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Faculty of Economic and Management Sciences

Department of Economics
Semester Test 1
EKN 110
Duration: 60 minutes. Date: 22 March 2025 Total: 40 marks

INSTRUCTIONS
1) Answer all 40 questions.
2) Please use SIDE 1 of the orange mark-reading sheet to record your answers. Follow the
instructions for completion at the top of the orange mark reading form.
(Please use a pencil)

PLEASE CHECK ARE YOU RECORDING YOUR ANSWERS ON SIDE 1 OF THE MCQ
ANSWERING SHEET

1. The observation that people compare the marginal benefits with the marginal costs in making
such decisions as how to spend time, which products to buy, whether or not to work, and
which goods to produce and sell, is most closely associated with:
A. The economic perspective.
B. Macroeconomics.
C. Policy economics.
D. The other things being equal assumption.

2. What is the best definition of economics?

A. The study of how people make choices to satisfy their needs and wants.
B. The study of money and banking systems.
C. The study of how to increase national wealth.
D. The study of business and trade.

3. Which of the following statements best explains scarcity?

A. There are limited resources to meet unlimited wants.
B. There is an abundance of goods and services for everyone.
C. Governments can create unlimited resources for their citizens.
D. Prices determine the availability of resources.

4. Why is economics often referred to as the study of choices?

A. Because people must decide how to allocate limited resources.
B. Because money determines all decisions.
C. Because businesses make profits by selling goods.
D. Because economic systems never change.

5. When a country decides to invest more in military spending rather than education,
what is the opportunity cost?
A. The improvement in national security.
B. The education and skill development that could have been funded.
C. The total amount of government spending.
D. The increase in military personnel.

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6. What role does opportunity cost play in personal finance decisions?
A. It helps individuals weigh the benefits of different choice.
B. It forces people to spend all their money.
C. It eliminates the need for financial planning.
D. It ensures that all choices result in a financial gain.

7. Which of the following statements about scarcity and opportunity cost is false?
A. Scarcity forces individuals and societies to make choices.
B. Opportunity cost always involves a monetary value.
C. Opportunity cost applies to both individuals and governments.
D. Scarcity exists because resources are limited while wants are unlimited.

8. Which of the following is a key concern of macroeconomics?

A. The pricing decisions of a single firm.
B. The impact of government spending on economic growth.
C. The supply and demand of a specific market.
D. The cost structure of a single industry.

9. Which of the following is an example of a microeconomic issue?

A. The effect of a change in interest rates on national savings.
B. A firm's decision to increase the price of its product.
C. The impact of fiscal policy on unemployment.
D. The influence of trade policies on a country’s exports.

10. Which of the following is an example of a normative economic statement?

A. The inflation rate in the country is currently 5%.
B. Increasing the minimum wage will lead to job losses.
C. The government should provide free healthcare for all citizens.
D. A decrease in taxes can stimulate economic growth.

11. Which of the following is not a macroeconomic issue?

A. National unemployment rates.
B. Changes in the money supply.
C. The pricing strategy of a local bakery.
D. The impact of fiscal policy on GDP growth.

12. Why is the distinction between positive and normative economics important?
A. It helps separate factual analysis from subjective opinions.
B. It ensures that all economic policies are based on moral values.
C. It eliminates the need for government intervention in the economy.
D. It prevents disagreements among economists.

13. Which of the following is a fundamental characteristic of a free market economy?

A. Government sets all prices and wages.
B. Private individuals and firms own most resources.
C. Central authorities control production and distribution.
D. There is no competition among producers.

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14. The question "How should goods and services be produced?" focuses on:
A. The technological and resource efficiency in production.
B. The level of taxation on businesses.
C. The demand for luxury goods in an economy.
D. The global trade policies affecting production.

15. In a command economy, the answers to the five basic economic questions are
determined by:
A. Private businesses and consumer choices.
B. Government planning and central authority decisions.
C. Supply and demand forces.
D. The influence of international trade organizations.

16. What is a major challenge when answering "What goods and services should be
produced?" in any economic system?
A. The difficulty in setting prices.
B. The limited availability of resources and unlimited wants.
C. The need to avoid inflation.
D. The requirement to eliminate government policies.

17. How do mixed economies typically answer the five basic economic questions?
A. By relying entirely on private businesses.
B. By allowing both market forces and government intervention.
C. By eliminating the role of supply and demand.
D. By focusing only on public sector production.

18. Which of the following is a key assumption behind the Invisible Hand Principle?
A. Markets are inefficient and require continuous government intervention.
B. Individuals act in their own self-interest, leading to unintended social
benefits.
C. Producers and consumers are unaware of price mechanisms.
D. Economic decisions should always be made by central planners.

19. Which of the following is not an assumption of the cardinal utility approach?
A. Utility is measurable.
B. Marginal utility of money remains constant.
C. Consumer preferences are ranked.
D. Consumers aim to maximize total utility.

20. If a consumer spends all their income on two goods, X and Y, utility maximization
occurs when:
A. MUX + MUY=0
B. PX=PY
C. MUX + MUY=0
D. MUX/PX=MUY/PY

21. According to the ordinal approach, consumers make choices based on:
A. Quantitative measurement of utility
B. Ranking of preferences without assigning numerical values.
C. The assumption that all goods provide equal satisfaction.
D. The idea that total utility can always be maximized.

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22. The slope of an indifference curve represents:
A. The consumer's budget constraint.
B. The marginal rate of substitution (MRS).
C. The marginal cost of production.
D. The elasticity of demand.

23. The budget constraint in the ordinal approach represents:

A. The maximum utility a consumer can attain.
B. The set of all affordable combinations of goods given income and prices.
C. The satisfaction level derived from consuming one good only.
D. The total cost of producing goods in an economy.

24. A limitation of the ordinal utility approach is that:

A. It assumes that consumers can measure utility numerically.
B. It does not explain consumer choices in the presence of risk and uncertainty.
C. It ignores the concept of preferences.
D. It cannot be applied to real-world consumer decisions.

25. The consumer’s Marginal Rate of Substitution (MRS) between two goods (A and
B) is given by MRS = MUA / MUB. If the marginal utility of A (MUA) is 30 and the
marginal utility of B (MUB) is 15, what is the MRS?
A. 0.5
B. 1
C. 2
D. 3

26. A consumer’s budget constraint is given by the equation PxX + PyY = Income. If
Income = R100, the price of Good X (Px) is R10, and the price of Good Y (Py) is
R5, what is the maximum quantity of Good Y the consumer can purchase if they buy
no units of Good X?
A. 10 units
B. 15 units
C. 20 units
D. 25 units

27. The following table illustrates alternative production techniques for producing 18
widgets that can be sold for R1 each for a total revenue of R18.

Refer to the above table. If the price per unit of labour were to increase from R2 to R3,
the most efficient production technique would then be:
A. A
B. B
C. C
D. D

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28. In a Total Utility (TU) curve, what happens when the curve reaches its highest point?
A. Marginal Utility (MU) is at its maximum.
B. Marginal Utility (MU) is zero.
C. Total Utility (TU) starts decreasing.
D. The consumer stops consuming any more units.

29. If a Marginal Utility curve crosses the x-axis and takes negative values, what does this
imply about the Total Utility curve?
A. Total Utility is still increasing.
B. Total Utility has reached its maximum and is now decreasing.
C. Total Utility remains constant.
D. Total Utility becomes negative as well.

30. Two indifference curves can never intersect because:

A. Consumers can have more than one utility level at the same time.
B. It would violate the assumption of transitivity in consumer preferences.
C. It would mean that goods provide infinite utility.
D. The budget constraint does not allow for intersections.

31. A consumer’s equilibrium occurs where:

A. The highest possible indifference curve is tangent to the budget line.
B. The budget line crosses multiple indifference curves.
C. The consumer is at the highest point of the indifference curve.
D. The marginal rate of substitution (MRS) is equal to zero.

32. What is the primary difference between accounting profit and economic profit?
A. Accounting profit includes implicit costs, while economic profit excludes them.
B. Economic profit includes both explicit and implicit costs, while accounting
profit only considers explicit costs.
C. Accounting profit is always lower than economic profit.
D. Economic profit is based on revenues alone, while accounting profit considers
costs.
33. If a business earns R100,000 in revenue, has explicit costs of R70,000, and implicit
costs of R20,000, what is its economic profit?
A. R100,000
B. R30,000
C. R50,000
D. R10,000

34. If a company’s accounting profit is positive but its economic profit is negative, what
does this indicate?
A. The company is not covering all its explicit costs.
B. The company is making losses and should shut down immediately.
C. The company is covering explicit costs but not earning enough to compensate
for opportunity costs.
D. The company is earning a higher return than it could get elsewhere.

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35. What is the main idea behind economies of scale?
A. As production increases, the average cost per unit decreases.
B. As production increases, total costs always remain constant.
C. As production increases, the price of goods must increase.
D. As production increases, businesses always make higher profits.

36. A firm is experiencing diseconomies of scale when:

A. Its average cost per unit is decreasing as production increases.
B. It expands beyond an optimal size, leading to higher per-unit costs.
C. It benefits from improved technology and specialization.
D. It receives tax cuts that reduce total costs.

37. In the long run, what happens to firms in a perfectly competitive market that
experience economies of scale?
A. They earn long-term economic profits.
B. Their average costs fall, allowing them to lower prices.
C. They dominate the market and eliminate competition.
D. They experience higher costs due to inefficiencies.

38. Which of the following explains why the Average Fixed Cost (AFC) curve is always
downward sloping?
A. Fixed costs increase as production increases.
B. Fixed costs remain constant, but they are spread over more units of output.
C. The firm experiences increasing marginal returns.
D. Variable costs become fixed in the long run.

39. When the Marginal Cost (MC) curve is below the Average Variable Cost (AVC)
curve, what happens to the AVC curve?
A. It decreases.
B. It remains constant.
C. Increases.
D. It becomes equal to the ATC curve.

40. If a firm wants to minimize short-run costs, it should produce at the output level
where:
A. The Average Variable Cost (AVC) is at its highest point.
B. The Marginal Cost (MC) equals the Average Total Cost (ATC) at its lowest
point.
C. The Average Fixed Cost (AFC) is zero.
D. The Total Cost (TC) curve is flat.