Foundations of Economics
Mock Exam
Course Introduction
Foundations of Economics provides an introduction to the basic principles that underpin the study of economics, including the concepts of scarcity, opportunity cost, supply and demand, market equilibrium, and the role of government in economic systems. The course explores both microeconomic and macroeconomic perspectives, enabling students to understand how individuals, firms, and societies allocate resources and make decisions. By examining real-world economic issues, students develop analytical skills essential for interpreting economic events and policies, laying a solid groundwork for more advanced study in economics and related disciplines.
Recommended Textbook
Foundations of Microeconomics 6th Edition by Robin Bade Michael Parkin
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Page 2
Chapter 1: Getting Started
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Sample Questions
Q1) Normative statements
Idescribe how the world is.
Iidescribe how the world ought to be.
Iiidepend on people's values and cannot be tested.
A)i only
B)ii only
C)iii only
D)ii and iii
E)i and iii
Answer: D
Q2) An incentive is
A)a reward or a penalty that encourages or discourages an action.
B)when people make rational choices by comparing costs and benefits.
C)what you must give up to get something.
D)a choice is made on the margin.
E)a good or service that satisfies wants.
Answer: A
Q3) What does the slope of the line shown in the above figure equal?
Answer: The slope equals the change in variable on the y-axis divided by the change in the variable on the x-axis, or (18 - 27)/(10 - 20)= 0.90.
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Chapter 2: The Usand Global Economies
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Sample Questions
Q1) Most countries in the world are classified as
A)advanced.
B)in transition.
C)developing.
D)industrialized.
E)emerging market.
Answer: C
Q2) The largest share of total production in the United States is
A)consumption goods and services.
B)capital goods.
C)government goods and services.
D)exported goods and services.
E)imported goods and services.
Answer: A
Q3) In the United States, which factor of production earns the largest share of the nation's total income?
Answer: The largest fraction of the nation's total income is earned by labor.In the United States, wages paid to labor account for about 69 percent of the nation's total income.
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4
Chapter 3: The Economic Problem
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Sample Questions
Q1) The United States produced approximately ________ worth of goods and services in 2011.
A)$15 trillion
B)$15 billion
C)$150 trillion
D)$150 billion
E)$1,500 trillion
Answer: A
Q2) The figure above shows the production possibilities frontier for a country.A combination of 2 million gallons of milk and 2 million gallons of ice cream is A)unattainable.
B)attainable and production efficient.
C)attainable and production inefficient.
D)attainable but more than production efficient.
E)More information is needed to determine if the point is attainable or not.
Answer: C
Q3) How is economic growth shown in a production possibilities frontier graph?
Answer: Economic growth is illustrated as an outward shift of the PPF.
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5
Chapter 4: Demand and Supply
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Sample Questions
Q1) Suppose that tattoos gained immense popularity with retired people as well as college students.This gain in popularity best reflects which of the following influences on buying plans?
A)the price of a substitute good
B)income
C)expectations
D)preferences
E)the price of a complement good
Q2) If the number of sellers decreases, then the supply curve ________ and the supply
A)shifts rightward; increases
B)shifts rightward; decreases
C)shifts leftward; increases
D)shifts leftward; decreases
E)does not shift; does not change but there is a decrease in the quantity supplied
Q3) What is the effect on the price and quantity of a product if the demand decreases and the supply simultaneously increases?
Q4) What leads to a decrease in the quantity demanded of a good or service?
Q5) What are substitutes in production?
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Chapter 5: Elasticities of Demand and Supply
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Q1) Which of the following does NOT influence the price elasticity of demand?
A)the amount by which the demand curve shifts when the price of another good changes
B)the number of substitutes available to consumers
C)the price of the good relative to total income
D)the time period buyers have to respond to a price change
E)whether the good is a necessity or a luxury
Q2) The table above gives the supply schedule for a product.Using the midpoint method, find the price elasticity of supply between points A and B, between B and C, between C and D, and between D and E.
Q3) If the price of a product increases by 5 percent and the quantity demanded decreases by 5 percent, then the elasticity of demand is A)0.
B)1.
C)indeterminate.
D)5.
E)25.
Q4) "If the price falls and, as a result, the total revenue decreases, demand is elastic." Is the previous assertion correct?
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Chapter 6: Efficiency and Fairness of Markets
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Sample Questions
Q1) When the cost of producing a product is paid, at least in part, by someone other than the producer, the cost is referred to as
A)an external cost.
B)an external profit.
C)an external benefit.
D)an external/internal cost.
E)a public cost.
Q2) According to the "fair rules" view of fairness, are taxes fair? Explain.
Q3) The table above shows the production possibilities for an economy.When the economy produces a combination of 900 books and 50 loaves of bread,
A)production efficiency occurs because resources are not overused.
B)allocative efficiency is achieved because both goods are produced.
C)production efficiency is not achieved.
D)allocative and production efficiency are both achieved.
E)production efficiency is not achieved but allocative efficiency might be achieved.
Q4) If the demand for a good does not change, how will an increase in the price of that good affect the consumer surplus from it?
Q5) Briefly describe the concept of the "invisible hand."
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Chapter 7: Government Actions in Markets
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Sample
Questions
Q1) The above figure shows the market for a prescription drug.What is the equilibrium price of the drug? How many doses are purchased? Suppose the government imposes a price ceiling of $1.50 a dose.How many doses are purchased after the price ceiling is imposed?
Q2) The figure above illustrates the bagel market.Which of the following statements is correct?
A)With a price ceiling of $1.00 per bagel, the quantity demanded is equal to the quantity supplied.
B)With a price ceiling of $3.00 per bagel, the quantity demanded is greater than the quantity supplied.
C)With a price ceiling of $1.00 per bagel, there is a shortage of bagels.
D)Answers A and B are correct.
E)Answers B and C are correct.
Q3) A price floor set above the equilibrium price
A)creates a surplus.
B)creates a shortage.
C)creates excess demand.
D)balances supply and demand.
E)has no effect.
Q4) Compare and contrast a price ceiling and a price floor.
Page 9
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Chapter 8: Taxes
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Sample Questions
Q1) Suppose the demand for barley is perfectly elastic.The supply curve of barley is upward sloping.If a tax is imposed on barley,
A)barley sellers pay the entire tax.
B)barley buyers pay the entire tax.
C)the government pays the entire tax.
D)the tax is split evenly between barley buyers and sellers.
E)who pays the tax depends on whether the government imposes the tax on barley sellers or on barley buyers.
Q2) Which resource has the least elastic supply?
A)labor
B)capital
C)land
D)money
E)taxes
Q3) Ann pays $3,850 in taxes on an income of $38,500.Therefore her
A)marginal tax rate must be 10 percent.
B)taxes must be progressive in nature.
C)average tax rate must be 10 percent.
D)personal exemption is 10 percent.
E)proportional tax rate is undefined.
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Chapter 9: Global Markets in Action
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Q1) Goods and services that the United States sells to other nations are called A)exports.
B)imports.
C)bartered goods.
D)exchanges.
E)world goods.
Q2) Since the mid-1970s, the average U.S.tariff rate is
A)less than 5 percent.
B)between 6 percent and 15 percent.
C)between 16 percent and 25 percent.
D)between 26 percent and 35 percent.
E)larger than 36 percent.
Q3) International trade decreases the demand for workers in domestic industries that
A)produce goods that are exported from the country.
B)produce goods that are imported into the country.
C)help businesses import and export.
D)service imported goods.
E)produce the goods in which the nation has a comparative advantage.
Q4) Briefly define a tariff and a quota.Do any of these methods restrict trade without harming domestic consumers?
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Chapter 10: Externalities
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Q1) The figure above shows the marginal social cost curve of generating electricity and the marginal private cost curve.The marginal cost borne by producers when 200 billion kilowatt hours are produced is
A)0¢ per kilowatt.
B)10¢ per kilowatt.
C)20¢ per kilowatt.
D)15¢ per kilowatt.
E)5¢ per kilowatt.
Q2) Describe some of the external benefits associated with education.What can government do to encourage production of the efficient amount of education?
Q3) Explain the difference between a positive production externality and a positive consumption externality.
Q4) A voucher is
A)the production of a good by some public institution.
B)a payment that government makes to private producers.
C)a token that government provides to households to use in purchasing a specific good.
D)a permit to pollute.
E)a tax that is imposed on consumers rather than producers.
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Page 12
Chapter 11: Public Goods and Common Resources
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Q1) Suppose Burger King builds a new store across the street from a McDonald's.This is an example of
A)the free-rider problem.
B)the principle of minimum differentiation.
C)the public provision of a good.
D)a public good.
E)rational ignorance on the part of Burger King.
Q2) A good is rival if
A)it has substitutes.
B)it can be consumed by many people simultaneously.
C)it is excludable.
D)consumption by one person decreases the quantity available for another person.
E)it has no complements.
Q3) Lowe's starts to offer free weekend carpentry classes because Home Depot does.This decision is an example of
A)the principle of minimum differentiation.
B)provision of a public good.
C)rational ignorance.
D)overproduction of a private good.
E)overproduction of a public good.
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Chapter 12: Markets With Private Information
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Sample Questions
Q1) Which of the following has a positive externality and hence can be under provided?
A)chronically ill people are not allowed to buy insurance.
B)health insurance purchased through an employer
C)vaccination
D)Health Maintenance Organizations
E)None of the above have a positive externality.
Q2) In the used car market with warranties, the equilibrium is a ________ and the lemons problem is ________.
A)pooling equilibrium; solved
B)pooling equilibrium; unresolved
C)separating equilibrium; unresolved
D)separating equilibrium; solved
E)pooling equilibrium; possibly solved and possibly unresolved, depending on whether good used cars sell for a higher price than do lemons
Q3) Explain the concept of moral hazard.Give an example.
Q4) What is private information and what problems does it create?
Q5) What is the private information in the market for health-care insurance? What is the private information in the market for health care?
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Chapter 13: Consumer Choice and Demand
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Sample Questions
Q1) Along an indifference curve, if the marginal rate of substitution is 3, then the consumer is willing to
A)give up 1 unit of the good measured along the y-axis for 3 units of the good measured along the x-axis.
B)give up 3 units of the good measured along the y-axis for 1 unit of the good measured along the x-axis.
C)pay $3 for one unit of the good measured along the y-axis.
D)pay $3 for one unit of the good measured along the x-axis.
E)give up 3 units of the good measured along the y-axis for 1 unit of income, that is, $1 of income.
Q2) Suppose that you consume only pizza, which costs $4 per slice, and Diet Pepsi, which costs $2 each.The table above gives your utility from consuming these two goods.If your income is $14, which of the following consumption combinations will you choose?
A)3 slices of pizza and 1 Diet Pepsi
B)2 slices of pizza and 3 Diet Pepsis
C)1 slice of pizza and 5 Diet Pepsis
D)0 slices of pizza and 7 Diet Pepsis
E)None of the above answers are correct.
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Page 15
Chapter 14: Production and Cost
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Sample Questions
Q1) What is the relationship between the marginal product of labor and the marginal cost?
Q2) Average total cost equals
A)the change in total cost divided by the change in output.
B)total fixed cost divided by output.
C)average fixed cost plus average variable cost.
D)total cost minus total variable cost.
E)average fixed cost plus average variable cost plus marginal cost.
Q3) To produce more output in the short run, a firm must employ more of A)all its resources.
B)its fixed resources.
C)its variable resources.
D)the least costly resources regardless of whether they are fixed or variable.
E)Firms cannot produce more output in the short run.
Q4) The return to entrepreneurship is known as A)economic profit.
B)normal profit.
C)opportunity revenue.
D)normal revenue.
E)explicit profit.
Page 16
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Chapter 15: Perfect Competition
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Sample Questions
Q1) A market with a large number of sellers
A)can only be a perfectly competitive market.
B)might be an oligopoly or a perfectly competitive market.
C)might be a monopolistically competitive or a perfectly competitive market.
D)might be a perfectly competitive, monopolistically competitive, oligopoly, or monopoly market.
E)can only be a monopolistically competitive market.
Q2) In a perfectly competitive industry, when a firm is producing so that its total revenue equals its total cost, the firm is
A)making an economic profit.
B)incurring an economic loss.
C)making zero economic profit.
D)definitely not maximizing its profit.
E)None of the above answers is correct because the relationship between total revenue and total cost has nothing to do with the firm's profit or loss.
Q3) Can a perfectly competitive firm make an economic profit in the short run? Can it incur an economic loss?
Q4) Why do you never see firms in a perfectly competitive market advertise their product?
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Chapter 16: Monopoly
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Sample Questions
Q1) "Because of rent seeking, a monopoly may end up earning a normal profit." Is the previous statement correct or incorrect? Why?
Q2) If a monopoly wants to sell a larger quantity, it must
A)set a higher price.
B)maintain the current price.
C)set a lower price.
D)implement new technology.
E)increase the barrier to entry that protects it.
Q3) Explain how a single-price monopoly determines its output and price.Compare this process to how a perfectly competitive firm determines its output and price.
Q4) Why do some firms price discriminate? Relate your answer to the common practice of public colleges charging lower tuition to in-state students and higher tuition to out-of-state students.
Q5) What is an average cost pricing rule? Why do regulatory agencies use it for natural monopolies?
Q6) How do the price, output, consumer surplus, economic profit, and total surplus for a single-price monopoly compare to that of a competitive industry?
Q7) What is price discrimination?
Page 18
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Chapter 17: Monopolistic Competition
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Q1) The Herfindahl-Hirschman Index is used as a guideline to determine if a market is competitive or concentrated.Calculate the index value for each market described below.
a100 firms, each of which produces 1 per cent of market output
b50 firms, each of which produces 2 per cent of market output
c25 firms, each of which produces 4 per cent of market output
d20 firms, each of which produces 5 per cent of market output
e10 firms, each of which produces 10 per cent of market output
f5 firms, each of which produces 20 per cent of market output
g2 firms, each of which produces 50 per cent of market output
Q2) How do advertising and other selling costs affect a firm?
A)They shift the marginal cost curve upward.
B)The only effect is that the excess capacity is reduced.
C)The only effect is that the demand for the product increases.
D)They shift the average total cost curve upward.
E)They do not change demand and shift the average total cost curve downward.
Q3) What is the Herfindahl-Hirschman Index and what does it measure?
Q4) What type of profit can a firm in monopolistic competition make in the long run? Explain your answer.
Q5) Why would a firm in a monopolistically competitive industry advertise?
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Chapter 18: Oligopoly
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Sample Questions
Q1) As a result of a wave of mergers in the early part of the twentieth century, which act was passed?
A)the Anti-Merger Act of 1900
B)the Sherman Act of 1909
C)the Clayton Act of 1914
D)the Horizontal Merger Act of 1919
E)the Pro-Competition Act of 1912
Q2) Describe the Department of Justice's claims against Microsoft.
Q3) For a duopoly, the maximum total profit is reached when the duopoly produces
A)the same amount of output as the competitive outcome.
B)the same amount of output as the monopoly outcome.
C)an amount of output that lies between the competitive outcome and the monopoly outcome.
D)more output than the competitive outcome.
E)less output than the monopoly outcome.
Q4) Describe the characteristics of an oligopoly.
Q5) "If an industry's Herfindahl-Hirschman Index is below 1,000, a merger between any two firms in that industry will be disallowed." Comment on the accuracy of the previous statement.
Q6) Explain what a cartel is and the difficulties faced in maintaining a cartel.
Page 20
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Chapter 19: Markets for Factors of Production
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Sample Questions
Q1) Which of the following is a renewable resource?
Ia forest of pine trees grown by Georgia-Pacific
Iioil reserves in Saudi Arabia
Iiithe Everglades
A)i and ii
B)ii and iii
C)i and iii
D)i, ii, and iii
E)i only
Q2) The demand for labor curve slopes downward because
A)it takes more workers to produce more output.
B)the value of marginal product of labor diminishes as the quantity of labor employed increases.
C)at lower wages, people are not willing to work as many hours.
D)wages are fixed.
E)the supply of labor curve is upward sloping.
Q3) A worker has a marginal product of 15 units a day, each of which can be sold for $10.Is it profitable to hire this worker if the wage rate is $100 a day? Briefly explain your answer.
Q4) What tools can unions use to increase the demand for union labor?
Page 21
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Chapter 20: Economic Inequality
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Sample Questions
Q1) Describe how a negative income tax works.
Q2) Of the following major characteristics that lead to income disparity, the factor with the smallest impact is A)sex.
B)race.
C)region of the country.
D)education.
E)number of people in the household.
Q3) Discrimination by customers creates a wage differential between two groups by creating a difference in the two groups'
A)supply of labor.
B)value of marginal product.
C)marginal cost of labor.
D)minimum wage.
E)opportunity cost of acquiring skills.
Q4) What is "human capital"? How is it important in the determination of a worker's wage rate?
Q5) Which is distributed more equally: income or wealth?
Q6) What is a Lorenz curve?
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Q7) Describe the effect education and training have on outcomes in the labor market.