IJMBE Economics Paper III
1. The short-run in economics is best described as a period:
a) of exactly one year b) in which all factors of production are variable c) in which at least one factor of production is fixed d) in which no production takes place.
✅ c) in which at least one factor of production is fixed — In the short run, some inputs (typically capital) cannot be changed, distinguishing it from the long run.
2. A firm is said to be a price-taker when:
a) it can influence the market price b) it sets price above marginal cost c) it accepts the market price as given d) it charges different prices to different buyers.
✅ c) it accepts the market price as given — Price-takers in perfect competition have no individual market power and sell at the prevailing price.
3. Which of the following is an injection into the circular flow of income?
a) taxation b) savings c) imports d) government expenditure.
✅ d) government expenditure — Injections add to the circular flow; government spending, investment, and exports are the three injections.
4. The law of diminishing marginal utility states that:
a) total utility falls as more units are consumed b) marginal utility rises as consumption increases c) as more units of a good are consumed, marginal utility eventually declines d) utility cannot be measured.
✅ c) as more units of a good are consumed, marginal utility eventually declines — Each additional unit consumed adds less satisfaction than the previous one.
5. A budget deficit occurs when:
a) government revenue exceeds government expenditure b) government expenditure exceeds government revenue c) exports exceed imports d) imports exceed exports.
✅ b) government expenditure exceeds government revenue — A budget deficit means the government is spending more than it collects in revenue.
6. The demand curve for a normal good slopes downward because of:
a) the income effect and substitution effect b) the law of increasing returns c) rising marginal cost d) excess supply in the market.
✅ a) the income effect and substitution effect — As price falls, goods become relatively cheaper (substitution) and real income effectively rises (income effect), both increasing demand.
7. If two goods have a negative cross elasticity of demand, they are:
a) substitutes b) inferior goods c) complements d) normal goods.
✅ c) complements — Negative cross elasticity means a rise in one good's price reduces demand for the other — they are used together.
8. The equilibrium national income in a closed economy with no government is:
a) Y = C + G b) Y = C + I c) Y = C + I + G + (X−M) d) Y = S + T + M.
✅ b) Y = C + I — In a simple two-sector closed economy, national income equals consumption plus investment.
9. Which of the following best describes the concept of opportunity cost?
a) the monetary price of a good b) the cost of producing one more unit c) the value of the next best foregone alternative d) total cost minus fixed cost.
✅ c) the value of the next best foregone alternative — Opportunity cost is the real cost of any economic decision — what is given up.
10. A monopsonist in the labour market is:
a) a single seller of labour b) a single buyer of labour c) a firm with many competitors d) a trade union.
✅ b) a single buyer of labour — Monopsony is a market with only one buyer; in labour markets this means one dominant employer.
11. Which of the following is a characteristic of a perfectly competitive market?
a) product differentiation b) barriers to entry c) homogeneous products d) few sellers.
✅ c) homogeneous products — Perfect competition requires identical products so no single seller can charge a premium.
12. When average cost is falling, marginal cost must be:
a) rising b) equal to average cost c) below average cost d) above average cost.
✅ c) below average cost — MC pulls AC down when MC < AC, just as a below-average score lowers an average.
13. The concept of elasticity of supply measures:
a) how price responds to a change in quantity supplied b) how quantity supplied responds to a change in price c) the speed at which supply adjusts to demand d) the cost of increasing production.
✅ b) how quantity supplied responds to a change in price — Price elasticity of supply = % change in quantity supplied ÷ % change in price.
14. Which of the following is NOT a function of money?
a) medium of exchange b) store of value c) unit of account d) determinant of wages.
✅ d) determinant of wages — The four functions of money are medium of exchange, store of value, unit of account, and standard of deferred payment. Determining wages is not one.
15. National income at factor cost can be converted to national income at market prices by:
a) adding subsidies and subtracting indirect taxes b) adding indirect taxes and subtracting subsidies c) subtracting both indirect taxes and subsidies d) adding both indirect taxes and subsidies.
✅ b) adding indirect taxes and subtracting subsidies — Market prices include indirect taxes and exclude subsidies compared to factor cost.
16. Given C = 50 + 0.8Y and I = 100, what is the equilibrium level of national income?
a) 500 b) 600 c) 750 d) 800.
✅ c) 750 — Y = C + I → Y = 50 + 0.8Y + 100 → 0.2Y = 150 → Y = 750.
17. The isocost line shows:
a) all combinations of inputs that produce equal output b) all combinations of two inputs that can be purchased for a given total cost c) the minimum cost of producing a given output d) the maximum output achievable with given inputs.
✅ b) all combinations of two inputs that can be purchased for a given total cost — The isocost line is the producer's budget constraint, analogous to the consumer's budget line.
18. Which stage of production is considered irrational because total product is declining?
a) Stage I b) Stage II c) Stage III d) Stage IV.
✅ c) Stage III — In Stage III, marginal product is negative, meaning adding more input actually reduces total output.
19. The Phillips Curve illustrates the relationship between:
a) price level and output b) inflation and unemployment c) savings and investment d) money supply and interest rates.
✅ b) inflation and unemployment — The Phillips Curve shows the short-run trade-off between inflation and unemployment rates.
20. A firm producing in the long run at minimum average cost is said to be operating at:
a) technical efficiency b) allocative efficiency c) optimum scale of production d) maximum profit point.
✅ c) optimum scale of production — Producing at minimum LAC represents the most efficient scale of operation.
21. Which of the following best explains frictional unemployment?
a) unemployment caused by a fall in aggregate demand b) unemployment caused by workers being between jobs c) unemployment caused by automation d) unemployment caused by seasonal variation in demand.
✅ b) unemployment caused by workers being between jobs — Frictional unemployment is temporary and arises from the job search process.
22. In a mixed economy:
a) all resources are owned by the state b) all resources are privately owned c) both public and private sectors allocate resources d) foreign investors control all production.
✅ c) both public and private sectors allocate resources — A mixed economy combines market mechanisms with government intervention.
23. The multiplier effect in Keynesian economics refers to:
a) the increase in money supply from bank lending b) the proportional increase in national income resulting from an initial injection c) the rise in prices following an increase in money supply d) the expansion of exports following devaluation.
✅ b) the proportional increase in national income resulting from an initial injection — The multiplier = 1/(1−MPC); an injection generates a larger final increase in national income.
24. Price discrimination is possible when:
a) all buyers have the same elasticity of demand b) markets can be kept separate and resale is prevented c) the good is homogeneous d) there are many sellers in the market.
✅ b) markets can be kept separate and resale is prevented — Without market separation and resale prevention, price discrimination collapses as buyers arbitrage.
25. Which of the following would cause a rightward shift in the supply curve?
a) an increase in input costs b) a rise in the price of the commodity c) an improvement in production technology d) an increase in taxes on the good.
✅ c) an improvement in production technology — Better technology reduces production costs, enabling more supply at every price level.
26. Terms of trade refers to:
a) the volume of a country's exports b) the ratio of export prices to import prices c) the balance between imports and exports d) the rate at which one currency exchanges for another.
✅ b) the ratio of export prices to import prices — Favorable terms of trade means export prices are high relative to import prices.
27. An increase in the money supply, all else equal, will most likely lead to:
a) deflation b) a fall in national income c) inflation d) appreciation of the currency.
✅ c) inflation — Excess money supply chasing the same goods pushes prices upward (quantity theory of money).
28. The Lorenz Curve is used to measure:
a) economic growth b) income inequality c) price level changes d) unemployment rates.
✅ b) income inequality — The Lorenz Curve shows the cumulative distribution of income; greater deviation from the diagonal = greater inequality.
29. Which of the following is a characteristic of public goods?
a) rivalry and excludability b) non-rivalry and excludability c) non-rivalry and non-excludability d) rivalry and non-excludability.
✅ c) non-rivalry and non-excludability — Public goods are non-rival (one person's use doesn't reduce availability) and non-excludable (cannot prevent access).
30. Depreciation of the naira will most likely:
a) make Nigerian exports cheaper and imports more expensive b) make Nigerian exports more expensive and imports cheaper c) have no effect on trade d) reduce Nigeria's foreign reserves.
✅ a) make Nigerian exports cheaper and imports more expensive — Currency depreciation lowers the price of exports in foreign currency and raises the naira cost of imports.
31. The Malthusian theory of population argues that population:
a) grows arithmetically while food supply grows geometrically b) grows geometrically while food supply grows arithmetically c) and food supply grow at the same rate d) is always at the optimum level.
✅ b) grows geometrically while food supply grows arithmetically — Malthus warned that unchecked population growth would outstrip food production.
32. When marginal revenue equals zero, total revenue is:
a) falling b) rising c) at its maximum d) at its minimum.
✅ c) at its maximum — MR = 0 is the point at which total revenue stops increasing and begins to decline.
33. The concept of comparative advantage in international trade was developed by:
a) Adam Smith b) John Maynard Keynes c) David Ricardo d) Alfred Marshall.
✅ c) David Ricardo — Ricardo formalized the principle of comparative advantage based on opportunity cost differences between nations.
34. A regressive tax is one in which:
a) the tax rate rises as income rises b) everyone pays the same absolute amount c) the proportion of income paid in tax falls as income rises d) only high-income earners are taxed.
✅ c) the proportion of income paid in tax falls as income rises — Regressive taxes take a larger share of income from low earners than high earners.
35. Economic rent is best defined as:
a) payment for the use of land only b) any payment above transfer earnings c) the cost of hiring labour d) interest paid on borrowed capital.
✅ b) any payment above transfer earnings — Economic rent is the surplus a factor earns above its opportunity cost (transfer earnings).
36. If the price elasticity of demand for a good is 0.4, demand is:
a) elastic b) perfectly inelastic c) inelastic d) unit elastic.
✅ c) inelastic — PED < 1 means quantity demanded is relatively unresponsive to price changes.
37. Which of the following is an automatic stabilizer in an economy?
a) central bank open market operations b) government capital expenditure c) unemployment benefits d) import tariffs.
✅ c) unemployment benefits — Automatic stabilizers like unemployment benefits automatically increase government spending during downturns without legislative action.
38. The concept of derived demand applies to:
a) consumer goods b) luxury goods c) factors of production d) public goods.
✅ c) factors of production — Demand for labour, land, and capital is derived from the demand for the goods they help produce.
39. Balance of payments equilibrium exists when:
a) exports equal imports b) total receipts from abroad equal total payments abroad c) the current account is in surplus d) the capital account is zero.
✅ b) total receipts from abroad equal total payments abroad — BOP equilibrium means all international inflows and outflows are equal across all accounts.
40. Economies of scale refer to:
a) cost advantages gained as output increases b) the diseconomies arising from large-scale production c) the relationship between fixed and variable costs d) the minimum efficient scale of a firm.
✅ a) cost advantages gained as output increases — Internal economies of scale reduce average costs as a firm expands production.
41. Which of the following is true of a Giffen good?
a) demand falls as income rises b) demand rises as price rises c) it has a negative cross elasticity d) it has perfectly elastic demand.
✅ b) demand rises as price rises — Giffen goods exhibit a positive price-demand relationship, violating the ordinary law of demand.
42. The Gini coefficient value of 0 represents:
a) perfect inequality b) moderate inequality c) perfect equality d) maximum poverty.
✅ c) perfect equality — A Gini of 0 means every person has equal income; a Gini of 1 means one person has all income.
43. Which of the following policies is contractionary fiscal policy?
a) increasing government spending b) reducing interest rates c) increasing taxes d) expanding money supply.
✅ c) increasing taxes — Raising taxes reduces household disposable income and aggregate demand, contracting the economy.
44. A natural monopoly arises when:
a) the government grants exclusive rights to one firm b) a single firm can supply the entire market at lower cost than multiple firms c) one firm buys out all competitors d) foreign competition is eliminated by tariffs.
✅ b) a single firm can supply the entire market at lower cost than multiple firms — Natural monopolies occur in industries with very high fixed costs and significant economies of scale (e.g., utilities).
45. Stagflation refers to a situation of:
a) high growth and high inflation b) high unemployment and falling prices c) simultaneous high inflation and high unemployment d) rapid economic development with stagnant wages.
✅ c) simultaneous high inflation and high unemployment — Stagflation contradicts the traditional Phillips Curve trade-off, combining the worst of both conditions.
46. The infant industry argument is used to justify:
a) free trade b) export subsidies for large corporations c) temporary protection of newly established domestic industries d) permanent tariffs on all imports.
✅ c) temporary protection of newly established domestic industries — Infant industries need protection until they become competitive enough to face international competition.
47. When a firm's total fixed cost is ₦5,000 and it produces 500 units, average fixed cost is:
a) ₦25 b) ₦10 c) ₦50 d) ₦100.
✅ b) ₦10 — AFC = TFC ÷ Q = 5,000 ÷ 500 = ₦10.
48. The primary aim of ECOWAS is to:
a) establish a common military force b) promote economic integration and free trade among West African nations c) regulate oil production in West Africa d) provide loans to member states.
✅ b) promote economic integration and free trade among West African nations — ECOWAS was founded to advance regional economic cooperation and movement of goods, services, and people.
49. Which of the following is a supply-side economic policy?
a) increasing government welfare spending b) reducing income tax to encourage work and investment c) raising interest rates to curb inflation d) expanding money supply to boost demand.
✅ b) reducing income tax to encourage work and investment — Supply-side policies improve productive capacity; tax cuts incentivize labour supply and investment.
50. The velocity of circulation of money (V) in the quantity theory of money equation MV = PT refers to:
a) the speed at which new money is printed b) the number of times a unit of money changes hands in a given period c) the rate of inflation d) the ratio of money supply to national income.
✅ b) the number of times a unit of money changes hands in a given period — Velocity measures how actively money circulates in the economy; higher V means money turns over more frequently.