Foundations of Economics Final Test Solutions
Course Introduction
Foundations of Economics introduces students to the core principles and concepts that underpin economic theory and practice. The course explores fundamental topics such as supply and demand, market equilibrium, price mechanisms, and the roles of consumers and producers within different market structures. It examines the behavior of individuals and firms, the allocation of resources, and the impact of government intervention in the economy. By analyzing real-world economic issues and case studies, students gain a foundational understanding of how economies operate at both the microeconomic and macroeconomic levels, preparing them for more advanced study in the field.
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) Which of the following statements is TRUE?
A) The Great Depression, despite its name, was really a small economic downturn with very little unemployment.
B) The Great Depression refers to the severe economic downturn that occurred during the nineteenth century.
C) The Great Depression would have been less severe if the Federal Reserve had acted appropriately.
D) Well-functioning economies grow at a constant rate and do not experience booms and busts.
Answer: C
Q2) Most developed countries:
A) have stopped growing.
B) grow at an unsteady rate.
C) grow at a steady rate.
D) grow at an increasing rate.
Answer: B
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Chapter 2: The Power of Trade and Comparative
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Sample Questions
Q1) Specialization and trade can _____ the per-unit cost of production because _____
.
A) decrease; it allows for more small-scale production.
B) decrease; it creates economies of scale associated with large-scale production
C) increase; it requires more expensive, specialized equipment
D) increase; more expensive labor is needed.
Answer: B
Q2) A country produces and consumes eight units of sugar cane costing $50 per unit and two iPods that cost $200 each. After specialization and trade, that country consumes eight units of sugar cane and four iPods. With 24 units of labor, what are wages in this country?
A) $33.33 without trade and $50 with trade
B) $50 without trade and $75 with trade
C) $50 without trade and $33.33 with trade
D) $33.33 without trade and $75 with trade
Answer: A
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Chapter 3: Supply and Demand
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Sample Questions
Q1) Which statement correctly completes the definition of a demand curve? A demand curve is a function that shows the relationship between:
A) price and the quantity sold.
B) price and the quantity supplied.
C) price and the quantity demanded.
D) quantity demanded and quantity supplied.
Answer: C
Q2) The demand curve shows the quantity that consumers are willing and able to purchase at different prices.
A)True
B)False
Answer: True
Q3) If we expect the current poor weather conditions to lead to higher cotton prices in the future, the:
A) current demand for cotton will decrease.
B) future demand for cotton will increase.
C) current demand for cotton be unchanged.
D) current demand for cotton will increase.
Answer: D
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Page 5
Chapter 4: Equilibrium
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Sample Questions
Q1) Five new sellers enter a market (that previously had seven) and begin producing a good. Which of the following choices explains what happens to the equilibrium Q and P?
A) The demand curve will shift to the right, and the equilibrium P and Q will both rise.
B) The supply curve will shift to the right, the equilibrium P will fall, and the equilibrium Q will rise.
C) The supply curve will shift to the left, the equilibrium P will fall, and the equilibrium Q will rise.
D) The supply curve will shift to the right, the equilibrium P will rise, and the equilibrium Q will fall.
Q2) A market can be described by the equations Q<sub>d</sub> = 100 - P and Q<sub>s</sub> = -20 + P. At a price of $40, will this market experience a shortage or a surplus and what is the amount of this shortage or surplus?
Q3) A market shortage can be defined as a situation in which the quantity supplied in a market is greater than the quantity demanded, at the given price. A)True B)False
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Page 6
Chapter 5: Elasticity and Its Applications
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Q1) When a good has fewer substitutes in consumption, is a small part of the consumer's budget, and a long time has passed, demand for such a good is inelastic.
A)True
B)False
Q2) The demand for most goods tends to become ______ over time.
A) downward sloping
B) more vertical
C) more elastic
D) less elastic
Q3) If the price elasticity of demand is -1.2, economists would say the demand is:
A) elastic.
B) inelastic.
C) unit elastic.
D) unelastic.
Q4) The fundamental determinant of the elasticity of demand for a good is:
A) the opportunity cost of producing the good.
B) the value that consumers place on one more unit of the good.
C) how easy it is to substitute the good for another.
D) the number of consumers in the market.
Q5) Summarize the factors that cause goods to have a more inelastic supply.
Page 7
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Chapter 6: Taxes and Subsidies
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Sample Questions
Q1) If the government wanted to reduce alcohol consumption in the United States, would a state tax or federal tax be most effective?
A) A state tax on alcohol consumption would be more effective because state taxes affect more buyers.
B) A state tax on alcohol consumption would be more effective because the elasticity of demand is higher at the state level than at the federal level.
C) A federal tax on alcohol consumption would be more effective because the elasticity of demand is higher at the federal level than at the state level.
D) A federal tax on alcohol consumption would be more effective because suppliers cannot as easily avoid the tax simply by shipping alcohol to other states.
Q2) Commodity taxes impose a ______ upon society.
A) transfer loss
B) transfer benefit
C) deadweight loss
D) deadweight benefit
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Chapter 7: The Price System
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Sample Questions
Q1) A futures contract is:
A) a contract to buy or sell commodities at some point in the future at a predetermined price.
B) a contract to rent a resource for a specified period with the option of buying it at the end of the lease.
C) an investment security whose value depends on the prices of several other securities.
D) the rate at which one currency trades for another currency.
Q2) The Hollywood Stock Exchange:
A) allows people to buy stocks and bonds from movie theaters.
B) is a prediction market of expected film profits.
C) sets opening-day ticket prices for new movie releases.
D) allows movie producers to sell futures contracts to avoid the risk of poor ticket sales.
Q3) MOST markets are interdependent and rely on the outcomes of other markets.
A)True
B)False
Q4) In a free market, there are no unsatisfied wants at the equilibrium price.
A)True
B)False
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Page 9
Chapter 8: Price Ceilings and Floors
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Sample Questions
Q1) Deregulation of the airline industry has led to:
A) an increase in the quality and safety of air travel.
B) increases in the costs of production in air travel.
C) more firms providing air travel services.
D) fewer firms providing air travel services.
Q2) (Figure: Effects of Price Ceilings) Refer to the figure. Suppose that the data represent the retail gasoline market. At a price ceiling of $2, the total value of wasted time from waiting in line is:
A) $5.
B) $10.
C) $15.
D) $20.
Q3) (Figure: Price Ceiling) Refer to the figure. A price ceiling of $10 results in a:
A) shortage of 270 units.
B) shortage of 40 units.
C) surplus of 270 units.
D) surplus of 40 units.
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Chapter 9: International Trade
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Sample Questions
Q1) There is strong evidence to support the idea that protectionism increases domestic job growth.
A)True
B)False
Q2) (Figure: Trade) Refer to the figure. If the world price for the good in this figure were higher than the domestic price, a move to free international trade means that the domestic economy would become:
A) a net importer of the good.
B) a net exporter of the good.
C) neither a net importer nor a net exporter of the good.
D) either a net importer or a net exporter of the good but it is impossible to say which.
Q3) Economists consider tariffs to be:
A) necessary.
B) beneficial to domestic consumers.
C) harmful to domestic producers.
D) obstacles that reduce gains from trade.
Q4) Trade makes people better off through specialization.
A)True
B)False
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Chapter 10: Externalities- When the Price Is Not Right
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Sample Questions
Q1) Markets are often inefficient when external costs are present because:
A) externalities cannot be corrected without government regulation.
B) social costs exceed private costs at the private market solution.
C) private costs exceed social costs at the private market solution.
D) production externalities lead to consumption externalities.
Q2) The Coase theorem says that if transaction costs are high and property rights are clearly defined, the private bargains will ensure that the market equilibrium is efficient even when there are externalities.
A)True
B)False
Q3) Suppose the government limits the amount of pollution from cars by capping the amount of pollution they can emit to 30 pounds of carbon dioxide per car per year. If Alex was willing to pay $50 to emit an extra pound of carbon dioxide and Tyler was willing to sell a pound of his allowance for $30, would it be efficient for them to make this trade?
A) No, it would raise the cost of pollution abatement.
B) Yes, it would lower the cost of pollution abatement.
C) It is impossible to say whether this would or would not be an efficient trade.
D) There is no incentive for Alex and Tyler to trade.
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Page 12
Chapter 11: Costs and Profit Maximization Under Competition
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Sample Questions
Q1) A firm's short-run supply curve is its marginal cost curve.
A)True
B)False
Q2) As the price of a good fluctuates, a profit-maximizing firm will expand or contract production along its:
A) average cost curve.
B) average product curve.
C) marginal cost curve.
D) marginal product curve.
Q3) (Figure: Maximizing Profit) What is the firm's profit-maximizing level of output?
A) 4
B) 7
C) 9
D) 12
Q4) Price times quantity minus total cost equals:
A) total revenue.
B) fixed costs.
C) marginal revenue.
D) profit.
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Chapter 12: Competition and the Invisible Hand
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Sample Questions
Q1) Since all competitive firms produce wherever marginal cost equals the market price for the product, we can conclude that:
I. all competitive firms produce at the same marginal cost level.
II. all competitive firms produce the same quantity.
III. all competitive firms make normal profit.
A) I only
B) I and II only
C) II and III only
D) All of the answers are correct.
Q2) Suppose that you own two farms on which to grow corn. Farm 2 has a lower marginal cost of producing corn than Farm 1. To lower total cost of production, you should produce:
A) all on Farm 1.
B) all on Farm 2.
C) some on Farm 1 and some on Farm 2.
D) neither on Farm 1 nor on Farm 2.
Q3) We can write the Invisible Hand Property 1 as P = AC<sub>1</sub> = AC<sub>2</sub> = . . . = AC<sub>N</sub>.
A)True
B)False
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Chapter 13: Monopoly
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Sample Questions
Q1) (Figure: Monopoly Profits) Refer to the figure. The monopolist earns a profit of:
A) $630.
B) $420.
C) $540.
D) $480.
Q2) A monopoly is a firm with market power, and market power may arise from economies of scale, patent protection, and innovation.
A)True
B)False
Q3) When comparing a monopoly with a competitive industry, monopoly quantity:
A) and monopoly price will be lower than that of a competitive firm.
B) will be higher, and monopoly price will be lower, than that of a competitive firm.
C) will be lower, and monopoly price will be higher, than that of a competitive firm.
D) and monopoly price will be higher than that of a competitive firm.
Q4) Graphically depict a monopolist enjoying abnormal profits.
Q5) Explain how a firm can use its monopoly power to earn above-normal profits.
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Page 15
Chapter 14: Price Discrimination
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Sample Questions
Q1) A perfect price-discriminating seller:
A) cannot prevent arbitrage.
B) charges a single price.
C) maximizes consumer surplus.
D) eliminates deadweight loss.
Q2) A top-performing used-car salesman is able to sell his cars to each customer at their maximum willingness to pay, a practice known as:
A) insightful pricing.
B) pricing market-to-market.
C) perfect price discrimination.
D) price tying.
Q3) (Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets-Market A and Market B-through the process of price discrimination, how much profit is the monopolist making in Market A?
A) $270
B) $450
C) $830
D) $627.50
Q4) What conditions are necessary for a firm to practice price discrimination?
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Chapter 15: Oligopoly and Game Theory
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Sample Questions
Q1) Tactic collusion occurs even without explicit agreement or communication.
A)True
B)False
Q2) When cheating is less profitable or easier to detect, a cartel will be easier to sustain.
A)True
B)False
Q3) In the prisoner's dilemma, the dominant strategy is:
A) in the best interest of the players in the game.
B) in the least interest of the players in the game.
C) a moderate outcome for the players in the game.
D) not a possible outcome in the game.
Q4) Cartels have lots of market power and rarely ever collapse because cartel members have no incentive to expand output beyond the limits set by the carte.l
A)True
B)False
Q5) There are no government supported cartels in the United States.
A)True
B)False
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Chapter 16: Competing for Monopoly
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Sample Questions
Q1) Which increases the contestability of a market?
I. low fixed costs of entry
II. no legal barriers to entry
III. consumers are willing to try substitute goods
A) I, II, and III
B) II and III only
C) I only
D) II only
Q2) Firms that operate in contestable markets:
A) still price competitively since they face the threat of competition from new entrants.
B) are pure monopolies that set prices equal to consumers' highest willingness to pay.
C) earn zero economic profits.
D) face more competition when fixed costs are high.
Q3) Frequent flyer programs are often designed to:
A) increase contestability.
B) maintain contestability.
C) limit contestability.
D) have various effects on contestability.
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Chapter 17: Monopolistic Competition and Advertising
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Sample Questions
Q1) On average, advertising makes consumers worse off by raising prices.
A)True
B)False
Q2) Persuasive advertising is wasteful advertising and does nothing to affect overall demand for the product.
A)True
B)False
Q3) Firms in monopolistic competitive industries:
I. sell their products at a higher price than if their industry were strictly competitive.
II. sell their products at the same price as if they were in a monopoly market.
III. have a high incentive to innovate with new products and better quality.
A) I and II only
B) II and III only
C) I and III only
D) I, II, and III
Q4) Advertising can help finance many useful goods and services.
A)True
B)False
Q5) In what ways is the market for books competitive?
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Chapter 18: Labor Markets
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Sample Questions
Q1) In many universities, teaching summer classes pays professors a sum of money in addition to their annual salary. Full professors who have been at the university the longest typically get first priority for teaching summer classes, with newer assistant professors at the end of the line. Given this system, who ends up teaching the majority of summer classes at these universities? Explain why. What role do the different professors' labor supply curves play?
Q2) The market wage of computer programmers is determined by:
A) the demand for labor.
B) an upward sloping supply curve of labor and a downward sloping demand curve for labor.
C) a downward sloping demand and supply curve of labor.
D) the marginal product of labor and demand curve for labor.
Q3) Which of the following is NOT a kind of preference-based discrimination?
A) discrimination using statistics
B) discrimination by employers
C) discrimination by customers
D) discrimination by employees
Q4) The main way that unions raise wages is through increasing the demand for labor.
A)True
B)False
Page 20
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Chapter
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Sample Questions
Q1) The O'Reilly Factor is a popular cable television news show. To watch the show requires a paid subscription. Therefore, which of the following is TRUE?
A) This show is a nonrival private good because 1) nonpayers can be excluded and 2) when one person watches it does not diminish another person's ability to watch.
B) This show is a public good because payers and nonpayers alike are watching a rival show.
C) This show is a public good because 1) no one can be excluded and 2) when one person watches it does not diminish another person's ability to watch.
D) This show is a common good because 1) nonpayers can be excluded and 2) when one person watches it does not diminish another person's ability to watch.
Q2) Tuna overfishing is an example of a tragedy of the commons.
A)True
B)False
Q3) Why do large class sizes limit the classification of college courses as nonrival private goods?
Q4) 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) Rational ignorance may cause voters to make uninformed decisions; however, the outcomes tend to be the same as if voters had full information.
A)True
B)False
Q2) An incumbent is more likely to win reelection if average unemployment during his first four-year term is less than unemployment in the last year of that term.
A)True
B)False
Q3) Of the following, which is the smallest part of the United States budget?
A) defense
B) interest on the federal debt
C) Social Security
D) welfare
Q4) Sugar producers likely won't do much to oppose a law that reduces the supply of sugar and raises prices.
A)True
B)False
Q5) Explain the formula for political success. Provide an example.
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Chapter 21: Economics, Ethics, and Public Policy
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Q1) When it comes to redistribution, a utilitarian approach tries to determine which people can generate the greatest income with additional utility.
A)True
B)False
Q2) Positive statements are based on fact while normative statements are based on opinion.
A)True B)False
Q3) Which statement is TRUE?
A) It is illegal to sell horsemeat in European restaurants.
B) It is illegal to sell horsemeat in Japanese restaurants.
C) It is illegal to sell horsemeat in California restaurants.
D) All of these statements are correct.
Q4) Provide at least three normative economic statements that politicians often make about immigration?
Q5) A poor person who sells an organ is always being exploited.
A)True B)False
Q6) To what extent was Robin Hood a utilitarian?
Page 23
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Chapter 22: Managing Incentives
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Q1) Careful design of an incentive scheme can narrow the gap between "what you want" and "what you pay for."
A)True
B)False
Q2) A good social system aligns self-interest with the social interest.
A)True
B)False
Q3) Executive pay based on relative performance ties compensation more closely to the effort and ability of the executive than pay schemes that are tied to the firm's absolute stock price.
A)True
B)False
Q4) ______ can benefit from a piece rate pay system.
A) Only firms
B) Only workers
C) Neither firms nor workers
D) Both firms and workers
Q5) Corporate culture is needed to help firms incentivize what is easy to measure. A)True
B)False
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Chapter 23: Stock Markets and Personal Finance
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Q1) Over time, ______ to beat the market.
A) all forms of technical analysis are shown
B) some forms of technical analysis are shown
C) no forms of technical analysis are shown
D) technical analysis has been abandoned as a means
Q2) The efficient markets hypothesis implies that active investing strategies can outperform passive investing strategies.
A)True
B)False
Q3) If each of the approximately 320,000 securities and financial service agents in the United States bet on whether the market would go up or down for each of the next 10 years by flipping a coin, we would expect that approximately 312 agents would have been right 10 years in a row. This example suggests that:
A) it is easy to beat the market averages.
B) famous investors like Warren Buffett may have merely been lucky.
C) there are above-normal profit opportunities in the stock market.
D) All of the answers are correct.
Q4) Briefly list several important lessons for investing wisely that economics offers.
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Chapter 24: Price Discrimination
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Q1) Because home inspectors are not allowed to profit from any repairs they recommend, there is a reduction in:
A) mutually beneficial trades.
B) the principal-agent problem.
C) adverse selection.
D) moral hazard.
Q2) People who value their health:
A) will buy only cheap health insurance policies.
B) are less likely to purchase health insurance.
C) are more likely to purchase health insurance.
D) will always buy health insurance policies.
Q3) Which is an example of moral hazard?
A) A hair dresser colors poorly a client's hair.
B) A driver drives faster than the speed limit.
C) A car dealership offers a warranty.
D) A car salesman recommends a car that has been wrecked and repaired.
Q4) Signaling exists in nature.
A)True
B)False
Q5) Explain the health insurance death spiral.
Page 26
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Chapter 25: Consumer Choice
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Sample Questions
Q1) The demand curve is downward sloping due to diminishing marginal utility.
A)True
B)False
Q2) If the marginal utility per dollar for hamburgers is higher than the marginal utility per dollar for tacos, then to maximize utility the consumer should only consume hamburgers.
A)True
B)False
Q3) If the price of apples rises, oranges become relatively less expensive. The increase in the orange consumption resulting from this price change is an example of the income effect.
A)True
B)False
Q4) What does a single indifference curve represent?
A) a bundle of goods
B) a budget
C) a level of utility
D) decreasing marginal utility
Q5) As wages rise, will labor supply increase or decrease? Explain all possible scenarios.
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