Foundations of Economics Chapter Exam Questions
Course Introduction
Foundations of Economics introduces students to the essential principles and concepts that underpin the study of economics. The course covers both microeconomic and macroeconomic theories, exploring how individuals, firms, and governments make decisions regarding the allocation of scarce resources. Topics include supply and demand, market structures, consumer behavior, production and costs, as well as economic growth, inflation, and unemployment. Through real-world examples and analytical tools, students develop an understanding of how economic forces shape societal outcomes and influence policy-making. This foundational course equips learners with the critical thinking skills necessary for further study in economics and informed participation in economic discussions.
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Microeconomics 1st Canadian Edition by R. Glenn Hubbard
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Chapter 1: Economics: Foundations and Models
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Q1) The highest valued alternative that must be given up to engage in an activity is the definition of
A)economic equity.
B)marginal benefit.
C)opportunity cost.
D)marginal cost.
Answer: C
Q2) In economics, choices must be made because we live in a world of A)unemployment.
B)scarcity.
C)greed.
D)unlimited resources.
Answer: B
Q3) Which of the following correctly describes the relationship between economic efficiency and economic equity?
A)They are both automatically achieved in a free market economy.
B)They always call for opposite outcomes.
C)There is no conflict between the two goals.
D)There is often a trade-off between the two.
Answer: D
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Chapter 2: Trade-Offs, Comparative Advantage, and the Market System
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Q1) The attainable production points on a production possibility curve are
A)the horizontal and vertical intercepts.
B)the points along the production possibilities frontier.
C)the points outside the area enclosed by the production possibilities frontier.
D)the points along and inside the production possibility frontier.
Answer: D
Q2) All of the following countries come close to the free market benchmark except
A)Canada.
B)North Korea.
C)Germany.
D)Singapore.
Answer: B
Q3) Which of the following is not a factor of production?
A)an acre of farmland
B)a drill press in a machine shop
C)the manager of the local tire shop
D)$1,000 in cash
Answer: D
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Q1) If an increase in income leads to in an increase in the demand for peanut butter, then peanut butter is
A)a neutral good.
B)a normal good.
C)a necessity.
D)a complement.
Answer: B
Q2) An increase in the demand for lobster due to changes in consumer tastes, accompanied by a decrease in the supply of lobster as a result of bad weather reducing the number of fishermen trapping lobster, will result in
A)a decrease in the equilibrium quantity of lobster and no change in the equilibrium price.
B)an increase in the equilibrium price of lobster and no change in the equilibrium quantity.
C)an increase in the equilibrium price of lobster; the equilibrium quantity may increase or decrease.
D)a decrease in the equilibrium quantity of lobster; the equilibrium price may increase or decrease.
Answer: C
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Chapter 4: Economic Efficiency, Government Price Setting, and Taxes
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Q1) Economic efficiency is defined as a market outcome in which the marginal benefit to consumers of the last unit produced is equal to the marginal cost of production, and in which
A)the sum of consumer surplus and producer surplus is at a maximum.
B)economic surplus is minimized.
C)the sum of the benefits to firms is equal to the sum of the benefits to consumers.
D) the sum of consumer surplus and producer surplus is minimized.
Q2) Sen, Rybczynski, and Van de Wall studied the impact of minimum wages in Canada between 1981 and 2004 and found
A)there was a large reduction in employment in provinces with high minimum wages.
B)there was a large increase in employment in provinces with high minimum wages.
C)a 10 percent increase in the minimum wage decreased teen unemployment by 3 to 5 percent.
D)increases in the price of fast food were caused primarily by increases in the minimum wage.
Q3) The minimum wage is an example of a price ceiling.
A)True
B)False
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Chapter 5: Externalities, Environmental Policy, and Public Goods
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Q1) A product is considered to be rivalrous if
A)you can keep those who did not pay for the item from enjoying its benefits.
B) you cannot keep those who did not pay for the item from enjoying its benefits.
C)your consumption of the product reduces the quantity available for others to consume.
D)it is jointly owned by all members of a community.
Q2) Conceptually, the efficient level of carbon emissions is the level for which
A)the marginal benefit of reducing carbon emissions is maximized.
B)the marginal cost of reducing carbon emissions is minimized.
C)the marginal benefit of reducing carbon emissions is equal to the marginal cost of reducing carbon emissions.
D)the marginal benefit of reducing carbon emissions is minimized and the marginal cost of reducing carbon emissions is maximized.
Q3) Refer to Figure 5.3.The efficient output level is
A)Qm.
B)Qn.
C)Q .
D)Q - Qm.
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Chapter 6: Elasticity: the Responsiveness of Demand and Supply
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Q1) Suppose the price elasticity of demand for cigarettes is -0.4.Health Canada decides to regulate tobacco production, which increases the price of cigarettes and causes the quantity of cigarettes demanded to decrease by 25 percent.What is the percentage increase in price which would lead to the 25 percent decrease in quantity demanded? If the price elasticity was -4, what would be the percentage increase in price?
Q2) The demand for all carbonated beverages is likely to be ________ the demand for Dr.Pepper.
A)more elastic than B)perfectly elastic compared to C)less elastic than
D)perfectly inelastic compared to
Q3) Suppose that the price of a money clip increases from $0.75 to $0.90 and quantity supplied rises from 8,000 units to 10,000 units.Use the midpoint formula to calculate the price elasticity of supply.
A)1.22
Q4) Explain the relationship between price elasticity of demand and total revenue.
Page 8
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Chapter 7: Comparative Advantage and the Gains From International Trade
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Q1) In 2012 ________ of Magna International sales were outside Canada.
A)23 percent
B)more than 75 percent
C)less than half
D)95 percent
Q2) ________ raised average tariff rates by over 50 percent in the United States in 1930.
A)The GATT
B)The WTO
C)NAFTA
D)The Smoot-Hawley Act
Q3) One reason a country does not specialize completely in production is that not all goods and services are traded internationally.
A)True
B)False
Q4) Refer to Figure 7.2.With the tariff in place, Canada
A)imports 16 thousand kilograms of rice.
B)imports 9 thousand kilograms of rice.
C)imports 15 thousand kilgrams of rice.
D)exports 31 thousand kilograms of rice.
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Chapter 8: Consumer Choice and Behavioral Economics
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Q1) If preferences are transitive, indifference curves
A)intersect at the equilibrium consumption bundle.
B)intersect at the optimum consumption bundle.
C)intersect where the marginal rate of substitution for each indifference curve is equal.
D)do not intersect.
Q2) The substitution effect of an increase in the price of Raisin Bran refers to
A)the decrease in the demand for Raisin Bran when its price rises.
B)the result that consumers will now switch to a substitute good such as Cheerios, and the demand curve for Raisin Bran shifts to the left.
C)the fact that the higher price of Raisin Bran lowers consumer's purchasing power, holding money income constant.
D)the fact that the higher price of Raisin Bran relative to its substitutes, such as Cheerios, cause consumers to buy less Raisin Bran.
Q3) Refer to Figure 8.5.A change in the price of candy only is shown in
A)Panel A.
B)Panel B.
C)Panel C.
D)none of the above panels.
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Chapter 9: Technology, Production, and Costs
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Q1) Academic book publishers hire editors, designers, and production and marketing managers who help prepare books for publication.Because these employees work on several books simultaneously, the number of people the company hires will not go up and down with the quantity of books the company publishes during any particular year.The salaries and benefits of people in these job categories will be included in
A)fixed cost and marginal cost but not variable cost.
B)fixed cost but not variable cost and total cost.
C)marginal cost and total cost but not fixed cost.
D)fixed cost and total cost but not variable cost.
Q2) If, after hiring the 6th worker, a firm's output falls, then the marginal product of the 6th worker is negative.
A)True
B)False
Q3) Refer to Figure 9.1.The marginal product of the 7th worker is A)66.
B)9.43.
C)2.
D)-2.
Q4) Describe the relationship between marginal cost and average total cost.
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Chapter 10: Firms in Perfectly Competitive Markets
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Q1) In August 2008, Ethan Nicholas developed the iShoot application for the apple iPhone 3G, and within five months had earned $800,000 from this program.By May 2009, Nicholas had dropped the price from $4.99 to $1.99 in an attempt to maintain sales.This example indicates that in a competitive market,
A)earning an economic profit in the long run is extremely easy.
B)earning an economic profit in the long run is extremely difficult.
C)it is impossible to earn an economic profit in either the short run or the long run.
D)economic profits are only earned in the long run.
Q2) The perfectly competitive market structure benefits consumers because
A)firms do not produce goods at the lowest possible price in the long run.
B)firms are forced by competitive pressure to be as efficient as possible.
C)firms add a much smaller markup over average cost than firms in any other type of market structure.
D)firms produce high quality goods at low prices.
Q3) How are market price, average revenue, and marginal revenue related for a perfectly competitive firm and why?
Q4) Why are individual buyers and sellers in perfect competition called price takers?
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Chapter 11: Monopolistic Competition
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Q1) Refer to Figure 11.3.What is the area that represents the total revenue made by the firm?
A)0P aQ
B)0P bQ
C)0P cQ
D)0P dQ
Q2) A monopolistically competitive firm will
A)charge the same price as its competitors do.
B)always produce at the minimum efficient scale of production.
C)have some control over its price because its product is differentiated.
D)produce an output level that is productively and allocatively efficient.
Q3) The financial situation at Starbucks in the late 2000s illustrates the fact that maintaining long-run profits in a monopolistically competitive market is
A)somewhat difficult.
B)very difficult.
C)fairly easy.
D)almost always guaranteed.
Q4) Explain the differences between total revenue, average revenue, and marginal revenue.
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Chapter 12: Oligopoly: Firms in Less Competitive Markets
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Q1) Assume that two interior design companies, Alistair and Baine, are competing for customers and if they both advertise, they would each earn $30 million in profits.If neither advertises, they each earn $50 million in profits.If one advertises and the other doesn't, the firm that advertises earns $40 million in profit while the other earns $20 million in profit.
a.Present the information above in the form of a payoff matrix.Let Baine be the row player and Alistair the column player.
b.Does each firm have a dominant strategy and if so what is it?
c.What is the Nash equilibrium?
Q2) Producing a differentiated product occurs in which of the following industries?
A)oligopoly, monopolistic competition and perfect competition
B)monopolistic competition only
C)oligopoly only
D)monopolistic competition and oligopoly
Q3) Which of the following is the best example of an oligopolistic industry?
A)the beef market
B)the pharmaceutical industry
C)public education
D)the beauty products industry
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Chapter 13: Monopoly and Antitrust Policy
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Q1) If a theatre company expects $250,000 in ticket revenue from five performances and $288,000 in ticket revenue if it adds a sixth performance, the
A)marginal revenue of the sixth performance is $48,000.
B)marginal revenue of the sixth performance is $38,000.
C)cost of staging the sixth performance is probably higher than the cost of staging the previous five.
D)company will be making a loss on the sixth performance because its ticket sales will be less than the average received from the previous five.
Q2) Refer to Figure 13.2.Suppose the monopolist represented in the diagram above produces positive output.What is the price charged at the profit-maximizing/loss-minimizing output level?
A)$38
B)$54
C)$68
D)$75
Q3) What is the relationship between marginal revenue and average revenue for a monopolist and is it the same for a perfect competitor?
Q4) Provide two examples of a government barrier to entry?
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Chapter 14: The Markets for Labour and Other Factors of Production
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Q1) Comparable worth legislation
A)will eliminate the earnings gap between men and women.
B)mandate that employers pay the same wages to workers, regardless of their gender, for jobs that have comparable worth.
C)mandate that potential employers demonstrate that they are worth the wages they expect to earn.
D)guide markets toward the economically efficient wage.
Q2) A firm's demand for labour curve is also called its
A)marginal revenue product of labour curve.
B)marginal factor cost of labour curve.
C)marginal valuation curve.
D)marginal benefit of labour curve.
Q3) Firms use information on labour's marginal revenue product to determine
A)how much to produce at each output price.
B)how many workers to hire at each wage rate.
C)how much marginal product to produce at each wage rate.
D)how much labour services to supply at each wage rate.
Q4) Why do professional hockey players earn more than police officers? Illustrate this situation graphically.
Page 16
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Chapter 15: Public Choice, Taxes, and the Distribution of Income
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Q1) Refer to Figure 15.2.If the government imposes an excise tax of $1.00 on every unit sold, the producer's burden of the tax
A)is greater under the more elastic supply curve S .
B)is greater under the less elastic supply curve S .
C)is greater under the less elastic supply curve S .
D)is the same under either supply curve because there is a single demand curve that captures buyers' market behavior.
Q2) If the marginal tax rate is greater than the average tax rate, the tax structure is described as regressive.
A)True
B)False
Q3) Refer to Figure 15.2.If the government imposes an excise tax of $1.00 on every unit sold,
A)the deadweight loss is identical under either supply curve.
B)the deadweight loss is greater under the supply curve S .
C)the deadweight loss is greater under the supply curve S .
D)there is no deadweight loss since revenue raised is used to fund government projects.
Q4) Explain the effect of price elasticities of supply and demand on tax incidence.
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Chapter 16: Pricing Strategy
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Q1) All of the following are disadvantages of cost-plus pricing except A)it ignores the price elasticity of demand: for example, it may be possible to increase profits by raising or lowering price.
B)if the industry comprises identical firms (with identical costs), markups could be consistent among firms leading to no one firm having a competitive edge in terms of price.
C)allocating and apportioning business overheads to individual products could be somewhat arbitrary.
D)the business has less incentive to cut or control costs: if costs increase, then selling prices increase. Consequently, this might further erode a firm's competitiveness.
Q2) Lou buys a classic Mario Bros.game from Evan for $30 and resells it on eBay for $60.Which of the following statements is false?
A)Lou has earned some arbitrage profits, assuming that transaction costs are negligible.
B)The transaction has made Evan worse off because he underpriced the poster.
C)Lou has probably incurred some costs in connection with this sale.
D)It is possible that Evan has earned some producer surplus from this transaction.
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Chapter 17: Firms, the Stock Market, and Corporate Governance
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Q1) What is a primary market?
A)a market where primary inputs like steel are sold
B)a market where you can sell any bonds you own as a private investor
C)a market where a newly issued claims are sold to initial buyers by the borrowing firm
D)a market where you can sell any stocks you own as a private investor
Q2) How do a sole proprietorship and a corporation differ?
A)Proprietorships have unlimited liability while corporations have limited liability.
B)Corporations can issue stocks and bonds, while proprietorships cannot.
C)Corporations face more taxes than do proprietorships.
D)All of these are differences between the two types of businesses.
Q3) What are the advantages of setting up a corporation as opposed to a proprietorship or partnership?
Q4) In a typical year, ________ of new jobs are created by small firms.
A)less than 5 percent
B)10 percent
C)40 percent
D)75 percent
Q5) What is the difference between explicit and implicit costs?
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