Foundations of Economic Analysis
Test Preparation
Course Introduction
Foundations of Economic Analysis introduces students to the core principles and mathematical techniques that underpin modern economic theory. The course covers essential topics such as optimization, comparative statics, consumer and producer theory, market equilibrium, and efficiency. Emphasis is placed on the formal modeling of economic behavior, enabling students to rigorously analyze how individuals and firms make decisions under constraints. Through analytic frameworks and real-world applications, students gain the skills necessary to interpret economic phenomena, evaluate policy implications, and prepare for advanced studies in economics.
Recommended Textbook
Foundations of Economics 6th Edition by Robin Bade
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Page 2
Chapter 1: Getting Started
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Sample Questions
Q1) "It is impossible to represent a three variable relationship in a two-dimensional graph." Is this statement true or false? Explain your answer.
Answer: The statement is false because it is possible to represent a three variable relationship in a two dimensional graph.To do so,start by focusing on two of the variables.Assume that the third variable does not change (the ceteris paribus assumption)and then graph the relationship between the two variables.The graph shows how these two variables are related when the third variable does not change.When the third variable does change,then the entire relationship between the two graphed variables changes.In other words,the line showing the relationship between the two graphed variables shifts so that it becomes an entirely new line.The shift in the line shows how the third variable influences the other two.
Q2) What does the slope of the line shown in the above figure equal?
Answer: The slope equals the change in variable on the y-axis divided by the change in the variable on the x-axis,or (30 - 60)/(25 - 15)= -3.0.
Q3) In the figure above,what can you deduce about the slope of the curve?
Answer: The slope is positive and increasing in size as we move rightward along the curve.
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3
Chapter 2: The Usand Global Economies
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Sample Questions
Q1) The circular flow model shows the flow of A) expenditure and income throughout the economy.
B) only money throughout the economy.
C) only funds in stock and bond markets.
D) only tax payments and government expenditures.
E) goods market and factor markets as they move through the economy.
Answer: A
Q2) The largest category of state and local government expenditures is
A) public welfare.
B) highways.
C) education.
D) interest on their debt.
E) social security.
Answer: C
Q3) What are the payments each factor of production receives?
Answer: Rent is paid for the use of land.Wages are paid for the services of labor.Interest is paid for the use of productive capital.Entrepreneurs earn a profit.
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Page 4
Chapter 3: The Economic Problem
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Sample Questions
Q1) Liz has a comparative advantage in ________ and an absolute advantage in ________.
A) smoothies only; both goods
B) smoothies only; smoothies only
C) both goods; both goods
D) salads only; both goods
E) salads only; salads only
Answer: A
Q2) When a nation is producing on its production possibilities frontier,if more resources are used to produce one good,then the production of other goods
A) must increase.
B) must decrease.
C) must remain the same.
D) must change but they might increase or decrease.
E) might increase if the nation can produce more efficiently.
Answer: B
Q3) How is economic growth shown in a production possibilities frontier graph?
Answer: Economic growth is illustrated as an outward shift of the PPF.
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Chapter 4: Demand and Supply
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Sample Questions
Q1) Soda and peanuts are complements.Other influences on buying plans remaining the same,a rise in the price of soda
A) increases the demand for peanuts.
B) decreases the demand for peanuts.
C) decreases the demand for soda.
D) increases the demand for soda.
E) has no effect on the demand for peanuts, though it does change the quantity demanded of peanuts.
Q2) When the demand curve shifts rightward and the market moves to a new equilibrium,then the A) supply increases.
B) supply decreases.
C) quantity supplied increases.
D) quantity supplied decreases.
E) price falls to restore the equilibrium.
Q3) In the figure above,what is the equilibrium price and quantity?
Q4) What are substitutes in production?
Q5) List the factors that change demand and shift the demand curve.Tell what happens to demand and the demand curve when there is an increase in the factor.
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Chapter 5: Elasticities of Demand and Supply
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Q1) If the price elasticity of demand for opera tickets in Orlando is 1.00,then the demand for opera tickets in Orlando is
A) unit elastic.
B) elastic.
C) perfectly inelastic.
D) inelastic.
E) perfectly elastic.
Q2) Products X,Y,and Z have price elasticities of 3.0,0.80,and 1.0 respectively.Total revenue decreases if the price of
A) product X falls.
B) product Y falls.
C) product Z falls.
D) product X or product Z fall.
E) product Y or product Z fall.
Q3) Goods are ________ when the income elasticity of demand is less than zero. A) substitutes
B) complements
C) inferior
D) elastic
E) normal
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Chapter 6: Efficiency and Fairness of Markets
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Sample Questions
Q1) The figure above shows Diane's demand curve for soda.The price of a soda is $1.00.Diane's consumer surplus from her 15th soda is
A) $0.00.
B) $0.50.
C) $1.00.
D) $1.50.
E) $2.50.
Q2) Which of the following is true for taxes? They
A) are always administered fairly.
B) are a necessary part of living in an economy with a fair distribution of income.
C) are always administered without creating unfairness or inefficiency.
D) are an involuntary transfer of private property.
E) do not create a big tradeoff problem.
Q3) The figure above shows the market for hot dogs.
a.What is the maximum price consumers are willing to pay for the 25th hot dog?
b.What is the efficient quantity?
c.Suppose that the production was limited to 25 hot dogs.In the figure,indicate the amount of the deadweight loss.
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Chapter 7: Government Actions in Markets
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Sample Questions
Q1) The figure above illustrates the bagel market.Which of the following statements is correct?
A) With a price ceiling of $1.00 per bagel, the quantity demanded is equal to the quantity supplied.
B) With a price ceiling of $3.00 per bagel, the quantity demanded is greater than the quantity supplied.
C) With a price ceiling of $1.00 per bagel, there is a shortage of bagels.
D) Answers A and B are correct.
E) Answers B and C are correct.
Q2) A market with a price support set above the equilibrium price, A) consumers gain.
B) taxes on consumers decrease.
C) marginal benefit exceeds marginal cost.
D) is efficient.
E) farmers gain.
Q3) Suppose that producers are richer than consumers.Is a price support program fair? Explain your answer.
Q4) Why would an increase in the minimum wage to $15 per hour lead to more unemployment for teenage and low-skilled workers?
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Chapter 8: Taxes
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Sample Questions
Q1) Suppose the demand for specialty car license plates is perfectly inelastic and the supply curve for specialty license plates is upward sloping.A tax is imposed on specialty license plates.Which of the following is true?
A) Drivers pay the smallest share of the tax.
B) Drivers pay none of the tax.
C) Drivers pay all of the tax.
D) The government pays all of the tax.
E) The government collects nothing in tax revenues.
Q2) If neither the demand nor the supply for goods or labor is perfectly inelastic,then a sales tax on a good ________ a deadweight loss and an income tax ________ a deadweight loss.
A) creates; creates
B) creates; does not create
C) does not create; create
D) does not create; does not create
E) might create; might create
Q3) What is the difference between vertical equity and horizontal equity?
Q4) If the marginal tax rate is 20 percent,and Pearl earns an extra $100,how much must Pearl pay in additional taxes?
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Chapter 9: Global Markets in Action
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Sample Questions
Q1) A major reason why it is difficult to lower the barriers to free trade is
A) that total benefits are less than total costs from free trade.
B) the uneven distribution of gains and losses from free trade.
C) the loss of jobs without any gain of jobs from free trade.
D) the inability to compensate losers from free trade.
E) that the barriers allow us to compete with cheap foreign labor.
Q2) Suevania opens its doors to trade with Barvania.Barvania has a comparative advantage in the production of machinery.Hence,once trade occurs Suevania's consumers will buy ________ machinery and pay ________ before.
A) more; a higher price than
B) more; a lower price than
C) less; a higher price than
D) less; a lower price than
E) the same amount of; the same price as
Q3) The fundamental force that drives trade between nations is
A) the government.
B) NAFTA.
C) absolute advantage.
D) comparative advantage.
E) legal treaties.
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Chapter 10: Externalities
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Sample Questions
Q1) Does inoculation against chicken pox have both private and external benefits?
Q2) The Coase theorem deals with the problem of pollution by
A) giving the government regulatory power over polluters.
B) making all polluters stop polluting.
C) establishing and enforcing private property rights.
D) having the government take over ownership of all polluting processes.
E) allowing the government to set the proper emission charge.
Q3) Some policymakers have proposed giving parents of children in poorly performing schools tax dollars to help send their children to private schools.This proposal is an example of
A) vouchers.
B) public provision.
C) external costs.
D) taxes.
E) correcting an externality using a government good.
Q4) A private subsidy has what effect on the amount of a good or service produced? Is a subsidy an appropriate policy to offset the inefficiency from an external cost or an external benefit?
Q5) Why does the existence of an external benefit lead to the production of less than the efficient quantity?
Page 12
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Chapter 11: Public Goods and Common Resources
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Sample Questions
Q1) Rational ignorance is the decision NOT to
A) vote in elections.
B) acquire information because the marginal benefit of doing so exceeds the marginal cost.
C) acquire information because the marginal cost of doing so exceeds the expected marginal benefit.
D) acquire information because the marginal cost of doing so equals the expected marginal benefit.
E) follow the principle of minimum differentiation.
Q2) A public good
A) can only be consumed by one person at a time.
B) can be consumed simultaneously by many people.
C) is any good provided by a company owned by a member of the public.
D) is any good provided by government.
E) is both rival and excludable.
Q3) Why are fish in the ocean an example of a resource that suffers from the tragedy of the commons but cattle grazing in a farmer's pasture do not suffer from the tragedy of the commons?
Q4) Is a sailboat purchased in Victoria,British Columbia,a private good or a public good?
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Chapter 12: Markets With Private Information
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Sample Questions
Q1) In a pooling equilibrium,there is ________ of insurance in the market for safe drivers and there is ________ of insurance in the market for aggressive drivers.
A) overprovision; underprovision
B) overprovision; overprovision
C) underprovision; underprovision
D) underprovision; overprovision
E) underprovision; an efficient quantity
Q2) Which of the following is an example of moral hazard?
A) I hire you to work in my garden for a fixed fee, and you work hard all day.
B) I hire you to work at an hourly rate and you work as slowly as possible.
C) You apply for the job only because I pay a fixed wage per day, no matter how much or little you do.
D) You agree to be paid by the weed to work in my garden, and then you work hard.
E) You agree to be paid by the weed to work in my garden, and then you don't work hard.
Q3) What is the private information in the market for health-care insurance? What is the private information in the market for health care?
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Page 14
Chapter 13: Consumer Choice and Demand
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Sample Questions
Q1) If a person consumes only two goods,which of the following is NOT necessary for a consumer to be at his or her best affordable point of consumption?
A) The consumer chooses a bundle of goods that lies on his or her budget line.
B) The consumer is on his or her highest attainable indifference curve.
C) The consumer chooses equal amounts of both goods.
D) The marginal rate of substitution between the two goods is equal to the relative price of those two goods.
E) The indifference curve is tangent to the budget line.
Q2) Which of the following is the best statement of the paradox of value?
A) Why does the amount people are willing to pay for a good vary with the amount consumed?
B) Why do some goods like water, which is necessary for life, have a low price while other goods like diamonds have a high price?
C) What is the logical relationship between value and price?
D) Why is efficiency so valuable for a society?
E) None of the above states the paradox of value.
Q3) How is a budget line similar to a production possibilities frontier? How do they differ?
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Chapter 14: Production and Cost
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Sample Questions
Q1) The long-run average cost curve is U-shaped because of which of the following?
A) decreasing marginal returns as more labor is hired
B) constant fixed costs as output is increased
C) economies and diseconomies of scale
D) increasing marginal returns as more labor is hired
E) decreasing average fixed costs as output is increased
Q2) Which of the following statements correctly describes a total product curve?
A) Points above the total produce curve are efficient.
B) The curve shows that output always increases as labor employed increases.
C) The curve separates attainable outputs from unattainable outputs.
D) The curve shows minimum levels of output.
E) The curve first falls, reaches a minimum, and then rises.
Q3) Draw an average total cost curve,an average variable cost,and a marginal cost curve all on the same graph.Make sure to correctly label the axes.What relationship must exist between the marginal cost curve and the average total cost and average variable cost curves?
Q4) What is a normal profit? Is it part of the firm's opportunity costs,total revenue,or neither?
Q5) What is the difference between decreasing marginal returns and negative marginal returns?
Page 16
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Chapter 15: Perfect Competition
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Q1) If perfectly competitive firms are maximizing their profit and are making an economic profit,the market ________ in a short-run equilibrium and ________ in a long-run equilibrium.
A) is; is
B) is; is not
C) is not; is
D) is not; is not
E) is; might be
Q2) A firm maximizes its profit by producing the amount of output such that
A) marginal revenue equals marginal cost.
B) marginal revenue exceeds marginal cost by some amount.
C) marginal revenue is maximized.
D) marginal cost is minimized.
E) marginal revenue exceeds marginal cost by the maximum amount possible.
Q3) Which of the following market types has only a few competing firms?
A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly
E) perfect competition and monopolistic competition
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Chapter 16: Monopoly
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Sample Questions
Q1) Define price discrimination.What factors must be present in order for a firm to price discriminate? Why do firms price discriminate?
Q2) To be able to price discriminate,a firm must
A) lower prices for all customers.
B) raise prices for all customers.
C) be able to identify and separate different types of buyers.
D) sell a product that can be resold.
E) Both answers B and C are correct.
Q3) To encourage invention and innovation,the government provides A) patents.
B) public franchises.
C) government licenses.
D) natural monopolies.
E) easily obtained ownership barriers to entry.
Q4) When a regulatory agency uses rate of return regulation,the A) agency is able to eliminate the deadweight loss.
B) firm's managers have an incentive to inflate the firm's costs.
C) regulated firm's profit must be maximized for the market to be efficient.
D) regulated firm must receive a government subsidy.
E) the agency is using a form of marginal cost pricing.
Page 18
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Chapter 17: Monopolistic Competition
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Q1) The larger the four-firm concentration ratio,the ________ competition within an industry; the larger the Herfindahl-Hirschman Index,the ________ competition within an industry.
A) more; more
B) more; less
C) less; more
D) less; less
E) The premise of the question is wrong because the four-firm concentration ratio applies only to markets with four firms in it and these markets are, by definition, not competitive.
Q2) For a firm in monopolistic competition,define efficient scale and excess capacity.Briefly explain each.
Q3) Which of the following is correct?
A) Monopoly has a four-firm concentration ratio of 100.
B) Perfect competition has a four-firm concentration ratio near zero.
C) Monopolistic competition has a four-firm concentration ratio of more than 40.
D) Both answers A and B are correct.
E) Both answers A and C are correct.
Q4) How do product development and marketing affect a firm in monopolistic competition?
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Chapter 18: Oligopoly
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Sample Questions
Q1) A Nash equilibrium occurs when each player in a game takes the ________ given the action of the other player.
A) worst possible action for himself or herself
B) best possible action for himself or herself
C) most unpredictable possible action
D) most mutually beneficial possible action
E) best possible action for the other player
Q2) Explain what a cartel is and the difficulties faced in maintaining a cartel.
Q3) The major dilemma facing Boeing and Airbus is the
A) fact that neither will respond to the behavior of the other.
B) certainty surrounding the reaction of each firm to the behavior of the other firm.
C) fact that if each firm separately tries to maximize its profit, it might wind up with less profit that otherwise.
D) competition from other firms that drives their economic profit to zero.
E) fact that when they collude to maximize their profit, the other firm's profit might be larger than its profit.
Q4) Why are cartels among firms usually kept secret?
Q5) Describe the Department of Justice's claims against Microsoft.
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Chapter 19: Markets for Factors of Production
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Sample Questions
Q1) An increase in the price of the firm's output leads to a
A) movement up along the demand for labor curve.
B) movement down along the demand for labor curve.
C) rightward shift of the demand for labor curve.
D) leftward shift of the demand for labor curve.
E) rightward shift of the supply of labor curve.
Q2) According to the Hotelling Principle,the price of a nonrenewable resource is expected to
A) rise at a rate higher than the interest rate.
B) fall at a rate greater than the interest rate.
C) rise at a rate less than the interest rate.
D) rise at a rate equal to the interest rate.
E) fall at a rate equal to the interest rate.
Q3) "The decision to employ an additional unit of labor depends on whether the value of marginal product of labor is greater than or less than the wage rate." Is the previous statement correct or incorrect?
Q4) "As the quantity of labor hired increases,the value of marginal product stays constant as long as the wage rate is constant for all workers." Is the previous statement correct or incorrect? Explain your answer.
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Chapter 20: Economic Inequality
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Sample Questions
Q1) If discrimination against women decreases their value of marginal product,then women will have ________ wage rate than men and there will be ________ high-paying jobs for women.
A) a lower; more
B) a higher; fewer
C) a lower; fewer
D) a higher; more
E) the same; fewer
Q2) The measured inequality of annual income ________ the actual inequality of lifetime income because ________.
A) overstates; different households are at different stages in the life cycle
B) overstates; the Lorenz curves differ for income and wealth
C) understates; people live in different geographic areas
D) understates; people have different levels of education
E) overstates; different households have different amounts of wealth
Q3) Fully explain why it is a good idea for young people who are considering dropping out of high school to stay in school if the U.S.government pursues more liberal immigration policies over the next 20 years.
Q4) Describe the effect education and training have on outcomes in the labor market.
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