Sample Questions and Answers
- According to Public Choice theory, what assumption is made about politicians and government officials?
A) They act in the public interest without self-interest.
B) They act as rational self-interested individuals, similar to market participants.
C) They prioritize ethical considerations over economic incentives.
D) They are primarily motivated by altruism.
Answer: B - Which of the following best describes the “tragedy of the commons”?
A) A situation where individuals overuse a shared resource, leading to depletion.
B) The decline of democracy due to excessive government intervention.
C) A condition where public goods are underutilized due to lack of incentives.
D) The collapse of free markets due to monopolization.
Answer: A - In game theory, what is the dominant strategy in a Prisoner’s Dilemma scenario?
A) Cooperation
B) Betrayal
C) Random choice
D) Ignoring the game
Answer: B - Public Choice theory critiques which of the following economic assumptions?
A) That government intervention always leads to better outcomes.
B) That individuals always act irrationally in markets.
C) That free markets never fail.
D) That government policies are free from inefficiencies.
Answer: A - Which philosopher is most associated with the idea that markets promote individual freedom?
A) Karl Marx
B) John Rawls
C) Adam Smith
D) Thomas Hobbes
Answer: C - What is the primary ethical defense of free markets?
A) They maximize individual choice and voluntary exchange.
B) They create perfect equality in society.
C) They eliminate the need for government regulation.
D) They guarantee wealth for all participants.
Answer: A - The concept of “rent-seeking” refers to:
A) Firms seeking government favors to gain economic advantage.
B) Property owners charging high rents in urban areas.
C) The government redistributing wealth from the rich to the poor.
D) A business reinvesting profits to increase productivity.
Answer: A - Which of the following is an example of a negative externality?
A) A company polluting a river, harming nearby residents.
B) A business providing health benefits to employees.
C) A new store opening, increasing competition.
D) A person enjoying a public park for free.
Answer: A - In game theory, a Nash Equilibrium occurs when:
A) Players change their strategies frequently.
B) No player has an incentive to change their strategy unilaterally.
C) The government intervenes to correct market failures.
D) Free markets are perfectly competitive.
Answer: B - Which of the following best describes the “free rider problem”?
A) A person benefiting from a public good without contributing.
B) A monopoly overcharging consumers.
C) A government failing to regulate industries.
D) A worker demanding higher wages.
Answer: A - Public Choice theory applies economic reasoning to:
A) Market interactions only
B) Political decision-making
C) Consumer behavior
D) Ethical philosophy
Answer: B - Which of the following is a key argument in favor of free markets?
A) Decentralized decision-making leads to efficient resource allocation.
B) Government control is necessary to ensure economic efficiency.
C) Collective decision-making always results in better outcomes.
D) Markets fail more often than government policies.
Answer: A - Which economist is known for the concept of “creative destruction”?
A) John Maynard Keynes
B) Friedrich Hayek
C) Joseph Schumpeter
D) Milton Friedman
Answer: C - The ethical justification for free markets is most often grounded in:
A) Utilitarianism and individual liberty.
B) Strict egalitarianism.
C) Marxist economic theory.
D) Total government control.
Answer: A - A “public good” is characterized by which two features?
A) Excludability and rivalry
B) Non-excludability and non-rivalry
C) High cost and low demand
D) Government ownership and high taxation
Answer: B - What does the “invisible hand” metaphor describe?
A) Government control over the economy
B) The self-regulating nature of markets
C) The influence of monopolies on trade
D) The impact of social norms on behavior
Answer: B - The concept of “government failure” suggests that:
A) Markets never experience inefficiencies.
B) Government intervention can sometimes make problems worse.
C) Democracy always leads to bad economic outcomes.
D) Public goods should be privatized.
Answer: B - Which of the following best explains “rational ignorance” in Public Choice theory?
A) Voters remain uninformed because the cost of being informed is too high.
B) Politicians act irrationally when making policy decisions.
C) Markets fail due to lack of consumer knowledge.
D) Businesses ignore ethical considerations in decision-making.
Answer: A - What is the “Coase Theorem” primarily concerned with?
A) The efficiency of government regulations
B) The role of property rights in resolving externalities
C) The benefits of monopolistic competition
D) The moral obligations of businesses
Answer: B - The idea that competition promotes innovation and efficiency is central to:
A) Socialist economic theory
B) Free market capitalism
C) Centralized planning
D) Mercantilism
Answer: B - Which of the following is NOT a characteristic of a free market?
A) Voluntary exchange
B) Price controls set by the government
C) Private property rights
D) Decentralized decision-making
Answer: B - The “median voter theorem” suggests that:
A) Politicians adopt policies appealing to the average voter.
B) Only extreme political views dominate elections.
C) The government should regulate median-income earners.
D) Public choice theory is invalid.
Answer: A - What is a cartel?
A) A group of firms that collude to limit competition
B) A form of government intervention in trade
C) A type of public good
D) An economic system based on barter
Answer: A - What is “regulatory capture”?
A) When government agencies are influenced by the industries they regulate.
B) When the government controls all industries.
C) When regulations are enforced equally among businesses.
D) When firms ignore government regulations.
Answer: A - The concept of “spontaneous order” is most associated with:
A) Friedrich Hayek
B) Karl Marx
C) John Stuart Mill
D) John Maynard Keynes
Answer: A
- Which of the following best describes “moral hazard”?
A) When individuals take more risks because they are shielded from the consequences.
B) When firms refuse to follow ethical labor practices.
C) When governments overregulate industries.
D) When competition decreases innovation.
Answer: A - According to Public Choice theory, why do interest groups have disproportionate influence in policymaking?
A) They are more organized and have concentrated benefits, while costs are dispersed among the public.
B) They represent the majority of voters.
C) Politicians act solely in the public interest.
D) They are required to act ethically at all times.
Answer: A - Which of the following is a characteristic of rent-seeking behavior?
A) Seeking government favors rather than creating value.
B) Competing fairly in a free market.
C) Innovating new technologies for consumer benefit.
D) Expanding production to reduce costs.
Answer: A - What is the main reason for the existence of special interest groups in a democracy?
A) To advocate for policies that benefit a concentrated group at the expense of the general public.
B) To ensure all economic policies are fair and equal.
C) To eliminate the need for political campaigns.
D) To reduce economic freedom.
Answer: A - How does game theory help explain political decision-making?
A) It models strategic interactions where individuals consider the actions of others.
B) It predicts that governments will always act in the public interest.
C) It assumes that all voters are rational and fully informed.
D) It proves that political systems never experience inefficiencies.
Answer: A
- What is the primary reason why free markets are considered efficient?
A) They allocate resources based on voluntary exchanges and price signals.
B) They eliminate the need for government intervention.
C) They ensure absolute equality among all participants.
D) They prevent businesses from failing.
Answer: A - Which of the following best describes the “knowledge problem” in central planning?
A) Central planners cannot possess all necessary information to allocate resources efficiently.
B) Governments do not invest enough in education.
C) Free markets suffer from information asymmetry.
D) Businesses struggle to predict consumer behavior.
Answer: A - What role does competition play in a free market economy?
A) It drives innovation and efficiency while lowering prices.
B) It leads to the destruction of small businesses.
C) It forces governments to intervene constantly.
D) It reduces consumer choices.
Answer: A - The concept of “government failure” suggests that:
A) Government intervention can sometimes create inefficiencies worse than market failures.
B) All government policies are ineffective.
C) Markets require constant government oversight.
D) Free markets always function perfectly.
Answer: A - What is a “zero-sum game” in economic and political decision-making?
A) A situation where one person’s gain is exactly another person’s loss.
B) A market where everyone benefits equally.
C) A game where cooperation leads to the best outcome for all.
D) A government policy that increases total wealth.
Answer: A - Which of the following is a key argument against government price controls?
A) They create shortages and surpluses by distorting market signals.
B) They ensure fair wages for all workers.
C) They are the only way to protect consumers from high prices.
D) They eliminate the need for competition.
Answer: A - What is the “principal-agent problem” in political economy?
A) Elected officials (agents) may act in their own self-interest rather than in the interest of voters (principals).
B) Business managers always act in the best interests of shareholders.
C) Government policies always align with public preferences.
D) Free markets eliminate conflicts of interest.
Answer: A - According to game theory, why is cooperation difficult in a Prisoner’s Dilemma scenario?
A) Each player has an incentive to betray the other to minimize their own loss.
B) Players always choose to cooperate.
C) The government enforces cooperation.
D) The outcome is always unpredictable.
Answer: A - What is the primary function of property rights in a free market system?
A) To create incentives for individuals to invest, innovate, and trade.
B) To ensure that the government owns all resources.
C) To prevent economic competition.
D) To reduce wealth inequality.
Answer: A
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