All Free Economics MCQs with Answers

• A. Total utility is zero
• B. An additional unit of consumption will decrease total utility
• C. An additional unit of consumption will increase total utility
• D. Total utility is maximized

Explanation: Marginal utility is the addition to total utility from one more unit; when it reaches zero, total utility has reached its maximum.

• A. -4
• B. 0.25
• C. 4
• D. -0.25

Explanation: Cross-price elasticity equals the percentage change in quantity demanded of beef divided by the percentage change in the price of chicken…

• A. ratio of the change in price to the change in quantity demanded.
• B. ratio of the percentage change in quantity demanded to the percentage change in price.
• C. ratio of the change in quantity demanded to the change in price.
• D. ratio of the percentage change in price to the percentage change in quantity demanded.

Explanation: Price elasticity of demand measures responsiveness, so it is calculated as percentage change in quantity demanded divided by percentage…

• A. quantity demanded equals quantity supplied
• B. quantity demanded is less than quantity supplied
• C. quantity supplied is greater than quantity demanded
• D. quantity demanded is greater than quantity supplied

Explanation: Market equilibrium occurs where buyers' planned purchases equal sellers' planned sales at the prevailing price.

• A. a decrease in the quantity supplied of
• B. a decrease in the supply of
• C. an increase in the quantity supplied of
• D. an increase in the supply of

Explanation: Cheaper computer chips reduce firms' production costs, so they are willing to supply more personal computers at every price.

• A. A change in wealth
• B. A change in the price of compact discs
• C. A change in income.
• D. A change in the price of pre-recorded cassette tapes

Explanation: A change in the price of compact discs causes movement along their existing demand curve, not a shift of that curve.

• A. perfect substitutes
• B. complements
• C. unrelated goods.
• D. substitutes.

Explanation: If the price of Y falls and demand for Z rises, consumers are likely using Y and Z together, so they are complements.

• A. incomes, tastes, and the price of other goods.
• B. income, tastes, and the price of the good.
• C. income and tastes
• D. tastes and the price of other goods

Explanation: A demand curve isolates the effect of the good's own price, so income, tastes, and prices of other goods are held constant.

• A. The ceteris paribus effect
• B. The diminishing marginal utility effect.
• C. The substitution effect
• D. The income effect

Explanation: The substitution effect occurs when a fall in a good's price makes it relatively cheaper than alternatives, leading consumers to…

• A. as prices rise, demand decrease
• B. as prices fall, quantity demanded increase
• C. as prices fall demand increases
• D. as prices rise, quantity demanded increases

Explanation: The law of demand describes an inverse relationship between price and quantity demanded, with other factors held constant.

• A. there is no income effect when tax rates are changed
• B. the income effect of a wage change is greater than the substitution effect of a wage change.
• C. there is no substitution effect when tax rates are changed
• D. the substitution effect of a wage change is greater than the income effect of a wage change

Explanation: A lower tax rate raises the after-tax reward from working, creating a substitution effect toward labor.

• A. maximize producer surplus
• B. are efficient
• C. are inefficient
• D. are equitable

Explanation: An externality means that some costs or benefits fall on third parties and are not reflected in the market price.

• A. are equitable.
• B. are efficient
• C. maximize consumer surplus
• D. are inefficient

Explanation: Market power allows a producer to restrict output and charge a price above marginal cost.

• A. free market solutions are efficient
• B. free market solutions maximize total surplus
• C. all of these answers
• D. free market solutions are equitable
• E. free market solutions are efficient and free market solutions maximize total surplus

Explanation: With rational buyers and no market failure, competitive market decisions maximize total surplus and achieve efficiency.

• A. maximizes total surplus
• B. generates equality among the members of society
• C. minimizes total surplus
• D. both maximizes total surplus and generates equality among the members of society

Explanation: Smith's invisible hand describes how competition can coordinate self-interested decisions toward an efficient allocation that maximizes…

• A. none of these answers.
• B. the minimum amount the seller is willing to accept for a good
• C. the seller's producer surplus
• D. the maximum amount the seller is willing to accept for a good
• E. the seller's consumer surplus

Explanation: A seller's cost is the minimum amount the seller would accept because selling below cost would create a loss.

• A. total surplus is maximized
• B. the value placed on the last unit production by buyers exceeds the cost of production.
• C. producer surplus is maximized
• D. the cost of production on the last unit produced exceeds the value placed on it by buyers.
• E. consumer surplus is maximized

Explanation: At the equilibrium quantity, the value of the marginal unit equals its marginal cost.

• A. improves the material welfare of the buyers.
• B. decrease consumer surplus
• C. improves market efficiency.
• D. increase consumer surplus.

Explanation: A higher price reduces the surplus buyers receive because they pay more while their willingness to pay remains unchanged along the…

• A. minimum amount they are willing to pay for a good
• B. producer surplus.
• C. consumer surplus
• D. maximum amount they are willing to pay for a good
• E. none of these answers

Explanation: Willingness to pay is the maximum amount a buyer would give for a good.

• A. everyone has as much as they would like
• B. the benefit buyers place on medical care is equal to the cost of producing it
• C. buyers receive no benefit from another unit of medical care.
• D. we must cut back on the consumption of other goods.

Explanation: Consumption should continue while the marginal benefit of another unit exceeds its marginal cost.