Foundations of Economics Exam Materials
Course Introduction
Foundations of Economics introduces students to the basic principles and concepts that underpin economic theory and practice. The course explores fundamental topics such as supply and demand, market structures, consumer behavior, production and costs, and the roles of government and markets in resource allocation. Students will analyze real-world economic issues using graphical and quantitative tools, developing a clear understanding of how economies operate at both the micro and macro levels. This foundational knowledge serves as a basis for further study in economics and related fields.
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) The figure above shows the price of a DVD player from 1996 to 2000.
a.What type of graph is illustrated above?
b.What is the trend in the price of a DVD player?
Answer: a.The graph is a time-series graph because it plots time along the horizontal axis and the price of a DVD player along the vertical axis.
b.The trend in the price of a DVD player is negative,that is,the price of a DVD player has generally decreased from one year to the next.
Q2) In the above figure,as the y variable increases,
A) the x variable is constant.
B) the x variable increases.
C) the x variable decreases.
D) the x variable at first increases but then decreases.
E) the x variable probably changes, but more information is needed to determine if it increases, decreases, or stays the same.
Answer: A
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3
Chapter 2: The Usand Global Economies
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Q1) In the United States,the poorest 20 percent of households earn roughly ________ percent of total income.
A) 20
B) 10
C) 15
D) 3
E) 0.5
Answer: D
Q2) In the circular flow model,which of the following is on the selling side in the goods market?
A) federal, state, and local governments
B) only households
C) exporters
D) only firms
E) both firms and households
Answer: D
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Page 4
Chapter 3: The Economic Problem
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Q1) The figure above shows the production possibilities frontier for a country.In order for it to produce at point E,the
A) country would need to acquire more resources and/or more advanced technology.
B) production of compact cars would need to decrease.
C) production of SUVs would need to decrease.
D) country would need to use its resources more efficiently.
E) country would need to determine that compact cars and SUVs are equally important to it.
Answer: A
Q2) Which point in the figure above is an attainable combination that would have unemployed resources?
A) point A
B) point B
C) point C
D) point D
E) point A and point B
Answer: C
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Page 5
Chapter 4: Demand and Supply
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Sample Questions
Q1) What leads to a decrease in the quantity supplied of a good or service?
Q2) The price of salsa rises.How does the increase in the price of salsa affect the supply of salsa?
A) The supply of salsa increases.
B) The supply of salsa decreases.
C) There is no change to either the supply of salsa or the quantity of salsa supplied.
D) There is no change to the supply of salsa, but the quantity of salsa supplied increases.
E) There is no change to the supply of salsa, but the quantity of salsa supplied decreases.
Q3) Hot dogs and hot dog buns are complements.If the price of a hot dog falls,then
A) the demand for hot dogs will increase.
B) the demand for hot dog buns will decrease.
C) the quantity demanded of hotdogs will decrease.
D) the demand for hot dog buns will increase.
E) the quantity demanded of hot dog buns will increase.
Q4) When does a shortage occur?
Q5) In the figure above,what is the equilibrium price and quantity?
Q6) What is the law of demand?
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Chapter 5: Elasticities of Demand and Supply
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Q1) When the price of a cup of coffee falls from $3.00 to $2.50,the quantity demanded increases from 1,000 per month to 1,150 per month.Using the midpoint method,the price elasticity of demand is
A) 0.77.
B) 1.30.
C) 0.07.
D) 3.00.
E) 2.50.
Q2) If a 10 percent price increase generates a 10 percent decrease in quantity demanded,then demand is A) unit elastic.
B) elastic.
C) perfectly inelastic.
D) perfectly elastic.
E) inelastic.
Q3) What is the price elasticity of demand? In terms of percentage changes,what is its formula?
Q4) What effect does a price hike have on the total revenue of the producers?
Q5) Water is considered a necessity.So,is the demand for water elastic or inelastic?
Page 7
Q6) Explain why the number of substitutes influences the price elasticity of demand.
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Chapter 6: Efficiency and Fairness of Markets
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Sample Questions
Q1) When the market price rises,the consumers' consumer surplus ________.When the market price falls,the consumers' consumer surplus ________.
A) decreases; increases
B) decreases; decreases C) increases; increases D) increases; decreases E) does not change; increases
Q2) Which of the following can result in a market producing an inefficient quantity of a good?
i.competition
ii.an external cost or an external benefit
iii.a tax
A) i only
B) iii only
C) ii only
D) ii and iii
E) i and iii
Q3) Explain how the invisible hand delivers an efficient market outcome.
Q4) Why is the demand curve the same as the marginal benefit curve?
Q5) What is producer surplus?
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Chapter 7: Government Actions in Markets
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Sample Questions
Q1) When a price ceiling below the equilibrium price is imposed on a good,production of the good A) increases.
B) decreases.
C) does not change.
D) is frozen at the pre-ceiling level.
E) either increases or decreases depending on whether the supply of the good increases or decreases when the price ceiling is imposed.
Q2) In the 1980s,one of the most common sights in the socialist countries,such as the former Soviet Union and North Korea,were long lines for bread,sugar,and other necessities.These countries had price ceilings on these necessities.Some of the socialist nations,such as the former Soviet Union,have moved to a market economy by lifting the price ceilings,while others,such as North Korea,have retained their price ceilings.What prediction do you make about the presence (or absence)of long lines today in the former Soviet Union and North Korea? Explain your answer.
Q3) How does the elasticity of demand for labor affect the deadweight loss from an increase in the minimum wage? Why?
Q4) Discuss the inefficiencies created by a price floor.
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Page 9
Chapter 8: Taxes
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Q1) The benefits principle of fair taxation means that people A) pay taxes according to the level of benefits they receive.
B) pay taxes according to their ability to pay.
C) with the same ability pay the same taxes.
D) with a greater ability to pay, pay more taxes.
E) Answers B, C, and D are correct.
Q2) A sales tax imposed on tires ________ consumer surplus and ________ producer surplus.
A) increases; increases
B) increases; decreases C) decreases; increases D) decreases; decreases
E) does not change; does not change
Q3) The benefits principle of fairness of taxes is the proposition that A) taxes should only be used to correct market failures.
B) people should pay taxes according to how easily they can bear the burden. C) tax systems can only be fair if all people agree on them.
D) people should pay taxes equal to their benefit from public services.
E) the incidence of taxes should be equal across households.
Q4) "The only fair tax is a progressive tax." Comment on this assertion.
Page 10
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Chapter 9: Global Markets in Action
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Sample Questions
Q1) When protection is encouraged to protect a growing domestic industry; which of the following is being used?
A) Save domestic jobs argument
B) National security argument
C) Anti-dumping argument
D) Infant-industry argument
E) Diversity and stability argument
Q2) Trade is often restricted because the
A) total gain to all producers is larger than the total loss to all consumers.
B) total gain to all producers is smaller than the total loss to all consumers.
C) gain per producer is larger than the loss per consumer.
D) gain per producer is less than the loss per consumer.
E) gain per consumer is larger than the loss per producer.
Q3) If the United States imposes a tariff on a good,then
A) domestic consumption of the good decreases.
B) foreign consumption of the good decreases.
C) foreign production of the good increases.
D) domestic production of the good decreases.
E) the government makes less revenue than it would have gained if it imposed a quota.
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Page 11
Chapter 10: Externalities
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Sample Questions
Q1) The use of vouchers for education
A) decreases the demand for education and increases the equilibrium quantity.
B) increases the demand for education and increases the equilibrium quantity.
C) increases the deadweight loss for those who can't afford schooling.
D) decreases the quantity provided to the efficient level.
E) decreases the demand for education and decreases the equilibrium quantity.
Q2) The figure above shows a tax imposed on a good with an external cost.The area of the rectangle abcd equals
A) the MSB.
B) the total tax revenue collected by the government.
C) the amount of pollution tax per ton.
D) the MC.
E) the deadweight loss.
Q3) Legally established titles to the ownership,use,and disposal of factors of production are referred to as
A) property rights.
B) Coase rights.
C) pollution rights.
D) emission rights.
E) price-setting rights.
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Chapter 11: Public Goods and Common Resources
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Sample Questions
Q1) One way to overcome the tragedy of the commons is to
A) assign property rights so that someone owns the resource.
B) take away property rights so that no one owns the resource.
C) leave the market alone because the market will reach an equilibrium in which the efficient amount of the resource is used.
D) educate people in order to overcome the problem of rational ignorance.
E) None of the above answers is correct.
Q2) When describing goods and services,what is meant by the terms "rival" and "nonrival?" Are private goods rival or nonrival? Are public goods rival or nonrival? Are common resources rival or nonrival?
Q3) Paul and Paula are the only members of society.The table above gives their marginal benefits from missile gunboats,a public good.Determine the marginal benefit to society of the fourth missile gunboat.
A) $8 million
B) $4 million
C) $2 million
D) $1 million
E) $40 million
Q4) What are the differences between public goods and private goods?
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Chapter 12: Markets With Private Information
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Q1) Even if your college degree is irrelevant to an employer's needs,your high GPA might still get you the job because
A) the firm is not a profit maximizer.
B) your GPA screens some of your private information.
C) your GPA sends a signal about your quality as a worker.
D) the firm will most likely make an adverse selection.
E) the high GPA eliminates the possibility of moral hazard.
Q2) The figures show the expenditures per person on health care and the efficiency of the health care system in 8 different nations.The United States is bar ________ in expenditures per person and is bar ________ in efficiency index.
A) A; A
B) B; A
C) A; D
D) E; E
E) D; B
Q3) "People buy insurance do protect themselves from moral hazard." True or false? Explain.
Q4) What is private information and what problems does it create?
Q5) Explain the concept of adverse selection.Give an example.
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Chapter 13: Consumer Choice and Demand
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Q1) Suppose the quantity of burgers is measured on the horizontal axis and the quantity of bags of French fries is measured on the vertical axis.The marginal rate of substitution for burgers is
A) the ratio of burgers consumed to bags of fries consumed.
B) the ratio of bags of fries consumed to burgers consumed.
C) the rate at which a person is willing to give up burgers to get more bags of fries while staying on the same indifference curve.
D) the rate at which a person is willing to give up bags of fries to get more burgers while staying on the same indifference curve.
E) the number of burgers consumed minus the number of bags of fries consumed.
Q2) What is the utility-maximizing rule?
Q3) Amy has the total utility values given above for video rentals a week.Complete the table by calculating her marginal utilities.
Q4) "As Mike consumes more dates over the course of a day,it is likely that his marginal rate of substitution of dates for other goods will rise." Is the previous statement correct or incorrect?
Q5) What is the "principle of diminishing marginal utility"?
Q6) Why is the budget line negatively sloped?
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Chapter 14: Production and Cost
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Q1) Which of the following is correct?
A) The short run for a firm can be longer than the long run for the same firm.
B) The short run is the same for all firms.
C) The long run is the time frame in which the quantities of all resources can be varied.
D) The long run is the time frame in which all resources are fixed.
E) The long run does not exist for some firms.
Q2) The above table gives some production and cost information for Flaming Fernando's,a restaurant that sells Fiery Frijoles.What is the average variable cost of producing 1,000 frijoles?
A) $1
B) $2
C) $3
D) $3,000
E) More information is needed to determine the answer.
Q3) Are the short-run average total cost curve and the long-run average cost both U-shaped for the same reasons? If so,carefully explain these reasons.If not,explain why each curve is U-shaped.
Q4) What is the difference between decreasing marginal returns and negative marginal returns?
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Chapter 15: Perfect Competition
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Q1) We know that a perfectly competitive firm is a price taker because
A) its MC curve slopes upward.
B) its ATC curve is U-shaped.
C) its demand curve is horizontal.
D) MC and ATC are equal at the profit-maximizing amount of output.
E) it has no supply curve.
Q2) Based on the figure above,if the firm produces 7 cans per day,the firm ________ maximizing its profit and is ________.
A) is; incurring an economic loss
B) is; making a normal profit
C) is; making an economic profit
D) is not; incurring an economic loss
E) is not; making a normal profit
Q3) If perfectly competitive lawn care firms are making an economic profit,then
A) wages will be bid up until the economic profit are gone.
B) the firms must be superior and will continue to make an economic profit.
C) new firms will enter the industry.
D) they are not equating marginal revenue to marginal cost.
E) government regulation will be imposed to decrease their profit.
Q4) Describe how economic losses are eliminated in a perfectly competitive industry.
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Chapter 16: Monopoly
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Q1) Is a single-price monopoly efficient?
A) Yes, because it creates a deadweight loss.
B) No, because it creates a deadweight loss.
C) Yes, because consumers gain and producers lose some of their surpluses.
D) Yes, because consumers lose and producers gain some of their surpluses.
E) Yes, because it produces the quantity at which MR=MC.
Q2) If we compare a perfectly competitive market to a single-price monopoly with the same costs,the monopoly sells
A) the same quantity at a higher price.
B) a smaller quantity at a higher price.
C) a larger quantity at a lower price.
D) a larger quantity at a higher price.
E) a smaller quantity at the same price.
Q3) Rent seeking is defined as
A) charging higher prices for an apartment.
B) the act of obtaining special treatment by the government to create an economic profit.
C) charging a price below marginal cost.
D) selling a greater quantity than is profitable.
E) charging different prices for different units of the good or service.
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Chapter 17: Monopolistic Competition
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Q1) What is the difference between a four-firm concentration ratio and a Herfindahl-Hirschman Index?
Q2) At a long-run equilibrium in monopolistic competition,price equals A) average total cost.
B) marginal cost but not marginal revenue.
C) marginal revenue but not marginal cost.
D) zero.
E) marginal revenue and marginal cost.
Q3) When the firm in the figure above maximizes its profit,it makes an economic profit of A) $3,125.
B) $6,250.
C) $9,375.
D) $5,625.
E) None of the above answers are correct because the firm incurs an economic loss.
Q4) Explain the role of advertising in monopolistic competition.Describe how advertising by all firms in a monopolistically competitive industry impacts a firm's ATC curve,its MC curve,its demand curve,and its MR curve.
Q5) Why would a firm in a monopolistically competitive industry advertise?
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Chapter 18: Oligopoly
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Q1) "If firms in an oligopoly operate as a monopoly,the industry produces the most output and if they operate as perfect competitors,the industry produces the least output." Is the previous statement correct or incorrect? Why?
Q2) The government believes that which entry barrier has allowed Microsoft to gain monopoly power?
A) ownership of the entire supply of a resource
B) patents
C) trademarks
D) economies of scale and network economies
E) territorial confinement
Q3) If an oligopolistic game is repeatedly played,which of the following can occur?
A) Players can learn ways to cooperate and make an economic profit.
B) The competitive price and output consistently is the final result.
C) Firms can learn how to cheat more effectively on the other player.
D) One firm will be driven out of business.
E) An implicit agreement is reached in which one firm constantly cheats on the cartel and the other firm complies with it.
Q4) Why do oligopoly firms find it difficult to cooperate and not cheat on a cartel agreement?
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Chapter 19: Markets for Factors of Production
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Q1) Which of the following curves is most inelastic?
A) the supply of land
B) the supply of labor for an individual worker
C) the supply of labor for all workers
D) the demand for capital
E) the demand for labor
Q2) The market for land
A) has an elastic supply.
B) has a perfectly inelastic supply.
C) determines the equilibrium interest rate.
D) has an upward sloping supply curve.
E) has no equilibrium because both the demand curve and the supply curve are vertical.
Q3) Using the above table,if the price of a bat is $8,then the value of marginal product of labor of the fourth worker is
A) $40.
B) $0.625.
C) $1.375.
D) 5 bats.
E) None of the above answers is correct.
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Page 21
Chapter 20: Economic Inequality
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Q1) ________ is a component of welfare programs.
A) A progressive income tax
B) Unemployment compensation
C) Medicaid
D) Social Security payroll taxes
E) The negative income tax
Q2) A tax is progressive if the average tax rate
A) increases as income increases.
B) increases as income decreases.
C) is negative.
D) is positive.
Q3) If a firm is willing to pay a high-skilled worker $25 per hour and a low-skilled worker
$10 per hour then the value of marginal product of skill is
A) $15.
B) $40.
C) $10.
D) $25
E) There is not enough information to answer this question.
Q4) How is human capital acquired?
Q5) Describe the effect education and training have on outcomes in the labor market.
Page 22
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