Foundations of Economics
Exam Answer Key
Course Introduction
Foundations of Economics introduces students to the essential principles and concepts that underpin economic theory and practice. The course explores the basics of supply and demand, market structures, consumer and producer behavior, and the role of government in the economy. Students will examine both microeconomic and macroeconomic perspectives, learning how individual choices and broader economic forces shape resource allocation and influence societal well-being. Through real-world examples and analytical frameworks, the course aims to develop a solid understanding of how economies function and how economic decisions impact everyday life.
Recommended Textbook
Economics 20th Edition Volume I and Volume II by Campbell R. McConnell
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21 Chapters
2785 Verified Questions
2785 Flashcards
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Page 2
Chapter 1: Limits, Alternatives, and Choices
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210 Verified Questions
210 Flashcards
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Sample Questions
Q1) The basic purpose of the other-things-equal assumption is to:
A) allow one to reason about the relationship between variables X and Y without the intrusion of variable Z.
B) allow one to focus upon micro variables by ignoring macro variables.
C) allow one to focus upon macro variables by ignoring micro variables.
D) determine whether X causes Y or vice versa.
Answer: A
Q2) In drawing a particular budget line,money income and the prices of the two products are fixed.
A)True
B)False
Answer: True
Q3) (Consider This)At fast-food restaurants:
A) consumers enjoy complete and accurate information.
B) decisions are usually made by trial and error.
C) decisions entail comparisons of marginal costs and marginal benefits.
D) benefits always exceed costs.
Answer: C
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3
Chapter 2: The Market System and the Circular Flow
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109 Flashcards
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Sample Questions
Q1) The economic function of profits and losses is to:
A) bring about a more equal distribution of income.
B) signal that resources should be reallocated.
C) eliminate small firms and reduce competition.
D) tell government which industries need to be subsidized.
Answer: B
Q2) The market system's answer to the fundamental question "How will the system accommodate change?" is essentially:
A) "Through government leadership and direction."
B) "Through the guiding function of prices and the incentive function of profits."
C) "Through training and retraining programs."
D) "Through trial and error."
Answer: B
Q3) From society's point of view,the economic function of profits and losses is to:
A) promote the equal distribution of real assets and wealth.
B) achieve full employment and price level stability.
C) contribute to a more equal distribution of income.
D) reallocate resources from less desired to more desired uses.
Answer: D
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Page 4
Chapter 3: Demand, Supply, and Market Equilibrium
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180 Flashcards
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Sample Questions
Q1) A recent study found that an increase in the federal tax on beer (and thus an increase in the price of beer)would reduce the demand for marijuana.We can conclude that:
A) beer and marijuana are substitute goods.
B) beer and marijuana are complementary goods.
C) beer is an inferior good.
D) marijuana is an inferior good.
Answer: B
Q2) The location of the product supply curve depends on the:
A) production technology.
B) number of buyers in the market.
C) tastes of buyers.
D) location of the demand curve.
Answer: A
Q3) If demand increases and supply simultaneously decreases,equilibrium price will rise.
A)True
B)False
Answer: True
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5
Chapter 4: Market Failures: Public Goods and Externalities
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Sample Questions
Q1) Along a supply curve,product price and producer surplus are inversely related.
A)True
B)False
Q2) According to the marginal-cost-marginal-benefit rule:
A) only government projects (as opposed to private projects)should be assessed by comparing marginal costs and marginal benefits.
B) the optimal project size is the one for which MB = MC.
C) the optimal project size is the one for which MB exceeds MC by the greatest amount.
D) project managers should attempt to minimize both MB and MC.
Q3) Along a demand curve,product price and consumer surplus are inversely related.
A)True
B)False
Q4) Where there is asymmetric information between buyers and sellers:
A) product shortages will occur at the equilibrium price.
B) product surpluses will occur at the equilibrium price.
C) markets can produce inefficient outcomes.
D) markets will fail due to the "free-rider problem."
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6
Chapter 5: Governments Role and Government Failure
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Sample Questions
Q1) A government using fiscal policy in an attempt to stimulate the economy would do which of the following?
A) Raise taxes.
B) Raise interest rates.
C) Lower interest rates.
D) Raise government spending.
Q2) Which of the following would best explain why regulatory capture is a problem?
A) The regulations implemented tend to reduce the profitability of the regulated industry and reduce global competitiveness.
B) Regulatory capture unduly increases the size and power of government,increasing costs for taxpayers.
C) Individuals implementing the regulations lack expertise about the industry and therefore make poor regulatory choices.
D) The regulations implemented serve the private interests of the regulated industry,rather than addressing social interests such as consumer safety and environmental protection.
Q3) Fiscal policy is more susceptible to politicization than monetary policy.
A)True
B)False
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Page 7
Chapter 6: Elasticity
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134 Flashcards
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Sample Questions
Q1) Which type of goods is most adversely affected by recessions?
A) Goods for which the income elasticity coefficient is relatively low or negative.
B) Goods for which the income elasticity coefficient is relatively high and positive.
C) Goods for which the cross elasticity coefficient is positive.
D) Goods for which the cross elasticity coefficient is negative.
Q2) The more time consumers have to adjust to a change in price:
A) the smaller will be the price elasticity of demand.
B) the greater will be the price elasticity of demand.
C) the more likely the product is a normal good.
D) the more likely the product is an inferior good.
Q3) Studies show that the demand for gasoline is:
A) price inelastic in the short run but elastic in the long run.
B) price inelastic in both the short and long run.
C) price elastic in the short run but inelastic in the long run.
D) price elastic in both the short and long run.
Q4) Antiques tend to have highly inelastic supply curves.
A)True
B)False
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Page 8
Chapter 7: Utility Maximization
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Sample Questions
Q1) The fact that most medical care purchases are financed through insurance:
A) has no effect on health care consumption because aggregate costs are the same regardless of payment method.
B) reduces the amount of health care consumed by raising the price of additional units of care.
C) has decreased health care costs and therefore reduced aggregate health care expenditures.
D) increases the amount of health care consumed by reducing the price of additional units of care.
Q2) Graphically,the consumer maximizes total utility where the budget line is tangent to an indifference curve.
A)True
B)False
Q3) The slope of a budget line reflects the:
A) elasticity of demand for the two products.
B) price ratio of the two products.
C) amount of the consumer's income.
D) utility ratio of the two products.
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9
Chapter 8: Behavioral Economics
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153 Flashcards
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Sample Questions
Q1) Heuristics:
A) are rules of thumb that generate decisions that generally maximize net benefits.
B) take a long time to develop and are therefore avoided by rational decision makers.
C) are shortcuts that save time and energy in decision making.
D) always waste mental resources by leading people to suboptimal outcomes.
Q2) Josh will receive a salary of $300,000 next year.According to prospect theory:
A) Josh will be happy with that amount regardless of what he has made in the past.
B) Josh will only be happy with that salary if everyone else around him makes less than he does.
C) Josh will only be happy with that salary if his cost of living has not increased.
D) Josh's satisfaction with that salary depends on how much he made in the past.
Q3) Between System 1 and System 2 in the brain,System 1 makes most of the decisions.
A)True
B)False
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10
Chapter 9: Businesses and the Cost of Production
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159 Verified Questions
159 Flashcards
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Sample Questions
Q1) When total product is increasing at a decreasing rate,marginal product is:
A) positive and increasing.
B) positive and decreasing.
C) constant.
D) negative.
Q2) Total fixed cost (TFC):
A) falls as the firm expands output from zero,but eventually rises.
B) falls continuously as total output expands.
C) varies directly with total output.
D) does not change as total output increases or decreases.
Q3) Other things equal,if the prices of a firm's variable inputs were to fall:
A) one could not predict how unit costs of production would be affected.
B) marginal cost,average variable cost,and average fixed cost would all fall.
C) marginal cost,average variable cost,and average total cost would all fall.
D) average variable cost would fall,but marginal cost would be unchanged.
Q4) Which of the following is correct?
A) There is no relationship between MP and MC.
B) When AP is rising MC is falling,and when AP is falling MC is rising.
C) When MP is rising MC is rising,and when MP is falling MC is falling.
D) When MP is rising MC is falling,and when MP is falling MC is rising.
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Chapter 10: Pure Competition in the Short Run
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115 Verified Questions
115 Flashcards
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Sample Questions
Q1) A purely competitive firm's short-run supply curve is:
A) perfectly elastic at the minimum average total cost.
B) upsloping and equal to the portion of the marginal cost curve that lies above the average variable cost curve.
C) upsloping and equal to the portion of the marginal cost curve that lies above the average total cost curve.
D) upsloping only when the industry has constant costs.
Q2) The demand curve in a purely competitive industry is ______,while the demand curve to a single firm in that industry is ______.
A) perfectly inelastic;perfectly elastic
B) downsloping;perfectly elastic
C) downsloping;perfectly inelastic
D) perfectly elastic;downsloping
Q3) A firm reaches a break-even point (normal profit position)where:
A) marginal revenue cuts the horizontal axis.
B) marginal cost intersects the average variable cost curve.
C) total revenue equals total variable cost.
D) total revenue and total cost are equal.
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12
Chapter 11: Pure Competition in the Long Run
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Sample Questions
Q1) Which of the following distinguishes the short run from the long run in pure competition?
A) Firms can enter and exit the market in the long run but not in the short run.
B) Firms attempt to maximize profits in the long run but not in the short run.
C) Firms use the MR = MC rule to maximize profits in the short run but not in the long run.
D) The quantity of labor hired can vary in the long run but not in the short run.
Q2) When a purely competitive firm is in long-run equilibrium:
A) marginal revenue exceeds marginal cost.
B) price equals marginal cost.
C) total revenue exceeds total cost.
D) minimum average total cost is less than the product price.
Q3) Suppose that an industry's long-run supply curve is downsloping.This suggests that:
A) it is an increasing-cost industry.
B) relevant inputs have become more expensive as the industry has expanded.
C) technology has become less efficient as a result of the industry's expansion.
D) it is a decreasing-cost industry.
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Page 13
Chapter 12: Pure Monopoly
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119 Flashcards
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Sample Questions
Q1) Answer the question on the basis of the demand schedule shown below:
\[\begin{array}{l}
\begin{array} { c c c }
&&\text { Quantity }\\
\text { Price } && \text { Demanded } \\
\hline
\$ 77 & & 1 \\
6 & & 2 \\
5 & & 3 \\
4 & & 4 \\
3 & & 5
\end{array}
\end{array}\] Refer to the data.The marginal revenue obtained from selling the third unit of output is:
A) $6.
B) $1.
C) $2.
D) $5.
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Page 14
Chapter 13: Monopolistic Competition and Oligopoly
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192 Flashcards
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Sample Questions
Q1) In an oligopolistic market:
A) one firm is always dominant.
B) products may be standardized or differentiated.
C) the four largest firms account for 20 percent or less of total sales.
D) the industry is monopolistically competitive.
Q2) If the firms in an oligopolistic industry can establish an effective cartel,the resulting output and price will approximate those of:
A) a purely competitive producer.
B) a pure monopoly.
C) a monopolistically competitive producer.
D) an industry with a low four-firm concentration ratio.
Q3) If three or four homogeneous oligopolists collude,the resulting price and production outcomes will be similar to those of pure monopoly.
A)True
B)False
Q4) The demand curve of a monopolistically competitive producer is less elastic than that of a purely competitive producer.
A)True
B)False
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Chapter 14: Technology RD and Efficiency
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106 Flashcards
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Sample Questions
Q1) The marginal cost to a firm of R&D expenditures is the market interest rate the firm must pay to obtain the needed financing.
A)True
B)False
Q2) Technological advance is shown as a(n):
A) movement from a point inside a production possibilities curve to a point on the curve.
B) movement along a production possibilities curve.
C) outward shift of a production possibilities curve.
D) inward shift of a production possibilities curve.
Q3) Suppose that a firm's legal staff concludes that a new production process that the firm is developing is patentable.Graphically,this new information would shift the firm's expected-rate-of-return curve on R&D to the:
A) right and reduce its optimal amount of R&D.
B) right and increase its optimal amount of R&D.
C) left and increase its optimal amount of R&D.
D) left and reduce its optimal amount of R&D.
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Chapter 15: The Demand for Resources
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Sample Questions
Q1) The equation MP<sub>L</sub>/P<sub>L</sub> = MP<sub>C</sub>/P<sub>C</sub>:
A) designates the MR = MC level of output.
B) assumes imperfect competition in the hiring of labor and capital.
C) is a sufficient condition for the maximization of profits.
D) is a necessary,but not sufficient,condition for the maximization of profits.
Q2) A firm will find it profitable to hire workers up to the point at which their:
A) marginal resource cost equals their wage rate.
B) wage rate equals product price.
C) MP is equal to their MRP.
D) marginal resource cost is equal to their MRP.
Q3) Other things equal,the less competitive the market in which a firm sells its product,the less elastic will be its resource demand curve.
A)True
B)False
Q4) The demand curve for labor would shift leftward as the result of:
A) an increase in the price of the product labor is producing.
B) a decrease in the productivity of labor.
C) an increase in the price of labor.
D) a decrease in the price of capital,provided the output effect exceeds the substitution effect.
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Chapter 16: Wage Determination
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Sample Questions
Q1) Industrial unions are more likely to increase wage rates by restricting the supply of labor than are craft unions.
A)True
B)False
Q2) The productivity and real wages of workers in industrially advanced economies have risen historically partly because:
A) workers have acquired less education and training over time.
B) workers have been able to use larger quantities of capital equipment.
C) over time the capital equipment used by workers has deteriorated in quality.
D) the supply of labor has increased.
Q3) Economists regard expenditures on education as investments because:
A) they are subject to tax deductions at the same rate as are expenditures on machinery and equipment.
B) education is economically beneficial at the same time it is being acquired.
C) such expenditures are current costs that are intended to enhance future earnings.
D) they differ from expenditures on health and worker mobility.
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18
Chapter 17: Rent Interest and Profit
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Sample Questions
Q1) Henry George's single-tax movement was based on the argument that:
A) the tax structure should consist solely of a highly progressive tax on nonwage incomes.
B) interest is unearned income and should be taxed away by government.
C) in less developed countries the supply of and demand for land will be such that land will be a free good and therefore capable of bearing sizable taxes.
D) a high tax on land rent is justified because land rent performs no incentive function.
Q2) Economic profit might result from:
A) easy entry into industries.
B) dynamic change and uncertainty.
C) X-inefficiency.
D) a decline in entrepreneurship.
Q3) Suppose that in some year nominal interest rates are less than the rate of inflation.This means that:
A) money demand exceeds money supply.
B) real interest rates are negative.
C) real interest rates are positive and unusually high.
D) real interest rates exceed nominal interest rates.
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Chapter 18: Natural Resource and Energy Economics
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Sample Questions
Q1) Which of the following is considered a renewable natural resource?
A) Aquifers.
B) Coal.
C) Petroleum.
D) Iron.
Q2) The total fertility rate necessary to keep the population constant is approximately equal to:
A) 1.0.
B) 1.5.
C) 2.1.
D) 3.0.
Q3) Which of the following statements is true about falling birthrates?
A) They tend to lag behind falling death rates,allowing population growth to continue for at least one or two more generations.
B) They tend to precede declines in death rates,causing a temporary dip in population before it stabilizes in a generation or two.
C) They tend to lag behind declining standards of living.
D) They always cause population to decline.
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Chapter 19: Public Finance: Expenditures and Taxes
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Sample Questions
Q1) Which of the following statements is most consistent with the benefits-received principle of taxation?
A) A childless couple should not be required to pay taxes for the support of public schools.
B) Prosperous corporations should pay substantial taxes even if they use few government goods and services.
C) The best tax is the income tax.
D) People with high incomes should pay more taxes than people with low incomes.
Q2) Taxable income is:
A) total income less deductions and exemptions.
B) the same as gross income.
C) the only income to which marginal tax rates apply.
D) the sum of all wage and property income.
Q3) Federal employment in the United States is dominated by what two functions?
A) National defense and postal service.
B) Health care and police.
C) Postal service and education.
D) Health care and national defense.
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21
Chapter 20: Antitrust Policy and Regulation
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Sample Questions
Q1) Which of the following is correct?
A) Vertical mergers are more likely to be acceptable under antitrust laws than are horizontal mergers.
B) A vertical merger entails the merging of two or more competing firms.
C) Horizontal mergers are more likely to be acceptable under antitrust laws than are vertical mergers.
D) Conglomerate mergers occur when two or more firms at various stages in a good's production are combined.
Q2) Which one of the following is not prohibited by the original Clayton Act?
A) The purchase of the stocks of rival firms that lessens competition.
B) The purchase of the assets of rival firms that lessens competition.
C) An exclusive dealer or tying agreements that lessen competition.
D) Price discrimination that lessens competition.
Q3) Defenders of social regulation point out that:
A) social regulation is a better alternative than unregulated natural monopoly.
B) critics who stress the high administrative and compliance costs of social regulation underestimate the social benefits that the regulations produce.
C) the number of regulatory agencies has declined over the past two decades.
D) social regulations reduce product prices.
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Page 22
Chapter 21: Agriculture: Economics and Policy
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Sample Questions
Q1) Since 1950,farm productivity has:
A) advanced twice as fast as in nonfarm sectors of the economy.
B) lagged behind productivity advances in the nonfarm economy.
C) almost exactly matched productivity increases in the rest of the economy.
D) doubled.
Q2) The Food,Conservation,and Energy Act of 2008 provides three types of agricultural subsidies: direct payments,countercyclical payments,and marketing loans.
A)True
B)False
Q3) Farm groups spend considerable amounts of money to maintain and enlarge political support for farm subsidies.This illustrates:
A) coalitions.
B) rent-seeking activity.
C) the special-interest effect.
D) the voting paradox.
Q4) About 10 percent of the U.S.labor force is in agriculture.
A)True
B)False
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Page 23