Principles of Economics (IN01 D089)
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Free Principles of Economics (IN01 D089) Questions
What illustrates unemployment in a production possibility frontier
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Producing at a point on the outside of the production possibility frontier
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Producing at a point on the inside of the production possibility frontier
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Producing at a point in the exact middle of the production possibility frontier
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Producing at a point on either end of the production possibility frontier
Explanation
Correct Answer:
B. Producing at a point on the inside of the production possibility frontier
Explanation:
Unemployment or underutilization of resources is illustrated by producing at a point inside the PPF. This indicates that not all resources are being used efficiently.
Why other options are wrong:
A. Producing at a point on the outside of the production possibility frontier: This is impossible because it represents a level of production that exceeds the economy’s capacity.
C. Producing at a point in the exact middle of the production possibility frontier: The location in the middle does not inherently indicate unemployment; it depends on the PPF's specific structure.
D. Producing at a point on either end of the production possibility frontier: These points represent extreme allocations of resources, not necessarily unemployment.
Which is an example of a variable cost in production?
- Interest payments on loans
- Rent paid for the use of a factory building
- Wages paid to labor
- Rent paid on land
Explanation
Explanation
Correct answer: (C.) Wages paid to labor
Variable costs change with the level of output, meaning they increase as production rises and decrease as production falls. Wages paid to labor are a typical variable cost because more workers or hours are needed when production increases, and fewer when it decreases. In contrast, interest payments and rent for buildings or land are fixed costs, as they must be paid regardless of the level of output in the short run.
Which method should be used to calculate the unemployment rate as a decimal
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Divide the unemployed by the total population
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Divide the unemployed by the total labor force
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Divide the unemployed by the working-age population
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Divide the unemployed by the employed population
Explanation
Correct Answer:
B. Divide the unemployed by the total labor force
Explanation:
The unemployment rate is calculated as the ratio of unemployed individuals to the total labor force (which includes both employed and unemployed individuals).
Why other options are wrong:
A. Divide the unemployed by the total population: The total population includes children, retirees, and others not in the labor force, which would distort the calculation.
C. Divide the unemployed by the working-age population: Not all working-age individuals are part of the labor force, as some are not actively seeking employment.
D. Divide the unemployed by the employed population: This does not accurately represent unemployment, as it excludes those not currently employed but looking for work.
A government enacts an expansionary monetary policy. How will this change affect the aggregate demand curve?
- Shifts to the right
- Becomes steeper
- Shifts downward
- Shifts to the left
Explanation
Explanation
Correct answer: (A.) Shifts to the right
Expansionary monetary policy increases the money supply and typically lowers interest rates. Lower interest rates encourage more borrowing and spending by consumers and businesses, increasing overall demand for goods and services. This results in a rightward shift of the aggregate demand curve, indicating a higher quantity of output demanded at each price level. The other options do not accurately reflect the impact of expansionary monetary policy on aggregate demand.
An economist left her teaching position that paid $80,000 yearly to work full-time in her own consulting firm. The firm had a total revenue of $150,000 in the first year, and her business expenditure was $70,000. What is the amount of economic profit made by the economist
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-$3,000
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$5,000
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-$2,000
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$0
Explanation
Step-by-Step Calculation:
Economic profit = Total Revenue - (Explicit Costs + Implicit Costs)
1.Total Revenue = $150,000
2. Explicit Costs (business expenditures) = $70,000
3. Implicit Costs (opportunity cost of her teaching salary) = $80,000
Economic Profit = 150,000 − (70,000 + 80,000)
Economic Profit = 150,000 −150,000
= 0
Correct Answer:
D. $0
Explanation:
When the total revenue equals the sum of explicit and implicit costs, the economic profit is zero. This means the economist covered her opportunity costs and explicit costs but did not make additional economic profit.
Why other options are wrong:
A. -$3,000: This would imply the total cost was overestimated by $3,000.
B. $5,000: This mistakenly subtracts only explicit costs without including opportunity costs.
C. -$2,000: This incorrectly adjusts the total costs, leading to a calculation error.
What is the first step when analyzing equilibrium after a change in a non-price factor in the market?
- Draw the initial demand and supply curves for the market
- Determine how the shift affects the equilibrium price
- Decide whether the curve shifts to the right or left
- Decide whether the initial effects will be on consumers or producers
Explanation
Explanation
Correct answer: (A.) Draw the initial demand and supply curves for the market
When analyzing how a non-price factor affects market equilibrium, the first step is to establish the baseline by drawing the initial demand and supply curves. This provides a reference point to visualize how shifts in demand or supply, caused by changes in factors like income, technology, or input costs, will affect equilibrium price and quantity. Only after establishing the initial curves can you determine the direction of shifts and their impact on the market.
The federal government substantially increases educational subsidies, which increases productivity. Which effect does this situation have on the long-run aggregate supply (LRAS) curve?
- It shifts to the left.
- It shifts to the right.
- It becomes flatter.
- It becomes steeper.
Explanation
Explanation
Correct answer: (B.) It shifts to the right
Long-run aggregate supply (LRAS) represents the economy’s potential output, determined by factors such as labor, capital, and productivity. Increasing educational subsidies improves human capital and productivity, enabling the economy to produce more goods and services at full employment. This increase in potential output causes the LRAS curve to shift to the right, indicating a higher level of sustainable output.
An individual deposits half of his salary in a bank account every month. Which function of money represents this action?
- Unit of account
- Medium of exchange
- Store of value
- Barter
Explanation
Explanation
Correct answer: (C.) Store of value
Depositing money in a bank preserves its value for future use. This reflects the store of value function of money, which allows individuals to save wealth and defer spending. The other functions—medium of exchange (used to make purchases), unit of account (used to measure value), and barter (direct exchange of goods and services)—do not describe the act of saving or storing money for future use.
A student is planning their weekend activities. They would like to attend a jazz festival and watch the latest blockbuster movie. They can choose one activity since the timing of the movie and the festival coincides. Which basic economic principle is best illustrated by the student’s choice?
- People respond to incentives
- Rational people think at the margin
- Trade benefits everybody
- Everyone faces tradeoffs
Explanation
Explanation
Correct answer: (D.) Everyone faces tradeoffs
The student must choose between two activities because they cannot do both simultaneously. This situation illustrates the economic principle that everyone faces tradeoffs: choosing more of one thing means giving up something else. Tradeoffs are fundamental in economics because resources, including time, are limited. The other options describe different principles that are not directly relevant to this scenario.
What does a consumer's budget constraint identify?
- Alternative production technologies
- Combinations of affordable goods
- Likelihood of wasted resources
- Opportunities to earn extra income
Explanation
Explanation
Correct answer: (B.) Combinations of affordable goods
A consumer's budget constraint shows all the combinations of goods and services that a consumer can afford given their income and the prices of those goods. It represents the trade-offs a consumer faces when allocating limited resources. It does not address production technologies, wasted resources, or ways to earn additional income.
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Frequently Asked Question
Price elasticity of demand measures how responsive the quantity demanded of a good is to changes in its price. Learn more in-depth on the topic and practice questions on ULOSCA.com.
Taxes on goods, like sugary drinks, increase their price. This typically causes a leftward shift in the demand curve. Understand the mechanics behind this with additional resources at ULOSCA.com.
A shift in demand refers to a change in the entire demand curve due to factors like income or preferences, while a movement along the curve happens when the price changes but no other factors are at play. Learn more through practice questions at ULOSCA.com.
A rightward shift in the demand curve can occur when factors such as an increase in consumer income, favorable changes in tastes, or a reduction in the price of complementary goods cause consumers to demand more. Find relevant explanations on ULOSCA.com.
Complementary goods are products that are consumed together. For instance, coffee and sugar. Learn how price changes in one good affect its complement on ULOSCA.com.
'Elastic' demand means that the quantity demanded of a good changes significantly in response to a price change. Understand elasticity in detail with examples and exercises at ULOSCA.com.
Inelastic demand means that price increases do not significantly reduce the quantity demanded. Explore further examples and case studies at ULOSCA.com.