Economics Model Test

Time-2 hour Marks – 80

[Note: Read the question carefully and Answer them properly. Part 1 MCQ, Part 2 short
question and Part 3 broad question with explanations.]
Part 1
Choose the best answer from the followings. Write answer only.
[Each question contains 1 marks 25 *1 = 25]
1. Which of the following is correct about product cost?
a. Product cost refers to a distribution system.
b. Product cost refers to the total of fixed costs, variable costs and semi-variable costs
c. It refers to the total cost of the product.
d. Product cost refers to the sales of the product.

2. Which of the following statements about opportunity cost is TRUE?

I. Opportunity cost is equal to implicit costs plus explicit costs.
II. Opportunity cost only measures direct monetary costs.
III. Opportunity cost accounts for alternative uses of resources such as time and money.
a) I, II and III. b) I c) III only. d) I and III only.

3. Which of the following statements about sunk costs is FALSE?

I. Sunk costs are those that cannot be recovered, no matter what future action is taken.
II. Because sunk costs cannot be recovered, they are irrelevant for future decision-making.
III. The presence of sunk costs can affect future decision-making, if they are large enough.
a) II and III only.
b) II only.
c) III only.
d) I and III only.
4. Which factor of production would you consider a cow?
a. Land b. Labor c. Capital d. Entrepreneur
5. The goods used in the production process such as factories, machinery and equipment
a. Land b. Labor c. Resources d. Capital
6. The people who work in both the public and private sector
a. Land b. Labor c. Resources d. Capital
7. The skills of people who are willing to invest time and money to run a business
a. Labor b. Land c. Capital d. Entrepreneurship
8. Difference between wants and needs and available resources
a. Economy b. Factors of Production c. Resources  d. Scarcity 
9. The ideas and emotional drive a person has to produce something that other people will want
to buy describes which factor of production?
A. Capital b. Labor c. Entrepreneurship d. Land
10. Suppose that in the land of Plenty there is no scarcity. We can conclude that:
A. all resources are fully employed.
B. the production possibilities curve is concave to the origin.
C. opportunity costs are zero when the production of bread increases.
D. all goods are free.
E. both c and d are correct.

11. All of the following are examples of opportunity cost except:

A. the leisure time sacrificed to study for an exam.
B. the tuition fees paid to a university.
C. the income which could have been earned by a college student had he or she worked full time
instead of attending college.
D. the building which could have been built with the construction materials and labor used to
build a new university library.
E. all of the above are examples of opportunity costs.

12. Suppose you have to wait in line to purchase a soft drink at a Missouri State - Tulsa football
game. The drink costs one dollar. While, waiting in line, you hear the crowd roar as someone
scores a touchdown. While running back to your seat, you fall and spill your drink on another
spectator. What is your opportunity cost for the drink?
A. the cost of the drink plus the lost enjoyment of not seeing Missouri State score another
touchdown (it couldn't have been Tulsa).
B. the cost of the drink, the lost enjoyment of not seeing the Missouri State touchdown, your
thirst (you didn't get a drink), and the discomfort (to the other spectator) of sitting in the sun with
wet, sticky clothing.
C. the lost enjoyment of not seeing the Missouri State touchdown, your thirst (you didn't get a
drink), and the discomfort (to the other spectator) of sitting in the sun with wet, sticky clothing.
D. the lost enjoyment of not seeing the Missouri State touchdown, your thirst (you didn't get a
drink), and your discomfort (assuming the other spectator responded by throwing his drink in
your lap) of sitting in the sun with wet, sticky clothing.
13. Which of the following is the best definition of opportunity costs?
A. the amount of one good that must be given up in order to produce one more unit of another
good.
B. the amount of money that must be paid in order to purchase one more unit of a good.
C. the amount of an input that must be used in order to produce one more unit of a good.
D. the price of a good that must be charged in order for a merchant to sell one more unit.
E. none of the above.

14. A free good is not scarce because:

A. individuals can have all they desire at zero price.
B. price rations the good so that all individuals willing to pay the market price can buy the good
and it is, therefore, not scarce.
C. human desires for the good exceed the amounts available at a zero money price.
D. it is an abundant natural resource.
E. a and b.
15. Which of the following statements could not be tested by economic analysis?
A. Higher tax rates cause tax revenues to fall.
B. Only cigarette companies are harmed by higher cigarette taxes.
C. Gambling should be legalized to raise tax revenue.
D. Outlawing bars will reduce drunk driving.

16. Which of the following is a positive statement?

A. An unemployment rate of 7 percent is a national disgrace.
B. Unemployment is not so important a problem as inflation.
C. When the national unemployment rate is 7 percent, the unemployment rate for inner-city
youth is often close to 40 percent.
D. Unemployment and inflation are equally important problems.

17. All of the following statements are positive except:

A. "My administration will balance the federal budget by 1983." (Ronald Reagan, campaign
promise, 1980.)
B. "It is an economic contradiction for airline passengers to pay higher fares to fly shorter
distances than longer ones." (Hobart Rowen, Washington Post, 1985.)
C. "inflation makes everyone worse off by lowering the purchasing power of people's income."
D. "rent controls are preferable to income grants for assisting low-income families."
E. all of the above are positive statements.

18. Microeconomics is not concerned with:

A. the quantities of each good produced.
B. the size of aggregate money flows in the economy.
C. the distribution of goods among households.
D. the allocative function of changes in relative prices.
E. microeconomics is concerned with all of the above.

19. Most of economic theory:

A. views charitable human actions as especially moral.
B. assumes that groups of people often behave irrationally.
C. is based on the notion that politicians, entrepreneurs, and criminals are especially selfish and
greedy.
D. views individuals as home economists.
E. assumes that individuals act purposefully and rationally to maximize their own self-interest.

20. If it is impossible to make somebody better off without making someone else worse off, the
current situation must:
A. be allocative efficient.
B. not be optimal.
C. be inequitable.
D. cure the problem of scarcity.
21. Inefficiency:
A. implies the existence of economic inequity.
B. occurs whenever it is possible to make someone better off without making someone else
suffer.
C. exists whenever maximum output is achieved given the resources available.
D. whenever present, implies that more total output could always be produced given an
economy's resources.
22. All of the following basic economic questions deal with microeconomics except:
A. How is the supply of goods allocated among the members of the society?
B. What goods and services are being produced and in what quantities?
C. By what methods are goods and services being produced?
D. Is the economy's capacity to produce goods growing over time?
E. all of the above
23. Slope of production possibility curve is ______________.
a. a straight line b. convex to point of origin c. concave to point of origin d. None of these

24. According to marginal analysis, optimal decision-making involves:

a) Taking actions whenever the marginal benefit is positive.

b) Taking actions only if the marginal cost is zero.
c) Taking actions whenever the marginal benefit exceeds the marginal cost.
d) All of the above.

25. What’s a market economy?

a. the organized way a society provides goods and services to meet the wants and needs of its
people.
b. an economic system
c. trade off

Part 2
Short Questions, Answer the following questions. [Each question contains 2 Marks, 10*2=20]
1. When will an increase in supply lead to a decrease in price only, but no change in
quantity?
2. If the demand of a commodity decreases but supply remains constant, what will be the
effect on price and quantity?
3. What happens if the market price is more than equilibrium price?
 4. Suppose you play a round of golf costing $75. The golf takes four hours to play. If you
were not playing golf you could be working and earning $40 per hour. The opportunity
cost of your golf game will be?
5. I am considering loaning my brother $10,000 for one year. He has agreed to pay 10%
interest on the loan. If I don’t loan my brother the $10,000, it will stay in my bank
account for the year, where it will earn 2% interest. What is the opportunity cost to me of
the loan to my brother?
6. Explain what is meant by opportunity cost and the law of increasing costs?
7. Illustrate these concepts opportunity cost with the use of a production possibilities
frontier.
8. What happens when government fixes the price of any commodity below the equilibrium
price?
9. The equation for a supply curve is P = 3Q – 8. What is the elasticity in moving from a
price of 4 to a price of 7?
10. What is the price elasticity of demand & supply? Can you explain it in your own words?

Part 3
Answer the following questions and give explanation where mention it. [Each question
contains 5 marks, 5*7=35]

1. A tea shop rents for $650 per month and at that price 10,000 units are rented as shown in
figure above. When the price increases to $700 per month, 13,000 units are supplied into
the market. By what percentage does apartment supply increase? What is the price
sensitivity?

2. Distinguish, using examples, between the different factors of production.

 3.
Price of T-shirt Quantity of T-shirts Quantity of T-shirts
demanded when the average demanded when the average
tourist income is $20,000 tourist income is $30,000
$4 3000 5000
$5 2400 4200
$6 1600 3000
$7 800 1800

a. Using the midpoint method, calculate the price elasticity of demand when the price of a T-shirt
rises from $5 to $6 and the average tourist income is $20,000. Also calculate it when the average
tourist income is $30,000.
b. Using the midpoint method, calculate the income elasticity of demand when the price of a T-
shirt is $4 and the average tourist income increases from $20,000 to $30,000. Also calculate it
when the price is $7.
4. With the aid of an appropriate diagram, explain how the equilibrium price and quantity traded
of a normal good will change with an increase in the daily minimum wage.
5. If the price of something is higher or lower than the equilibrium price, what forces (i.e., human
behavior) push the price and quantity to equilibrium, explain with diagram?