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Principles of Economics — Practice Questions flashcards

6 of 55 questions free to study here · 24 topics · the whole deck is built into Willys

Multiple-choice practice questions, one best answer each, on supply and demand, elasticity, costs and market structures, externalities, GDP, inflation, multipliers and macro policy.

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Practice deck · part of Principles of Economics (Micro and Macro) · written against: Standard two-course principles sequence; OpenStax Principles of Economics 3e, consulted as a reference; no text copied. Updated 2026-10-10.

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  1. An economy is producing at a point inside its production possibilities frontier. Which statement about this point is correct?

    A) It cannot be reached with current resources and technology
    B) It is productively efficient but not allocatively efficient
    C) Output of one good could rise with no loss of the other
    D) It shows the economy holding resources in reserve efficiently
    C) Output of one good could rise with no loss of the other

    A point inside the frontier means resources are idle or misused, so output of one good can rise at no cost in the other. Every point on the frontier, not inside it, is productively efficient.
    Scarcity and Choice
  2. A firm's total cost is 40, 70, 90, 120, 170 and 230 dollars at outputs of 0, 1, 2, 3, 4 and 5 units. What is average variable cost at 4 units?

    A) 42.5 dollars
    B) 10 dollars
    C) 50 dollars
    D) 32.5 dollars
    D) 32.5 dollars

    Fixed cost is the 40 dollars incurred at zero output, so variable cost at 4 units is 170 − 40 = 130 and AVC = 130 ÷ 4 = 32.5 dollars. 42.5 is average total cost, 50 is the marginal cost of the 4th unit, and 10 is average fixed cost.
    Production and Costs
  3. A factory's production releases pollution that harms people downstream, and the factory does not pay for the harm. Compared with the socially efficient outcome, what does the unregulated market produce?

    A) Too much output at too low a price
    B) Too much output at too high a price
    C) The efficient output, but at too low a price
    D) Too little output at too high a price
    A) Too much output at too low a price

    With a negative externality, the firm's private cost is below the social cost, so supply sits too far right: the market overproduces and the price omits the external harm. A per-unit tax equal to that harm can correct it.
    Externalities
  4. A country has 250 million adults. Of them, 144 million are employed, 6 million are unemployed and the rest are not in the labor force. What are the unemployment rate and the labor force participation rate?

    A) 4% and 60%
    B) 4.2% and 60%
    C) 4% and 57.6%
    D) 2.4% and 60%
    A) 4% and 60%

    The labor force is 144 + 6 = 150 million, so the unemployment rate is 6 ÷ 150 = 4% and participation is 150 ÷ 250 = 60%. The rate divides by the labor force, not by all adults or only the employed.
    Unemployment
  5. In a simple Keynesian model with no taxes that vary with income, the marginal propensity to consume is 0.75. Government purchases rise by 50 billion dollars. By how much does equilibrium output rise?

    A) 37.5 billion dollars
    B) 50 billion dollars
    C) 150 billion dollars
    D) 200 billion dollars
    D) 200 billion dollars

    The spending multiplier is 1 ÷ (1 − 0.75) = 4, so output rises 4 × 50 = 200 billion. 150 uses the smaller tax multiplier, and 37.5 counts only the first round of extra consumer spending.
    The Keynesian Perspective
  6. Which of these is an automatic stabilizer?

    A) A one-time tax rebate enacted after a downturn
    B) A new highway program passed during a recession
    C) Unemployment benefits that rise as layoffs grow
    D) Defense spending approved in yearly appropriations
    C) Unemployment benefits that rise as layoffs grow

    Automatic stabilizers change without new legislation: in a downturn, unemployment benefits rise and tax revenue falls on their own, supporting demand. Highway programs and rebates are discretionary fiscal policy.
    Budgets and Fiscal Policy

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Review status: Second-reader reviewed, with corrections applied.

Checked against:

  • OpenStax Principles of Economics 3e, consulted as a reference; no text copied.
  • Original questions written for this deck; no official exam, textbook or question-bank items were copied.

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