economics quiz

From the Desk of Fred Foldvary
land value tax

An Economics Quiz


by Fred E. Foldvary, Senior Editor

How well do you know economics? Test yourself with this quiz. Select the best answer for each question. Answers are provided below.

Answers:

1. b) Demand by definition is a schedule of prices and the quantities bought at those prices during some time, and therefore also a curve on a graph showing quantities bought at all the various prices. Demand is a relationship between price and quantity, holding everything else constant. The amount bought at a particular price is the "quantity demanded." Effective demand involves both desire and cash, just wanting something is called a "notional" demand.

2. c) Two-way trade can take place as each country concentrates on its most efficient production of goods. Even if one country can produce everything at a lower physical cost, two countries can both benefit from trade if they have a comparative advantage in some goods, i.e. if they are relative more productive in these goods.

3. a) Firms make no profit above normal returns, and they produce at the lowest possible cost. Normal returns are the usual wages and returns on investments. In a very competitive market, if profits are higher than normal returns, then other firms will enter, expand the supply, drive the price down, and squeeze out the extra profit.

4. d) The profit-maximizing quantity is less than the revenue- maximizing quantity if the costs are positive. A monopolist cannot set both price and quantity, since for any particular price, the quantity sold is based on the demand.

5. c) A tax on a produced good raises the price by less than the tax, and reduces the quantity sold. That's because there is a lower quantity sold, and the producers with the highest costs leave the industry. The remaining firms have lower costs, so after adding the tax, the sales price goes up less than the tax, but still goes up, hurting both consumers and producers.

6. If you own your own business, your real gain is c) the revenue minus what you pay for costs minus the best return elsewhere for your labor and resources. Your real economic gain is the revenue minus all costs, including what your wage and returns on investment would be elsewhere.

7. An employer hire the amount of labor at the level where a) the wage equals the extra amount the worker adds to production. In economic terms, wages tend to equal the marginal product of labor, the extra amount a worker contributes to the value of the product. Where labor productivity is low, wages are low.

8. When a price is below the market equilibrium price, there is a) a shortage, and quantity demanded exceeds quantity supplied. An example is rent control, where the rental of housing is set below the market price. The result is more folks wanting housing than is available. Often a black market develops at a higher, illegal price. This is an example of a distortion caused by intervention.

9. As the price of crude oil falls, c) the supply of gasoline will likely increase, and its price will likely decrease. Lower input prices lower the cost of production and expand supply, reducing the price.

10. If government collects a tax on land rent, a) suppliers, i.e. owners, must bear the entire burden of the tax, since it reduces the rent they keep. Since the supply of land is fixed, the supply does not become reduced by a tax on the rent. Landlords are not able to pass on the tax to renters if they were already setting the rent at what the market will bear. So the market rent paid by tenants does not change. The selling price of land falls to where it would provide a normal after-tax return.

Your grade: 9 or 10: A, congratulations, maven! 8, B. Your knowledge was good, and now it is better! 7, C. Your knowledge was OK, and now much better! 5 or 6: D. There were a few things you didn't know, and now you do! 0 to 4: F. You didn't know many of the answers, but now you know more economics than most folks!

-- Fred Foldvary      


The publisher adds -- also give yourself an A for taking the quiz, no matter how you scored. Participating is what counts most. Now share your opinions with The Progress Report:

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Copyright 1999 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.