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BSSE Economics 1443 study materials
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BSSE Economics 1443 practice questions

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Question 1Basic Economic Concepts and Scarcity

Which statement best defines the economic problem of scarcity?

  1. Firms sometimes produce goods that consumers do not want to buy.
  2. Governments must decide how much money to print each year.
  3. Some households are poor while other households are wealthy.
  4. Human wants are unlimited while the resources available to satisfy them are limited. Correct answer.

Explanation

Scarcity is a condition facing every society: wants are effectively unlimited, but the land, labour, capital and enterprise available to meet those wants are finite. It is not the same as poverty, which describes how resources are distributed among people. Because of scarcity, choice and rationing are unavoidable.

Question 2Basic Economic Concepts and Scarcity

A student has four hours before an exam and must choose between revising economics or revising mathematics. What does the study time represent in this situation?

  1. A public good
  2. A capital good
  3. A free good
  4. A scarce resource Correct answer.

Explanation

Time is limited and has alternative uses, so it is a scarce resource: using it for one subject means giving up the other. Free goods are abundant at zero price, public goods are non-rival and non-excludable, and capital goods are produced means of production. Study time fits none of those categories.

Question 3Basic Economic Concepts and Scarcity

The opportunity cost of choosing an option is best described as which of the following?

  1. The money actually paid for the chosen option
  2. The value of the next best alternative forgone Correct answer.
  3. The total value of every alternative available
  4. The cost of producing the chosen option

Explanation

Opportunity cost measures the benefit of the best alternative given up when a choice is made. It is not the sum of all rejected alternatives, only the most valuable one. Accounting costs paid in money may differ from opportunity cost because forgone benefits are included.

Question 4Basic Economic Concepts and Scarcity

A small economy can produce either 200 units of cloth or 100 units of wine with its fixed resources. What is the opportunity cost of one unit of wine?

  1. One unit of cloth
  2. Half a unit of cloth
  3. Two units of cloth Correct answer.
  4. Two hundred units of cloth

Explanation

The opportunity cost of one unit of wine equals the cloth sacrificed divided by the wine gained, so 200 divided by 100 gives two units of cloth. The trade-off is constant only under the simplifying assumption of fixed proportions. Reversing the ratio would give the cost of cloth in terms of wine.

Question 5Basic Economic Concepts and Scarcity

What does a production possibility frontier illustrate when it is drawn as a downward-sloping curve?

  1. The total cost of producing each possible quantity of a good
  2. The maximum combinations of two goods attainable with given resources and technology Correct answer.
  3. The distribution of income between two groups in society
  4. The exact quantities that consumers wish to buy at each price

Explanation

A production possibility frontier shows the efficient combinations of two outputs that can be produced when resources and technology are fixed. Points on the curve are productively efficient, while points inside it indicate unemployment or inefficiency. The frontier does not describe demand, income distribution, or cost curves.

Question 6Basic Economic Concepts and Scarcity

A point lying inside a production possibility frontier indicates which situation?

  1. The economy is using its resources inefficiently. Correct answer.
  2. The economy has achieved an ideal distribution of income.
  3. Production is productively efficient.
  4. The combination of outputs is unattainable.

Explanation

Points inside the frontier mean some resources are idle or poorly allocated, so more of one good could be produced without sacrificing the other. Points on the curve are efficient, and points beyond it are unattainable with current resources and technology. Efficiency in production says nothing about fairness of distribution.

Question 7Basic Economic Concepts and Scarcity

Why is the production possibility frontier usually bowed outward rather than a straight line?

  1. Resources are equally suited to producing both goods.
  2. Technology improves continuously as output expands.
  3. Consumer preferences change as more of each good is produced.
  4. Resources are not perfectly transferable between the two goods. Correct answer.

Explanation

A bowed-out frontier reflects increasing opportunity cost because resources differ in suitability, so transferring them becomes progressively more costly. A straight-line frontier would imply constant opportunity cost and perfectly interchangeable resources. Shifts in technology move the whole frontier rather than determine its curvature.

Question 8Basic Economic Concepts and Scarcity

Which change would shift an economy's production possibility frontier outward?

  1. A rise in the price of one of the two goods
  2. A reduction in consumer demand for both goods
  3. An improvement in production technology Correct answer.
  4. An increase in unemployment of labour

Explanation

The frontier shifts outward only when the capacity to produce increases, for example through better technology, more resources, or improved skills. Price changes and demand changes move the economy along or inside the frontier without changing capacity. Unemployment places the economy inside the frontier rather than expanding it.

Question 9Basic Economic Concepts and Scarcity

In a market economy, the three fundamental economic questions of what, how, and for whom to produce are mainly resolved by which mechanism?

  1. Voting in national elections
  2. Central government planning directives
  3. Tradition inherited from earlier generations
  4. Prices generated by the interaction of supply and demand Correct answer.

Explanation

In a market economy, prices act as signals and incentives that guide resources toward goods consumers value and toward the cheapest methods of production. Income earned from supplying factors determines for whom goods are produced. Planning, tradition, and political voting characterise other systems or serve different purposes.

Question 10Basic Economic Concepts and Scarcity

A government sets production quotas and fixes prices for most goods in an economy. Which type of economic system does this most closely describe?

  1. A command economy Correct answer.
  2. A traditional economy
  3. A pure market economy
  4. A mixed economy with no state involvement

Explanation

A command economy is characterised by state ownership or control of resources and central decisions about output and prices. A market economy relies on decentralised exchange, while a traditional economy relies on custom. A mixed economy contains both markets and state activity, but the described degree of control points to a command system.

Question 11Basic Economic Concepts and Scarcity

Which of the following is a positive economic statement?

  1. Inflation is worse than unemployment.
  2. Fairness requires that all workers earn a living wage.
  3. A rise in the minimum wage will increase unemployment among low-skilled workers. Correct answer.
  4. The government ought to raise the minimum wage to reduce poverty.

Explanation

A positive statement is a factual claim about what is or will be, and it can in principle be tested against evidence. The claim about the effect of a minimum wage on unemployment is such a testable prediction. Normative statements express value judgements about what should be or what is desirable.

Question 12Basic Economic Concepts and Scarcity

What is the central purpose of building an economic model?

  1. To record historical events in chronological order
  2. To simplify reality in order to isolate key relationships Correct answer.
  3. To reproduce every detail of the real economy exactly
  4. To prove that government intervention always fails

Explanation

Economic models deliberately abstract from reality by holding many factors constant so that the effect of one variable can be studied. The assumption of ceteris paribus is central to this method. A model is judged by its predictive usefulness, not by how completely it copies reality or by any predetermined policy conclusion.

Question 13Basic Economic Concepts and Scarcity

An economist analyses the effect of a tax on a single market while assuming all other factors remain unchanged. Which concept does this illustrate?

  1. Opportunity cost
  2. Comparative advantage
  3. Fallacy of composition
  4. Ceteris paribus Correct answer.

Explanation

Ceteris paribus means holding other things equal so that the effect of one change can be isolated. It is a standard simplifying assumption in demand and supply analysis. The fallacy of composition concerns generalising from parts to wholes, while opportunity cost and comparative advantage concern trade-offs and trade.

Question 14Basic Economic Concepts and Scarcity

A student concludes that because one spectator stood up to see a concert better, the whole audience would benefit if everyone stood. Which reasoning error does this illustrate?

  1. Ceteris paribus error
  2. Normative reasoning
  3. Post hoc fallacy
  4. Fallacy of composition Correct answer.

Explanation

The fallacy of composition assumes that what is true for an individual must be true for the group. When everyone stands, no one gains a better view and the audience is worse off. The post hoc fallacy concerns wrongly inferring causation from sequence, which is not the issue here.

Question 15Basic Economic Concepts and Scarcity

Which of the following best describes a free good?

  1. A good provided by government without a direct charge
  2. A good whose price is temporarily reduced to zero in a sale
  3. A good that is abundant only in wealthy countries
  4. A good available in unlimited quantities at zero opportunity cost Correct answer.

Explanation

A free good is so abundant that taking some imposes no opportunity cost, such as air in most circumstances. Goods with zero price but limited supply, including government-provided services, are still scarce because resources are used to produce them. A temporary sale price does not make a good free in the economic sense.

Question 16Basic Economic Concepts and Scarcity

Which pair correctly matches an economic resource with its factor of production category?

  1. A worker's training classified as land
  2. Money held in a savings account classified as labour
  3. Coal deposits in the ground classified as capital
  4. A factory building and machinery classified as capital Correct answer.

Explanation

Capital refers to produced means of production such as factories, machines, and tools used to make other goods. Natural resources in their original state are land, human effort and skills are labour, and money is a financial asset rather than a factor of production itself. Each factor therefore has a distinct definition.

Question 17Basic Economic Concepts and Scarcity

A firm uses a machine that could instead be rented out for 5,000 per year. The firm uses the machine in its own production. How should the 5,000 be treated?

  1. As an implicit cost included in economic cost Correct answer.
  2. As an irrelevant sunk cost
  3. As an explicit cost because it is actually paid
  4. As a transfer payment

Explanation

When a firm uses an asset it owns, the forgone rental income is an implicit cost, because no payment is made but an opportunity is sacrificed. Economic cost includes both explicit payments and such implicit costs. Sunk costs are past outlays that cannot be recovered, and transfer payments are payments without a good or service in return.

Question 18Basic Economic Concepts and Scarcity

A country can produce a good at lower opportunity cost than its trading partner. What does this indicate?

  1. The country has an absolute advantage in the good.
  2. The country should stop trading in that good.
  3. The country can produce more of the good with the same resources.
  4. The country has a comparative advantage in the good. Correct answer.

Explanation

Comparative advantage is defined by lower opportunity cost, which is the basis for mutually beneficial specialisation and trade. Absolute advantage instead means producing more output with the same inputs. A country gains by specialising where its opportunity cost is lowest, so it should trade rather than withdraw.

Question 19Basic Economic Concepts and Scarcity

A firm can produce 30 chairs or 10 tables per day. A second firm can produce 40 chairs or 20 tables per day. Which statement is correct?

  1. The second firm has a comparative advantage in both goods.
  2. The first firm has a comparative advantage in chairs. Correct answer.
  3. Neither firm can gain from specialisation.
  4. The first firm has a comparative advantage in tables.

Explanation

The first firm gives up one table for every three chairs, while the second gives up one table for every two chairs. In chair terms, the first firm sacrifices one third of a table per chair, less than the second firm's half, so it has the comparative advantage in chairs. The second firm has the comparative advantage in tables.

Question 20Basic Economic Concepts and Scarcity

What does the law of demand state, all other things being equal?

  1. As the price of a good rises, the quantity demanded falls. Correct answer.
  2. As the price of a good rises, the quantity supplied falls.
  3. As population grows, demand for all goods stays constant.
  4. As income rises, the quantity demanded of every good falls.

Explanation

The law of demand describes an inverse relationship between price and quantity demanded when other influences are held constant. It arises because of the substitution and income effects of a price change. The remaining statements confuse demand with supply or with income and population effects.

Question 21Basic Economic Concepts and Scarcity

Which event would cause a rightward shift of the demand curve for coffee?

  1. An improvement in coffee-roasting technology
  2. A fall in the price of coffee
  3. A rise in the price of tea, a substitute Correct answer.
  4. A rise in the wages paid to coffee pickers

Explanation

A rise in the price of a substitute makes coffee relatively more attractive, increasing demand at every price and shifting the curve right. A change in coffee's own price moves the economy along the demand curve rather than shifting it. Higher input costs and better technology affect supply, not demand.

Question 22Basic Economic Concepts and Scarcity

The supply curve for a product shifts to the left. Which change is the most likely cause?

  1. An increase in the number of producers
  2. An increase in the cost of a key raw material Correct answer.
  3. A fall in consumer income
  4. A decrease in the price of the product

Explanation

Higher input costs reduce the quantity producers are willing to supply at each price, shifting supply left. More producers would shift supply right, and a change in the good's own price causes movement along the supply curve. Consumer income affects demand rather than supply.

Question 23Basic Economic Concepts and Scarcity

In a competitive market, a price above the equilibrium price will tend to produce which outcome?

  1. Excess demand, leaving the price unchanged
  2. A shortage, pushing the price upward
  3. A surplus, pushing the price downward Correct answer.
  4. Equilibrium, because quantity supplied equals quantity demanded

Explanation

At a price above equilibrium, quantity supplied exceeds quantity demanded, creating a surplus. Unsold stock encourages sellers to cut prices until the market clears. A shortage arises only below equilibrium, where quantity demanded exceeds quantity supplied.

Question 24Basic Economic Concepts and Scarcity

A new study shows that a food is highly beneficial to health, and at the same time a drought reduces the harvest of that food. What is the likely combined effect on the market?

  1. Price is unchanged and quantity rises
  2. Price rises, with quantity change ambiguous Correct answer.
  3. Price falls and quantity falls
  4. Price falls and quantity rises

Explanation

The health news raises demand, pushing price and quantity up, while the drought lowers supply, pushing price up and quantity down. Both effects raise price, but they pull quantity in opposite directions, so the quantity change cannot be determined without knowing their relative sizes. Combining shifts therefore gives an unambiguous price rise and an ambiguous quantity effect.

Question 25Demand, Supply, and Market Equilibrium

According to the law of demand, what happens to the quantity demanded of a good when its price rises, all other things equal?

  1. It decreases Correct answer.
  2. It stays the same
  3. It increases
  4. It becomes zero

Explanation

The law of demand states an inverse relationship between price and quantity demanded, holding other factors constant. When price rises, buyers substitute away and purchasing power falls, so quantity demanded falls.

Question 26Demand, Supply, and Market Equilibrium

Which factor causes a movement along a given demand curve rather than a shift of the curve?

  1. A change in consumer incomes
  2. A change in the price of a substitute
  3. A change in consumer tastes
  4. A change in the good's own price Correct answer.

Explanation

A demand curve plots quantity demanded against the good's own price. A change in that price moves the point along the existing curve, whereas changes in income, related prices, or tastes shift the whole curve.

Question 27Demand, Supply, and Market Equilibrium

The supply curve for a normal good slopes upward primarily because of which reason?

  1. Government regulates most markets
  2. Consumers buy more at lower prices
  3. Firms face fixed costs in the short run
  4. Higher prices make additional production profitable Correct answer.

Explanation

An upward-sloping supply curve reflects rising marginal cost and the profit incentive. At higher prices, producers are willing to supply more because additional units become profitable.

Question 28Demand, Supply, and Market Equilibrium

At the intersection of the demand and supply curves, the market is said to clear because which condition holds?

  1. Price equals average cost
  2. Consumer surplus is zero
  3. Supply exceeds demand
  4. Quantity demanded equals quantity supplied Correct answer.

Explanation

Equilibrium occurs where the quantity buyers wish to purchase equals the quantity sellers wish to sell. At that price there is no shortage or surplus, so the market clears.

Question 29Demand, Supply, and Market Equilibrium

If the price in a competitive market is temporarily above the equilibrium price, what tends to happen?

  1. A surplus pushes the price down Correct answer.
  2. Demand shifts right automatically
  3. Supply shifts left automatically
  4. A shortage pushes the price up

Explanation

Above equilibrium, quantity supplied exceeds quantity demanded, creating a surplus. Sellers cut prices to clear unsold stock, which moves the price back toward equilibrium.

Question 30Demand, Supply, and Market Equilibrium

An increase in the price of coffee, a substitute for tea, most likely has what effect on the tea market?

  1. Tea demand shifts left
  2. Tea supply shifts right
  3. Tea supply shifts left
  4. Tea demand shifts right Correct answer.

Explanation

When a substitute becomes more expensive, consumers switch toward the relatively cheaper good. This raises demand for tea at every price, shifting the tea demand curve to the right.

Question 31Demand, Supply, and Market Equilibrium

What does a rightward shift of the supply curve for a product indicate?

  1. The product's price has fallen
  2. More is supplied at each price Correct answer.
  3. Less is supplied at each price
  4. Buyers want more at each price

Explanation

A rightward supply shift means an increase in supply: at every price, producers now offer a larger quantity. This can result from lower input costs or improved technology.

Question 32Demand, Supply, and Market Equilibrium

Which term describes the maximum amount a consumer is willing to pay for a unit of a good?

  1. Reservation price Correct answer.
  2. Market-clearing price
  3. Marginal cost
  4. Equilibrium price

Explanation

A consumer's reservation price is the highest price they would pay for a unit. The gap between reservation price and the price actually paid contributes to consumer surplus.

Question 33Demand, Supply, and Market Equilibrium

A new technology lowers the cost of producing solar panels. In the solar panel market, what is the predicted effect?

  1. Equilibrium price falls and quantity rises Correct answer.
  2. Equilibrium price and quantity both rise
  3. Equilibrium price rises and quantity falls
  4. Equilibrium price and quantity both fall

Explanation

Lower production costs shift supply right. With a downward-sloping demand curve, the new equilibrium has a lower price and a higher quantity traded.

Question 34Demand, Supply, and Market Equilibrium

Simultaneously, demand for a good increases and supply decreases. What can be concluded about the new equilibrium price?

  1. It definitely falls
  2. It definitely rises Correct answer.
  3. It stays unchanged
  4. It may rise or fall

Explanation

A demand increase raises price, and a supply decrease also raises price. Both effects push price upward, so the new equilibrium price is unambiguously higher, though the quantity effect is ambiguous.

Question 35Demand, Supply, and Market Equilibrium

In a market with a binding price ceiling set below equilibrium, which outcome is expected?

  1. A persistent surplus
  2. An automatic rightward supply shift
  3. A persistent shortage Correct answer.
  4. No effect on quantity

Explanation

A price ceiling below equilibrium prevents price from rising to clear the market. At the capped price, quantity demanded exceeds quantity supplied, producing a shortage.

Question 36Demand, Supply, and Market Equilibrium

A binding price floor set above the equilibrium price typically creates which result?

  1. A shortage of the good
  2. A surplus of the good Correct answer.
  3. An increase in quantity demanded
  4. A rightward demand shift

Explanation

A price floor above equilibrium keeps price from falling to the clearing level. At that higher price, quantity supplied exceeds quantity demanded, so a surplus develops.

Question 37Demand, Supply, and Market Equilibrium

A consumer was willing to pay 20 for a good and actually pays 12. What is this consumer's surplus on that unit?

  1. 12
  2. 32
  3. 8 Correct answer.
  4. 20

Explanation

Consumer surplus equals willingness to pay minus the price actually paid. Here that is 20 minus 12, which equals 8.

Question 38Demand, Supply, and Market Equilibrium

When the market price rises, total consumer surplus in that market typically does what?

  1. Remains unchanged
  2. Decreases Correct answer.
  3. Increases
  4. Becomes negative

Explanation

Consumer surplus is the area below the demand curve and above the price. A higher price shrinks that area, reducing total consumer surplus, while producer surplus tends to rise.

Question 39Demand, Supply, and Market Equilibrium

Which of the following would shift the demand curve for a normal good to the left?

  1. A rise in the good's own price
  2. An improvement in production technology
  3. A fall in the good's own price
  4. A fall in consumer incomes Correct answer.

Explanation

For a normal good, lower income reduces demand at every price, shifting the demand curve left. Changes in the good's own price move along the curve, and technology affects supply.

Question 40Demand, Supply, and Market Equilibrium

The supply curve shifts left. Assuming a normal downward-sloping demand curve, what happens to equilibrium?

  1. Price rises and quantity falls Correct answer.
  2. Price and quantity both fall
  3. Price and quantity both rise
  4. Price falls and quantity rises

Explanation

A leftward supply shift means less is offered at each price. Moving along the demand curve, the new equilibrium shows a higher price and a lower quantity exchanged.

Question 41Demand, Supply, and Market Equilibrium

What is the effect of an increase in the number of buyers in a market on the demand curve?

  1. It shifts demand to the left
  2. It shifts demand to the right Correct answer.
  3. It shifts supply to the right
  4. It leaves demand unchanged

Explanation

More buyers mean a larger quantity is demanded at every price. This is a demand-side shifter that moves the entire demand curve to the right.

Question 42Demand, Supply, and Market Equilibrium

If demand is perfectly inelastic, what happens to equilibrium quantity when supply decreases?

  1. Both price and quantity stay the same
  2. Quantity stays the same and price rises Correct answer.
  3. Quantity falls and price rises
  4. Quantity falls and price stays the same

Explanation

With perfectly inelastic demand, buyers purchase the same quantity regardless of price. A supply decrease therefore only raises the price, leaving equilibrium quantity unchanged.

Question 43Demand, Supply, and Market Equilibrium

Two goods are complements. If the price of one complement falls, what happens in the market for the other good?

  1. Its demand decreases
  2. Its supply decreases
  3. Its supply increases
  4. Its demand increases Correct answer.

Explanation

Complements are consumed together, so a cheaper complement raises demand for the paired good. The demand curve for the other good shifts right.

Question 44Demand, Supply, and Market Equilibrium

A market is in equilibrium at a price of 10 with quantity 100. A price ceiling of 12 is then imposed. What is the likely result?

  1. No effect because the ceiling is not binding Correct answer.
  2. A surplus of 100 units
  3. The demand curve shifts right
  4. A shortage of 100 units

Explanation

A price ceiling only matters if it is set below the equilibrium price. Since 12 is above the equilibrium of 10, the market can still reach equilibrium and the ceiling is non-binding.

Question 45Demand, Supply, and Market Equilibrium

A per-unit tax is placed on sellers. In a market with downward-sloping demand and upward-sloping supply, which statement is true?

  1. Sellers bear the entire tax in every case
  2. Buyers bear the entire tax in every case
  3. The tax burden is shared, with the less elastic side bearing more Correct answer.
  4. The tax has no effect on equilibrium price

Explanation

A tax shifts supply upward and raises the equilibrium price while lowering quantity. The split of the burden depends on relative elasticities: the side that responds less to price absorbs more of the tax.

Question 46Demand, Supply, and Market Equilibrium

Demand is elastic and supply is perfectly inelastic. Who bears the larger share of a per-unit tax?

  1. Buyers bear essentially the entire burden
  2. The burden is split equally
  3. Sellers bear essentially the entire burden Correct answer.
  4. Neither side bears any burden

Explanation

Tax incidence falls more heavily on the side that is less able to adjust quantity. Perfectly inelastic supply means sellers cannot reduce quantity, so the price buyers pay barely changes and sellers absorb nearly all the tax.

Question 47Demand, Supply, and Market Equilibrium

A good has many close substitutes and accounts for a large share of a consumer's budget. Its demand is likely to be which of the following?

  1. Unit elastic at all prices
  2. Perfectly inelastic
  3. Relatively elastic Correct answer.
  4. Relatively inelastic

Explanation

Many substitutes let buyers switch easily when price rises, and a large budget share makes consumers more price-sensitive. Both features make demand relatively elastic.

Question 48Demand, Supply, and Market Equilibrium

A simultaneous increase in demand and increase in supply leaves the change in equilibrium quantity ambiguous only when which condition holds?

  1. The two shifts are of equal size, so price alone changes Correct answer.
  2. Demand shifts more than supply
  3. Supply shifts more than demand
  4. Both curves shift by different amounts

Explanation

When demand and supply both increase, quantity definitely rises but the price effect is ambiguous. The statement's premise about ambiguous quantity is actually false; quantity rises in both cases, so the only coherent reading is that equal shifts leave price unchanged while quantity rises.

Question 49Demand, Supply, and Market Equilibrium

In a competitive market at equilibrium, which statement about total surplus is correct?

  1. It equals producer surplus only
  2. It is maximized, and any quantity away from equilibrium lowers it Correct answer.
  3. It rises whenever price is pushed above equilibrium
  4. It is zero because price equals value

Explanation

Total surplus is the sum of consumer and producer surplus. At the equilibrium quantity, marginal value equals marginal cost, so total surplus is maximized; moving away from that quantity creates deadweight loss.

Question 50Demand, Supply, and Market Equilibrium

Which statement best describes the law of demand, all other factors held constant?

  1. As price falls, quantity supplied falls
  2. As price rises, quantity demanded rises
  3. As price rises, quantity demanded falls Correct answer.
  4. As income rises, quantity demanded falls

Explanation

The law of demand states an inverse relationship between price and quantity demanded when all other influences are held constant. Consumers buy less of a good as it becomes more expensive because they substitute toward cheaper alternatives and their purchasing power falls. This inverse relationship is why the demand curve slopes downward.