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    Economics Study Guide

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    Question 1
    Among the reasons economists consider economic profit to be the best measure of a company's performance is

    Accounting profit is difficult to measure.
    Explicit costs are fully accounted for in economic but not accounting profit.
    Estimating income for tax purposes only includes explicit costs.
    The opportunity costs of all resources are subtracted from total revenue.

    Question 2

    Linda gave up her job paying $60,000 a year to start Frozen Yogurt Express. The first year of operation, Frozen Yogurt Express generated $70,000 in revenues and $20,000 in explicit costs, not including any payment to Linda for her time. What is Linda's economic profit?


    Question 3

    When comparing the risk between two investments

    The standard deviation is appropriate even if the expected returns differ significantly.
    The one with the greater expected value is always riskier.
    Those with shorter life spans tend to be riskier.
    The standard deviation is appropriate if the expected returns are close in value.

    Question 4

    Among common factors that give rise to principal-agent problems is

    Information is shared equally by managers and agents.
    Common goals are shared by managers and owners.
    Asymmetric information is present.
    A greater number of agents relative to the number of principals.

    Question 5

    If accounting profit is negative, economic profit must be

    Greater than accounting profit.

    Question 6

    The Soup Kitchen, a local charity, was given the gift of a building by a local philanthroper. The charity's board voted to remodel the building and use it to expand its services. The economic cost to the charity of using the building includes

    Only the cost of remodeling.
    The cost of remodeling and maintaining it.
    The cost of remodeling, maintenance, and loss of revenue if the building had been rented/sold.
    Only the value of lost revenue if the building had been rented or sold.

    Question 7

    Net benefits (profits) are maximized when

    The additional benefit from the last unit of activity exceeds the additional cost of the last unit by the largest amount.
    The difference between total benefit and total cost is maximized.
    Total benefit is maximized.
    Total benefit equals total cost.

    Question 8

    Assuming the supply curve remains constant, a decrease in demand can be expected to

    Reduce equilibrium price and increase equilibrium quantity.
    Increase equilibrium price and reduce equilibrium quantity.
    Decrease equilibrium price and quantity.
    Not result in a change in either equilibrium price or quantity.

    Question 9

    In which of the following examples will it NOT be possible to determine the effect (increase or decrease) on equilibrium price of hamburgers without knowing more about the magnitude of the shifts in supply and demand?

    The demand for hamburgers decreases and the supply of hamburgers increases.
    The demand for hamburgers increases and the supply of hamburgers decreases.
    The demand for hamburgers increases while the cost of meat increases.
    The demand for hamburgers increases and the supply of hamburgers increases.

    Question 10

    Suppose that the market for diamonds is in equilibrium. If political unrest shuts down several major diamond mines, which of the follow is most likely to happen?

    The equilibrium quantity of diamonds decreases.
    The supply of diamonds increases.
    The equilibrium price of diamond decreases.
    The demand for diamonds decreases.

    Question 11

    Assume that more people want Super Bowl tickets than are available through the ticket office at the current price. Select the statement that best represents the situation.

    There is a shortage of Super Bowl tickets at the current price.
    The current price is higher than the equilibrium price for Super Bowl tickets.
    If the current price is lowered, the excess demand for Super Bowl tickets would decrease.
    There is a surplus of Super Bowl tickets at the current price.

    Question 12

    Assume that a decrease in the price of product X results in fewer units of product Y being sold. You can conclude that X and Y are

    Complementary goods.
    Normal goods.
    Inferior goods.
    Substitute goods.

    Question 13

    The equilibrium price and quantity of tea both rise. Which of the following best fits the observed data?

    a decrease in demand with supply constant
    an increase in supply with demand constant
    a decrease in demand coupled with an increase in supply
    an increase in demand with supply constant

    Question 14

    When Napa Winery reduces the price of its chardonnay from $20 a bottle to $15 a bottle, the result is an increase in

    The demand for its chardonnay.
    The supply of its chardonnay.
    The quantity demanded of its chardonnay.
    The quantity of its chardonnay supplied.

    Question 15

    If the market price of milk decreases at the same time the market quantity of milk purchased rises, a possible factor influencing this change is

    An increase in demand for milk with no change in supply.
    An increase in supply of milk with no change in demand.
    A decrease in supply of milk and an increase in demand.
    An increase in supply of milk and an increase in demand for milk.

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    Solution Summary

    The answers with the rationale for each of the questions has been provided.