True or False Economics Questions: Test Your Knowledge
Economics True or False Quiz
Test Your Understanding
1. Economic problems arise solely due to constantly rising prices of goods and services.
False. Economic problems can also arise from scarcity, which occurs when resources are limited relative to wants and needs.
2. According to the law of demand, if the price of a good rises, its quantity demanded falls. Therefore, if the price remains constant, demand should not vary.
False. Demand can vary even if the price remains constant if other factors influencing demand change, such as consumer income or preferences.
3. Absolute advantage is the comparison between producers based on their benefit.
False. Absolute advantage is determined by comparing producers based on their productivity, or the amount of output they can produce with a given amount of input.
4. The demand for cars has increased in recent years because the price of cars has decreased.
False. While a decrease in price can lead to an increase in quantity demanded, an increase in overall demand is typically driven by changes in other factors, such as consumer income or preferences.
5. When negative externalities exist in a market, the social cost is greater than the private cost.
True. Social cost includes both the private cost borne by producers and consumers and the external costs imposed on third parties due to the negative externality.
6. International trade only benefits industrialized countries.
False. International trade can benefit all participating countries by allowing them to specialize in producing goods and services in which they have a comparative advantage and then trade with other countries.
7. An increase in income generates increased demand for wine, and therefore also an increase in the supply of this product.
False. While an increase in income can lead to an increase in demand for wine, it does not directly affect the supply of wine. Supply is influenced by factors such as production costs and technology.
8. The price of goods is always adjusted to balance the quantity demanded and supplied.
True. In a competitive market, the interaction of supply and demand forces tends to move the price towards equilibrium, where the quantity demanded equals the quantity supplied.
9. Cross elasticity of demand measures the percentage change in the price of one good in response to changes in the quantity demanded of another good.
False. Cross elasticity of demand measures the percentage change in the quantity demanded of one good in response to a percentage change in the price of another good.
10. Market demand is the sum of individual demands in that market.
True. The market demand curve is derived by horizontally summing the individual demand curves of all consumers in the market.
11. In an economy with very high incomes, there are no economic dilemmas.
False. Even in high-income economies, scarcity still exists, and choices must be made about how to allocate limited resources among competing wants and needs.
12. The equilibrium price clears the market.
True. At the equilibrium price, the quantity demanded equals the quantity supplied, leaving no shortage or surplus in the market.
13. When a price is set below the equilibrium, it generates a situation of scarcity.
True. When the price is below equilibrium, the quantity demanded exceeds the quantity supplied, leading to a shortage or excess demand.
14. Absolute advantage is the comparison among producers according to their opportunity cost.
False. Absolute advantage is based on productivity, while comparative advantage is based on opportunity cost.
15. Opportunity cost equals the sum of all costs involved.
False. Opportunity cost represents the value of the next best alternative forgone when making a choice. It is not necessarily equal to the sum of all costs involved.
16. Whenever a sales tax is applied in a market, its impact is equally divided between producers and consumers.
False. The distribution of the tax burden between producers and consumers depends on the relative elasticities of supply and demand.
17. When classifying goods according to their income elasticity of demand, they are divided into substitutes, complementary, and independent.
False. Goods are classified as normal, inferior, or luxury based on their income elasticity of demand.
18. The supply of apartments has increased in recent years because new technologies allow for faster construction.
True. Technological advancements can increase the supply of goods and services by making production more efficient.
19. The number of buyers and expectations are determinants of demand.
True. Both the number of buyers and consumer expectations can influence the overall demand for a product.
20. When a company pollutes, the social cost equals the private cost minus the cost of pollution.
False. The social cost of pollution includes both the private cost borne by the company and the external cost imposed on society due to the pollution.
21. Economic benefit is the difference between income and the cost involved.
False. Economic benefit, or profit, is the difference between total revenue and total cost, including both explicit and implicit costs.
22. A point outside and above the Production Possibilities Frontier (PPF) is inefficient.
False. A point outside and above the PPF is unattainable given the current resources and technology. Points on the PPF represent efficient production.
23. If an economy is using all available resources, it is said to be on the Production Possibilities Frontier.
True. The PPF represents the maximum possible output combinations an economy can produce when all resources are fully utilized.
24. A person can have absolute advantages in producing two goods but cannot have a comparative advantage in producing both.
True. Comparative advantage is based on opportunity cost, and it is not possible for one person to have a lower opportunity cost in producing both goods compared to another person.
25. According to the law of supply, if the price of a good rises, the supply of that good increases.
False. An increase in price leads to an increase in the quantity supplied, not the overall supply, of a good.
26. In recent months, the demand for cars fell sharply because the prices of cars were rising.
False. While a rise in price can lead to a decrease in quantity demanded, a sharp fall in demand is usually caused by changes in other factors, such as consumer income or preferences.
27. Monopoly and externalities are market failures.
True. Both monopoly and externalities can lead to inefficient outcomes in markets, deviating from the socially optimal allocation of resources.
28. Income elasticity of demand measures the percentage change in quantity demanded of a good in response to a percentage change in price.
False. Income elasticity of demand measures the percentage change in quantity demanded in response to a percentage change in income.
29. When a price is fixed above the equilibrium price, there is a consumer surplus.
False. When the price is fixed above equilibrium, there is a surplus or excess supply, as the quantity supplied exceeds the quantity demanded.
30. A good or service has a positive price (greater than zero) because it is scarce.
True. Scarcity is a fundamental concept in economics, and goods and services that are scarce command a positive price in the market.
31. Producer surplus is the difference between the willingness to pay and the cost of production.
False. Producer surplus is the difference between the price received by producers and their cost of production.
32. When we refer to complementary and substitute goods, we are referring to the price elasticity of demand.
False. Complementary and substitute goods are related to cross elasticity of demand, which measures how the quantity demanded of one good changes in response to a change in the price of another good.
33. When a government decides to apply a specific tax to a property, the consumer ultimately pays the tax, without disrupting the market.
False. The incidence of a tax, or who ultimately bears the burden, depends on the relative elasticities of supply and demand. The market can also be affected by the tax, potentially leading to changes in price and quantity.
34. Opportunity cost is the same as the least economic cost accounting cost.
False. Opportunity cost represents the value of the next best alternative forgone, while accounting cost only considers explicit costs.
35. Demand for apartments declined in recent months as prices have risen.
False. A rise in price typically leads to a decrease in quantity demanded, not a decrease in overall demand. A decrease in demand would be caused by changes in other factors, such as consumer income or preferences.
36. An increase in income generates an increase in demand for chocolates, and therefore also an increase in the supply of chocolates.
False. While an increase in income can lead to an increase in demand for chocolates, it does not directly affect the supply of chocolates. Supply is influenced by factors such as production costs and technology.
37. Whenever taxes are applied in a market, the incidence is almost equally divided between the government and consumers.
False. The incidence of a tax depends on the relative elasticities of supply and demand, not on an arbitrary division between the government and consumers.
38. In a fixed exchange rate system, the government is fixing the price of foreign currency.
True. In a fixed exchange rate system, the government or central bank sets a specific exchange rate between its currency and another currency and intervenes in the foreign exchange market to maintain that rate.
39. Marginal revenue is always equal to price.
False. Marginal revenue is equal to price only for firms in perfectly competitive markets. In other market structures, such as monopoly, marginal revenue is less than price.
40. When the marginal product of labor is decreasing, the production of the company decreases.
False. When the marginal product of labor is decreasing, production is still increasing, but at a decreasing rate. Production only decreases when the marginal product of labor becomes negative.
41. Average variable cost equals total cost divided by the quantity produced.
False. Average variable cost equals total variable cost divided by the quantity produced.
42. The CPI (Consumer Price Index) is the same as the Index of Wholesale Price.
False. The CPI measures the average change over time in the prices paid by urban consumers for a basket of consumer goods and services, while the WPI measures the average change in prices received by domestic producers for their output.
43. GDP (Gross Domestic Product) is the production of real goods and services valued at current prices.
False. Nominal GDP is valued at current prices, while real GDP is valued at constant prices to adjust for inflation.
44. A sunk cost is that cost which is under the market price.
False. A sunk cost is a cost that has already been incurred and cannot be recovered, regardless of the market price.
45. The GNP of Canada is Canada’s GDP, unless the production of foreign firms in Canada.
False. GNP (Gross National Product) is the total value of goods and services produced by a country’s residents, regardless of their location, while GDP is the total value of goods and services produced within a country’s borders, regardless of the nationality of the producers.
46. A specific tax raises social welfare as the state collects the tax, which can increase public expenditure.
False. Taxes can reduce social welfare by creating a deadweight loss, which is the loss of economic efficiency that occurs when the equilibrium for a good or service is not achieved.
47. The specific incidence of a tax depends on the amount of tax.
False. The incidence of a tax depends on the relative elasticities of supply and demand, not on the amount of the tax.
48. The monopolist can always set the price and quantity desired.
False. While a monopolist has market power, it is still constrained by the demand curve. It can choose either the price or the quantity, but not both independently.
49. The competitive firm maximizes profits when the price equals marginal revenue.
False. A competitive firm maximizes profits when marginal revenue equals marginal cost. In a perfectly competitive market, price is equal to marginal revenue, but this is not the case in other market structures.
50. When the marginal benefit is zero, the total profit is maximized.
True. Total profit is maximized when marginal revenue equals marginal cost, which is also the point where marginal profit is zero.
51. In one company, the average income is always equal to marginal revenue.
False. Average revenue is equal to marginal revenue only in perfectly competitive markets. In other market structures, such as monopoly, average revenue is greater than marginal revenue.
52. In a monopoly, there is a deadweight loss.
True. Monopoly leads to a deadweight loss because the monopolist charges a price above marginal cost, resulting in a lower quantity produced and consumed compared to the socially optimal level.
53. GDP can never be equal to GNP.
False. GDP can be equal to GNP in a closed economy with no foreign investment or foreign production by domestic firms.
54. A price elasticity of demand less than one means that it is a complementary good.
False. A price elasticity of demand less than one indicates that demand is inelastic, meaning that quantity demanded is not very responsive to changes in price. Complementary goods are those that are consumed together, and their cross elasticity of demand is negative.
55. Openness to international trade raises the welfare of a country, but some sectors gain and others lose.
True. International trade can lead to overall gains in welfare, but it can also lead to some sectors experiencing gains while others experience losses, especially in the short run.
56. Marginal revenue is the increase in total cost when one more unit is sold.
False. Marginal revenue is the increase in total revenue when one more unit is sold.
57. In order to maximize profit, the firm must compare the price with the average variable cost.
False. To maximize profit, a firm should compare marginal revenue with marginal cost.
58. Given that real GDP in Chile in 2007 was higher than real GDP in 2006, we can ensure that there was a rise in the price level of the economy.
False. Real GDP is adjusted for inflation, so an increase in real GDP indicates an increase in the quantity of goods and services produced, not necessarily a rise in the price level.
59. The median income is equal to the monopoly price.
False. The median income is the income level that divides the population into two equal groups, while the monopoly price is the price charged by a monopolist.
60. As the number of workers increases, the marginal product of labor declines.
True. In the short run, with a fixed amount of capital, the marginal product of labor eventually declines as more workers are added due to diminishing returns.
61. When marginal revenue equals marginal cost, marginal profit is maximized.
False. When marginal revenue equals marginal cost, total profit is maximized, and marginal profit is zero.
62. In the long run, the competitive firm is earning economic profits.
False. In the long run, competitive firms earn zero economic profits due to the entry and exit of firms in the market.
63. Marginal revenue is the increase in total cost when one more unit is sold.
False. Marginal revenue is the increase in total revenue when one more unit is sold.
64. A competitive firm maximizes profits where the price equals the average cost.
False. A competitive firm maximizes profits where price equals marginal cost.
65. Firms in a competitive market all have the same costs.
False. Firms in a competitive market can have different cost structures, even though they all face the same market price.
66. In the long run, a firm must exit the market if the price is lower than average cost.
True. If the price is consistently below average total cost in the long run, a firm will incur losses and eventually exit the market.
67. The natural monopoly arises when one company owns natural resources.
False. A natural monopoly arises when a single firm can supply a good or service to an entire market at a lower cost than two or more firms due to economies of scale.
68. The unemployment rate is the quotient (division) between the number of unemployed and the total population.
False. The unemployment rate is the number of unemployed divided by the labor force, which includes both employed and unemployed individuals.
69. Argentina’s GDP includes the production value of British companies established in Argentina.
True. GDP includes the value of all production within a country’s borders, regardless of the nationality of the producers.
70. The marginal product is the increase in total cost when it produces one more unit.
False. The marginal product is the increase in total output when one more unit of a variable input, such as labor, is added.
71. The diminishing marginal product is because it raises the price of production factors.
False. Diminishing marginal product occurs because, in the short run, at least one input, such as capital, is fixed, and as more of the variable input is added, the marginal product of the variable input eventually declines.
72. In the short term, an enterprise must close if the price is below marginal cost.
False. In the short run, a firm should continue to operate as long as price is above average variable cost, even if it is below average total cost.
73. The total income of an enterprise is the monetary amount the company receives from the sale of its production.
True. Total revenue is the total amount of money a firm receives from selling its output.
74. The unemployment rate is the quotient (division) between the number of unemployed and the working-age population.
False. The unemployment rate is the number of unemployed divided by the labor force.
75. The monopoly’s marginal revenue is always less than the price.
True. A monopolist faces a downward-sloping demand curve, so to sell more output, it must lower the price on all units sold, which means that marginal revenue is less than price.
76. GDP (Gross Domestic Product) equals GNP (Gross National Product).
False. GDP measures the value of production within a country’s borders, while GNP measures the value of production by a country’s residents, regardless of their location.
77. When marginal cost is greater than marginal revenue, the competitive firm needs to close.
False. A competitive firm should reduce output when marginal cost is greater than marginal revenue, but it should only shut down if price is below average variable cost.
78. The competitive firm has no market power.
True. A competitive firm is a price taker and cannot influence the market price.
79. Any profit-maximizing firm should follow the rule MR = MC, regardless of whether it is in a competitive market or a monopoly.
True. The profit-maximizing rule for any firm is to produce where marginal revenue equals marginal cost.
80. It is perfectly possible that the number of unemployed increased, but the unemployment rate decreases.
True. The unemployment rate can decrease even if the number of unemployed increases if the labor force grows at a faster rate.
81. When the monopolist increases the quantity sold, there is a price effect and a production effect.
True. When a monopolist increases output, it must lower the price, which is the price effect. The production effect is the increase in total revenue from selling more units.
82. If there is a steady increase in domestic consumption of an economy, this will be reflected in GDP and not GNP.
False. An increase in domestic consumption will be reflected in both GDP and GNP.
83. The labor force participation rate is equal to the number of employed plus the number of unemployed divided by the total population.
True. The labor force participation rate is the percentage of the working-age population that is either employed or actively looking for work.
84. The monopolist can sell its output at the price it wants. For this reason, it charges the highest price possible.
False. While a monopolist has market power, it is still constrained by the demand curve and cannot charge any price it wants. It will charge the price that maximizes its profits, which is not necessarily the highest possible price.
85. When in Brazil the price of the dollar rises, it means that the real weakens.
True. If it takes more Brazilian reals to buy one US dollar, it means that the real has depreciated or weakened against the dollar.
86. In a monopoly, there is a deadweight loss.
True. Monopoly leads to a deadweight loss because the monopolist restricts output and charges a price above marginal cost, resulting in a loss of economic efficiency.
87. GNP can never be greater than GDP.
False. GNP can be greater than GDP if the value of production by a country’s residents abroad is greater than the value of production by foreign residents within the country.
88. In a competitive market, the price is always the same.
False. While all firms in a competitive market charge the same price, the market price can change due to shifts in supply or demand.
89. Marginal revenue is the increase in total product when one more unit is sold.
False. Marginal revenue is the increase in total revenue when one more unit is sold.
90. To maximize profit, the firm must compare the price with the average variable cost.
False. To maximize profit, a firm should compare marginal revenue with marginal cost.
91. In a fixed exchange rate system, it is the market that sets the price of foreign currency.
False. In a fixed exchange rate system, the government or central bank sets the exchange rate.
92. The median income is always equal to price.
False. Average revenue is equal to price, not median income.
93. Brazil’s GDP includes the value of production of Brazilian companies established in Chile.
False. GDP includes the value of production within a country’s borders, regardless of the nationality of the producers.
94. A competitive market is characterized by intense price competition.
False. In a perfectly competitive market, firms are price takers and cannot engage in price competition. They all charge the same market price.
95. When a competitive firm that sells double the amount, your total income goes up twice.
True. In a perfectly competitive market, a firm’s total revenue is equal to price times quantity, so if the quantity doubles and the price remains the same, total revenue will also double.
96. Monopoly profits always get excessive.
False. A monopolist’s profits depend on the relationship between price, average total cost, and quantity sold. It is possible for a monopolist to incur losses.
97. GDP can never be equal to GNP.
False. GDP can be equal to GNP in a closed economy with no foreign investment or foreign production by domestic firms.
98. The competitive firm maximizes profits at the point at which marginal revenue equals price.
False. A competitive firm maximizes profits where marginal revenue equals marginal cost. In a perfectly competitive market, price is equal to marginal revenue, but this is not the case in other market structures.
99. A competitive market is characterized by intense price competition.
False. In a perfectly competitive market, firms are price takers and cannot engage in price competition. They all charge the same market price.
100. Since Chile’s real GDP in 2006 was higher than real GDP in 2005, then there was a rise in the price level of the economy.
False. Real GDP is adjusted for inflation, so an increase in real GDP indicates an increase in the quantity of goods and services produced, not necessarily a rise in the price level.
101. Firms in a competitive market accept the same price and have similar variable costs.
False. While firms in a competitive market all charge the same price, they can have different cost structures, including different variable costs.
102. The supply curve of a competitive firm is its marginal cost curve from the point where this exceeds the average variable cost.
True. In the short run, a competitive firm will supply output as long as the price is above its average variable cost. Its short-run supply curve is the portion of its marginal cost curve that lies above its average variable cost curve.
103. If the average total cost is below the price, the competitive company makes a profit.
True. A competitive firm’s profit is equal to (Price – Average Total Cost) x Quantity. If the price is greater than average total cost, the firm will earn a profit.