Midterm Exam 1: Economic Fundamentals
Instructions
• Time allowed: 90 minutes
• Total points: 100
• Answer all questions
• Show all work for calculation problems
• No electronic devices allowed except for non-programmable calculators
Part A: Multiple Choice (20 points, 2 points each)
1. Which of the following best defines economics? a. The study of how to make money
in business b. The study of how society allocates scarce resources c. The study of
government taxation policies d. The study of stock market trends
2. The fundamental concept that drives all economic analysis is: a. Inflation b. Scarcity
c. Supply and demand d. Taxation
3. The opportunity cost of an action is: a. The monetary price paid for a good or service
b. The value of the next best alternative foregone c. The total benefit received from
the action d. The amount of time spent on the action
4. A production possibilities frontier (PPF) illustrates: a. The maximum profit a firm can
make b. The maximum possible combinations of two goods that can be produced c.
The relationship between price and quantity demanded d. The total revenue a firm
can generate
5. If a PPF is concave (bowed outward), this suggests: a. Constant opportunity costs b.
Decreasing opportunity costs c. Increasing opportunity costs d. Zero opportunity
costs
6. Ceteris paribus means: a. "Over a period of time" b. "In the short run" c. "All other
factors held constant" d. "For all goods and services"
7. Which of the following is a positive economic statement? a. "The government
should provide universal healthcare." b. "A 10% increase in price led to a 5%
decrease in quantity demanded." c. "Income inequality is unfair and should be
reduced." d. "The minimum wage ought to be $15 per hour."
, 8. An economy is operating efficiently when: a. It is producing at a point inside its PPF
b. It is producing at a point on its PPF c. It is producing at a point outside its PPF d. It
is producing only one good
9. The primary factors of production include all of the following EXCEPT: a. Land b.
Labor c. Money d. Capital
10. Marginal analysis in economics refers to: a. Comparing total benefits to total costs
b. Analyzing the effect of small incremental changes c. Studying economic activity
at the margin of society d. Measuring the profit margin of a business
Part B: True/False (10 points, 2 points each)
11. Microeconomics focuses on the behavior of the economy as a whole, including
inflation and unemployment rates.
12. Rational decision-makers will take an action if the marginal benefit exceeds the
marginal cost.
13. The law of increasing opportunity costs suggests that as more of one good is
produced, the opportunity cost of producing additional units rises.
14. Points inside a production possibilities frontier represent combinations that are
unattainable with current resources and technology.
15. Specialization and trade can make all participants better off, even if one party has
an absolute disadvantage in producing all goods.
Part C: Short Answer (30 points)
16. (10 points) Explain the concept of scarcity and its significance in economics. Why is
it considered the fundamental economic problem? Provide two real-world examples
that illustrate scarcity.
17. (10 points) Distinguish between positive and normative economics. Provide one
example of each type of statement related to environmental policy. Why is it
important for economists and policymakers to understand the difference?
18. (10 points) Define opportunity cost and explain its importance in economic
decision-making. Provide an example of how opportunity cost might influence a
student's decision about whether to attend college full-time or work full-time.
Part D: Problems (40 points)
Instructions
• Time allowed: 90 minutes
• Total points: 100
• Answer all questions
• Show all work for calculation problems
• No electronic devices allowed except for non-programmable calculators
Part A: Multiple Choice (20 points, 2 points each)
1. Which of the following best defines economics? a. The study of how to make money
in business b. The study of how society allocates scarce resources c. The study of
government taxation policies d. The study of stock market trends
2. The fundamental concept that drives all economic analysis is: a. Inflation b. Scarcity
c. Supply and demand d. Taxation
3. The opportunity cost of an action is: a. The monetary price paid for a good or service
b. The value of the next best alternative foregone c. The total benefit received from
the action d. The amount of time spent on the action
4. A production possibilities frontier (PPF) illustrates: a. The maximum profit a firm can
make b. The maximum possible combinations of two goods that can be produced c.
The relationship between price and quantity demanded d. The total revenue a firm
can generate
5. If a PPF is concave (bowed outward), this suggests: a. Constant opportunity costs b.
Decreasing opportunity costs c. Increasing opportunity costs d. Zero opportunity
costs
6. Ceteris paribus means: a. "Over a period of time" b. "In the short run" c. "All other
factors held constant" d. "For all goods and services"
7. Which of the following is a positive economic statement? a. "The government
should provide universal healthcare." b. "A 10% increase in price led to a 5%
decrease in quantity demanded." c. "Income inequality is unfair and should be
reduced." d. "The minimum wage ought to be $15 per hour."
, 8. An economy is operating efficiently when: a. It is producing at a point inside its PPF
b. It is producing at a point on its PPF c. It is producing at a point outside its PPF d. It
is producing only one good
9. The primary factors of production include all of the following EXCEPT: a. Land b.
Labor c. Money d. Capital
10. Marginal analysis in economics refers to: a. Comparing total benefits to total costs
b. Analyzing the effect of small incremental changes c. Studying economic activity
at the margin of society d. Measuring the profit margin of a business
Part B: True/False (10 points, 2 points each)
11. Microeconomics focuses on the behavior of the economy as a whole, including
inflation and unemployment rates.
12. Rational decision-makers will take an action if the marginal benefit exceeds the
marginal cost.
13. The law of increasing opportunity costs suggests that as more of one good is
produced, the opportunity cost of producing additional units rises.
14. Points inside a production possibilities frontier represent combinations that are
unattainable with current resources and technology.
15. Specialization and trade can make all participants better off, even if one party has
an absolute disadvantage in producing all goods.
Part C: Short Answer (30 points)
16. (10 points) Explain the concept of scarcity and its significance in economics. Why is
it considered the fundamental economic problem? Provide two real-world examples
that illustrate scarcity.
17. (10 points) Distinguish between positive and normative economics. Provide one
example of each type of statement related to environmental policy. Why is it
important for economists and policymakers to understand the difference?
18. (10 points) Define opportunity cost and explain its importance in economic
decision-making. Provide an example of how opportunity cost might influence a
student's decision about whether to attend college full-time or work full-time.
Part D: Problems (40 points)
