Foundations of Economic Analysis
Exam Materials
Course Introduction
Foundations of Economic Analysis introduces students to the fundamental principles, models, and quantitative tools that underpin economic reasoning and decision-making. The course covers key microeconomic concepts such as utility, choice, and market equilibrium, as well as macroeconomic fundamentals including national income determination and aggregate behavior. Emphasizing analytical rigor, it explores the role of optimization, comparative statics, and equilibrium analysis in understanding both individual behavior and market outcomes. By integrating theoretical frameworks with practical examples, the course equips students with essential skills for advanced study in economics and applications in policy and business contexts.
Recommended Textbook Essentials of Economics 3rd Edition by Glenn Hubbard
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Chapter 1: Economics: Foundations and Models
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Q1) Define microeconomics.
Answer: Microeconomics is the study of how households and firms make choices,how they interact in markets,and how the government attempts to influence their choices.
Q2) ________ increases economic efficiency because it forces firms to produce and sell goods and services as long as the additional benefit to consumers is greater than the additional cost of production.
A) Competition
B) Voluntary exchange
C) Equity
D) A centrally planned economy
Answer: A
Q3) In economics,the term 'equity' means
A) everyone has an equal standard of living.
B) the hardest working individuals consume all they want.
C) only elected officials have high standards of living.
D) economic benefits are distributed fairly.
Answer: D
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Chapter 2: Trade-Offs, comparative Advantage, and the Market System
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Q1) If a country is producing efficiently and is on the production possibility frontier,the country can produce more of one good without producing less of the other good.
A)True
B)False
Answer: False
Q2) Refer to Table 2-6.China has a comparative advantage in the production of A) wheat.
B) digital cameras.
C) both products.
D) neither product.
Answer: A
Q3) Refer to Figure 2-5.If the economy is currently producing at point A,what is the opportunity cost of moving to point B?
A) 8 thousand wrenches
B) 6 thousand hammers
C) 30 thousand wrenches
D) 23 thousand hammers
Answer: B
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Q1) The income effect of a price change refers to the impact of a change in
A) income on the price of a good.
B) demand when income changes.
C) the quantity demanded when income changes.
D) the price of a good on a consumer's purchasing power.
Answer: D
Q2) Refer to Figure 3-4.At a price of $10,how many units will be sold?
A) 200
B) 400
C) 600
D) 800
Answer: A
Q3) If consumers believe the price of iPads will decrease in the future,this will cause the demand for iPads to decrease now.
A)True
B)False
Answer: True
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Chapter 4: Market Efficiency and Market Failure
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Sample Questions
Q1) If demand is inelastic,the absolute value of the price elasticity of demand is A) one.
B) less than one.
C) greater than one.
D) greater than the absolute value of the slope of the demand curve.
Q2) To calculate the price elasticity of supply we divide
A) the percentage change in price by the percentage change in quantity supplied.
B) the percentage change in quantity supplied by the percentage change in price.
C) the rise by the run.
D) the average price by the average quantity supplied.
Q3) If,at a price of $24,Octavia sells 36 home-grown orchids and at $30 she sells 24 home-grown orchids,the demand for her orchids is A) elastic.
B) inelastic.
C) unit-elastic.
D) perfectly elastic.
Q4) When is demand perfectly elastic? When is demand perfectly inelastic? What are the values of the price elasticity of demand when demand is perfectly elastic or perfectly inelastic? What do perfectly elastic and perfectly inelastic demand curves look like?
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Chapter 5: The Economics of Healthcare
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Q1) Refer to Table 5-4.If a minimum wage of $12.50 an hour is mandated,what is the quantity of labour supplied?
A) 80 000
B) 550 000
C) 630 000
D) 1 180 000
Q2) The total amount of producer surplus in a market is equal to
A) the difference between quantity supplied and quantity demanded.
B) the area above the market supply curve and below the market price.
C) the area above the market supply curve.
D) the area between the demand curve and the supply curve below the market price.
Q3) If,in a competitive market,marginal benefit is less than marginal cost,
A) the net benefit to consumers from participating in the market is less than the net benefit to producers.
B) the government must force producers to raise prices in order to achieve economic efficiency.
C) the quantity sold is greater than the equilibrium quantity.
D) the quantity sold is less than the equilibrium quantity.
Q4) What is the difference between scarcity and a shortage?
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Chapter 6: Firms,the Stock Market,and Corporate Governance
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Sample Questions
Q1) If,when a firm doubles all its inputs,its average cost of production increases,then production displays
A) diminishing returns.
B) economies of scale.
C) diseconomies of scale.
D) declining fixed costs.
Q2) If production displays increasing marginal returns,then
A) total product rises by a constant amount throughout.
B) each new worker hired adds more to output than previous hires.
C) the firm must be adding new capital to keep boosting productivity.
D) total product reaches a maximum sooner than if production displayed decreasing returns.
Q3) The marginal cost curve is U-shaped because of the law of increasing opportunity costs.
A)True
B)False
Q4) In economics,what is the difference between the short run and the long run?
Q5) What is minimum efficient scale? What is likely to happen in the long run to firms that do not reach minimum efficient scale?
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Chapter 7: Consumer Choice and Elasticity
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Sample Questions
Q1) Mark Frost grows apples in a perfectly competitive market.If we drew a line in a graph that illustrates Mark's total revenue from selling apples,it would be
A) a straight, upward-sloping line.
B) a horizontal line.
C) a straight, downward-sloping line.
D) a curve that is negatively sloped at low levels of output and positively sloped at higher levels of output.
Q2) Suppose the equilibrium price in a perfectly competitive industry is $10 and a firm in the industry charges $12.Which of the following will happen?
A) The firm will sell more output than its competitors.
B) The firm's revenue will increase.
C) The firm will not sell any output.
D) The firm's profits will increase.
Q3) The price of a seller's product in perfect competition is determined by
A) the individual seller.
B) a few of the sellers.
C) market demand and market supply.
D) the individual demander.
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Chapter 8: Technology, production, and Costs
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Sample Questions
Q1) Many biologic drug manufacturers are pushing for patent protection to be extended by an additional 12 years before generics are allowed to be introduced to the market.This reflects which of the following barriers to entry?
A) Control of a key resource
B) Network externalities
C) Entry blocked by government action
D) Economies of scale creating a natural monopoly
Q2) Refer to Figure 8-6.The monopolist's total cost is
A) $1116.
B) $1240.
C) $1660.
D) $1726.40.
Q3) Refer to Figure 8-4.What is the profit-maximising/loss-minimising output level?
A) 600 units
B) 800 units
C) 940 units
D) 1160 units
Q4) How do the price and quantity of a monopoly compare to that of a perfectly competitive industry?
Q5) Identify four reasons for high entry barriers.Briefly explain each reason.
Page 10
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Chapter 9: Firms in Perfectly Competitive Markets
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Q1) An oligopolist differs from a perfect competitor in that
A) there is cutthroat competition in perfect competition but little competition in oligopoly because firms have significant market power.
B) firms in an oligopoly do not produce homogeneous products while firms in perfect competition do.
C) the market demand curve for a perfectly competitive industry is perfectly elastic but it is downward sloping in an oligopolistic industry.
D) there are no entry barriers in perfect competition but there are entry barriers in oligopoly.
Q2) Oligopolies are difficult to analyse because
A) the firms are so large.
B) demand and cost curves do not exist for these types of industries.
C) how firms respond to a price change by a rival is uncertain.
D) oligopolies are a recent development so economists have not had time to develop models.
Q3) Does the fact that monopolistically competitive firms do not achieve productive efficiency or allocative efficiency mean that there is a significant loss in consumer welfare?
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Chapter 10: Monopoly and Antitrust
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Sample Questions
Q1) If a worker can produce 20 units of output which can be sold for $4 per unit,what is the maximum wage that firm should pay to hire this worker?
A) $80
B) $80 minus the firm's profit mark-up
C) It depends on what the going wage rate is in the labour market.
D) There is insufficient information to answer the question.
Q2) Worker discrimination occurs when
A) workers refuse to perform risky tasks.
B) workers refuse to work with persons of a different race.
C) customers refuse to buy products produced by a racially diverse workforce.
D) employers pay different employees different wages based on race.
Q3) Refer to Table 10-2.What is the profit-maximising quantity of labour that the firm should hire?
A) 5 units
B) 4 units
C) 3 units
D) 2 units
Q4) How will a government-imposed minimum wage affect the equilibrium level of employment in a competitive labour market and in a monopsony labour market?
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Chapter 11: Monopolistic Competition and Oligopoly
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Q1) Economists often analyse the interaction of individuals and firms in markets.Economists also examine the actions of individuals and firms as they attempt to use government to make themselves better off at the expense of others,a process that is referred to as
A) rent seeking.
B) logrolling.
C) government failure.
D) the public choice initiative.
Q2) Define the tragedy of the commons.Give three examples of common resources.Briefly explain why common property resources are subject to overuse.
Q3) The tragedy of the commons was avoided in the Middle Ages by A) selling common grounds to individuals.
B) the local police, who monitored entry into the commons.
C) social pressure to uphold traditionally accepted limits on family use of the commons. D) the government, which imposed a tax for the use of the commons.
Q4) What is the private benefit from consumption? What is the social benefit from consumption? When is the private benefit from consumption equal to the social benefit from consumption?
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Chapter 12: GDP: Measuring Total Production and Income
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Q1) An increase in ________ shifts ________ the production function,and makes it possible to produce a higher level of GDP with ________ capital per hour worked.
A) technology; down; the same amount of B) technology; up; the same amount of C) consumption; up; a lesser amount
D) labour productivity; down; the same amount of
Q2) If the per-worker production function shifts up
A) it now takes more capital per hour worked to get the same amount of real GDP per hour worked.
B) an economy can increase its real GDP per hour worked without changing the level of capital per hour worked.
C) the per-worker production function becomes flatter.
D) negative technological change has occurred in the economy.
Q3) Which of the following is counted in GDP?
A) The value of goods and services produced in the underground economy.
B) The cost of a speed boat purchased at Bob's Boats used by drug smugglers.
C) The value of do-it-yourself work.
D) The value of leisure.
Q4) How is the economic growth rate calculated?
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Chapter 13: Unemployment and Inflation
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Q1) Discouraged workers are
A) not considered part of the unemployed because they are not actively seeking work.
B) considered part of the unemployed because they are not working.
C) considered part of the unemployed because they are still in the labour force.
D) not considered part of the unemployed because they are not qualified to work.
Q2) The unemployment rate is measured as the
A) number of unemployed people divided by the number of employed people, multiplied by 100.
B) number of unemployed people divided by the labour force, multiplied by 100.
C) number of unemployed people divided by the total population, multiplied by 100.
D) labour force minus the number of unemployed, multiplied by 100.
Q3) The cost to firms of changing prices is called
A) redistribution costs.
B) menu costs.
C) anticipation costs.
D) money illusion costs.
Q4) Does inflation mean that consumers can no longer afford to buy as many goods and services due to the higher prices? Explain.
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Chapter 14: Economic Growth, the Financial System and Business Cycles
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Sample Questions
Q1) In Figure 14.2,given the economy is at point A in year 1 and point B in year 2,what is the growth rate in potential GDP between those two years?
A) 9.1 per cent
B) 8 per cent
C) 12 per cent
D) 10 per cent
Q2) An increase in the quantity of capital in the economy shifts both the short-run and long-run aggregate supply curves.
A)True
B)False
Q3) Along a short-run aggregate supply curve,a decrease in the price level causes A) firms to increase their production levels, as the lower prices will increase consumer demand.
B) no change in output to occur as, at the macroeconomic level, the price level does not affect supply.
C) firms to reduce their production levels.
D) production levels to rise as the price of inputs become cheaper.
Q4) What is a supply shock,and why might a supply shock lead to stagflation?
Q5) What are sticky prices or wages,and how can contracts make them 'sticky'?
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Chapter 15: Aggregate Demand and Aggregate Supply Analysis
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Q1) Which of the following is used by the Reserve Bank of Australia as the main measure of monetary movements in Australia?
A) M1.
B) M3.
C) Broad money.
D) Credit.
Q2) The statement,'Bill Gates has $1 million in his demand-deposit account' describes Mr Gates' A) income.
B) credit.
C) money.
D) wealth.
Q3) In March 2014,the level of credit in Australia was approximately A) $2237.9 billion.
B) $49.8 billion.
C) $141.8 billion.
D) $445.1 billion.
Q4) Governments in the world today do not issue paper that can be redeemed for gold. A)True B)False
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Chapter 16: Money, banks, and the Federal Reserve System
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Q1) The money supply curve would be vertical if
A) banks and the RBA jointly determine the money supply.
B) the RBA is able to completely fix the money supply.
C) banks and households determine the money supply.
D) households and the RBA jointly determine the money supply.
Q2) An increase in public saving has what impact on the market for loanable funds?
A) The supply of loanable funds increases.
B) The demand for loanable funds increases.
C) The supply of loanable funds decreases.
D) The demand for loanable funds decreases.
Q3) A government could use control of a central bank to further its political interests by
A) decreasing the cash rate before an election to decrease production and employment.
B) decreasing the cash rate before an election to increase production and employment.
C) decreasing the cash rate before an election to decrease inflation.
D) increasing the cash rate before an election to increase inflation.
Q4) Explain why the demand for loanable funds curve has a negative slope.
Q5) What is the function of exchange settlement accounts?
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Chapter 17: Monetary Policy
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Sample Questions
Q1) If tax reduction and simplification are effective,then
A) labour supply decreases.
B) saving increases.
C) investment decreases.
D) fewer new firms are formed.
Q2) Expansionary fiscal policy should shift the
A) aggregate demand curve to the left.
B) aggregate demand curve to the right.
C) short-run aggregate supply curve to the left.
D) short-run aggregate supply curve to the right.
Q3) The tax multiplier
A) is negative.
B) is larger in absolute value compared to the government purchases multiplier.
C) only works when taxes are cut.
D) is less than one.
Q4) Between 1970 and 2014 in Australia,the largest budget deficits occurred
A) during the early to mid-1990s.
B) during the early 1980s.
C) between 2009 and 2011.
D) following the 1974 oil price shock.
Page 19
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Chapter 18: Fiscal Policy
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Q1) Which of the following is the best example of a quota?
A) A limit imposed on the number of sport utility vehicles that Australia can import from Japan.
B) A subsidy granted by the government to domestic garment manufacturers so they can compete more effectively with foreign garment manufacturers.
C) A tax placed on all sport utility vehicles sold in the domestic market.
D) A $5000 per-car fee imposed on all sport utility vehicles imported into Australia.
Q2) If Japanese workers are more productive than French workers,then trade between Japan and France
A) can take place only if France has an absolute advantage in producing a good or service Japanese buyers want.
B) cannot take place because Japanese goods and services will be less expensive than French goods and services.
C) cannot take place until French workers become more productive.
D) will take place so long as each country has a comparative advantage in a good or service that buyers in the other country want.
Q3) Why do domestic firms offshore production processes?
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Chapter 19: Comparative Advantage, international Trade, and Exchange Rates
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Q1) Which of the following is not a feature of the current exchange rate system?
A) Some developing countries attempt to keep their currencies' exchange rates fixed against the US dollar or other major currencies.
B) Developed countries rely on the gold standard to fix their currencies' exchange rates.
C) Most Western European countries have adopted a single currency, the euro.
D) Australia allows the dollar to float against other major currencies, only intervening occasionally.
Q2) If you know that a country's net foreign investment is positive,what does that tell you about the relationship between the country's national saving and private investment?
Q3) According to the saving and investment equation,if net foreign investment falls by $35 million
A) national savings in excess of domestic investment will decrease by $35 million.
B) national savings will rise by $35 million.
C) domestic investment will fall by $35 million.
D) national savings in excess of domestic investment will rise by $35 million.
Q4) Describe how the Bretton Woods System operated.
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