AA Economics Theories 5

Question 1

Which economic concept explains why individuals contribute less to public goods when they expect others to pay?

Accepted Answer

Free-rider problem

Answer

The free-rider problem occurs because non-excludable public goods allow people to benefit without contributing to their cost.

Question 2

According to the theory of the firm, a profit-maximizing firm should produce where:

Accepted Answer

Marginal cost equals marginal revenue

Answer

Setting MC = MR ensures that each additional unit adds at least as much to revenue as to cost, maximizing profit.

Question 3

The concept of 'adverse selection' in economics most commonly arises because of:

Accepted Answer

Asymmetric information between buyers and sellers

Answer

Adverse selection occurs before a transaction when one party has private information that leads to unfavorable market outcomes, as in Akerlof's 'market for lemons.'

Question 4

The multiplier effect in Keynesian economics predicts that an initial increase in government spending leads to:

Accepted Answer

A larger total increase in GDP due to successive rounds of spending

Answer

Each round of spending becomes income for others who spend a fraction of it, amplifying the initial fiscal injection.

Question 5

Mercantilism, an early economic theory, held that national wealth was best accumulated by:

Accepted Answer

Maximizing exports and accumulating gold reserves

Answer

Mercantilist policy favored trade surpluses and protectionism to build national gold stocks, which Adam Smith later criticized.

AA - Associate of Arts Practice Test

AA - Associate of Arts Practice Test

AA Economics Theories 5