IVY SOFTWARE MBA PREPWORKS FUNDAMENTALS OF ECONOMICS
QUESTIONS AND ANSWERS
1. What is the fundamental economic problem that all societies face?
ANSWER: Scarcity—unlimited wants and needs coupled with limited resources.
2. What does the term "opportunity cost" refer to?
ANSWER: The value of the next best alternative that is forgone when making a choice.
3. In economics, what are the three primary factors of production?
ANSWER: Land, Labor, and Capital.
4. What is the difference between microeconomics and macroeconomics?
ANSWER: Microeconomics studies the behavior of individual actors like households and firms,
while macroeconomics studies the economy as a whole, including topics like inflation and
unemployment.
5. What does a Production Possibilities Frontier (PPF) illustrate?
ANSWER: The maximum combination of two goods an economy can produce when all resources
are fully and efficiently employed.
6. What point on a PPF represents an inefficient use of resources?
ANSWER: Any point inside the curve.
7. What does an outward shift of the PPF represent?
ANSWER: Economic growth, driven by factors like technological advancement or an increase in
resources.
,8. What is the law of demand?
ANSWER: There is an inverse relationship between the price of a good and the quantity
demanded, ceteris paribus.
9. What is the law of supply?
ANSWER: There is a direct relationship between the price of a good and the quantity supplied,
ceteris paribus.
10. What is the term for a situation where the quantity demanded equals the quantity
supplied?
ANSWER: Market Equilibrium.
11. A surplus in a market occurs when...
ANSWER: The price is above the equilibrium price, leading to quantity supplied exceeding
quantity demanded.
12. A shortage in a market occurs when...
ANSWER: The price is below the equilibrium price, leading to quantity demanded exceeding
quantity supplied.
13. If coffee and tea are substitutes, an increase in the price of coffee will cause the demand for
tea to...
ANSWER: Increase.
14. If peanut butter and jelly are complements, an increase in the price of jelly will cause the
demand for peanut butter to...
ANSWER: Decrease.
, 15. What is a normal good?
ANSWER: A good for which demand increases when consumer income rises.
16. What is an inferior good?
ANSWER: A good for which demand decreases when consumer income rises.
17. What is the price elasticity of demand?
ANSWER: A measure of the responsiveness of quantity demanded to a change in price.
18. If demand is elastic, a price increase will lead to a ______ in total revenue.
ANSWER: Decrease.
19. If demand is inelastic, a price increase will lead to a ______ in total revenue.
ANSWER: Increase.
20. What does a perfectly inelastic demand curve look like on a graph?
ANSWER: A vertical line.
21. What is cross-price elasticity of demand?
ANSWER: A measure of how the quantity demanded of one good responds to a change in the
price of another good.
22. What is income elasticity of demand?
ANSWER: A measure of how the quantity demanded of a good responds to a change in
consumer income.
23. What is the utility in economic theory?
ANSWER: The satisfaction or benefit derived from consuming a good or service.
QUESTIONS AND ANSWERS
1. What is the fundamental economic problem that all societies face?
ANSWER: Scarcity—unlimited wants and needs coupled with limited resources.
2. What does the term "opportunity cost" refer to?
ANSWER: The value of the next best alternative that is forgone when making a choice.
3. In economics, what are the three primary factors of production?
ANSWER: Land, Labor, and Capital.
4. What is the difference between microeconomics and macroeconomics?
ANSWER: Microeconomics studies the behavior of individual actors like households and firms,
while macroeconomics studies the economy as a whole, including topics like inflation and
unemployment.
5. What does a Production Possibilities Frontier (PPF) illustrate?
ANSWER: The maximum combination of two goods an economy can produce when all resources
are fully and efficiently employed.
6. What point on a PPF represents an inefficient use of resources?
ANSWER: Any point inside the curve.
7. What does an outward shift of the PPF represent?
ANSWER: Economic growth, driven by factors like technological advancement or an increase in
resources.
,8. What is the law of demand?
ANSWER: There is an inverse relationship between the price of a good and the quantity
demanded, ceteris paribus.
9. What is the law of supply?
ANSWER: There is a direct relationship between the price of a good and the quantity supplied,
ceteris paribus.
10. What is the term for a situation where the quantity demanded equals the quantity
supplied?
ANSWER: Market Equilibrium.
11. A surplus in a market occurs when...
ANSWER: The price is above the equilibrium price, leading to quantity supplied exceeding
quantity demanded.
12. A shortage in a market occurs when...
ANSWER: The price is below the equilibrium price, leading to quantity demanded exceeding
quantity supplied.
13. If coffee and tea are substitutes, an increase in the price of coffee will cause the demand for
tea to...
ANSWER: Increase.
14. If peanut butter and jelly are complements, an increase in the price of jelly will cause the
demand for peanut butter to...
ANSWER: Decrease.
, 15. What is a normal good?
ANSWER: A good for which demand increases when consumer income rises.
16. What is an inferior good?
ANSWER: A good for which demand decreases when consumer income rises.
17. What is the price elasticity of demand?
ANSWER: A measure of the responsiveness of quantity demanded to a change in price.
18. If demand is elastic, a price increase will lead to a ______ in total revenue.
ANSWER: Decrease.
19. If demand is inelastic, a price increase will lead to a ______ in total revenue.
ANSWER: Increase.
20. What does a perfectly inelastic demand curve look like on a graph?
ANSWER: A vertical line.
21. What is cross-price elasticity of demand?
ANSWER: A measure of how the quantity demanded of one good responds to a change in the
price of another good.
22. What is income elasticity of demand?
ANSWER: A measure of how the quantity demanded of a good responds to a change in
consumer income.
23. What is the utility in economic theory?
ANSWER: The satisfaction or benefit derived from consuming a good or service.
