Economics concepts worksheet with answers

Fixed costs are costs that:

1. ADo not change with the level of output in the short run
2. BCan be avoided entirely by producing nothing in the short run
3. CRise in proportion to each unit produced
4. DAre paid only when the firm makes a profit

Economies of scale occur when:

1. AA firm produces less to cut costs
2. BTotal costs fall as output increases
3. CPrices rise as the firm grows
4. DLong-run average cost falls as output increases

Fiscal policy uses:

1. AGovernment spending and taxation
2. BExchange rate controls only
3. CTrade agreements only
4. DInterest rates set by the central bank

In perfect competition in the long run, firms earn:

1. AMonopoly profits
2. BZero economic profit
3. CLarge economic profits
4. DLosses forever

A firm has spent €1 million on research for a product that now looks unprofitable. When deciding whether to continue, the €1 million should be:

1. AAdded to the expected future costs
2. BTreated as the opportunity cost of stopping
3. CIgnored, because it is a sunk cost
4. DRecovered by raising prices

Unemployment benefits and progressive income taxes are called automatic stabilisers because they:

1. AFix the exchange rate automatically
2. BReduce fluctuations in demand without new government decisions
3. CKeep the government budget balanced in every year of the business cycle
4. DPrevent all recessions from happening

For a normal good, when its price falls, the substitution effect and income effect:

1. AWork in opposite directions
2. BBoth decrease the quantity demanded
3. CBoth increase the quantity demanded
4. DCancel out exactly

Moral hazard arises when:

1. AOne party changes behaviour after a contract because they do not bear the full consequences
2. BA buyer cannot observe product quality before buying, so low-quality sellers dominate the market
3. CTwo firms collude on price
4. DPrices are too high for poor consumers