BMAL-590 MICROECONOMICS EXAM] – EXAM-STYLE QUESTIONS AND
ANSWERS | VERIFIED AND WELL DETAILED ANSWERS | PLUS RATIONALES |
GUARANTEED PASS | 2026/27 LATEST UPDATE | EXAM PREP | STUDY GUIDE |
PRACTICE TEST
1. Which of the following best defines the concept of scarcity in economics?
A. The uneven distribution of wealth and income within a society.
B. The condition that arises when human wants exceed the available resources to
satisfy them.
C. The measure of a country's output of goods and services over a specific period.
D. The study of how individuals and businesses make financial decisions.
Correct Answer: B. The condition that arises when human wants exceed the
available resources to satisfy them.
Rationale: Scarcity is the fundamental economic problem that drives the need for
choice. It exists because resources are finite while human desires are virtually
infinite. Option A describes inequality, which is a related but distinct concept.
Option C defines Gross Domestic Product (GDP), and Option D is a broad
description of economics itself, not scarcity.
2. A local bakery notices that as the price of its artisan bread increases, the
quantity demanded decreases. This observation best illustrates the law of:
A. Supply.
B. Demand.
C. Diminishing Marginal Utility.
D. Increasing Opportunity Cost.
,Correct Answer: B. Demand.
Rationale: The law of demand states an inverse relationship between price and
quantity demanded, ceteris paribus. Option A, the law of supply, describes a direct
relationship between price and quantity supplied. Option C, diminishing marginal
utility, explains why the law of demand occurs, but the observation itself is the law
of demand. Option D is related to the production possibility frontier.
3. A firm's total revenue is $50,000, its explicit costs are $30,000, and its implicit
costs are $15,000. What is the firm's economic profit?
A. $20,000
B. $35,000
C. $5,000
D. -$5,000
Correct Answer: C. $5,000
Rationale: Economic profit is calculated by subtracting both explicit and implicit
costs from total revenue (Total Revenue - Explicit Costs - Implicit Costs = $50,000 -
$30,000 - $15,000 = $5,000). Accounting profit (Option A) only considers explicit
costs. Option B incorrectly adds all costs. Option D would be the economic loss if
the costs exceeded revenue.
4. A price ceiling set below the equilibrium price in a competitive market will
most likely result in:
A. A surplus of the good.
B. A shortage of the good.
C. A decrease in demand.
D. An increase in supply.
,Correct Answer: B. A shortage of the good.
Rationale: A price ceiling is a legal maximum price. When set below equilibrium, it
prevents the market from clearing. At this artificially low price, quantity demanded
will exceed quantity supplied, creating a shortage. Option A describes a price floor
set above equilibrium. Options C and D are shifts in the curves, not direct results of
the price ceiling.
5. Which of the following is an example of a positive externality?
A. A factory emitting pollution into a nearby river.
B. A neighbor's loud music disturbing the community.
C. A homeowner planting a beautiful garden that increases property values on
the entire street.
D. A firm laying off workers during an economic downturn.
Correct Answer: C. A homeowner planting a beautiful garden that increases
property values on the entire street.
Rationale: A positive externality is a benefit enjoyed by a third party who did not
choose to be involved in the transaction. The homeowner's garden provides an
uncompensated benefit to neighbors. Options A and B are examples of negative
externalities. Option D is an internal business decision with external effects but not
a classic externality in the economic sense.
6. The cross-price elasticity of demand between two goods is -2.5. This
indicates that the goods are:
A. Substitutes.
B. Complements.
, C. Inferior goods.
D. Normal goods.
Correct Answer: B. Complements.
Rationale: A negative cross-price elasticity of demand indicates that an increase in
the price of one good leads to a decrease in the quantity demanded of the other.
This is the defining characteristic of complementary goods. Option A would have a
positive cross-price elasticity. Options C and D are classified using income elasticity
of demand.
7. Which market structure is characterized by a single seller, a unique product
with no close substitutes, and extremely high barriers to entry?
A. Perfect Competition.
B. Monopolistic Competition.
C. Oligopoly.
D. Monopoly.
Correct Answer: D. Monopoly.
Rationale: A monopoly is the extreme opposite of perfect competition. It features a
sole producer of a good with no close substitutes, allowing the firm significant
market power, largely due to high entry barriers. Option A has many firms. Option
B has many firms with differentiated products. Option C has a few dominant firms.
8. A firm is producing at a level where Marginal Cost (MC) is less than Marginal
Revenue (MR). To maximize profit, the firm should:
A. Increase output.
B. Decrease output.
ANSWERS | VERIFIED AND WELL DETAILED ANSWERS | PLUS RATIONALES |
GUARANTEED PASS | 2026/27 LATEST UPDATE | EXAM PREP | STUDY GUIDE |
PRACTICE TEST
1. Which of the following best defines the concept of scarcity in economics?
A. The uneven distribution of wealth and income within a society.
B. The condition that arises when human wants exceed the available resources to
satisfy them.
C. The measure of a country's output of goods and services over a specific period.
D. The study of how individuals and businesses make financial decisions.
Correct Answer: B. The condition that arises when human wants exceed the
available resources to satisfy them.
Rationale: Scarcity is the fundamental economic problem that drives the need for
choice. It exists because resources are finite while human desires are virtually
infinite. Option A describes inequality, which is a related but distinct concept.
Option C defines Gross Domestic Product (GDP), and Option D is a broad
description of economics itself, not scarcity.
2. A local bakery notices that as the price of its artisan bread increases, the
quantity demanded decreases. This observation best illustrates the law of:
A. Supply.
B. Demand.
C. Diminishing Marginal Utility.
D. Increasing Opportunity Cost.
,Correct Answer: B. Demand.
Rationale: The law of demand states an inverse relationship between price and
quantity demanded, ceteris paribus. Option A, the law of supply, describes a direct
relationship between price and quantity supplied. Option C, diminishing marginal
utility, explains why the law of demand occurs, but the observation itself is the law
of demand. Option D is related to the production possibility frontier.
3. A firm's total revenue is $50,000, its explicit costs are $30,000, and its implicit
costs are $15,000. What is the firm's economic profit?
A. $20,000
B. $35,000
C. $5,000
D. -$5,000
Correct Answer: C. $5,000
Rationale: Economic profit is calculated by subtracting both explicit and implicit
costs from total revenue (Total Revenue - Explicit Costs - Implicit Costs = $50,000 -
$30,000 - $15,000 = $5,000). Accounting profit (Option A) only considers explicit
costs. Option B incorrectly adds all costs. Option D would be the economic loss if
the costs exceeded revenue.
4. A price ceiling set below the equilibrium price in a competitive market will
most likely result in:
A. A surplus of the good.
B. A shortage of the good.
C. A decrease in demand.
D. An increase in supply.
,Correct Answer: B. A shortage of the good.
Rationale: A price ceiling is a legal maximum price. When set below equilibrium, it
prevents the market from clearing. At this artificially low price, quantity demanded
will exceed quantity supplied, creating a shortage. Option A describes a price floor
set above equilibrium. Options C and D are shifts in the curves, not direct results of
the price ceiling.
5. Which of the following is an example of a positive externality?
A. A factory emitting pollution into a nearby river.
B. A neighbor's loud music disturbing the community.
C. A homeowner planting a beautiful garden that increases property values on
the entire street.
D. A firm laying off workers during an economic downturn.
Correct Answer: C. A homeowner planting a beautiful garden that increases
property values on the entire street.
Rationale: A positive externality is a benefit enjoyed by a third party who did not
choose to be involved in the transaction. The homeowner's garden provides an
uncompensated benefit to neighbors. Options A and B are examples of negative
externalities. Option D is an internal business decision with external effects but not
a classic externality in the economic sense.
6. The cross-price elasticity of demand between two goods is -2.5. This
indicates that the goods are:
A. Substitutes.
B. Complements.
, C. Inferior goods.
D. Normal goods.
Correct Answer: B. Complements.
Rationale: A negative cross-price elasticity of demand indicates that an increase in
the price of one good leads to a decrease in the quantity demanded of the other.
This is the defining characteristic of complementary goods. Option A would have a
positive cross-price elasticity. Options C and D are classified using income elasticity
of demand.
7. Which market structure is characterized by a single seller, a unique product
with no close substitutes, and extremely high barriers to entry?
A. Perfect Competition.
B. Monopolistic Competition.
C. Oligopoly.
D. Monopoly.
Correct Answer: D. Monopoly.
Rationale: A monopoly is the extreme opposite of perfect competition. It features a
sole producer of a good with no close substitutes, allowing the firm significant
market power, largely due to high entry barriers. Option A has many firms. Option
B has many firms with differentiated products. Option C has a few dominant firms.
8. A firm is producing at a level where Marginal Cost (MC) is less than Marginal
Revenue (MR). To maximize profit, the firm should:
A. Increase output.
B. Decrease output.
