49 questions. Try each one, then open the answer to check yourself and read the explanation.
In market economy, the question of what, how and for whom to produce are solved by the
Answer: C (price mechanism)
In a market economy the forces of demand and supply, through prices, decide what is produced, how and for whom.
Economic goods are termed scarce goods when they are
Answer: A (not available in sufficient quantities to satisfy all wants for them)
Goods are scarce when the quantity available is less than what people would want, so they command a price.
A school girl who needs a book and mirror, each costing five naira, decides to purchase the book instead of the mirror since she cannot pay for the two at the same time. Determine the real cost of her book.
Answer: C (The mirror)
The real (opportunity) cost of the book is the next best alternative she gave up, which is the mirror.
Macroeconomics is a study of economic science from the point of view of
Answer: C (aggregate or general economy)
Macroeconomics studies the economy as a whole: national income, total employment, the general price level. Individual firms and consumers belong to microeconomics.
If units of a variable factor are increasingly added to a fixed factor and the marginal physical product keeps increasing, production is said to be taking place under conditions of
Answer: A (increasing returns to the variable factor)
Only one factor is being varied and each extra unit adds more output than the last, so there are increasing returns to the variable factor (not to scale, which needs all inputs to change).
At any given level of output, the total cost of a firm equals the
Answer: C (average cost multiplied by its output)
Average cost = total cost ÷ output, so total cost = average cost × output.
At any given level of output, a firm's total variable cost equals
Answer: B (total cost less total fixed costs)
Total cost = total fixed cost + total variable cost, so TVC = TC − TFC.
Consider the diagram where XYZ represent the average cost curve of a firm. XY shows that as output increases the average declines. However, this decline cannot continue indefinitely because of
Answer: C (the extent of the market)
Average cost falls as output grows only while the market can absorb the extra output; the size (extent) of the market limits how far the firm can expand and enjoy economies.
If the price of a ball point pen falls from N1.00 to N0.60 and the quantity demanded increases from 200 to 300, the point elasticity of demand is equal to
Answer: A (1.25)
Quantity rises by 100/200 = 50% while price falls by 0.40/1.00 = 40%, so elasticity = 50 ÷ 40 = 1.25.
If a society is operating on the production possibility curve, this implies that the resources are
Answer: A (fully and efficiently utilized)
Points on the PPC show the most that can be produced with all resources employed efficiently; points inside show waste or unemployment.
A market is in disequilibrium if
Answer: D (the quantity demanded differs from the quantity supplied)
Equilibrium means quantity demanded equals quantity supplied; when they differ there is a shortage or surplus.
Use the diagram (MC and AC curves with MR = AR lines at R and P). The excess profit made by the firm in the short-run is represented by
Answer: C (QRTW)
In the short run price is OR and the firm produces OZ where MC = MR at T. Average cost at that output is ZW = OQ, so the supernormal profit is the rectangle QRTW.
Use the diagram (MC and AC curves with MR = AR lines at R and P). The long-run equilibrium price and quantity for the firm are respectively
Answer: A (OP, OY)
In the long run new firms push price down to the lowest point of AC, at V, where MC = MR = AR = P. Price is OP and output OY, and only normal profit is earned.
The cross-elasticity of demand between complementary goods is
Answer: D (negative)
For complements a rise in the price of one reduces demand for the other, so the cross-elasticity has a negative sign.
Resources are efficiently allocated when production takes place at that output where price equals
Answer: C (marginal cost)
Allocative efficiency requires P = MC: the value consumers place on the last unit equals the cost of the resources used to make it.
Comparison of the price and output decisions of a perfectly competitive firm with those of a monopolist shows that the
Answer: B (perfect competitor charges a lower price and produces a larger output than the monopolist)
A monopolist restricts output to raise price; a competitive industry produces more and sells at a lower price.
The table shows output (Q), total cost (TC) of production and marginal cost (MC) for a firm in a competitive market.
Q (tons): 600, 700, 800, 900, 1000
TC (N): 6800, 8700, 8400, 9600, 11000
MC (N/ton): –, 10, 6, 12, 14
Suppose price (P) = N12, what is the maximum profit the firm can make?
Answer: B (N1,200.00)
The firm produces where MC = P = N12, i.e. 900 tons. Revenue = 900 × 12 = N10,800; profit = 10,800 − 9,600 = N1,200, the largest in the table.
In a perfectly competitive market, the firm is in long-run equilibrium at the output where
Answer: B (average cost is minimum)
In the long run free entry removes supernormal profit, so price equals the minimum of average cost.
Use the diagram (demand and marginal revenue curves). The firm portrayed is selling in
Answer: C (an imperfectly competitive market)
The demand curve slopes downward and MR lies below it, which happens only in imperfect competition.
Use the diagram (demand and marginal revenue curves). Demand is relatively inelastic
Answer: D (at any price below P2)
MR is zero at output Q2, where the demand price is P2, so demand is unit elastic at P2. Below P2 MR is negative, which means demand is inelastic.
Which of the following statements must hold if price discrimination is to be possible?
Answer: D (The markets should be separable and there should be no resale)
Charging different prices only works if the markets can be kept apart so buyers in the cheap market cannot resell to the dear one.
The ordinary partner in a partnership
Answer: C (has unlimited liability in case of business failure)
An ordinary (general) partner can lose his private property to pay the firm's debts; only a limited partner has limited liability.
A possible factor which limits the extent of growth of a firm is the
Answer: D (unwillingness to share ownership and control)
To grow, a firm usually needs new partners or shareholders; owners who refuse to share ownership and control keep the firm small.
One of the most outstanding disadvantages of co-operative societies as business organizations is that
Answer: C (it is poorly financed)
Co-operatives raise capital only from members' small contributions and cannot sell shares to the public, so they lack funds.
A disadvantage of a joint-stock company is
Answer: D (loss of controlling interest)
As shares are sold widely, the founders may lose control of the company to other shareholders. Limited liability and continuity are advantages.
A characteristic of a debenture is that
Answer: B (its yield is a fixed rate of interest)
A debenture is a loan to the company that earns a fixed rate of interest whether or not profit is made.
Industries tend to be located closer to market centres than to the sources of major raw materials if the
Answer: B (products are relatively more expensive to transport than the major raw materials)
Firms locate to save transport costs; if finished goods are dearer to move (bulky, fragile or perishable), they set up near the market.
One disadvantage of trade by barter is that
Answer: B (the person wishing to buy good X may not have good Y which is what the other person wants)
Barter needs a double coincidence of wants: each trader must have exactly what the other wants, which is often not the case.
One of the functions of Development Banks is to
Answer: D (provide medium and long-term finance for the development of the economy)
Development banks lend for long periods to agriculture, industry and other productive projects that commercial banks avoid.
To perform its function as a store of wealth and standard for deferred payment, money must be
Answer: C (stable in value)
Money can hold wealth and settle future debts fairly only if its value does not change much over time.
Fiduciary issue is that part of
Answer: C (the issue of notes not backed by gold)
The fiduciary issue is currency issued on trust (backed by government securities), not by gold.
An effect of inflation is that it
Answer: B (favours debtors at the expense of creditors)
When prices rise, money loses value, so debtors repay with money worth less than what they borrowed and creditors lose.
Banks aid economic expansion and development by
Answer: B (mobilizing savings for investment lending)
Banks collect the savings of many people and lend them to firms for investment, which helps the economy grow.
The term 'Stock of Capital' means
Answer: C (amount of equipment plant and inventory existing at a time)
The capital stock is the quantity of man-made productive goods (machines, buildings, stocks of goods) in existence at a point in time.
A tax that takes an increasing fraction of income as income goes down is called
Answer: B (regressive)
A regressive tax takes a larger share of a poor person's income than of a rich person's.
Budget deficit is the amount by which
Answer: A (total expenditure exceeds revenue)
A budget deficit is the gap when total government spending is greater than total revenue.
The average tax rate is defined as
Answer: C (the ratio of total taxes paid to total income)
Average tax rate = total tax paid ÷ total income; the rate on additional income is the marginal rate.
Personal distribution of income implies
Answer: A (the way in which income is distributed among specific households or spending units)
Personal distribution looks at how much income each household or person receives, as against the functional distribution among factors.
One of the advantages of international trade is that it
Answer: A (increases world output)
Trade lets each country specialise where it has comparative advantage, so total world output rises.
There is an improvement in the terms of trade of a country if
Answer: C (a smaller quantity of exports is given up to obtain a unit of imports)
Terms of trade improve when export prices rise relative to import prices, so fewer exports buy the same imports.
Under flexible exchange rates, a deficit could be corrected by
Answer: B (appreciation of other currencies)
If other currencies rise in value, the deficit country's exports become cheaper abroad and imports dearer at home, which reduces the deficit.
The higher the dependency ratio the
Answer: B (smaller the proportion of the active labour force relative to the inactive)
Dependency ratio = dependants ÷ working-age population; a higher ratio means fewer active workers for each dependant.
The age distribution of a country's population is of economic importance because it affects the
Answer: A (pattern of expenditure)
Different age groups need different things (schools for the young, health care for the old), so age structure shapes spending patterns.
It is important to measure the National Income of a country because
Answer: A (it is a major determinant of the standard of living)
National income (especially per head) shows how much goods and services people can enjoy, so it is used to judge the standard of living.
The Gross Domestic Product is defined as the total value of
Answer: A (all final goods and services produced in a country during the year)
GDP is the money value of all final goods and services produced within a country in a year.
Stage of product: value of input; sale value of output
Maize farmer: –; N10.00
Flour miller: N10.00; N12.00
Baker: N12.00; N15.00
Shop keeper: N15.00; N20.00
The value of total output in the economy using the value added approach is
Answer: C (N20.00)
Value added at each stage = output − input: 10 + 2 + 3 + 5 = N20, which equals the value of the final product.
If W stands for wages/salaries, P for profit, R for interest and Z for rent on land and real estate, then national income is
Answer: D (W + P + R + Z)
By the income method, national income is the sum of all factor incomes: wages + profit + interest + rent.
In the national income and product accounts, double counting is avoided if
Answer: A (only final goods are counted)
Intermediate goods are already included in the price of final goods, so counting only final goods avoids counting them twice.
A major obstacle to economic development is
Answer: B (low farm productivity)
Where most people farm, low output per farmer keeps incomes, savings and food supply low, which holds back development.