Practice Questions for Economics

1. Which of the following is a characteristic of a perfectly competitive market?

a. Firms are price setters.
b. There are few sellers in the market.
c. Firms can exit and enter the market freely.
d. All of these.

2. In the long run, a profit-maximizing firm will choose to exit a market when
a. Fixed costs exceed sunk costs.
b. Average fixed cost is rising.
c. Revenue from production is less than total costs.
d. Marginal cost exceeds marginal revenue at the current level of production.

3. When firms have an incentive to exist a competitive market, their exit will
a. Drive down market prices.
b. Drive down profits of existing firms in the market.
c. Decrease the quantity of goods supplied in the market.
d. All of the above are correct.

4. Efficiency can be described as the relation between revenue and cost

a. True b. False

5. Which of the following is not included in the decisions that every society must take?
a. What goods will be produced?
b. Who will produce goods?
c. What determine consumer preferences?
d. Who will consume the goods?

6. This theory explains that market disequilibrium is associated to unanticipated changes in the economic
environment including changes in demand, supply, political stability, safety and protection etc.

a. Disequilibrium Profit Theory c. Frictional Profit Theory b. Compensatory Profit

Theory d. Monopoly Profit Theory

7. The net economic activity should be increased to the point where the _________ is zero.
a. Marginal cost c. Net marginal cost
b. Average cost d. Net marginal benefit

8. A change in the level of economic activity is desirable and should be undertaken as long as the marginal benefit
exceeds the _____________.
a. Marginal returns c. Marginal costs
b. Total costs d. Average costs

9. At a price of P4.95, a fiction novel is expected to sell 9,000 copies. If the novel is offered for sale at a price of
P3.95, then the publisher can expect to sell
a. Less than 9,000 copies
b. 9,000 copies
c. More than 9,000 copies
d. It is impossible to predict the effect of a lower price on sales

10. At a variable cost of P299.95, the manufacturer of a portable gas-powered generator is willing to produce 19,000
units per quarter. At a fixed cost of P349.95, it is likely that the manufacturer will be willing to produce
a. More than 19,000 units per quarter
b. 19,000 units per quarter
c. Less than 19,000 units per quarter
d. It is impossible to predict the effect of these costs to future production

11. If automobile manufacturers are producing cars faster than people want to buy them,
a. There is an excess supply and price can be expected to decrease
b. There is an excess supply and price can be expected to increase
c. There is an excess demand and price can be expected to decrease
d. There is an excess demand and price can be expected to increase

12. If a cellphone company introduces new units and finds that the sellers’ sales far exceed the number of units that
are being produced,
a. There is an excess supply and price can be expected to decrease
 b. There is an excess supply and price can be expected to increase
c. There is an excess demand and price can be expected to decrease
d. There is an excess demand and price can be expected to increase

13. Cost minimization involves consideration of cost relations only wherein revenue relations are not considered. It is
the point when
a. Marginal cost is equal to zero
b. Total cost is at its highest level
c. Marginal cost is equal to average cost
d. Average cost is equal to total cost

14. Which of the following statements is true?

I. When marginal revenue is negative, total revenue is increasing while when marginal revenue is
positive, total revenue is decreasing.
II. When a linear equation exists between price and the number of units sold, both price and
marginal revenue relations begin at same point on the Y-axis, but marginal revenue falls
twice as fast as the price with respect to output.
a. I only c. I and II
b. II only d. Neither I nor II

15. This is considered to be the simplest and most direct form for presenting economic data
a. Table c. Equation
b. Spreadsheets d. Graphical Presentation

16. Total profit is simply the difference between total revenue and total cost. Marginal profit is the change in total
profit due to a 1-unit change in output, equivalently, marginal profit can be thought of as the difference between
a. Price and variable cost which drives the change in the total cost
b. Marginal revenue and marginal cost
c. Average revenue and average cost
d. Total revenue and total fixed cost

17. Demand is determined by

a. Price of the product c. Tastes and habits
b. Relative prices of other goods d. All of the above

18. The demand curve has a _____ slope.

a. Undefined c. Negative
b. Zero d. Positive

19. A university decides to raise tuition fees to increase the total revenue it receives from students. This strategy will
work if the demand for education at that university is:
a. Perfectly elastic. c. Inelastic
b. Inversely related to price d. Elastic

20. The bus fare charged by the local bus company is £2.00 during the morning rush hour, but only £1.50 during the
early afternoon. This can be explained by the fact that the demand for bus rides during the morning rush hour is
_____; but during the early afternoon the demand for bus rides is _____:
a. more elastic; less elastic
b. less elastic; more elastic
c. perfectly inelastic; relatively inelastic
d. perfectly elastic; perfectly inelastic

21. If the change in price of one product results to an increase in demand of the other, then the other good is:
a. a normal good c. a luxury good
b. a complement d. a substitute good

22. If the income elasticity of the demand for a good is negative, then the good is:
a. A normal good c. A luxury good
b. An income-neutral good d. An inferior good
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23. If the government is seeking to raise revenue by increasing the rate of indirect tax on a product, it will be most
successful where price elasticity of demand is:
a. relatively inelastic c. perfectly inelastic.
b. relatively elastic d. perfectly elastic

24. Which of the following is not a determinant of a consumer's demand for a commodity?
a. Income c. Prices of related goods b. Population d. Tastes

25. The law of demand refers to the

a. inverse relationship between the price of a commodity and the quantity demanded of the commodity per
time period.
b. direct relationship between the desire a consumer has for a commodity and the amount of the commodity
that the consumer demands.
c. inverse relationship between a consumer's income and the amount of a commodity that the consumer
demands.
d. direct relationship between population and the market demand for a commodity.

26. If the price of a good increases, then

a. the demand for complementary goods will increase.
b. the demand for the good will increase.
c. the demand for substitute goods will increase.
d. the demand for the good will decrease.

27. If consumer income declines, then the demand for

a. normal goods will increase.
b. inferior goods will increase.
c. substitute goods will increase.
d. complementary goods will increase.

28. Which of the following will cause a decrease in quantity demanded?

a. An decrease in the price of a complementary good.
b. An increase in income when the good is normal.
c. A decrease in the price of a substitute good.
d. An increase in the price of the good.

29. Which of the following will not decrease the demand for a commodity?
a. The price of a substitute decreases
b. Income falls and the good is normal
c. The price of a complement increases
d. The commodity's price increases

30. Demand curves have a negative slope because

a. firms tend to produce less of a good that is more costly to produce.
b. the substitution effect always leads consumers to substitute higher quality goods for lower quality goods.
c. the substitution effect always causes consumers try to substitute away from the consumption of a
commodity when the commodity's price rises.
d. an increase in price reduces real income and the income effect always causes consumers to reduce
consumption of a commodity when income falls.

31. If a good is normal, then a decrease in price will cause a substitution effect that is
a. positive and an income effect that is positive.
b. positive and an income effect that is negative.
c. negative and an income effect that is positive.
d. negative and an income effect that is negative.

32. The demand by a firm for inputs used in the production of a commodity that the firm offers for sale
a. is called a derived demand.
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b. is directly related to the demand for the commodity.

c. is negatively sloped.
d. is all of the above.

33. If the price elasticity of demand for a firm's output is elastic, then the firm's marginal revenue is
a. positive, and an increase in price will cause total revenue to increase.
b. positive, and an increase in price will cause total revenue to decrease.
c. negative, and an increase in price will cause total revenue to increase.
d. negative, and an increase in price will cause total revenue to decrease.

34. The price elasticity of demand for a good will tend to be more elastic if
a. the good is broadly defined (e.g., the demand for food as opposed to the demand for carrots).
b. the good has relatively few substitutes.
c. a long period of time is required to fully adjust to a price change in the good.
d. none of the above are true.

35. If a good is inferior, then

a. the income elasticity of demand will be negative.
b. the income elasticity of demand will be zero.
c. the income elasticity of demand will be positive.
d. a decrease in income will cause demand to decrease.

36. If two goods are complements, then

a. the cross-price elasticity of demand will be negative.
b. the cross-price elasticity of demand will be zero.
c. the cross-price elasticity of demand will be positive.
d. an increase in the price of one good will increase demand for the other.

37. Business profit

a. The residual of sales revenue minus explicit accounting costs of doing business
b. Is a normal rate of return
c. Economic profit
d. The return of stockholder’s equity

38. Managers who seek satisfactory rather than optimal results:

a. Are insensitive to social constraints
b. Increase allocative efficiency
c. Are insensitive to self-imposed constraints
d. Take actions that benefit parties other than stockholders

39. Value maximization is broader than profit maximization because it considers:

a. Total revenues c. Real-world constraints
b. Total costs d. Interest rates

40. The value of the firm decreases with the decrease in

a. Total revenue c. The cost of capital
b. The discount rate d. Total cost

41.Given the price, if the cost of production increases because of higher price of raw materials, the supply
a. Decreases c. Remains the same
b. Increases d. Any of the above

42.The short-run Average Cost is _________ shaped.

a. V c. L
b. U d. Any of the above

43.Oligopoly is a type of __________ market. A ____________ exists in the industry

a. Perfect, few firms c. Perfect, many firms
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b. Imperfect, few firms d. Imperfect, many firms

44. Managerial economics deals with the problem of

a. Global economy c. An industry
b. An economy d. An individual firm

45. The relationship between price and demand is

a. Inverse C. Direct
b. Positive D. Proportionate

46. Which of the following is an example of a resource constraint?

a. Pollution control laws
b. Inadequate demand
c. Excessive production cost
d. Inadequate financial capital

47. In macroeconomics, we study about

a. Theory of National Income & Employment
b. Theory of International Trade & Eco Growth
c. Theory of Money Supply & Price Level
d. All of the above

48. Which of the following is/are the goals of macroeconomics?

a. To achieve higher level of GDP
b. Stability of prices
c. To achieve higher level of employment
d. All of the above

49. What are the tools of macroeconomics?

a. Monetary policy c. Fiscal policy
b. Income policy d. All of the above

50. Information related to the financial transactions for a country is given below with values stated in billions of
pesos.
Gross Domestic Product (GDP) P4,000 Personal taxes 250
Transfer payments 500 Undistributed corporate profits 25
Corporate Income Taxes 50 Depreciation 500
Social Security contributions 200 Net income earned abroad 0
Indirect business taxes 210

What is Net Domestic Product?

a. P3,500 c. P3,475
b. P3,450 d. P4,500

51. Foreign trade

a. Allows a country to avoid tradeoffs.
b. Makes a country more equitable.
c. Allows a country to have a greater variety of products at a lower cost than if it tried to produce everything
at home.
d. None of the above.

52. Which of the following statements about trade is true?

a. Unrestricted international trade benefits every person in a country equally.
b. People that are skilled at all activities cannot benefit from trade.
c. Trace can benefit everyone in society because it allows people to specialize in activities in which they
have absolute advantage.
d. Trade can benefit everyone in society because it allows people to specialize in activities in which they
have a comparative advantage.

Items 53 & 54. Suppose that a price of P30 per month, there are 30,000 subscribers to cable television in
Tagbilaran. If the Tagbilaran Cablevision raises the price to P40 per month, subscribers will fall to 20,000.
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53. What is the price elasticity of demand for cable TV in Tagbilaran, using the midpoint method?
a. 0.66 c. 1.0
b. 0.75 d. 1.4

54. At which of the following prices does Tagbilaran Cablevision earn the greatest total revenue?
a. Either P30 or P40 because the price elasticity of demand is 1.0.
b. P30 per month.
c. P40 per month.
d. P0 per month.

55. Under a system of floating interest rate, the exchange rate is

a. Determined by the government. c. Both a and b.
b. Market determined. d. Neither a nor b.

56. A country which pegs its exchange rate and runs a persistent balance of payments deficit also runs risk of
a. High unemployment
b. Running out of foreign exchange.
c. Accumulating too much foreign exchange.
d. Its exchange rate rising.

57. The sale of government securities in the open market will

a. Increase in bank reserves
b. Decrease in bank reserves
c. Raise the money supply
d. Reduce the discount rate.

58. If the BSP purchases P50 millions of government securities in the open market, with a 0.10 required reserve ratio,
the maximum increase in deposit will be
a. P5 million c. P500 million
b. P50 million d. P200 million

59. The direct contribution of the foreign sector to GDP is represented by:
a. Government foreign aid
b. Net imports
c. Gross exports less capital inflows
d. Personal consumption

60. Philippine technological progress allows them to be more competitive and offer numerous new products at lower
prices next year. Assuming a freely floating exchange rate, this should cause a PH
a. Balance of payments deficit
b. Balance of payments surplus
c. Peso depreciation
d. Peso appreciation