Economic Modeling Test Bank

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17 Chapters
558 Verified Questions
 Economic Modeling
Test Bank
Course Introduction
Economic Modeling explores the development and application of quantitative models to

analyze economic phenomena, predict outcomes, and inform policy decisions. Students

will learn to construct mathematical and computational models that represent

real-world economic systems, understand the underlying assumptions, and interpret

results critically. Topics include linear and nonlinear models, optimization, model

calibration, and the use of software tools for simulation and estimation. The course

emphasizes both theoretical foundations and practical skills, enabling students to

address complex economic issues using formal modeling techniques.

Recommended Textbook
Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson

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17 Chapters
558 Verified Questions
558 Flashcards
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Page 2
 Chapter 1: Economic Models
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Sample Questions
Q1) If society is producing a combination of goods on its production possibilities frontier
A)it must be employing all available resources.
B)it must be growing.
C)it is using all the available natural resources but may not be using all available labor
resources.
D)Both a and b
Answer: A

Q2) Graphically,the solution to a system of two independent linear equations is usually

A)the average of the slopes.
B)the average of the intercepts.
C)a single point.
D)None of the above.
Answer: C

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Page 3
 Chapter 2: Utility and Choice
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Sample Questions
Q1) Suppose a little girl likes peanut butter and jelly sandwiches with exactly 2T of jelly
and 1T of peanut butter.Suppose further that her mom agrees to make sandwiches to
those exact specifications and the price of peanut butter is $.25/T and the price of jelly is
$.10/T.If she has $1.80 to spend on peanut butter and jelly ingredients (ignore the
bread)in a week,how many sandwiches will she make?
A)1
B)2
C)4
D)8
Answer: C

Q2) As an individual moves northwest along an indifference curve substituting more and
more Y for X,his or her MRS of X for Y
A)increases.
B)decreases.
C)stays the same.
D)changes in a way that cannot be determined.
Answer: A

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Page 4
 Chapter 3: Demand Curves
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Sample Questions
Q1) If demand is elastic,a decrease in quantity will cause the total spending \(( P \times
Q )\) to
A)rise.
B)fall.
C)remain unchanged.
D)change in a way that cannot be determined.
Answer: B

Q2) The demand for gasoline is more elastic in the long run than in the short run
because
A)other prices are more likely to change in the long run.
B)incomes tend to rise over time.
C)people can buy new cars in the long run.
D)cars have become more expensive over time.
Answer: C

Q3) Suppose demand can be written as \(Q = 5\) .The elasticity of demand is)
A)increasing as price rises.
B)decreasing as price rises.
C)constant regardless of prices and perfectly inelastic.
D)constant regardless of prices and unit elastic.
Answer: C

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Page 5
 Chapter 4: Uncertainty
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Sample Questions
Q1) A gamble can be described as "fair" if the expected value of the gamble (including
any costs of play)is
A)positive.
B)zero.
C)negative.
D)one.

Q2) Suppose a risk-neutral power plant needs 10,000 tons of coal for its operations next
month. It is uncertain about the future price of coal. Today it sells for $60 a ton but next
month it could be $50 or $70 (with equal probability). How much would the power plant
be willing to pay today for an option to buy a ton of coal next month at today's price?
(Ignore discounting over the short period of a month.)
A)5
B)4
C)3
D)0

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Page 6
 Chapter 5: Game Theory
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Sample Questions
Q1) The beauty of Nash's equilibrium concept is that
A)all games have one.
B)all games have no more than one.
C)all games have a rich set to choose from.
D)it is a Pareto optimum.

Q2) Consider the game between the teens from the previous question.The pure-strategy
Nash equilibrium is (equilibria are)
A)Both Declare.
B)Both Ignore/Rebuff.
C)There are two: in one,both Declare,and in the other,both Rebuff/Ignore.
D)There are two: in both,the teens do the opposite of each other.

Q3) The game of Matching Pennies

A)has no Nash equilibrium.
B)has a pure-strategy Nash equilibrium.
C)has a mixed strategy Nash equilibrium.
D)has multiple Nash equilibria.

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Page 7
 Chapter 6: Production
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Sample Questions
Q1) In a two-input model you can tell that a non-optimal short-run production decision
is being made if
A)all decisions in the short run are nonoptimal
B)the rate of technical substitution is equal to the ratio of the input prices
C)the rate of technical substitution is not equal to the ratio of the input prices

Q2) The marginal rate of technical substitution of labor for capital measures
A)the amount by which capital input can be reduced while holding quantity produced
constant when one more unit of labor is used.
B)the amount by which labor input can be reduced while holding quantity produced
constant when one more unit of capital is used.
C)the ratio of total labor to total capital.
D)the ratio of total capital to total labor.

Q3) Suppose Q = K^aL^b,if a + b < 1 the isoquants will be

A)upward sloping.
B)progressively closer together at higher quantities.
C)progressively further apart at higher quantities.
D)equally spaced.

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Page 8
 Chapter 7: Costs
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Sample Questions
Q1) The firm's expansion path records
A)profit-maximizing output choices for every possible price.
B)cost-minimizing input choices for all possible output levels for when input prices
expand along with production.
C)cost-minimizing input choices for all possible output levels for a fixed set of input
prices.
D)cost-minimizing input choices for profit-maximizing output levels.

Q2) In the short run,

A)all inputs are fixed.
B)all inputs are variable.
C)some inputs are fixed.
D)no production occurs.

Q3) Suppose that a lawn mowing services production function for lawns mowed in a
week is M = (LK)1/2,where L is labor hours and K is the amount of capital (mowers and
trimmers).The expansion path depends on
A)the wage rate only.
B)the rental rate only.
C)both the wage and rental rates.
D)neither the wage nor rental rates.

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Page 9
 Chapter 8: Profit Maximization and Supply
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Sample Questions
Q1) Which of the following conditions would result in the short run marginal cost curve
not correctly reflecting the supply behavior of a profit maximizing firm?
A)The firm is a price taker.
B)Price exceeds average total cost.
C)The elasticity of demand facing the firm is ?3.
D)the firm can vary several inputs in the short run.

Q2) Suppose a farmer is a price taker in soybeans with cost functions given by ?
TC = .1q² + 2q + 30
MC = .2q + 2
Suppose the farmer has to purchase a license for $50 per period in order to stay in
business. In this case,its new total cost function is
A)still TC = .1q² + 2
B)TC = .1q² + .2q + 80
C)TC = .1q² + 2q + 50
D)TC = 50

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Page 10
 Chapter 9: Perfect Competition in a Single Market
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Sample Questions
Q1) Suppose there are 100 firms each with a short run total cost of STC = q²
+ q + 10,so that marginal cost is MC = 2q +1.If market demand is given by Q_D
= 1050 - 50P,how much will the individual firm produce?
A)3
B)4
C)5
D)6

Q2) Suppose a chemical company is in a perfectly competitive industry and has a short
run total cost curve of \(\mathrm { TC } = \frac { 1 } { 3 } \mathrm { q } ^ { 3 } + 5
\mathrm { q } ^ { 2 } + 10 q + 10\) and a short run marginal cost of SMC =
q² + 10q + 10.At the price of 385,how much will be produced?
A)0
B)3
C)5
D)15

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Page 11
 Chapter 10: General Equilibrium and Welfare
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Sample Questions
Q1) Suppose the Economics Department has a graduation party for its students but as a
final test they must show they have learned something about trade.The men are given
food when they walk in and the women are given drink.Suppose they have identical
preferences where food and drink provide utility U = FαDβ.The exchange would be such that
A)both would be guaranteed to be better off than when they entered.
B)both would be guaranteed to be at least as well off as when they entered.
C)the men would end up with more.
D)the women would end up with more.

Q2) Under a perfectly competitive price system

A)an equitable allocation of the available resources will always result.
B)there is no opportunity for individuals to trade amongst themselves.
C)there is no reason to expect that voluntary trading will result in an equitable allocation
of the available resources.
D)None of the above will result.

Q3) The slope of the production possibility frontier shows

A)the marginal rate of substitution between the two goods.
B)the relative marginal costs of the two goods.
C)the efficient combination of outputs possible using fixed amounts of input.
D)the relative marginal productivities of the two goods.

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Page 12
 Chapter 11: Monopoly
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Sample Questions
Q1) The "deadweight loss" from a monopoly refers to
A)the portion of a monopolist's profits that are above the competitive profit level.
B)the increase in price due to the monopolization of a market.
C)the inefficient use of factors of production by a monopoly.
D)the loss of consumer surplus due to the monopolization of a market that is not
transferred to another economic actor.

Q2) A monopolist with constant average and marginal cost equal to 8 (AC = MC =
8)faces demand Q = 100 - P,implying that its marginal revenue is MR = 100 - 2Q. Its profit
maximizing quantity is
A)8
B)46
C)50
D)92

Q3) From the point of view of economic efficiency,output in a monopolized market is

A)too high.
B)perfect.
C)too low.
D)undesirable.

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Page 13
 Chapter 12: Imperfect Competition
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Sample Questions
Q1) Consider the market for nonalcoholic beers from the previous question.Which of the
following is the best-response function for Boors from the Bertrand game?
A)PB = -2.5 + .05PC
B)PB = 2.5 + .05PC
C)PC = 2.5 - .05PB
D)PB = 2.5 - .15PC

Q2) Each firm in a cartel has an incentive to chisel because market price exceeds
A)marginal cost.
B)average cost.
C)average variable cost.
D)average fixed cost.

Q3) Which game does the Cournot model most resemble and why?
A)the Battle of the Sexes because firms need to coordinate their outputs.
B)the Battle of the Sexes because firms disagree on which outcome is best.
C)the Prisoners Dilemma because firms don't maximize joint payoffs in equilibrium.
D)the Prisoners Dilemma because firms play dominant strategies.

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Page 14
 Chapter 13: Pricing in Input Markets
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Sample Questions
Q1) A price discriminating monopsonist could increase its profits by
A)paying the minimum wages possible.
B)hiring as little capital as possible.
C)paying lower wages to workers with inelastic supply of labor curves than to workers
with elastic curves.
D)paying lower wages to workers with elastic supply of labor curves than to workers with
inelastic curves.

Q2) If a factor of production comes to have more and more alternative uses,its supply
curve to any one use
A)remains unchanged.
B)becomes more inelastic.
C)becomes more elastic.
D)may move in any direction.

Q3) A firm's demand for labor is known as a "derived demand" because

A)the firm gains utility from hiring more labor.
B)the amount of labor hired depends upon how much output the firm can sell.
C)the wage rate paid to workers is derived from the market for labor.
D)it is derived from the demand for capital.

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Page 15
 Chapter 14: Capital and Time
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Sample Questions
Q1) In a perfectly competitive market a firm's rental rate for a machine (v)will be given
by: v = P(r + d)where r is the prevailing rate of interest and d is the depreciation rate.In
this formula P represents
A)the present market price of the machine.
B)the initial purchase price of the machine (assuming this differs from its present market
price.
C)the price of the firm's product.
D)the depreciated value of the machine.

Q2) A rise in the real interest rate r

A)creates income and substitution effects that reduce C0.
B)creates income effects that reduce C0,substitution effects that increase C0.
C)creates income effects that increase C0,substitution effects that reduce C0.
D)creates income and substitution effects that increase C0.

Q3) The rental rate approach to investment choices by firms and the present value
approach
A)always agree.
B)agree only if depreciation is 0.
C)agree only if the price of equipment does not change.
D)agree only when inflation rates are zero.

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Page 16
 Chapter 15: Asymmetric Information
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Sample Questions
Q1) Which is a distortion (a loss of social surplus)associated with a monopolist's inability
to observe consumer types when constructing a nonlinear pricing scheme?
A)The monopolist must expend more resources on market research.
B)All bundles involve inefficiently low quantities.
C)Some but not all bundles involve inefficiently low quantities.
D)Quantities aren't distorted,but prices extract too much consumer surplus.

Q2) A risk-averse manager is hired to run a firm for shareholders. If shareholders cannot
observe the manager's effort,which would be the best employment contract?
A)a high-powered incentive contract to elicit maximum effort.
B)a fixed salary.
C)a moderately powered incentive scheme that elicits some effort without exposing the
manager to too much risk.
D)an incentive scheme that provides maximum incentives and maximum insurance.

Q3) Adverse selection in competitive insurance markets harms

A)high-risk individuals.
B)low risk individuals.
C)owners of competitive insurance companies.
D)everyone.

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Page 17
 Chapter 16: Externalities and Public Goods
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Sample Questions
Q1) The "free-rider problem" of public goods refers to
A)individuals' refusal to pay taxes.
B)individuals' attempts to hide their preferences for collective goods and to avoid paying
for them.
C)individuals' overuse of collective goods.
D)the inelasticity of individuals' demands for public goods.

Q2) Externalities between two firms can be "internalized" if: Which statement(s)correctly
complete(s)the sentence?
I.The two firms merge.
II.Bargaining costs are zero.
III.The externalities affect each firm equally.
IV.Marginal costs for both firms are constant.
A)Only II.
B)All except III.
C)I and II,but not III and IV.
D)I and IV,but not II and III

Q3) Left to their own,private markets tend to

A)under-allocate resources to public goods.
B)allocate the economically efficient amount of resources to public goods.
C)over-allocate resources to public goods.

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Page 18
 Chapter 17: Behavioral Economics
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Sample Questions
Q1) The option-value principle can be roughly stated as "more choices can't make a
person worse off." Are there any exceptions to this rule? Choose all that apply.?
A)No.
B)Yes,in strategic situations.
C)Yes,in situations involving self-control.
D)Yes,for certain complicated financial derivatives.

Q2) Consider the same ultimatum game as in the previous question but consider some
new preferences reflecting a desire for fairness. In particular,now assume players get 1
util per dollar earned but lose 1/4 util for the absolute difference between their monetary
payoffs. Which of the following is an offer that arises in a subgame-perfect equilibrium
with these new preferences?
A)1.
B)2.
C)4.
D)5.

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Page 19