All Free Economics MCQs with Answers

• A. The franchiser's fee that a restaurant must pay to the national restaurant chain
• B. The payroll taxes that are paid on employee wages.
• C. The monthly rent on office space that it leased for a year
• D. The interest payments made on loans.

Explanation: Payroll taxes are tied to employee wages, so they increase or decrease as the firm's employment bill changes and are therefore variable…

• A. marginal revenue and marginal cost.
• B. total revenue and total cost
• C. total revenue and marginal cost
• D. marginal revenue and average cost

Explanation: Profit equals total revenue minus total cost, so a firm maximises profit by maximising this difference.

• A. wages in the United States will rise relative to Mexican wages
• B. American jobs will be lost to workers in Mexico
• C. The environment is not adequately protected by NAFTA
• D. None of the above

Explanation: Critics of NAFTA commonly argued that U.S. jobs would move to Mexico and that environmental safeguards were inadequate.

• A. relatively high; relatively large
• B. relatively high; relatively small
• C. relatively low ; relatively large
• D. relatively low ; relatively small

Explanation: A high initial tariff creates greater scope for trade creation when internal tariffs are removed, while a larger customs union offers more…

• A. trade diversion effect
• B. increased monopoly power of firms
• C. decrease customs costs
• D. economy-of-scale effect

Explanation: Economic integration can enlarge the market, allowing firms to produce at a lower average cost through economies of scale.

• A. trade creation
• B. trade diversion
• C. trade exclusion
• D. trade distortion

Explanation: Trade creation occurs when integration replaces costly domestic production with lower-cost imports from a member country, increasing trade…

• A. trade creation
• B. trade diversion
• C. trade exclusion
• D. trade distortion

Explanation: Trade diversion is the shift from a lower-cost nonmember supplier to a higher-cost member supplier because internal barriers are removed…

• A. a country moves from autarky to free trade
• B. a movement to a customs union reduces the costs of trade through standardization economic integration results in a
• C. economic integration results in a movement in product origin to a lower cost member country
• D. economic integration results in a shift in product origin from a lower-cost, nonmember country to a member country having higher costs

Explanation: Trade diversion occurs when integration shifts imports from a lower-cost nonmember supplier to a higher-cost member supplier because the…

• A. elimination of trade restrictions among member countries
• B. a common tax system and monetary union
• C. prohibition to restriction on factor movements
• D. a common tariff levied in imports from nonmembers

Explanation: A common market removes internal trade barriers, permits factor movement, and usually applies a common external tariff.

• A. Increasing the number of shares from 10 to 20
• B. All of these answers provide the same amount of risk reduction
• C. Increasing the number of shares in the portfolio from 1 to 10
• D. Increasing the number of shares from 20 to 30

Explanation: Diversification reduces firm-specific risk most sharply when a portfolio expands from very few holdings, especially from one to ten.

• A. information analysis
• B. risk management
• C. fundamental analysis
• D. diversification

Explanation: Fundamental analysis evaluates a company's financial statements, business condition and future earnings prospects to estimate its…

• A. reduce aggregate risk
• B. eliminate all risk
• C. increase the standard deviation of the portfolio's return
• D. reduce idiosyncratic risk

Explanation: Diversification spreads investments across assets whose individual risks are not perfectly correlated, thereby reducing idiosyncratic or…

• A. After Gull buys fire insurance, he begins to smoke cigarettes in bed.
• B. None of these answers demonstrate moral hazard
• C. Mahmood has been feeling poorly lately so he seeks health insurance
• D. All of these answers demonstrate moral hazard

Explanation: Moral hazard occurs when insurance changes behaviour after coverage is obtained, as Gull's insured status encourages riskier smoking…

• A. None of these answers are true
• B. All of these answers are true
• C. They dislike bad things more than the like comparable good things
• D. The utility they would lose from losing a Rs50 bet would exceed the utility they would gain from winning a Rs 50 bet
• E. Their utility function exhibit the property of diminishing marginal utility of wealth

Explanation: Risk aversion is represented by a concave utility function, meaning diminishing marginal utility of wealth and a greater utility loss from…

• A. increases the present value of future returns from investment and increases investment
• B. decreases the present value of future return from investment and decreases investment
• C. decreases the present value of future returns from investment and increase investment
• D. increases the present value of future returns from investment and decreases investment

Explanation: A higher interest rate increases the discount rate, so the present value of future investment returns falls.

• A. Rs400.00
• B. Rs 104.00
• C. Rs 121.67
• D. Rs 123.98

Explanation: Compound interest gives future value = 100 × (1.04)^5 = Rs121.665, which rounds to Rs121.67.

• A. stock markets tend to be inefficient
• B. all of these answers
• C. index funds are able to buy undervalued stocks
• D. actively managed funds trade more often and charge fees for their alleged expertise

Explanation: Active funds often trade more frequently and charge management fees, creating costs that an index fund largely avoids.

• A. shares are overvalued
• B. people behave irrationally when choosing shares
• C. markets reflect all available information in a rational way
• D. shares are undervalued

Explanation: Under informationally efficient markets, new information is rapidly incorporated into share prices, leaving price changes difficult to…

• A. None of these answers
• B. An increase in expected dividends
• C. A reduction in aggregate risk
• D. A reduction in the interest rate
• E. All of these answers

Explanation: Share value rises when expected dividends increase, when risk falls, or when the interest rate falls because future payments are…

• A. shares tend to be overvalued
• B. the stock market is informationally efficient so share prices should follow a random walk
• C. All of these answers
• D. fundamental analysis is a valuable tool for increasing one's returns from investing in shares

Explanation: The efficient markets hypothesis says available information is already reflected in share prices, so predictable excess returns from…