.
Which of the following is correct?
a. I only.
b. II only.
c. III only.
d. None of the above.*
2. A recent economics graduate was hired by a highly competitive restaurant and was
assigned the task of improving efficiency in the restaurant. It was felt that an inefficient
combination of two variable factor inputs was being employed. The economist was able to
make the following calculations where each lunch sells for $2.00:

The economist correctly diagnosed the problem and advised the restaurant owner on the
appropriate course of action. That course was to:
a. hire more A and more B.*
b. hire more A but no more B.
c. hire more B but no more A.

Page 8 of 32
 d. hire less B and less A.
3. In one of the largest manufacturing firms, an agreement was recently reached between
management and unions that wage rates would increase proportionately with average
labour productivity (the output per employee). Last year the firm increased its plant and
equipment, retained all of its labour force fully employed, and enjoyed a 6 per cent
increase in output. The unions have gone on strike because management has refused to
pay any wage increase.
According to the agreement, which of the following is correct?
a. The unions should not receive a wage increase because the 6 per cent increase in
output is attributable to the increase in plant and equipment.
b. The unions should receive a wage increase because average labour productivity
has increased.*
c. The unions should receive a wage increase only if the firm increases its plant and
equipment by less than 6 per cent.
d. Whether the unions should receive an increase according to the agreement cannot
be determined from the given information.
4. A family will be away from its house for six months. The monthly mortgage payment on
the house is $130. Local utilities, to be paid by the owner, are $30 per month if the house is
occupied, otherwise zero. If the family wished to minimise its losses (or
maximise its gains) from the house (assuming wear and tear, etc. to be zero whether or
not the house is occupied), it should let for as much as the market will bear as long as
monthly rent is above the following:
a. 0.
b. $30.*
c. $130.
d. $160.
5. Which unit of labour has the highest marginal product (MPL)?

a. 3
b. 5*
c. 4
d. 6
6. Related to previous table: Consider points
I. 25,8
II. 25,9
III. 25,10
IV. 25,11
Which of the following output/factor combinations is attainable?
a. I only
b. II only
c. II, III and IV only*

Page 9 of 32
 d. I, II, III and IV
7. Related to previous table: At what level of output (Q) is average productivity of labour
(APL) greatest?
a. 19*
b. 22
c. 24
d. 25
8. Related to previous table, At points 15,5 and 24,8 the
I. average products of labour (APL) are equal.
II. marginal products of labour (MPL) are equal.
Which of the following is correct?
a. I only.*
b. II only.
c. Both I and II.
d. Neither I nor II.
9. Related to previous table, The marginal product (MPL) of the third unit of labour is 3, i.e.
△Q/△L = 6-3/1
At what other point of the production frontier does MPL= 3?
a. 10,4
b. 15,5
c. 22,7*
d. 19,6
10. To earn any profit, assuming a profit is possible, a firm must operate at the level of
output at which
I. total revenue minus total cost is maximum
II. marginal revenue equals marginal cost
Which of the following is correct?
a. I only
b. II only
c. Both I and II
d. Neither I nor II*
11. What will cause a firm’s short-run supply curve to shift to the right?
a. A decrease in the cost of fixed factor inputs
b. An increase in the cost of fixed factor inputs
c. A decrease in the cost of variable factor inputs*
d. An increase in the cost of variable factor inputs
12. If an industry long run supply curve is infinitely elastic, i.e. a horizontal line, it means that
I. each firm’s long run supply curve is infinitely elastic
II. factor input prices are unaffected by firms entering or leaving the industry
Which of the following is correct?
a. I only
b. II only*
c. Both I and II
d. Neither I nor II
13. Which of the following is correct?
I. When MPL is decreasing, APL is decreasing also
II. When MPL is at a maximum, APL is at a maximum also
a. I only
b. II only
c. Both I and II
d. Neither I nor II*

Page 10 of 32
14. Which of the following is correct?
I. If APL > 0,TP > 0
II. If APL > 0, MPL > 0
a. I only
b. II only
c. Both I and II*
d. Neither I nor II
15. An inverse relationship exists between certain productivity and cost variables
I. when MPL is minimum, AVC is minimum
II. when APL is maximum, AVC is minimum
Which of the following is correct?
a. I only
b. II only*
c. Both I and II
d. Neither I nor II
16. As additional units of labour were hired
I. MPL was decreasing but APL was increasing
II. MC was rising but AVC was decreasing
Which of the following is correct?
a. Only I could occur*
b. Only II could occur
c. Both I and II could occur
d. Neither I nor II could occur
17. Which of the following can never increase as the variable factor input increase?
a. MPL
b. APL
c. AFC*
d. TVC
18. The short run market supply curve would shift to the left if
I. some firms left the industry
II. the cost of fixed factor inputs increased
Which of the following is correct?
a. I only
b. II only
c. Both I and II
d. Neither I nor II*

Page 11 of 32
 Chapter (5&6) MCQs
1. Sal likes to eat pizza. The ________ is the maximum amount that Sal is willing to pay
for one piece of pizza.
a. marginal benefit*
b. efficient price
c. efficient amount
d. marginal cost
2. Which of the following represents the "marginal cost" of a soda?
I. The opportunity cost of producing another soda.
II. The minimum price someone is willing to pay for another soda.
III. The number of units of another good, say a pizza, that someone must give up to get
another soda
a. I only
b. I and III*
c. I and II
d. II and III
3. Which of the following statements can used to describe efficiency?
I. Efficiently using resources means that producers make the highest profits possible.
II. Using resources efficiently means that we cannot produce more of one good without
producing less of another good that has a higher value.
III. Resource use is efficient when we produce goods and services that people value most
highly.
a. I, II and III
b. I only
c. I and II
d. II and III*

4. In the above figure, when the quantity equals 400 pretzels,

a. producers are willing to supply 400 pretzels for $2.
b. producers are willing to supply 400 pretzels for $3.
c. the marginal benefit is greater than the marginal cost.
d. consumers are willing to pay $2 for the 400th pretzel.*
5. The above figure shows that the maximum amount a person is willing to pay for the 400th
pretzel
a. is less than the marginal benefit of the 400th pretzel.
b. is greater than the marginal cost of the 400th pretzel.
c. and the marginal benefit of the 400th pretzel are both $2.*
d. is greater than the marginal benefit of the 200th pretzel.
Page 12 of 32
6. In the above figure, what is the marginal benefit of the four-hundredth pretzel?
a. $0
b. $3.00
c. $4.00
d. $2.00*
7. In the above figure, what is the marginal cost to the economy of producing the four-
hundredth pretzel?
a. $2.00
b. $4.00*
c. $0
d. None of the above answers are correct.
8. In the above figure, what is the efficient quantity of pretzels to produce each day?
a. two hundred
b. three hundred*
c. one hundred
d. four hundred
9. In the above figure, if 300 pretzels are produced
a. resource use is efficient.*
b. the marginal cost is greater than the marginal benefit.
c. the marginal benefit is greater than the marginal cost.
d. the marginal cost of another pretzel is 300.
10. The value of one more unit of a good or service is the
a. minimum price that people are willing to pay for another unit of the good or service.
b. marginal cost.
c. opportunity cost of producing one ore unit of a good or service.
d. marginal benefit.*
11. Consider the market for hot dogs. As long as the marginal benefit of consuming hot dogs
is greater than the price of hot dogs,
a. there is no decreasing marginal benefit of eating hot dogs.
b. we will receive consumer surplus from eating hot dogs*
c. the price of hot dogs will rise
d. the value of hot dogs will rise
12. Nick can purchase each milkshake for $2. For the first milkshake purchased Nick is willing
to pay $4, for the second milkshake $3, for the third milkshake $2 and for the fourth
milkshake $1. What is the value of Nick's consumer surplus?
a. $3*
b. $9
c. $10
d. $2
13. Consumer surplus is
a. the opportunity cost of making a good minus the price paid for it.
b. the price paid for a good minus the value of the good
c. the value of a good minus the price paid for it.*
d. the price paid for a good minus the opportunity cost of making it
14. The marginal cost curve
a. is the same as the demand curve
b. shows what buyers are willing to give up to get one more unit of a good or service
c. shows the maximum price that a producer must receive to induce it to produce a unit of
a good or service
d. shows the minimum price sellers must receive to produce a unit of a good or service*
15. In the market for CDs, the producer surplus will decrease if ________.
a. the market price of a CD increases
b. the opportunity cost of a CD decreases
c. the demand for CDs decreases*
d. the supply of CDs increases
Page 13 of 32
16. Currently tire producers must receive a price of $50 per tire to produce 5000 tires. If the
supply curve of tires is upward sloping, then to produce one additional tire, tire producers
will need to receive a price
a. less than $50.
b. of $50.
c. $0
d. more than $50*
17. If there are no external costs, the supply curve shows the quantity supplied at each price
and also shows the
a. total surplus of the good
b. benefit from each unit of the good
c. maximum price for which suppliers will sell each unit of the good
d. marginal cost of each unit of the good*
18. Producer surplus is the
a. difference between the price of a good or service and the opportunity cost of
producing the good or service*
b. number of dollars' worth of other goods and services forgone to produce one more unit
of a good or service
c. difference between the marginal benefit and the marginal cost
d. difference between the total cost of a good or service and the marginal cost
19. If the market for roller blades is at a competitive equilibrium, and there are no external
costs nor benefits and no price ceilings, price floors, taxes, or subsidies, then
a. the sum of consumer surplus and producer surplus is maximized
b. resources are being used efficiently
c. marginal benefit is equal to marginal cost
d. All of the above answers are correct*
20. Deadweight loss can be the result of
a. underproduction, but not overproduction
b. overproduction, but not underproduction
c. both overproduction and underproduction*
d. neither overproduction, nor underproduction
21. Deadweight loss is the decrease in ________ from producing an inefficient amount of
a product
a. Profit
b. consumer surplus
c. producer surplus
d. consumer surplus and producer surplus*
22. At the efficient level of production, ________.
a. producer surplus must be greater than consumer surplus
b. there is no deadweight loss*
c. consumer surplus must be greater than producer surplus
d. the market price is greater than the monopoly price
23. If you increase your consumption of soda by one additional can a week, your marginal
benefit of this last can is $1.00. The ________ of this last can of soda is $1.00.
a. marginal cost
b. opportunity cost
c. value*
d. price
24. If the market price of a pizza increases and the demand curve for pizza does not shift,
then the consumer surplus from pizza will ________.
a. Increase
b. equal the producer surplus if the market produces the efficient quantity of pizza
c. remain the same
d. decrease*

Page 14 of 32
25. If resources are used efficiently, then ________.
a. consumer surplus plus producer surplus is maximized*
b. producer surplus is maximized
c. consumer surplus equals producer surplus
d. opportunity cost is minimized
26. Underproduction of good ________ a deadweight loss and overproduction of a good
________ a deadweight loss.
a. will not; will not
b. will; will*
c. will not; will
d. will; will not
27. When 2,000 hamburgers per day are produced, the marginal benefit is $1.50 and the
marginal cost is $1.00. And when 7,500 hamburgers per day are produced, marginal benefit
is $1.00 and marginal cost is $1.50. The efficient production quantity of hamburgers is
________ a day.
a. more than 7,500
b. 2,000
c. between 2,000 and 7,500*
d. 7,500
28. If the marginal benefit from a slice of pizza is less than the marginal cost of producing a
slice of pizza, then the resources will be used more efficiently if ________ slices of
pizza are produced and ________ other goods are produced
a. more; fewer
b. more; more
c. less; more*
d. less; fewer
29. If the marginal cost of producing a hair styling decreases, then the efficient quantity of
hair stylings to produce ________.
a. Decreases
b. remains the same
c. increases*
d. depends on the marginal benefit
30. A rent ceiling set below the equilibrium price
a. restricts the quantity demanded but not the quantity supplied
b. restricts the quantity supplied but not the quantity demanded.*
c. restricts both the quantity demanded and the quantity supplied
d. has no effect
31. Price ceilings in the housing market create
a. efficiency, but often cause housing to deteriorate
b. efficiency and lead to the building of more housing.
c. inefficiency and often cause housing to deteriorate*
d. inefficiency, but lead to the building of more housing.
32. A price ceiling set below the equilibrium price ____ search activity and ____ the use
of black markets.
a. increases; increases*
b. increases; decreases
c. decreases; increases
d. decreases; decreases
33. A price floor
a. always results in a surplus
b. always results in a shortage.
c. results in a surplus if the floor price is greater than the equilibrium price*
d. results in a shortage if the floor price is greater than the equilibrium price

Page 15 of 32
34. In the above figure, a rent ceiling of $300 per month would
a. not affect the equilibrium quantity
b. result in a surplus of 7000 units.
c. result in a shortage of 7000 units*
d. result in a shortage of 2000 units
35. In the above figure, a rent ceiling of $500 per month would
a. not affect the equilibrium quantity*
b. cause a shortage
c. raise the rent and cause a surplus
d. reduce the rent and create a surplus
36. An effective minimum wage is a price
a. ceiling that results in a shortage of low-skilled labor.
b. ceiling that results in a surplus of low-skilled labor
c. floor that results in a shortage of low-skilled labor
d. floor that results in a surplus of low-skilled labor*
37. An effective minimum wage is a price ____ that ____ the quantity of low-skilled labor
demanded
a. ceiling; decreases
b. ceiling; increases
c. floor; decreases*
d. floor; increases
38. A sales tax is imposed on the sellers of gasoline. This tax shifts
a. the supply of gasoline curve leftward.*
b. the supply of gasoline curve rightward
c. the demand for gasoline curve leftward.
d. both the supply of gasoline and demand for gasoline curves leftward
39. Outlawing the sale of a good shifts the supply curve
a. leftward and lowers the price
b. leftward and raises the price.*
c. rightward and lowers the price
d. rightward and raises the price
40. Making the buying and selling of a good illegal shifts the demand curve ____ and shifts
the supply curve ____.
a. rightward; rightward
b. rightward; leftward
c. leftward; rightward
d. leftward; leftward*

Page 16 of 32
41. In the above figure, without a minimum wage, the equilibrium quantity is of labor
employed ____ million hours, and the equilibrium wage rate is ____ per hour.
a. 100; $2
b. 200; $4*
c. 300; $6
d. 400; $8
42. In the above figure, if the minimum wage is set at $6 per hour, what quantity of labor is
employed?
a. 100 million hours*
b. 200 million hours
c. 300 million hours
d. 400 million hours
43. In the above figure, if the minimum wage is set at $2 per hour, what quantity of labor is
employed?
a. 100 million hours.
b. 200 million hours.*
c. 300 million hours.
d. 400 million hours.
44. In the above figure, at what wage rate is the unemployment level equal to 200 million
hours?
a. $2 per hour.
b. $4 per hour.
c. $6 per hour.*
d. $8 per hour.
45. Search activity ____.
a. occurs there is a surplus of the good
b. is unnecessary when a black market exists
c. increases when an effective price ceiling is set on a good*
d. decreases when an effective price ceiling is set on a good

Page 17 of 32
46. The above figure shows the market for neckties. Based on the graph, how much tax per
necktie has been imposed by the government?
a. $1.25 per tie.
b. $1.00 per tie.*
c. $0.75 per tie.
d. More information is needed to determine the tax that the government has imposed.
47. The above figure shows the market for neckties after the government has imposed an
excise tax. How much government revenue is generated by the tax?
a. $1,000.00 per month.
b. $800.00 per month.
c. $500.00 per month.
d. $400.00 per month.*
48. The above figure shows the market for neckties after the government has imposed an
excise tax. How much deadweight loss results from this excise tax?
a. $250.00
b. $200.00
c. $150.00
d. $50.00*

Page 18 of 32
 Chapter (7) MCQs
1. When a firm operates under conditions of pure competition, marginal revenue always
equals:
a. price.*
b. average cost
c. marginal cost
2. In which market structure(s) can a firm’s supply function be described as its marginal cost
curve above its average variable cost curve?
a. Oligopoly or monopoly.
b. Perfect competition only*
c. Perfect competition or monopolistic competition
3. A purely competitive firm will tend to expand its output so long as:
a. marginal revenue is positive
b. marginal revenue is greater than price
c. market price is greater than marginal cost*
4. A firm is likely to operate in the short run as long as price is at least as great as:
a. marginal cost
b. average total cost.
c. average variable cost*
5. Compared to a perfectly competitive industry, in an industry characterized by
monopolistic competition:
a. both price and quantity are likely to be lower
b. price is likely to be higher and quantity is likely to be lower*
c. quantity is likely to be higher and price is likely to be lower
6. A firm will most likely maximize profits at the quantity of output for which:
a. price equals marginal cost
b. price equals marginal revenue
c. marginal cost equals marginal revenue*
7. A market characterized by low barriers to entry, good substitutes, limited pricing power,
and marketing of product features is best characterized as:
a. oligopoly.
b. perfect competition
c. monopolistic competition.*
8. In the world of perfect competition
I. firms set prices in the short run to maximise profit or minimise loss
II. firms set prices in the long run to maximise sales
Which of the following is correct?
a. I only
b. II only
c. Both I and II
d. Neither I nor II*
9. In response to above normal profit/returns firms move into an industry. Which of the
following reflects this movement?
a. The demand and supply curves shift to the right, price decreases
b. The supply curve shifts to the right, price decreases, consumers move down the
demand curve*
c. MU/price for the good in question decreases; total utility increases
d. Existing firms increase output, shifting the supply curve to the right.
10. A firm’s stated objective was ‘to motivate employees for results’. Which of the following
is best suited for solving the implicit principal/agent problem? Paying each employee
a. for hours worked
b. the same wage as every other
c. for his/her contribution to output*
d. the average product of labour in the firm

Page 19 of 32
11. Common features of perfectly and imperfectly competitive firms are
I. in the long run in equilibrium both produce at the minimum points on their long run
average cost curves
II. facing downward sloping demand curves in the short run
Which of the following is correct?
a. I only
b. II only
c. Both I and II
d. Neither I nor II*
12. An imperfectly competitive firm discovers that at its present level of output average
total cost, which is at a minimum, is $16.50 and its average revenue is $18. Marginal
revenue is $12. To maximise profit what should the firm do?
a. Leave price and output unchanged.
b. Increase price and leave output unchanged.
c. Increase price and decrease output.*
d. Decrease price and decrease output.
13. Suppose a fully employed economy had only two industries, one being monopolistic and
the other being competitive. Assuming that there are no economies of large-scale
production, what would be the result of government action to break up the monopoly into
many competitive firms? There would be
a. an increase in output for the monopolised industry and a decrease in output for the
competitive industry.*
b. a decrease in output for the monopolised industry and an increase in output for the
industry.
c. an increase in output for both industries.
d. a decrease in output for both industries.
14. In the world of perfect competition it is assumed that
I. on the demand side consumers, with perfect knowledge, are utility maximisers
II. on the supply side firms, with perfect information, face no restrictions on movement
in to and out of any industry.
Which of the following is correct?
a. I only
b. II only
c. Both I and II*
d. Neither I nor II
15. Assume the jumps were completely automated so that variable costs were zero what
price per jump would result in a maximum profit and why?

a. $2.00 because demand is price elastic

b. $4.00 because marginal revenue is zero when output = 40*
c. $6.00 because demand is price inelastic
d. The answer cannot be determined from the diagram

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16. Related to previous graph, If the leisure company wishes to maximise daily revenue what
price should it charge and how many jumps will it sell?
a. $2.00 and 80 jumps
b. $4.00 and 40 jumps*
c. $6.00 and 30 jumps
d. The answer cannot be determined from the diagram
17. Related to previous graph, If the average total cost (ATC) of operating the jump were
constant at all levels of output and equalled $4.00 what would be the profit maximising
output and price?
a. 60 and $2.00
b. 40 and $4.00
c. 20 and $6.00*
d. The answer cannot be determined from the diagram and data
18. Related to previous graph, If the demand curve were to shift to the left and average
variable costs were to stabilise at $4.00 per jump for all levels of output what would be
the profit maximising price?
a. $5.00
b. $6.00
c. $7.00
d. The answer cannot be determined from the diagram and information given*
19. At which price would a monopolist whose cost and revenue curves are those pictured in
Figure 7.17 maximise profit?

a. B
b. C
c. D
d. E*
20. What is the largest output the monopolist in Figure 7.17 could produce without suffering
losses?
a. G
b. H
c. I
d. J*
21. Related to previous graph, The monopolist’s average revenue curve
a. is the line labelled MR.
b. is the line labelled D.*
c. is the line labelled MC.
d. does not appear on the Figure.
22. In Figure 7.17, which output would yield for the monopolist the greatest total revenue?
a. F
b. G*
c. H
d. J
Page 21 of 32
23. At which operating level would a monopolist maximise profit (minimise loss)? At the
output where
a. marginal cost equalled average cost.
b. marginal cost equalled marginal revenue.*
c. marginal cost equalled price.
d. average cost equalled price.
24. Which of the following is correct? In the long run, in monopolistic competition, high profits
on the part of one firm
a. will lead to high profits for others, as they imitate the successful firm’s meth-ods.
b. will drive other firms out of the industry, and lead to pure monopoly.
c. will lead to new entry, and tend to drive profits down to normal.*
d. will continue indefinitely, since the profitable firm will erect barriers to entry.
25. Which of the following relationships would be true for a perfectly competitive firm where
AR = average revenue, MR = marginal revenue, TR = total revenue, Q = quantity, P = price?
a. MR = P x Q □Q
b. AR = P × Q
c. TR = P × ΔQ
d. P = AR = MR*
26. Which of the following is the key economic objection to a profit-maximising, unregulated
monopoly?
a. Price will not equal average cost.
b. Price will be above marginal cost.*
c. Marginal revenue will be below marginal cost.
d. Marginal cost will not equal average cost.
27. It is stated that the demand curve facing a perfectly competitive firm is completely price
elastic. This means that
I. price equals average revenue
II. price equals marginal revenue
III. price times quantity sold by the firm is constant
Which of the following is correct?
a. I and II*
b. I and III only
c. II only
d. I, II and III
28. The profit maximising output is that output level at which marginal revenue equals
marginal cost. This statement applies to
I. perfectly competitive firms
II. monopolistically competitive firms
III. monopolistic firms
Which of the following is correct?
a. I only
b. I and II only
c. III only
d. I, II and III*
29. For a monopolist, which of the following is the best definition of ‘marginal revenue’?
a. The highest price it can charge without attracting competition.
b. The price at which it can sell one more unit.
c. The change in total revenue if it sells one more unit.*
d. The difference in the price of the last unit sold and the price of the next unit sold.
30. Which of the following characteristics applies to perfectly competitive industries but
does not apply to imperfectly competitive industries?
a. large numbers of firms
b. ease of entry
c. firms have no control over prices*
d. ease of exit
Page 22 of 32
31. The kinked demand curve in oligopolistic industries indicates that as one firm
I. increases its price all other firms follow
II. lowers its price no other firms follow
Which of the following is correct?
a. I only
b. II only
c. Both I and II
d. Neither I nor II*
32. A government regulates a monopoly, in which economies of scale exist, by forcing the
monopoly to produce that output level at which price equals long run marginal cost.
I. The monopolist’s profits are reduced but he is guaranteed at least normal returns
because normal returns are included in the cost estimate
II. Marginal cost in the short run must equal marginal revenue no matter the
government regulation
Which of the following is correct?
a. I only
b. II only
c. Both I and II
d. Neither I nor II*
33. To which type of industry would the following characteristics, taken together, apply?
High degree of concentration, small number of firms, homogeneous product, significant
control over price
a. Imperfectly competitive
b. Monopolistically competitive
c. Monopoly
d. Oligopoly*
34. Suppose a certain industry is monopolistic but not subject to government regulation. Also
suppose that the firm or firms in that industry is/are maximising profit. From the
viewpoint of the most efficient allocation of resources in the nation as a whole, which of
the following will be correct regarding the monopolistic industry? There will be
a. no research.
b. too much advertising.
c. too many resources devoted to current production.
d. too few resources devoted to current production.*
35. If economies of scale exist for a firm it means that
I. the firm receives quantity discount on factor inputs
II. the long run average cost decreases as output increases
III. short run marginal costs decrease as output increases
a. I only
b. II only*
c. II and III only
d. I, II and III
36. Ignoring questions of legality it would pay oligopolistic firms to form a cartel because
I. this would increase the size of the market
II. they could charge the profit maximising monopoly price
III. they could divide up the market so each firm is better off
Which of the following is correct?
a. I only
b. I and II only
c. II and III only*
d. I, II and III

Page 23 of 32
37. If a competitive firm is making above normal profits it means
I. there is a range of output where total revenue exceeds total costs
II. in the short run new firms will move into the industry
Which of the following is correct?
a. I only*
b. II only
c. Both I and II
d. Neither I nor II
38. Implications of the kinked demand curve are
I. the marginal revenue curve is discontinuous
II. changes in marginal costs may not cause the firm to alter its output
Which of the following is correct?
a. I only
b. II only
c. Both I and II*
d. Neither I nor II

Chapter (8&9&10) MCQs

1. An aggregate supply (AS) curve depicts the relationship between
a. the price level and nominal GDP.
b. household expenditures and household income
c. the price level and the aggregate quantity supplied*
d. the price level and the aggregate quantity demanded
2. In the macroeconomic long run,
a. GDP always is below potential GDP
b. there is full employment with no unemployment.
c. output always is above potential GDP.
d. there is full employment and real GDP is equal to potential GDP.*
3. The quantity of real GDP supplied at full employment is called
a. hypothetical GDP
b. short-run equilibrium GDP
c. potential GDP.*
d. all of the above
4. At potential GDP
a. there is no unemployment but there is not necessarily full employment
b. there is no unemployment and there is full employment
c. unemployment is at its natural rate.*
d. None of the above are correct
5. In the long-run
a. the aggregate supply curve is upward sloping
b. real GDP is equal to potential GDP.*
c. aggregate supply depends on the price level.
d. All of the above answers are correct
6. In the macroeconomic long run,
a. real GDP = potential GDP
b. the economy is at full employment
c. regardless of the price level, the economy is producing at potential GDP
d. All of the above are correct.*
7. The long-run aggregate supply curve is ____ because along it, as prices rise, the money
wage rate ____.
a. vertical; falls
b. vertical; rises*
c. upward sloping; falls
d. upward sloping; stays constant

Page 24 of 32
8. If the economy is at the natural rate of unemployment,
a. real GDP > potential GDP
b. real GDP < potential GDP
c. real GDP = potential GDP*
d. All of the above can occur when the economy is at the natural rate of unemployment
9. In the macroeconomic short run,
a. actual real GDP may be less than or more than potential GDP.*
b. the unemployment rate is zero
c. the economy is always moving away from full employment.
d. actual real GDP always equals potential GDP.
10. The short-run aggregate supply curve
a. is vertical
b. has a negative slope
c. has a positive slope.*
d. is horizontal
11. A change in the full-employment quantity of labor ____ the short-run aggregate supply
curve and ____ the long-run aggregate supply curve.
a. shifts; shifts*
b. shifts; does not shift
c. does not shift; shifts
d. does not shift; does not shift
12. The short-run aggregate supply curve shifts because of changes in all of the following
EXCEPT
a. the capital stock
b. technological progress.
c. money wage rates
d. the price level.*
13. A decrease in the money wage rate
a. increases the long-run aggregate supply
b. decreases the long-run aggregate supply
c. increases the short-run aggregate supply.*
d. decreases the short-run aggregate supply
14. The aggregate demand curve
a. has a negative slope*
b. has a positive slope
c. is vertical
d. is horizontal
15. According to the wealth effect, an increase in the price level ____ real wealth and
____ consumption expenditure.
a. increases; increases
b. increases; decreases
c. decreases; increases
d. decreases; decreases*
16. The intertemporal substitution effect of prices on aggregate demand
a. is the same as the real wealth effect
b. is one reason that the aggregate demand curve has a negative slope*
c. explains why aggregate demand increases when the amount of money increases
d. is one reason that the aggregate demand curve has a positive slope
17. An increase in expected future incomes
a. increases aggregate demand*
b. increases the aggregate quantity demanded
c. decreases the aggregate quantity demanded
d. decreases aggregate demand

Page 25 of 32
18. In the above figure, which part corresponds to a destruction of part of the nation’s capital
stock?
a. Figure A.*
b. Figure B.
c. Figure C.
d. Figure D.
19. In the above figure, which point corresponds to an increase in technology?
a. Figure A.
b. Figure B.
c. Figure C.*
d. Figure D.
20. In the above figure, which part corresponds to an increase in the money wage rate?
a. Figure A.
b. Figure B.*
c. Figure C.
d. Figure D.
21. In the above figure, which part corresponds to a fall in the money wage rate?
a. Figure A.
b. Figure B.
c. Figure C.
d. Figure D.*
22. An increase in the price level decreases net exports thereby decreasing the amount of
real goods and services purchased in the United States. This phenomenon as
a. the wealth effect
b. the barter effect
c. a substitution effect*
d. the GDP effect
23. A fall in the expected future inflation rate
a. increases aggregate demand
b. increases the aggregate quantity demanded
c. decreases the aggregate quantity demanded
d. decreases aggregate demand*

Page 26 of 32
24. An increase in government purchases of goods and services
a. increases aggregate demand*
b. increases the aggregate quantity demanded
c. decreases the aggregate quantity demanded
d. decreases aggregate demand
25. Lower taxes
a. increases aggregate demand*
b. increases the aggregate quantity demanded
c. decreases the aggregate quantity demanded
d. decreases aggregate demand
26. A decrease in the quantity of money
a. increases aggregate demand
b. increases the aggregate quantity demanded
c. decreases the aggregate quantity demanded
d. decreases aggregate demand*
27. In short-run macroeconomic equilibrium
a. real GDP equals potential GDP and aggregate demand determines the price level
b. the price level is fixed and short-run aggregate supply determines real GDP
c. real GDP and the price level are determined by short-run aggregate supply and
aggregate demand*
d. real GDP is less than potential GDP.
28. In long-run macroeconomic equilibrium
a. real GDP equals potential GDP*
b. the price level is fixed and aggregate demand determines real GDP.
c. real GDP and the price level are determined by short-run aggregate supply and
aggregate demand and long-run aggregate supply is irrelevant
d. real GDP is less than potential GDP
29. Suppose the economy is experiencing a recessionary gap. In the long run, the money wage
rate ____, unemployment ____, and the price level ____.
a. falls; rises; falls
b. falls; falls; falls*
c. rises; rises; rises
d. rises; falls; rises
30. In a short-run macroeconomic equilibrium, potential GDP exceeds real GDP, so the
a. short-run aggregate supply curve will shift rightward as the money wage rate falls.*
b. short-run aggregate supply curve will shift leftward as the money wage rate rises.
c. long-run aggregate supply curve will shift leftward as the money wage rate rises.
d. long-run aggregate supply curve will shift leftward as the money wage rate falls.
31. In a short-run macroeconomic equilibrium, real GDP exceeds potential GDP, so the
a. short-run aggregate supply curve will shift rightward as the money wage rate falls.
b. short-run aggregate supply curve will shift leftward as the money wage rate rises.*
c. long-run aggregate supply curve will shift leftward as the money wage rate rises.
d. long-run aggregate supply curve will shift leftward as the money wage rate falls.

Page 27 of 32
32. In the above figure, point A represents
a. a recessionary gap.*
b. a full-employment equilibrium.
c. an inflationary gap.
d. an increase in aggregate demand
33. In the above figure, point B represents
a. a recessionary gap.
b. a full-employment equilibrium.*
c. an inflationary gap.
d. an increase in aggregate demand
34. In the above figure, point C represents
a. a recessionary gap.
b. a full-employment equilibrium.
c. an inflationary gap.*
d. an increase in aggregate demand

Page 28 of 32
 Chapter (11) MCQs
1. Inflation is defined as a continuing increase in
a. the prices of specific products
b. the wages of all workers
c. the price level.*
d. money GDP
2. When an economy experiences inflation the
a. price level rises persistently
b. quantity of money is growing
c. value of money gets smaller and smaller
d. All of the above answers are correct.*
3. Demand-pull inflation starts as the
a. LAS curve shifts leftward
b. LAS curve shifts rightward
c. AD curve shifts rightward*
d. AD curve shifts leftward
4. Which of the following could start a demand-pull inflation?
a. There is an improvement in technology
b. There is a decrease in productivity
c. There is an increase in imports
d. None of the above could be the initial cause of demand-pull inflation.*
5. Which of the following is a change that would NOT begin a demand-pull inflation?
a. An increase in exports
b. An increase in labor productivity*
c. An increase in government purchases of goods and services
d. An increase in the quantity of money
6. A demand-pull inflation can be described as ____ shifts in the AD curve and ____
shifts in the SAS curve.
a. rightward; rightward
b. rightward; leftward*
c. leftward; rightward
d. leftward; leftward
7. Demand-pull inflation persists because of
a. continuing increases in government purchases
b. continuing increases in the quantity of money*
c. continuing increases in real wage rates.
d. continuing increases in aggregate supply
8. In a demand-pull inflation brought about by increases in the quantity of money, real GDP
might increase at times because
a. tax rates decline
b. real wages fall*
c. money wages fall
d. real wages rise
9. When the AD and SAS curves intersect at a level of real GDP which exceeds potential
GDP, which of the following will occur?
a. The AD curve shifts rightward because the Fed decreases the money supply
b. The AS curve shifts leftward because the money wage rate rises.*
c. The AS curve shifts leftward because the money wage rate falls.
d. The AD curve shifts leftward because the money wage rate rises.
10. To prevent demand-pull inflation
a. firms must refuse to increase wages
b. the Fed must not let the quantity of money persistently rise.*
c. the natural rate of unemployment must increase
d. real GDP must increase

Page 29 of 32
11. In a demand-pull inflation, if the Fed stops expanding the quantity of money
a. a cost-push inflation will occur
b. government purchases will cause the demand-pull inflation to continue
c. a deflation will occur
d. the demand-pull inflation ends.*
12. Cost-push inflation can start with
a. a decrease in investment
b. an increase in oil prices*
c. an increase in government purchases
d. a decrease in the quantity of money
13. An increase in the money wage rate shifts the SAS curve
a. rightward, as does an increase in the money prices of raw materials
b. leftward, as does an increase in the money prices of raw materials*
c. rightward, whereas an increase in the money prices of raw materials shifts the SAS
curve leftward
d. leftward, whereas an increase in the money prices of raw materials shifts the SAS
curve rightward.
14. By itself, a fall in the price of oil shifts the
a. short-run aggregate supply curve leftward and does not shift the aggregate demand
curve.
b. short-run aggregate supply curve rightward and does not shift the aggregate demand
curve.*
c. aggregate demand curve leftward and does not shift the short-run aggregate supply
curve.
d. aggregate demand curve rightward and does not shift the short-run aggregate supply
curve.
15. Stagflation is characterized by a(n)
a. increase in both output and the price level
b. decrease in output and the price level
c. increase in the unemployment rate and an increase in the price level*
d. economy which is growing at a rate equal to its historical average growth rate
16. The Phillips curve shows the relationship between
a. the nominal interest rate and the real interest rate.
b. the expected rate of inflation and the nominal interest rate
c. the real interest rate and the unemployment rate.
d. the unemployment rate and the inflation rate*
17. The short-run Phillips curve gives much the same information as
a. the AD curve
b. the SAS curve*
c. the LAS curve
d. None of the above
18. The short-run Phillips curve
a. slopes downward*
b. slopes upward
c. is horizontal
d. is vertical
19. Moving along the short-run Phillips curve indicates
a. that higher inflation leads to a higher unemployment rate
b. that higher unemployment leads to a higher inflation rate
c. a tradeoff between inflation and unemployment so that high inflation is related to
lower unemployment*
d. a natural rate of unemployment that does not vary with inflation

Page 30 of 32
20. An increase in the expected inflation rate shifts the
a. short-run Phillips curve downward
b. short-run Phillips curve upward*
c. long-run Phillips curve upward
d. long-run Phillips curve downward.
21. The long-run Phillips curve
a. slopes downward
b. slopes upward
c. is horizontal
d. is vertical*
22. The short-run Phillips curve intersects the long-run Phillips curve at the
a. natural interest rate
b. nominal interest rate
c. natural inflation rate
d. expected inflation rate*
23. An increase in the natural rate of unemployment shifts
a. both the short-run and the long-run Phillips curves rightward*
b. the short-run but not the long-run Phillips curve rightward
c. the long-run but not the short-run Phillips curve rightward
d. neither the short-run nor the long-run Phillips curve.
24. Suppose that in 2002 the economy has an MPC of 0.67 and in 2003 the MPC changes to 0.8.
Which of the following best describes what happens to the multiplier?
a. It falls from 1.49 to 1.25
b. It rises from 1.25 to 1.49.
c. It falls from 5 to 3
d. It rises from 3 to 5.*
25. Given an MPC of 0.80, if there are no income taxes or imports and prices are constant,
then when investment increases by $50 million, when prices are fixed equilibrium GDP
would
a. increase by $50 million
b. increase by $250 million*
c. increase by $400 million
d. To answer the question more information on income is needed.
26. A business cycle is
a. The downward trend in real GDP
b. An irregular fluctuation in real GDP about its trend *
c. The trend increase in real GDP
d. A periodic and predictable fluctuation in GDP about its trend
27. A business cycle mechanism
a. Ends business cycle fluctuations
b. Starts business cycle fluctuations
c. Eliminates the effects of economic shocks
d. Transmits economic shocks to the economy *
28. If aggregate demand decreases and neither short-run nor long-run aggregate supply
changes, then
a. the price level increases in the short-run and decreases in the long-run.
b. there is an inflationary gap
c. there is a recessionary gap*
d. in the long run, the long-run aggregate supply will decrease
29. An above full-employment equilibrium is
a. a theoretical possibility but cannot happen in reality
b. the equilibrium in which the economy is in most of the time
c. when real GDP exceeds potential GDP*
d. the period of time when prices are falling.

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30. laissez-faire, laissez-passer means that
a. government policy is critical to achieving potential GDP
b. a fixed, low wage rate is required for full-employment
c. government should not interfere with the economy*
d. free markets must be regulated to achieve beneficial results for participants
31. according to the classical economists, competition is ……. And prices ……..
a. free ; inflexible
b. limited ; inflexible
c. free ; flexible *
d. free ; constant
e. limited ; flexible
32. the keynesian aggregate supply curve is
a. downward-sloping, because product prices are fixed
b. vertical, because the rate of employment is fixed
c. upward-sloping, because factor prices are fixed
d. horizontal, because the price level is fixed*

Page 32 of 32