Foundations of Economics Exam Review
Course Introduction
Foundations of Economics introduces students to the essential principles and concepts that underpin the study of economics. The course explores the fundamental ideas of scarcity, opportunity cost, supply and demand, and the allocation of resources in various types of economies. Through the examination of both microeconomic and macroeconomic perspectives, students gain an understanding of how markets function, the role of government in the economy, and the impact of economic policies on individuals and societies. The course also encourages critical thinking about real-world economic issues, equipping students with analytical tools to make informed decisions as consumers, producers, and citizens.
Recommended Textbook
Modern Principles Microeconomics 3rd Edition by Tyler Cowen
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Chapter 1: The Big Ideas
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Sample Questions
Q1) Imposing the death penalty on rapists may increase the number of murders, because:
A) the death penalty is not a deterrent to the behavior of a rapist.
B) once a victim is raped there is no additional penalty imposed for also killing the victim.
C) rapists are irrational and place no value on the life of their victim.
D) rapists do not think about the consequences of their actions.
Answer: B
Q2) One of the limitations of economics is that the principles only apply to the American economic system and not foreign economies.
A)True
B)False
Answer: False
Q3) Which of the following helped the most to bring an end to malaria in the United States?
A) government aid to the poor
B) climate change
C) economic growth
D) spending on health care
Answer: C
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Chapter 2: The Power of Trade and Comparative
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Sample Questions
Q1) Increased communication speed played a significant role in recent developments that led to increased trade and globalization?
A)True
B)False
Answer: True
Q2) Jesse is good at math and excellent at making friends and Addae is equally good at both. Mathematically and socially challenged Jordan wants to hire tutors to help in each area. Who should tutor Jordan in which area to maximize Jordan's college experience?
A) Jesse and Addae should tutor Jordan in both math and social skills.
B) Jesse should teach math and Addae should teach how to make friends.
C) Jesse and Addae should both teach how to make friends.
D) Jesse should teach how to make friends and Addae should teach math.
Answer: D
Q3) Globalization is best described as:
A) a new process.
B) an old process that has consistently grown.
C) an old process that has grown intermittently.
D) an old process that has declined over time.
Answer: C
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Page 4
Chapter 3: Supply and Demand
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Sample Questions
Q1) An inferior good is one that:
A) is of low quality or not very durable.
B) gets poor reviews from objective, independent evaluators.
C) no consumers are willing to buy.
D) experiences decreased demand when income increases.
Answer: D
Q2) Suppose that Country X is a high-cost producer of oil and Country Y is a low-cost producer of oil. The citizens of Country X use both oil produced in their own country as well as oil produced in Country Y. If the market price of oil decreases, oil production in Country X will _______, and the citizens of Country X will _________________.
A) decrease; purchase a larger fraction of their oil from Country Y
B) increase; purchase a larger fraction of their oil from Country X
C) decrease; not change their consumption mix between imported and domestic oil
D) increase; purchase a smaller fraction of their oil from Country Y
Answer: A
Q3) Total consumer surplus is measured by the area beneath the demand curve.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Equilibrium
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Sample Questions
Q1) When there is a surplus of a good:
A) sellers will lower the price in order to increase quantity demanded.
B) sellers will raise the price in order to decrease quantity demanded.
C) sellers will compete with buyers.
D) this is an indication the buyers do not value the good.
Q2) Before his pioneering experiments on market equilibrium, Vernon Smith believed that the market equilibrium concept:
A) described reality.
B) might describe reality.
C) did not describe reality.
D) may have described reality.
Q3) Economic growth in China and India has reduced the world supply of oil.
A)True B)False
Q4) At a free market equilibrium there are no unexploited gains from trade. A)True B)False
Q5) At the equilibrium price, quantity demanded is equal to quantity supplied. A)True B)False
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Chapter 5: Elasticity and Its Applications
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Sample Questions
Q1) The price of wheat increases, but few people cut back on their consumption of bread because:
A) the price of bread is a small portion of the budget, and thus the demand for bread is inelastic.
B) the price of bread is a large portion of the budget, and thus the demand for bread is elastic.
C) change in the price of wheat does not affect the price of bread.
D) None of the answers is correct.
Q2) If the price elasticity of demand for cigarettes is -0.50 and the price of cigarettes increases 10 percent, the quantity demanded of cigarettes decreases by 50 percent.
A)True
B)False
Q3) The fundamental determinant of the elasticity of supply is:
A) how many substitute goods exist.
B) the price of the good.
C) how quickly the per-unit cost of production increases with an increase in production.
D) the rate of change of quantity demanded as compared to the quantity supplied.
Q4) Summarize the factors that cause goods to have a more inelastic supply.
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Chapter 6: Taxes and Subsidies
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Sample Questions
Q1) If the elasticity of supply is 3 and the elasticity of demand is 1 (in absolute value), buyers will bear less of the tax than sellers.
A)True
B)False
Q2) As demand becomes more elastic, ceteris paribus, the deadweight loss from a tax:
A) increases.
B) remains the same.
C) decreases.
D) changes unpredictably.
Q3) Who bears the majority of the burden in the case of a state cigarette tax?
A) buyers
B) sellers
C) the state government
D) the neighboring state's government
Q4) The question of who pays the greater amount of a commodity tax is determined by: A) Congress.
B) the President of the United States.
C) the relative elasticities of demand and supply.
D) the individual who writes the check for the tax.
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Chapter 7: The Price System
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Sample Questions
Q1) (Figure: Speculation) Today, speculators anticipating trouble in the Middle East will ______ the current supply of oil, causing the price of oil to _______.
A) decrease; rise from B to A
B) decrease; fall from A to B
C) increase; rise from B to A
D) increase; fall from A to B
Q2) Hewlett-Packard uses an internal prediction market to predict future hardware sales. A)True
B)False
Q3) The locovore movement encourages eating locally produced food to reduce the greenhouse gases emitted from transporting food long distances, placing upward pressure on local land prices as farmland becomes more valuable. Which statement reflects what will likely occur as a result?
A) The price of beef falls as more people eat beef.
B) Hunting animals becomes more common.
C) Local forests become less common.
D) In the short term, the price of lumber rises.
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Chapter 8: Price Ceilings and Floors
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Sample Questions
Q1) Southwest Airlines was able to enter the national market in 1978 as a result of:
A) winning a series of lawsuits.
B) accumulating market share.
C) airline deregulation.
D) establishment of new price controls.
Q2) (Figure: Price Ceilings and Consumer Surplus) Refer to the figure. There is a price ceiling of $20. What is the value of consumer surplus if all the goods are allocated randomly?
A) $120
B) $180
C) $80
D) None of the answers are correct.
Q3) Regulation of entry in the airline industry increased costs and reduced innovation. A)True
B)False
Q4) When the maximum price that can be legally charged is above the market price we say that there is a price floor.
A)True
B)False
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Chapter 9: International Trade
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Sample Questions
Q1) Consider the following statements:
I. Relative to a no-trade situation, if the United States exported wheat, the U.S. domestic wheat price would rise and domestic production of wheat would expand.
II. Relative to a no-trade situation, international trade causes the prices of all goods to rise.
A) I is true; II is false.
B) I is false; II is true.
C) Both I and II are true.
D) Both I and II are false.
Q2) A tariff benefits domestic producers but hurts domestic consumers.
A)True
B)False
Q3) Strategic trade protectionism makes:
A) all countries better off.
B) no one better off.
C) foreign countries better off at the expense of the domestic country.
D) the domestic country better off at the expense of foreign countries.
Q4) Briefly discuss any benefits of "protectionism".
Q5) What are the three major benefits of trade? Explain briefly.
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Chapter 10:
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Sample Questions
Q1) Which is an example of an external benefit?
A) You get a raise that increases your pay 20%.
B) Your neighbor's rooster wakes you up every morning before your alarm clock goes off, reducing the amount of sleep you get at night.
C) Researchers at Johnson & Johnson are working on a cure for cancer.
D) Your neighbors fix up their homes, which raises property values on the entire street.
Q2) A beekeeper's hives are located in an orchard where the bees gather nectar to produce honey and simultaneously pollinate the orchard, which increases the yield of fruit. This benefits:
A) only the owner of the orchard.
B) only the beekeeper.
C) the beekeeper, but it creates a negative externality because the bees are a hazard to the orchard owner.
D) both the beekeeper and the orchard owner.
Q3) Explain in your own words: 1) What is an externality? and 2) What is the difference between a positive and negative externality. Provide examples.
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Page 12
Chapter 11: Costs and Profit Maximization Under Competition
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Sample Questions
Q1) A firm should always shut down if it is earning negative profits.
A)True
B)False
Q2) Firms in a perfectly competitive industry maximize profits by:
A) eliminating the competition.
B) producing a higher quality good and setting a price higher than the competition.
C) setting a price equal to the market price.
D) setting a price less than the market price and undercutting the competition.
Q3) Which of the following statements is FALSE?
A) AC = TC/Q
B) A firm that produces 100 units at a total cost of $500 has an average cost of $5 per unit.
C) Firms will earn positive profits if price exceeds average cost.
D) When marginal cost is below average cost, average cost is rising.
Q4) Firms should exit the market if:
A) sunk costs are a significant portion of the total cost.
B) producer surplus is just equivalent to recoverable costs.
C) price falls below the average cost.
D) marginal cost exceeds the average cost.
Page 13
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Chapter 12: Competition and the Invisible Hand
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Sample Questions
Q1) If there are significant externalities present, then:
A) prices will still send the correct signal in a free market.
B) the invisible hand still works perfectly.
C) there will not be an ideal balance of resources between industries.
D) creative destruction won't work.
Q2) In The Meaning of Competition, economist Friedrich Hayek questioned an assumption of so-called perfect competition-that all products are identical. He wrote that the goal of all business people is to make their products differ from those of their competitors. How does this relate to Schumpeter's thoughts on the textbook emphasis of pushing price down to average cost?
A) Competition is about innovation.
B) Prices often stay above average cost.
C) Competition focuses on making the most out of opportunity costs.
D) Firms focus on constraining entry.
Q3) Consider the market for DVD players and HDTVs (high-definition televisions). A firm can produce DVD players at an average cost of $20 each, or HDTVs at a cost of $150 each. Which product should this firm produce if the price of DVD players is $15 and the price of HDTVs is $200? Why? Explain what you would expect other firms in both the markets for DVD players and HDTVs to do. Assume both markets are competitive.
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Page 14
Chapter 13: Monopoly
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Sample Questions
Q1) When a single firm can supply the entire market at lower cost than two or more firms, we say that the industry is:
A) profit maximizing.
B) a natural monopoly.
C) a bilateral monopoly.
D) a natural competitor.
Q2) Which of the following is NOT a source of monopoly power?
A) laws preventing entry of competitors
B) economies of scale
C) innovation
D) inelastic demand for the product
Q3) A natural monopoly occurs when:
A) the product is sold in its natural state (such as water or diamonds).
B) there are economies of scale over the relevant range of output.
C) the firm is characterized by a rising marginal cost curve.
D) production requires the use of free natural resources, such as water or air.
Q4) Graphically show that a monopolist facing a market with a relatively inelastic demand curve will impose a higher markup than it will in a market with a relatively elastic demand curve. Explain this behavior using the "You can't take it with you" effect.
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Chapter 14: Price Discrimination
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Sample Questions
Q1) If a monopolist begins to perfectly price discriminate,:
A) the deadweight loss will be eliminated as output expands to its efficient level.
B) consumer surplus will expand as prices fall.
C) the deadweight loss will increase as there are now more lost gains from trade.
D) consumer surplus is eliminated and the deadweight loss is maximized.
Q2) Which of the following is NOT an example of bundling?
A) cell phones and phone calls
B) computer software
C) automobiles and engines
D) McDonald's value meals
Q3) Universities are ______ price discrimination.
A) forbidden by law to practice
B) among the biggest practitioners of
C) not knowledgeable in the practice of
D) recently beginning to engage in
Q4) It is easier to price discriminate on services than on goods.
A)True
B)False
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Page 16
Chapter 15: Oligopoly and Game Theory
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Sample Questions
Q1) Cartels in manufactured goods are difficult to maintain because other firms can enter the market and easily produce substitute products.
A)True
B)False
Q2) By 1985, OPEC had:
A) sustained effectiveness as a cartel.
B) largely failed as a cartel.
C) disbanded.
D) not yet formed.
Q3) With price matching plus 10% of the difference the equilibrium will occur when:
A) both firms set the price at the high price.
B) firm A sets the price at the high price, and firm B sets the price at the low price.
C) firm A sets the price at the low price, and firm B sets the price at the low price.
D) both firms set the price at the low price.
Q4) Governments create barriers to entry with licenses or other regulations that limit entry.
A)True
B)False
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Chapter 16: Competing for Monopoly
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Sample Questions
Q1) The story of QWERTY is about:
A) how an inferior product can become the "locked-in" standard simply because it was first to market.
B) how network goods are noncontestable.
C) the absence of a Nash equilibrium when there are large fixed costs to entry.
D) the creation of monopoly power through the use of loyalty programs.
Q2) Hotels often offer reward cards that provide discounts to customers who frequent their establishments. Why do hotels offer these loyalty programs?
A) to decrease switching costs
B) to increase switching costs
C) to eliminate switching costs
D) to reduce their market power
Q3) A network good is a good whose value to one consumer:
A) increases the network of the consumer.
B) increases some, but decreases in value as other consumers use the good.
C) also creates the same value to other consumers as they use the good.
D) increases the more that other consumers use the good.
Q4) Why are network goods usually sold by monopolies or oligopolies?
Q5) Describe the features of markets for network goods.
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Chapter 17: Monopolistic Competition and Advertising
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Sample Questions
Q1) In the long run, a monopolistically competitive firm will set P = MC.
A)True
B)False
Q2) (Figure: Monopolistic Competition) Refer to the figure. Suppose the figure represents a firm that operates in a monopolistically competitive market. In the long run you would expect:
A) prices to increase.
B) demand to become more inelastic.
C) less quality and innovation.
D) more firms to enter the market.
Q3) In 2010, which was the location of more advertisement for the iPad?
A) Charlottesville, Virginia
B) Berlin, Germany
C) Silicon Valley, California
D) These markets were equally saturated with iPad ads.
Q4) Advertising can help people enjoy more products.
A)True
B)False
Q5) What are the features that describe monopolistic competition?
Q6) In what ways is the market for books a monopoly?
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Chapter 18: Labor Markets
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Q1) The wages of office cleaners in the United States are ________ than the wages of office cleaners in India because ________.
A) lower; few Americans want jobs as office cleaners generating a lower supply of office cleaners in the United States
B) lower; Indians work more hours
C) greater; American offices are more productive, hence more valuable to keep clean
D) greater; more Indian cleaners are in a union
Q2) The marginal product of labor is the increase in a firm's revenues created by hiring an additional laborer.
A)True
B)False
Q3) Since the 1980s:
A) the return to a college education has been flat.
B) the return to a college education has been decreasing.
C) the return to a college education has been increasing.
D) the penalty for dropping out of high school has been decreasing.
Q4) Explain how market shifts in demand and/or supply can lead to higher wages for workers.
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Page 20
Chapter 19: Public Goods and the Tragedy of the Commons
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Sample Questions
Q1) The city government taxes its residents to pay for mosquito control. Betty is not happy about paying the tax, for mosquitoes never bite her. Betty is a:
A) free rider.
B) forced rider.
C) taxed rider.
D) lonesome rider.
Q2) Explain whether there is a free-rider problem with mosquito control and town parks. If so, how can it be addressed?
Q3) Which of the following goods is nonexcludable?
A) a can of Coke
B) a concert at Radio City Music Hall
C) national defense
D) an apartment building
Q4) What features does the sun have in common with public goods?
A) Like public goods, the sun is rival.
B) Like public goods, the sun is excludable.
C) Like public goods, the sun is nonrival and nonexcludable.
D) Like public goods, the sun is rival and nonexcludable.
Q5) Does equal sharing in farm output lead to free riders? Explain.
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Chapter 20: Political Economy and Public Choice
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Sample Questions
Q1) There are three voters and two representatives in a democracy. Voter 1 supports government spending of $30. Voter 2 supports government spending of $50. Voter 3 supports government spending of $90. According to the median voter theorem, politicians will converge upon a spending bill of:
A) $30.
B) $50.
C) $60.
D) $90.
Q2) In the public sector, politicians:
A) pursue primarily the general public interest since competition is less intense in the public sector.
B) pursue primarily the general public interest since they are concerned mostly with the collective good.
C) act in the narrow self-interest of their constituents and contributors to remain in office.
D) respond to the broader active political interests even though they choose to be rationally ignorant.
Q3) How are rational ignorance, special interest groups, and economic inefficiency related?
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Page 22
Chapter 21: Economics, Ethics, and Public Policy
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Q1) A cosmopolitan Rawlsian thinker would likely support:
A) more immigration.
B) the same amount of immigration.
C) more immigration restrictions.
D) no immigration.
Q2) Which statement about the maximin principle is correct?
A) Doing well by the better-off group is more important than improving the lot of worst-off groups.
B) Doing well by the worst-off group is more important than improving the lot of any other group.
C) Doing well by both the better-off group and worst-off group is equally important.
D) Doing well by neither the better-off group nor worst-off group is important.
Q3) The French government tries to support French culture by:
A) placing a sales tax on French-made music.
B) specifying a minimum number of French-language movies that must be shown on TV.
C) encouraging cross-cultural exchanges with other European countries.
D) encouraging foreign-film producers to shoot in France.
Q4) Discuss the problems of implementing utilitarianism?
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Chapter 22: Managing Incentives
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Q1) Suppose college administrators make it a top priority of the institution to increase the quality of their professors' teaching. They also believe in the power of incentives, and institute a system where teachers receive bonuses for high teaching evaluations. Explain whether this incentive scheme will help to increase the quality of teaching at the institution.
Q2) Amazingly, most doctors don't wash their hands between patients. This is a major problem since the risk of infection runs high. One theory suggests arrogance comes with experience as good doctors insist contamination must come from other hospital personnel, not them. When Cedars-Sinai Hospital sought to eliminate this problem, by far the most effective method was providing photographs of bacteria cultures from the hands of the hospital's Chief of Staff Advisory Committee, composed mostly of top doctors. The pictures served as screen savers for every computer in the hospital. What kind of incentive structure does this most closely resemble?
A) hourly rates
B) tournaments
C) piece rates
D) corporate culture
Q3) Explain what is meant by the term incentives, and why it is important to get incentives right.
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Chapter 23: Stock Markets and Personal Finance
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Q1) What is the risk-return trade-off?
A) Assets with the least risk tend to outperform the market.
B) To invest in less risky assets means higher returns.
C) Bonds earn higher returns than stocks because bonds are riskier.
D) To earn higher rates of return, a person must accept higher risk.
Q2) The fact that the majority of stock mutual funds cannot outperform the stock market averages is consistent with:
A) the no free lunch principle.
B) the risk-return trade-off principle.
C) the efficient markets hypothesis.
D) the active trading hypothesis.
Q3) In the stock market, profiting from inside information:
A) is nearly impossible because of the efficient markets hypothesis.
B) can lead to above-normal market returns for a long period.
C) requires the investor to keep the information secret and not act for a long period.
D) requires purchasing or selling large quantities of the stock very quickly.
Q4) You cannot get rich, on average, by buying and selling on public information.
A)True
B)False
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Chapter 24: Price Discrimination
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Q1) Which is an example of asymmetric information?
A) an employer not knowing which job candidate will do the best job
B) a buyer using a compiled report on the quality of a used car
C) a shopper using Internet reviews to help her decide which washing machine to purchase
D) a doctor prescribing a medication for a patient
Q2) Hyundai Motor Company offered "America's Best Warranty" to signal that:
A) they wanted to sell more vehicles.
B) they had improved the quality of their vehicles.
C) they were selling low-quality vehicles.
D) other brands of vehicles were lower quality than theirs.
Q3) When moral hazard occurs, the economy produces goods that no one wants or needs.
A)True
B)False
Q4) Examples of ratings agencies that help reduce moral hazard include all of the following EXCEPT:
A) Consumer Reports.
B) Standard and Poors.
C) Moody's.
D) eBay.
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Chapter 25: Consumer Choice
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Q1) Increasing marginal utility means that marginal utility ______ as consumption ______.
A) decreases; decreases
B) decreases; increases
C) increases; decreases
D) increases; increases
Q2) By assuming diminishing marginal utility, we mean that:
A) consumers get less overall value from goods as their income rises.
B) consumers value some goods more than others.
C) the cost of producing goods declines as output increases.
D) consumers value additional units of a good less than the previous unit.
Q3) The consumption bundle that maximizes utility for a consumer is the bundle that:
A) equates the slope of the budget constraint with the slope of the indifference curve.
B) maximizes marginal utility across all goods.
C) minimizes the costs of production.
D) maximizes the marginal rate of substitution.
Q4) To shop at places such as Costco, one does not have to pay a membership fee.
A)True B)False
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