48 questions. Try each one, then open the answer to check yourself and read the explanation.
Scarcity in Economics means that
Answer: D (resources are limited in relation to wants.)
Scarcity does not mean resources are few; it means they are not enough to satisfy all our wants.
Economics is often described as a science because
Answer: C (it uses scientific methods to explain observed phenomena and predict future events)
Economics is a science because it uses the scientific method: observing facts, forming theories and using them to predict.
When a variable is associated with time period, it is
Answer: A (a flow)
A flow is measured over a period of time (e.g. income per month); a stock is measured at a point in time (e.g. wealth).
Ufuoma is a consumer. His scale of preference shows that he prefers a pair of shoes to a wrist watch; he prefers the wrist watch to a pair of trousers; he prefers the pair of trousers to the pair of shoes. This means that Ufuoma is
Answer: C (inconsistent)
If shoes beat the watch and the watch beats trousers, a consistent consumer must prefer shoes to trousers. Ufuoma prefers trousers to shoes, so his choices are inconsistent.
Air is essential to life but commands no price! Diamond is not essential to life but commands a high price! This is the paradox of
Answer: B (value)
This is the paradox of value (water-diamond paradox): price depends on scarcity and marginal utility, not on how useful a thing is in total.
The average product of labour in a given period is obtained by dividing the
Answer: D (total product by the number of workers.)
Average product of labour = total product ÷ number of workers. Option C describes marginal product.
Developments outside a given firm which reduce the firm costs are called
Answer: B (external economies)
Cost savings that come from outside the firm, such as from the growth of the whole industry, are external economies.
Which of the following BEST describes the 'production function'?
Answer: C (it relates physical outputs to physical inputs)
A production function shows the physical relationship between the quantities of inputs used and the quantity of output produced.
A textile firm operates a plant in the North (where capital is expensive relative to labour) as well as a plant in the South (where labour is expensive relative to capital). In the diagram above the Southern plant will minimize cost by combining labour and capital in the amounts indicated by
Answer: C (X)
Where labour is relatively dear, the cost line is steep and touches the isoquant at a point using more capital and less labour. That is point X.
The Law of Diminishing Returns begins to operate when
Answer: C (marginal product begins to fall)
Diminishing returns set in once each extra worker adds less output than the one before, i.e. when marginal product starts to fall.
The assumption of profit maximization implies that profit
Answer: A (is the most important consideration of the firm)
Assuming firms maximise profit means profit is taken as their main goal, not that nothing else matters.
Total fixed cost measures the cost of
Answer: B (all assets where quantity cannot be varied in the short run)
Fixed costs are the costs of factors whose quantity cannot be changed in the short run, whatever the output.
The output at which total revenue equals total cost is known as
Answer: B (break-even level output)
At the break-even output the firm makes neither profit nor loss because total revenue equals total cost.
The demand and supply equations for a commodity are given respectively as
D = 20 − ½P
S = 8 + ¼P
Recalling that at equilibrium, D = S, the equilibrium price (P) and quantity (Q) can be obtained as
Answer: D (P = 16, Q = 12)
20 − ½P = 8 + ¼P gives 12 = ¾P, so P = 16. Then Q = 20 − 8 = 12.
A commodity is said to have a derived demand when the commodity
Answer: B (is demanded because of what it can help to produce)
Derived demand is demand for something because of what it helps to produce, as with factors of production.
If all goods were free, a rational consumer would consume
Answer: B (the amount where marginal utility became zero)
A consumer buys until marginal utility equals price. If the price is zero, he consumes until marginal utility falls to zero; beyond that, extra units would make him worse off.
Which of the following changes in equilibrium price and quantity is as a result of an upward shift in the market demand for a commodity?
Answer: D (Both the price and the quantity rise.)
An increase in demand with an upward-sloping supply curve raises both the equilibrium price and quantity.
One factor which influences the slope of a non-linear demand curve for a commodity is the
Answer: C (availability of substitutes)
The more substitutes a good has, the more buyers respond to its price, making the demand curve flatter.
If in the demand-supply diagram above, the quantity supplied is OQ, then
Answer: C (price will be ON)
At quantity OQ the demand curve is at point T, so buyers will take the whole quantity OQ only at price ON.
One of the characteristics of an imperfect market is
Answer: B (a lack of homogeneity of products)
In imperfect markets products are differentiated (not identical); identical products, many traders and full information belong to perfect competition.
Total revenue is always equal to
Answer: D (average revenue multiplied by the quantity sold.)
Average revenue is revenue per unit (the price), so total revenue = AR × quantity sold.
If prices fall in a perfectly competitive industry, the firms in that industry in the short run will
Answer: C (reduce production)
Each firm produces where price equals marginal cost; a lower price means a lower output, so firms cut production.
Which of the following is TRUE at the quantity of output where Average Cost (AC) per unit has reached its minimum level?
Answer: C (MC = AC)
The marginal cost curve cuts the average cost curve at its lowest point, so MC = AC there.
In the short run, the monopolistic competitor
Answer: D (may close down.)
In the short run a monopolistic competitor can make supernormal profit, normal profit or a loss; none of these is certain. If price cannot cover average variable cost it may close down, so D is the only statement that is always true.
Price leadership is
Answer: A (a form of tacit collusion)
Under price leadership, firms follow the price set by a leading firm without any formal agreement; this is tacit (unspoken) collusion.
In a public company, entrepreneurial functions are performed by the
Answer: D (board of directors.)
In a public company the board of directors, elected by shareholders, takes the major decisions and directs the business.
The most important limitation on the partnership as a form of business enterprise is the
Answer: A (implication for partners' liability)
In an ordinary partnership each partner has unlimited liability: his private property can be taken to pay the firm's debts. This risk is the main limitation of the partnership form.
Under partnership, investors who have no desires to be actively involved in the day-to-day management of such organizations, are called
Answer: B (sleeping partners)
A sleeping (dormant) partner contributes capital and shares profit but takes no part in running the business.
Localization of industries refers to the
Answer: A (tendency to concentrate industries in particular areas)
Localisation is the tendency of firms in an industry to concentrate in a particular area.
Restriction on credit creation by commercial banks can be effected through
Answer: D (liquidity ratio)
Raising the liquidity ratio forces banks to keep more liquid assets, so they can lend less.
Which of the following factors enhances the ability of commercial banks to create money?
Answer: A (Reduction in the reserve ratio)
A lower reserve ratio means banks keep less of each deposit and lend more, so the credit multiplier is larger.
The rate at which money changes hands is known as the
Answer: D (velocity of circulation.)
The number of times a unit of money is spent in a period is called the velocity of circulation.
Merchant banks perform all the following functions EXCEPT
Answer: B (provision of current account facilities)
Current accounts for ordinary customers are a commercial bank service; merchant banks deal in wholesale finance, issues and portfolio management.
Which of the following is a direct tax?
Answer: D (Property tax.)
A property tax is paid directly by the owner to the government; the others are taxes on goods, which are indirect.
Which of the following would most likely be considered an example of benefit taxation?
Answer: D (Highway-user tax.)
Under the benefit principle, those who use a service pay for it; a highway-user tax is paid by road users.
When a nation is experiencing balance of payments surplus, it is in a better position to
Answer: A (increase its foreign exchange reserves)
A surplus means more foreign currency is coming in than going out, so the country can add to its foreign reserves.
Which of the following is a good example of invisible item on balance of payments account?
Answer: A (Shipping and aviation)
Invisible items are services, such as shipping, aviation, insurance and tourism.
Deficit financing is mostly facilitated by the existence of
Answer: C (central bank)
Governments mostly finance deficits by borrowing from the central bank, which can create money for them.
The Malthusian theory of population predicts that growth in food production will
Answer: C (be at a slower rate than population growth)
Malthus said food grows arithmetically while population grows geometrically, so food production grows more slowly.
If aggregate income is N500.00 and aggregate consumption is N400.00, this means that the average propensity to consume is
Answer: B (0.80)
APC = consumption ÷ income = 400 ÷ 500 = 0.80.
Which of the following items is subtracted when computing Gross National Product at factor cost, by the expenditure method?
Answer: B (Indirect taxes)
Market prices include indirect taxes, so to get GNP at factor cost you subtract indirect taxes (and add subsidies).
Which of the following occurs in the circular flow of economic activities with no leakages?
Answer: D (National income equal national expenditure.)
If nothing leaks out of the circular flow (no saving, taxes or imports), all income earned is spent again, so national income equals national expenditure.
In estimating the national income of a country, the three approaches usually adopted are the
Answer: C (expenditure, income and output)
National income is measured by the income, output (product) and expenditure methods.
If technology becomes less capital-intensive, it means
Answer: B (an increase in the labour/capital ratio)
Less capital-intensive methods use more labour per unit of capital, so the labour/capital ratio rises.
The most threatening problem for the less developed countries is
Answer: C (population explosion)
Rapid population growth eats up gains in output, keeping income per head low in many developing countries.
An increase in an economy's productive capacity implies
Answer: B (an increase in the economy's capital stock)
Productive capacity grows when the economy has more capital goods (machines, roads, factories) to produce with.
Collectivism refers to the system of management of state enterprises in a
Answer: D (socialist economy.)
Under socialism the state owns and manages the means of production collectively.
The group of unemployed members of a community who are physically handicapped or disabled, is generally classified under unemployment as
Answer: C (residual)
Residual unemployment refers to people who find it hard to get work because of physical or mental disability.