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Sample of Multiple Choice Questions
Amos Witztum
1. An economy will necessarily be productively efficient:
(a) When all means of production are fully employed regardless of the
production technology;
(b) When labour alone is fully employed;
(c) When capital alone is fully employed;
(d) When at least one means of production is a fully employed and all means
of production are needed in fixed proportion for the production process.
2. If agent I can produce with a unit of his labour twice as many units of x as agent II
and four times more units of y as agent II:
(a) The two agents should not specialise and trade as agent II has nothing to
offer agent I;
(b) The two agents should not specialise and trade because agent I has nothing
to offer agent II;
(c) The two agents should specialise and trade by I specialising in x and II in
y;
(d) The two agents should specialise and trade by I specialising in y and II
specialising in x.
3. If an agent has a utility function of the form u(x,y)=xy then:
(a) S/he will be indifferent between (6,4) and (3,8);
(b) S/he will prefer (6,4) over (5,5);
(c) S/he will be indifferent between (6,4) and (5,5)
(d) None of the above.
4. There are two bundles: A and B and two individuals 1 and 2. We know that:
( ) and
( ) . We also know that
( ) and
( ) .
(a) Society should give bundle A to individual 1 and B to individual 2 because
total utility will be maximised;
(b) Society should give bundle B to individual 1 and A to individual 2 because
total utility will be maximised;
(c) Society should give bundle A to individual 1 and B to individual 2 so that
total utility will be minimised;
(d) Society cannot choose as both agents prefer bundle A over bundle B.
5. When price elasticity of demand is greater than unity (in absolute value):
(a) Revenue will increase with an increase in price;
(b) Revenue will decrease with a fall in price;
(c) Revenue will decrease with an increase in price;
(d) Revenue will remain unchanged with any change in price;
6. An estimation of demand facing a particular firm produced the following
information with regard to the elasticities of the demand function for x:
Where x, y and M are goods and I is income. Therefore:
(a) If price of x rose, your sales will fall but your total revenues will increase.
(b) If price of x fell, your sales will increase and so will your total revenues.
(c) If price of x fell, your sales will increase but your revenues will fall.
(d) If price of x rose, your sales will increase and so will your revenues.
7. With reference to the same information as in 6:
(a) Commodities x and M are complements while x and y are gross
substitutes.
(b) Commodities x and M are complements and so are x and y.
(c) Commodities x and M are gross substitutes and so are x and y.
(d) Commodities x and M are gross substitutes but x and y are complements.
8. Whenever average costs are falling:
(a) Marginal costs must be rising;
(b) Marginal costs will be above average costs;
(c) Marginal costs must be falling too;
(d) Marginal costs will be below average costs.
9. The contribution to output per worker is maximised when:
(a) Average and Marginal products are the same;
(b) Average product is greater than marginal product;
(c) Average product is smaller than marginal product;
(d) Average cost is falling and so is marginal cost.
10. A decrease in demand facing a perfectly competitive industry will:
(a) Cause a fall in price in the short run and no change in the long run;
(b) Cause a fall in the price in the short run and necessarily return to the
original price in the long run;
(c) Cause a fall in the price in the short run and will affect the long run
according to whether an expansion in the industry affects factor prices;
(d) Cause a fall in the price in the short run and a fall in the long run
equilibrium price if the expansion of the industry raises factor prices.
11. A monopolist maximises profits when:
(a) Average revenue equals average cost;
(b) Average revenue equals marginal cost; (c) Marginal revenue equals average cost;
(d) Marginal revenue equals marginal cost.
12. The degree of monopolistic power will:
(a) Increase when price elasticity is greater than unity but falling;
(b) Increase when price elasticity is greater than unity but rising;
(c) Increase when price elasticity is less than unity but rising;
(d) Increase when price elasticity is less than unity but falling.
13. When there are diminishing returns to scale:
(a) The minimum short run average cost is always at a higher level of output
than that at which the long-run and the short run average costs are the
same.
(b) The minimum short run average cost is always at a lower level of output
than that at which the long-run and the short run average costs are the
same.
(c) The minimum short run average cost is always at the same level of output
as that at which the long-run and the short run average costs are the same.
(d) None of the above.
14. In the furniture industry the output elasticity of labour is 0.6; the output elasticity of
capital is 0.2 and the output elasticity of management is 0.3.
(a) There are increasing returns to scale in the furniture industry which suggests
that the industry is not in perfectly competitive.
(b) There are increasing returns to scale in the furniture industry which suggests
that the industry is perfectly competitive.
(c) There are diminishing returns to scale in the furniture industry which
suggests that the industry is perfectly competitive.
(d) There is constant returns to scale in the furniture industry which suggests
that the industry must be a monopoly.
15. Perfect competition is an efficient market structure:
(a) Only in the long run when price equal the minimum average cost.
(b) As long as price equals marginal cost which happens both in the long run
and the short run.
(c) When price equals marginal cost but this only happens in the long run.
(d) Both in the long run and the short run because price equals the average
cost in both cases.
16. Effective advertising in monopolistic competition with product differentiation will
lead, in the long run, to:
(a) An efficient equilibrium where there are no profits above the normal.
(b) An inefficient equilibrium where there are profits above the normal. (c) An efficient equilibrium where there are profits above the normal.
(d) An inefficient equilibrium where there are no profits above the normal.
17. We face a Prisoner’s Dilemma when:
(a) Agents fail to achieve their objectives as there is no equilibrium when
agents behave strategically.
(b) The outcome of the interaction is such where both agents would have
preferred to reach the same, different, outcome.
(c) The equilibrium is every agent’s best response to the other agent’s choice.
(d) Every agent’s choice is not the best response to the other agent’s choice.
18. A government considers whether to build a tunnel connecting two parts of the
country which have been hitherto unconnected. The cost of the building and
running the tunnel is £25000000 a year (we ignore time factors). The smallest
tunnel can accommodate 10000 trips per year and the demand for its usage is given
by the following inverse demand schedule: p= 6000-x (where x is the number of
trips per year).
(a) The tunnel will not be built as there is no equilibrium price;
(b) The tunnel will be built because this is a clear case of market failure;
(c) The tunnel will not be built as the cost exceed the benefits;
(d) The tunnel will be built as the benefits exceed the costs.
19. With full (perfect) price discrimination, equilibrium output of the monopolist:
(a) The same as in a non-discriminating monopolist;
(b) Less than in a non-discriminating monopolist;
(c) The same as perfect competition;
(d) The same as in monopolistic competition.
20. The long-run demand for labour is flatter than the short-run because:
(a) The demand for labour is a function of labour’s marginal product and this
will increase in the long run because of the experience workers gain;
(b) The demand for labour is a function of labour’s marginal product and this
will decreases in the long run because workers become frustrated;
(c) The demand for labour is a function of labour’s marginal product and this
will increase in the long run because of the increase in the stock of capital;
(d) None of the above.
21. There are two firms in the market and the general demand they face is given by:
( )
While each firm has the following cost functions: (
)
(a) If firm 2 produced 100, firm 1’s best response would be to sell 250;
(b) If firm 2 produced 200, firm 1’s best response would be to sell 200;
(c) If firm 2 produced 300, firm 1’s best response would be to sell 100 (d) If firm 2 produced 300, firm 1’s best response would be to sell 75.
22. Supply of labour is backward bending. Therefore,
(a) An increase in demand for labour would lead to either an increase in
equilibrium wages or a decrease depending on where the equilibrium lies;
(b) An increase in demand for labour will only lead to an increase in wages as
only one of the intersections between demand and supply constitute an
equilibrium;
(c) An increase in demand for labour will only lead to a decrease in wages as
only one of the intersections between demand and supply constitutes an
equilibrium;
(d) An increase in demand for labour will not lead to any change in wages
given the backward bending nature of the supply of labour.
23. In a world of two goods (which are gross substitutes) which are produced by labour
alone, an exogenous decrease in the demand for y accompanied by a technological
innovation in the production of x will lead to:
(a) Relative price of x necessarily falling and therefore, an increase in the
production of x and a decrease in the production of y;
(b) Could lead to a fall in the relative price of x without a change in the
production of y;
(c) Could lead to a rise in the relative price of x without a change in the
production of x;
(d) Could lead to no change in the relative price of x without an increase in the
production of x.
24. In an economy where there are three markets (for x, for y and for L):
(a) Market price will reveal the true social costs only if all markets are
perfectly competitive;
(b) Market price will reveal the rue social costs even if one of the three
markets were not competitive,
(c) Market price will not reveal the true social costs if one market is not
competitive but the benefits of competition will still be accrued;
(d) Market prices will not reveal the true social costs under any circumstances.
25. In the case of missing markets the competitive nature of all existing markets will:
(a) Ensure that market prices reflect the true social costs and the benefits of
competition can be fully materialise;
(b) Ensure that market prices reflect the true social costs but prevent the
benefits of competition to be accrued;
(c) Ensure the benefits of competition although market prices do not reflect
social costs;
(d) Produce an allocation which will be as efficient as in the case where none
of the industries is competitive.
26. The allocation of property rights will resolve the problem of missing markets:
(a) Irrespective of their distribution and the presence of transaction costs;
(b) Irrespective of their distribution provided that there are no transaction
costs;
(c) The distribution of property rights matters for efficiency even in the
absence of transaction costs;
(d) None of the above.
27. The contract curve is a locus of points where:
(a) All indifference curves of one agent are tangent to those of the other;
(b) The Price-Consumption-Curves (PCC) of both agents intersect;
(c) There will be competitive equilibrium;
(d) There will be equitable distribution of goods.
28. The efficient provision of public good requires that:
(a) The marginal cost of its provision should be the same as everyone’s marginal
utility;
(b) The marginal cost of its provision should be the same as everyone’s average
utility;
(c) The marginal cost of its provision should be same as the sum of average
willingness to pay;
(d) The marginal cost of its provision should be the same as the sum of everyone’s
marginal utility.
Macroeconomics
1. Consider the following information on an economy (in billion dollars):
GNP 340; Private Consumption 150; Public Consumption 90; Exports 120; Transfer
payments 20; Imports 170; Depreciation 40; Taxes 60
(a) Private savings =90, disposable income =260 and Net imports =50;
(b) Net investment =11, Private savings = 110, disposable income = 260
(c) Net Investment =150, disposable income = 260 Savings=110;
(d) Net domestic investment =110, disposable income =240, private savings =110
2. Consider two economies with zero net domestic investment. In economy A imports
are comprised of consumption goods while in economy B imports are comprised
entirely of investment goods. Assuming unchanged technologies,
(a) economy A will grow while economy B will shrink; (b) economy A will shrink while economy B will grow;
(c) both economies will grow;
(d) economy A will neither grow nor shrink but economy B will grow;
(e) both economies will neither grow nor shrink.
3. The marginal propensity to save is 0.2 and the proportional rate of tax is 0.4. The
multiplier of the economy will be:
(a) 1.88;
(b) 1.92;
(c) 1.90;
(d) 6.
4. When the marginal propensity to spend is greater than the marginal propensity to
consume:
(a) the balanced budget multiplier will be less than 1;
(b) the balanced budget multiplier will be equal to 1;
(c) the balanced budget multiplier will be greater than 1;
(d) it will not be possible to maintain a balanced budget.
5. In Tragiland, the pensioners have no income. Everyone has the same marginal
propensity to consume (0.5) and there is a marginal propensity to invest of 0.15.
Proportional tax is at 30%. If the government announced that donations to pensioners
will be tax-free (to both donor and recipient), the equilibrium level of output with a
transfer of 100 will rise:
(a) by 15;
(b) by 30;
(c) nil;
(d) by 100;
6. Consider two identical economies with the same proportional tax. The only difference
between the two is that in economy A, the proportional tax is fixed at 25% and the
government adjusts its expenditure to keep a balanced budget while in B, the
government adjusts the tax rate to be equal to the expenditure.
(a) the multiplier of A will be greater than B; (b) the multiplier of A will be smaller than B;
(c) A and B will have the same multiplier;
(d) the two economies will never have the same equilibrium level of output and
thus, cannot be considered as identical.
7. Consider a closed economy in Keynesian unemployment with fixed demand for
investment and government expenditures. A fall in the rate of the proportional tax will
bring about:
(a) an increase in output and an increase in tax receipts;
(b) an increase in output and a fall in tax receipts;
(c) an increase in output and no change in tax receipts;
(d) none of the above.
8. In a closed economy with fixed prices and wages and where the marginal propensity
to consume of the rich is smaller than that of the poor, a transfer of income from the rich
to the poor will:
(a) Increase equilibrium level of output but reduce private savings;
(b) Decrease equilibrium level of output but increase private savings;
(c) Increase in output and an increase private savings;
(d) Decrease in output and a decrease in private savings.
9. When the demand for investment is an increasing function of income:
(a) a decrease in the autonomous component of consumption will bring about a
fall in equilibrium level of output and a fall in the equilibrium levels of savings
and investment;
(b) an increase in the autonomous component of consumption will bring about a
fall in equilibrium level of output and a fall in the equilibrium levels of savings
and investment;
(c) a decrease in the autonomous component of consumption will bring about a
fall in equilibrium level of output and an increase in the equilibrium levels of
savings and investment;
(d) an increase in the autonomous component of consumption will bring about an
increase in equilibrium level of output and a fall in the equilibrium levels of
savings and investment.
10. An increase in government spending which is funded by borrowing from the public
will bring about:
(a) an increase in equilibrium level of output and a fall in interest rates if the
economy is in Keynesian unemployment;
(b) an increase in prices, wages and a fall in interest rates if the economy is in
full-employment;
(c) an increase in prices, wages and a fall in investment if the economy is in full
employment;
(d) a fall in prices and an increase in wages and interest rates.
11. Distribution of dividends by firms when the economy is in Keynesian unemployment
equilibrium will cause:
(a) crowding out of investment by public consumption;
(b) crowding out of investment by private consumption;
(c) increase the equilibrium level of output and investment;
(d) increase in equilibrium level of output and decrease investment.
12. If the reserve ratio is 40% and the banks decide to pay interest on current accounts
(as well as charging interest on loans) then:
(a) if the current account interest is 6% and the interest on loans is 10%, the bank
will make no profits at all;
(b) the bank will make profits as long as the interest rates on current accounts is
smaller than on loans;
(c) the deposit multiplier will be 2.5 and the banks will make profits even if the
interest on current accounts is greater than the interest on loans;
(d) none of the above;
13. In a closed economy, the move from paying salaries once a month to every week will
cause:
(a) a fall in planned investment;
(b) a rise in planned investment;
(c) no change at all;
(d) increase in consumption.
14. When the reserve ratio is 25% and individuals choose to reduce the amount of cash
they hold in their pocket by 100 million dollars:
(a) due to the deposit multiplier, the public will become richer;
(b) the provision of loans will increase by 400 million dollars;
(c) the provision of deposits and loans will rise by 400 million dollars;
(d) the provision of loans will rise by 300 million dollars.
15. Which of the following will cause (eventually) a fall in real balances:
(a) increase in public expenditure which is financed by a loan from the Central
bank when the economy is in full-employment equilibrium;
(b) reduction in the reserve ratio when the economy is in full employment
equilibrium;
(c) reduction in the reserve ratio when the economy is in Keynesian
unemployment;
(d) an increase in the demand for liquid assets when the economy is in full
employment.
16. Which of the following would have justified an upward sloping supply of real
balances:
(a) at higher interest rates, the public needs less liquid assets;
(b) at lower interest rates, the demand for loans is rising;
(c) an increase in the price level reduces the supply of real balances;
(d) at lower interest rates, the banks would rather not lend and maintain excess
liquidity.
17. An increase in the marginal propensity to import will:
(a) cause a recession if the exchange rate and wages are flexible;
(b) cause an expansion of output if the exchange rate and wages are flexible;
(c) cause a recession if the exchange rate and wages are fixed;
(d) none of the above.
18. Which of the following policy-mixes can best help an economy to recover from a
recession:
(a) a fiscal expansion financed by borrowing from the Central bank;
(b) a fiscal expansion financed by borrowing from the public;
(c) a monetary expansion;
(d) a fiscal expansion and a monetary contraction.
19. Which of the following can cause stagflation:
(a) a one-off increase in money supply;
(b) a one-off decrease in money supply;
(c) an increase in fiscal policy;
(d) an increase in the rate at which money supply increases.
20. An increase in government spending in an open economy with a flexible exchange
rate will:
(a) cause an appreciation of the currency and an increase in net export;
(b) cause a depreciation of the currency and an increase in output;
(c) cause a depreciation of the currency and a fall in net export;
(d) cause an appreciation of the currency and a rise in output.
21.Technological development will cause:
(a) a rise in real wages and an increase in investment;
(b) a rise in real wages and a decrease in investment;
(c) no change in output but a fall in prices and wages;
(d) no change in output but an increase in prices and wages..
22. Which of the following will shift the aggregate demand to the right:
(a) an increase in reserve ratio;
(b) a cut in taxation;
(c) an appreciation; (d) a decrease in population.
23. If nominal wages are flexible in the short run:
(a) depreciation of the currency will cause a fall in consumption;
(b) depreciation of the currency will cause an increase in investment;
(c) monetary expansion will cause an increase in investment;
(d) appreciation of the currency will increase investment;
24. An expansionary monetary policy is ineffective. This means:
(a) prices are rigid;
(b) exchange rate is flexible;
(c) demand for money is horizontal;
(d) demand for money is vertical;
25. When the government announces that it will privatise many of the public enterprise,
this may lead to:
(a) a fall in investment;
(b) an increase in investment;
(c) a fall in the supply of money;
(d) a fall in interest rates.
26. Which of the following will have the greatest impact on the supply of real balances:
(a) an increase in interest rates;
(b) a decrease in interest rates;
(c) consumers increase their deposits in the bank;
(d) the government borrows from the Central Bank.
27. When the domestic interest rate is below the international interest rate:
(a) the currency will depreciate if exchange rate is flexible;
(b) the currency will appreciate if exchange rate is flexible; (c) there will be a decrease in money supply if exchange rate is fixed;
(d) there will be an increase in money supply if exchange rate is fixed.
28. A chronic surplus in the capital account, when exchange rate is flexible, means that:
(a) there is a surplus in the current account which suggests higher domestic
investment;
(b) there is a deficit in the current account which suggests higher investment;
(c) there is a surplus in the current account which suggests lower domestic
investment;
(d) there is a deficit in the current account which suggests lower domestic
investment.
