Principles of Economic Theory
Answer Key for Sample Multiple-Choice Questions
1. c) is the correct answer. If marginal benefit is less than marginal cost, firms will not make a profit and,
therefore, will not produce the good.
2. d) is the correct answer. In fact, just the opposite is the case. The supply curve must include all social
costs. For example, if a firm is polluting the air and paying no penalty, all social costs are not reflected in
the supply curve and the markets outcome will be inefficient.
3. c) is the correct answer. Since the supply curve is above the demand curve for quantities greater than
the equilibrium quantity, marginal cost is greater than marginal benefit. Answer a) is incorrect because it
denies the definition of marginal benefit.
4. b) is the correct answer. When income is redistributed it alters the composition of demand for different
goods and services
some demands increase, others decrease. The result is a change in market
5. b) is the correct answer. Answers a), c), and d) are all reasons the market is an attractive means of
allocating resources. The market system does not allocate resources so that everyone receives an equal
6. a) is the correct answer. For competition to exist, neither individual buyers nor sellers can be able to
influence market price, i.e., the market outcome. This requires a large number of both buyers and sellers.
7. c) is the correct answer. This is the condition for economic efficiency. Beginning at the point at which
marginal social benefits equal marginal social costs, a movement in either direction, i.e, an increase or
decrease in the level of output, will cause net gains to decline.
8. b) is the correct answer; it is the definition of consumer surplus. See the text.
9. a) is the correct answer. Consumers and producers must be well-informed about alternatives or their
choices may not maximize benefits or minimize costs. If pollution occurs, private costs are less than social
costs and the market outcome is not efficient. Therefore b) and d) are incorrect. Individuals must be
assured that they will enjoy the benefits of their property if they are to engage in innovative, but risky,
types of activities. Therefore c) is incorrect.
10. c) is the correct answer. The demand curve indicates the
amount consumers will pay for a
particular quantity of a good. For example, if price = $10 and quantity demanded = 50 units, this indicates
that consumers are willing to pay, at most, $10 for the 50th unit.
11. c) is the correct answer. The amount the consumer is willing to pay at each quantity represents the