Posted: September 18th, 2017


1)”Ability-to-Pay” principle” in taxation states:

a. taxes should always be fair.

b. taxes should always be neutral.

c. people should pay taxes based on their utilization of the system.

d. higher income people should pay more taxes than the lower income citizens.

e. higher income citizens should carry the burden of taxes and lower income people should be exempt from tax payments.


2) Assume that the government increases the property tax on rental apartments.  We can say that in the long run the incidence of taxation will fall on:

a. the community at large.

b. low income families.

c.the landlords.

d. the tenants.

e. we do not have enough information to determine the incidence of taxation in this case.


3)If people systematically fail to take into account some of the costs arising from their economic activities, the society will face a problem known in economics as:

a. consumer surplus.

b. producer surplus.

c. externalities.

d. selfish behavior.

e. moral hazard.


4) If Darius has comparative advantage over Alexander in production of helmets, then in that production process:

a) Darius must have higher opportunity cost than Alexander.

b) Darius must have lower opportunity cost than Alexander.

c) Darious and Alexander must have equal opportunity cost.

d) any of the above.

e) none of the above.


5) A job interviewer may rely on which one of the followings to address the asymmetric information and adverse selection issues regarding a job applicant?

a. screening techniques.

b. Reputation.

c. Signals.

d. All of the above.

e. None of the above.

6)       Which one of the followings may be subject to non-exclusion principle?


a. a computer software.

b. a movie recorded on DVD.

c. a pay-per-view event.

d. services of the Center for Disease Control.

e. all of the above.


7) Which one of the followings could be an economic reason for a space exploration program financed by the government?


a. To advance the science frontier.

b. To aid the pharmaceutical industry.

c. The positive externalities inherent in such program.

d. All of the above.

e. None of the above.


8) You earn $50,000 a year and you pay $10,000 in income taxes.  Your cousin makes $75,000 a year and pays $11,250 in income taxes. This tax system is:


a. progressive.

b. regressive.

c. proportional.

d. irrational.

e. rational.


9) This year you receive $2,000 bonus from your employer.  The tax rate applicable to this bonus amount is called:


a. regular tax rate.

b. final tax rate.

c. average tax rate.

d. marginal tax rate.

e. only (a) and (c) above.


10) Property taxes are:


a. imposed on income.

b. based on the value of the taxable item.

c. taxes imposed on production or consumption.

d. taxes imposed on luxury items.

e. none of the above.


11) People in a society can benefit from existence of a fire department without paying for it.  Economists refer to this situation as:


a. externalities.

b. zero marginal cost problem.

c. moral hazard.

d. free-rider problem.

e. any of the above.


12) You face an income tax situation where your first $25,000 of income is tax exempt; the next $25,000 is subject to 10% income taxes; the third $25,000 is subject to 20% income taxes; and any amount after that is subject to 30% income tax.  You are currently earning $75,000.  Your average and marginal tax rates are________ and ________ respectively.


a. 10% and 10%

b. 15% and 20%

c. 10% and 20%

d. 15% and 30%

e. none of the above.


13) If the society wants a very clean air and water, then the society


a. should elect politicians who pledge to accomplish the task.

b. should be willing to accept and pay for the extra costs.

c. should insist on moving the polluting industries out of the country.

d. should educate the public.

e. all of the above.


14) Which one of the following may be considered an externality?


a. the enjoyment of watching a movie.

b. the pleasure of having neighbors who beautify and properly maintain their yards.

c. greenhouse effect caused by some human activities.

d. all of the above.

e. only (b) and (c) above.


15) Incidence of taxation:


a. is the same thing as marginal tax rate.

b. is applicable only to taxes that are based on benefit principle.

c. shows how ultimately a given tax payment is distributed among taxpayers.

d. shows how heavy a tax burden is.

e. none of the above.

16) Characteristics of a private good is best evident in which one of the followings?

a. Homeland Security.

b. Space Program.

c. Pay-Per-View events.

d. Services of an Accountant.

e. Any of the above.


17) Which one of the following items are rival in their consumption?

a. a seat on a bench in a public park.

b. viewing of a masterpiece paintings collection posted on the internet.

c. fish in a public lake.

d. all of the above.

e. (a) and (c) above.


18) A tax on a tire you purchase for your car is based on

a. regressive philosophy of taxation.

b. ability to pay principle.

c. benefit principle.

d. fairness principle.

e. any of the above is possible.


19) When a market performs optimally, the outcome is efficient and:

a. consumer surplus is maximized.

b. producer surplus is maximized.

c. total surplus is maximized.

d. all of the above.

e. none of the above.


20) Almost all insurance policies carry some sort of a deductible.  This is done to minimize:

a. the consequences of free rider problem.

b. the consequences of moral hazard.

c. the cost to the society.

d. the costs of signaling and screening.

e. all of the above.


21) Assume that the demand for air travel is highly price elastic.  An added $10 excise tax on

air travel will be:


a. paid entirely by the travelers.

b. paid primarily by the travelers.

c. paid entirely by the airlines.

d. paid primarily by the airlines.

e. any of the above is possible.

22) One difference between tariff and quota is that:

a) tariff is effective while quota is not.

b) quota is effective while tariff is not.

c) tariff is a physical limit on quantity of imports while quota is    monetary tax on imports.

d) quota is a physical limit on quantity of imports while tariff is a monetary tax imporst.

e) none of the above.


23) Negative externalities may be dealt with through:

a. appropriate regulations.

b. establishment and enforcement of private property rights.

c. internalization of the external costs.

d. all of the above.

e. none of the above.


24) Government should continue production of a given public good until:

a. the society is satisfied with the quantity of that public good.

b. the production of that public good becomes profitable.

c. there is no citizen who wants more of that public good.

d. the marginal social benefit and marginal social cost of that public good are equal.

e. any of the above.


25) Which one of the followings may cause market failure?

a. Corporate profits.

b. Free exit and free entry.

c. perfect information.

d. asymmetric information.

e. All of the above.




  1. 1) Shark fin soup is viewed in Asia to be a delicacy. Currently the shark fin industry is a $1.2 billion industry a year.  Profit seeking fishermen venture to the sea and capture as many sharks as they can.  As a result, shark population has declined by some 80% over the past fifty years.  Many countries have tried to regulate catching sharks.  The high profits, however, attract poachers to continue the practice and it is estimated that 38 million sharks are killed each year through poaching.  What is this problem called in economics?  Why does it exist in the first place?  What can be done about it?


  1. 2) Currently, the law requires that small businesses to have accommodation such as rest rooms, parking spaces, and access ramps for disabled individuals.  These requirements, of course, add to costs of doing business and present hardships for many small businesses.  Take a position for or against these requirements and present an ECONOMIC reasoning to support your position.


  1. 3) Suppose you are about to hire a person for a job in your company.  You have several qualified candidates and you want to interview them.  What is the economic problem you face in this situation and what will you do to overcome it?

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