Tutorial
Introduction
Economic Principles
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1. Macroeconomics is the study of
a. the decision making process of economics.
b. the movement and trends in the economy
as a whole.
c. big corporations.
d. none of the above.
B. Macroeconomics is focused on the movement
and trends in the economy as a whole.
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2. Macroeconomics
a. studies the decision making aspects of economics, for
example, what price should a business owner charge to
maximize profits.
b. studies the economic behavior in particular markets.
c. studies how prices and quantity of goods are determined
in individual markets.
d. studies the economic behavior of entire economies, like
the economy of the United States or the world.
D. Choices a, b, and c are examples of a branch of
economics we call microeconomics. Microeconomics
deals with the decision making process of economics,
whereas macroeconomics looks at the economy in the
large, it considers the overall picture.
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3. Austrian economists differ from Keynesians in
that Austrians tend to favor free market
solutions to economic problems and Keynesians
economists tend to favor more government
intervention to solve economic problems.
TRUE
The main idea of Keynesian economists is that as long as
we can manage demand we can manage the economy.
Keynesians believe that when demand is insufficient to
maintain full employment, the government should take
up the slack. Keynesians tend to favor economic
planning, like nationalized health care.
Austrians favor free market principles with the
government making the rules supporting growth and
acting as a referee, they are very suspicious of excessive
planning because planned economies have always led to
economic stagnation and loss of personal freedom.
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4. Opportunity cost is
a. payments for plants and equipment
b. payment for plant and equipment minus taxes
and labor.
c. consumer costs for running a household, food,
utilities, rent, and upkeep.
d. that which you give up in the best choice when
making a decision.
D. Each time you make a decision there is something you
have to give up. Opportunity cost is not the total of
things you have to give up, but the one best thing that
you give up because of the choice you make.
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5. The opportunity cost of going to college includes
a. housing.
b. tuition.
c. earnings foregone by working less for pay.
C. If you are not working because you are a full time
student, a part of the cost of your education is the money
foregone by not working at the highest paying job you
qualify for and you realistically could have obtained. If
you are working part time, or at a job that pays you less
because of your school schedule, your opportunity cost is
the difference between what you are making and what you
could have made if it were not for your school schedule.
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6. Suppose you have to make a decision of how many sodas
to buy. You will keep buying additional sodas as long as
a. you are thirsty.
b. your marginal benefit is greater than your marginal
cost.
c. your total benefit exceeds your total cost.
d. you have money and your wants exceed your needs.
B. Each time you make a decision you use marginal
analysis. With each soda you consider purchasing you
will make a decision on whether you value the money
more or the soda more. If a soda is a dollar and you
decide that you value a soda more than a dollar, you
will buy the soda. If you decide you value the dollar
more than a soda, you will not buy that last soda.
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7. The net benefit of an activity is the
a. value of benefits to others in the economy.
b. sum of all the benefits from that activity.
c. non-monetary benefits from that activity.
d. total benefits minus the total costs of that activity.
D. The term net means the difference between
costs and benefits. Because there are costs and
benefits in every activity you will engage in, you
will either experience a net benefit or a net loss.
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8. Rational choices must be based on
a. complete knowledge and correct information.
b. the least amount of information possible.
c. self-interest.
d. expected opportunity cost.
D. All decisions are based on expectations of the
gains and costs of that decision. For every
decision you make you ask yourself (sometimes
unconsciously) “what will I have to give up for
making this decision and how much will I gain?”
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9. The opportunity cost of an activity
a. depends on the individual’s subjective values and
opinions.
b. is the same for everyone.
c. must be calculated and known before undertaking
the activity.
A. Opportunity cost is a very personal thing, it differs
from person to person. For example, should you paint
your room or hire someone to paint it? If you can make
$20 an hour and pay someone $8 an hour, you should
hire the work out. However, if you can only make $7 an
hour, it is better to paint the room yourself.
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10. Your opportunity cost when choosing a particular activity
a. can be easily and accurately calculated.
b. cannot be estimated.
c. does not change over time.
d. varies, depending on time and circumstances.
D. For example, the opportunity cost of cleaning your
bedroom is higher on a sunny day then it would be on a
rainy day. There are more things you can do outside when
the sun is shining than you can do when it is raining.
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11. Ann and Bob are business partners. Ann can type one page
every 5 minutes, and she can complete one page of accounting
every 15 minutes. Bob can type one page or complete one
page of accounting every 10 minutes. Which statements are
true?
a. Bob has a comparative advantage in both activities.
b. Bob has an absolute advantage in both activities.
c. Ann should type and Bob should do the accounting.
C. Ann has higher opportunity costs of doing the
accounting than Bob, and Bob has higher
opportunity costs of doing the typing.
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12. Buying stock on the margin means
a. buy shares of stock just before the price falls.
b. buying stock using the rule of 78s.
c. Buy shares of stock at the very bottom so that the
price has to increase.
d. Borrowing money from your stock broker to buy
shares of stock.
D. Buying stock on the margin is an example of using
leverage. If you borrow half the money to purchase
shares of a stock and the price increases, your gain is
doubled because you own twice as many shares.
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13. When a company has more debt than equity,
economist say that it is
a. underwater.
b. bankrupt.
c. leveraged.
d. insolvent.
C. Leverage is the practice of using debt to
make an investment. Leverage can multiply
gains, but it can also multiply losses.
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14. Price elasticity of demand is
a. solely measured .
b. a way for economists to calculate the point of profit
maximization.
c. at the point where marginal revenue equals marginal
cost.
d. used to show responsiveness, or elasticity, of the quantity
demanded of a good or service to a change in price.
D. Much of economics involves the process of making
decisions. If you own a business and you consider raising
your prices, will your total revenue go up or down?
Revenue will increase if a product faces an inelastic
demand curve and will decrease if it is price elastic.
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15. What is rent seeking?
a. Happens when people are looking for a place to rent.
b. Businesses financially support politicians to gain favor.
c. Happens when landlords advertise for renters.
d. the direct exchange of goods, without the use of money.
B Big business can often get more bang for their buck
by giving money to politicians to influence legislation
that would favor them in the market place rather
than spending the money on a better product.
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16. If a product faces an price inelastic demand curve,
total revenue will decrease when the price increases.
FALSE
Total revenue will increase because the amount of
money gained from the higher prices will more than
offset the money lost due to a decline in sales.
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17. What is moral hazard?
a. Occurs when businesses are insulated from risk and
therefore are encouraged to take big risks.
b. Happens when there is a break down of morals in
society.
c. Is a term which signifies the difficulty of staying moral
in a modern society.
d. Can only occur when people have the freedom of choice.
A. This term goes along with the concept of rent
seeking. When business are always bailed out and
do not incur losses when investments go bad, they
will be encouraged to make high risk investments.
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18. Marginal analysis is an economic principle.
TRUE
Each time you make a decision you use marginal analysis.
Each time you have a choice between alternatives, will
you choose this, or will you chose that?
You will make the choice whereby your total level of
satisfaction elevates the most. Your decision is based on
the margin, or the last unit.
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19. Which of the following is an economic principle?
a. Marginal analysis.
b. Leverage
c. Opportunity cost
d. Elasticity of demand
e. All of the above
E. The principles of economics are concepts, a way of
thinking, which enables us to better understand
cause and effect in a changing economy. These
principles form the foundation of economic analysis.
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20. Which of the following is an example of rent
seeking?
a. When a business operates where marginal revenue
equals marginal cost it is practicing the concept of
rent seeking.
b. When a business borrows money and makes a
profit it has demonstrated the advantages of rent
seeking.
c. A corporation lobbies Congress for special favors.
C. As a business owner, suppose you had a million dollars
to invest. Do you invest in a better product or put the
money influencing decisions in Congress that would
benefit your business? Money spent influencing
political decisions is what we call rent seeking.
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21. A stock is a time-dimensional variable, a flow is not.
FALSE
Each time a change takes place there is a short run (stock)
and a long run (flow) effect. The short run does not
consider changes that can occur over time, the long run
considers consequential changes over time.
If taxes increase, government revenues may increase in the
short run, but if personal incomes decrease over the long
run, government revenue will eventually decline.
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22. Economies of scale recognizes that as a business
grows, its costs can decrease up to a certain point.
TRUE
As a business grows there are many reasons why costs can
decrease. A large business can better utilizes a division of
labor, buying in bulk, and more efficient machines.
This is one reason a large business may favor minimum
wage laws and a small business will appose such laws. A
large business can better afford higher wages because
they can take advantage of economies of scale.
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23. Gross Domestic Product (GDP) is the monetary value of
all new and final goods and services produced within a
country’s borders in a specific time period, usually a year.
TRUE
A big part of macroeconomics is to know where we
have come from and to where we are going. Are
things getting better or getting worse? Are we
growing more or less than we did last year?
GDP is one way for economists to gauge the extent of
growth, or the lack of growth.
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END
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