Fundamentals of Economics
Chapter Exam Questions
Course Introduction
Fundamentals of Economics introduces students to the core principles and concepts that underpin the study of economics, including the basics of microeconomics and macroeconomics. The course explores topics such as supply and demand, market equilibrium, elasticity, opportunity cost, and the role of government in economic systems. Students will also examine the allocation of resources, consumer and producer behavior, and how economic decisions affect individuals and societies. Through real-world examples and analytical tools, the course provides a foundation for understanding how economic forces shape everyday life and influence global events.
Recommended Textbook Microeconomics Today The Macro View 17th Edition by Roger LeRoy Miller
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Chapter 1: The Nature of Economics
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Q1) Economics is an empirical science,which means that economists
A)look at evidence to see whether or not the model is applicable.
B)test their models by utilizing unknown variables.
C)do only laboratory experiments.
D)refuse to test their models since the usefulness of a model is determined by whether it is logical or not.
Answer: A
Q2) A politician says that the government should tax behavior they want less of and subsidize behavior they want more of.This is an example of A)cynical behavior in modern democracies.
B)failing to consider the alternatives available to the government.
C)a concern that people are not rational when they make decisions.
D)using incentives to alter behavior.
Answer: D
Q3) Is inflation a macroeconomic or a microeconomic question? Why?
Answer: Inflation is a macroeconomic question because it deals with an economy-wide phenomenon.The price increase of a specific product,such as gasoline,would be a microeconomic matter.Since inflation deals with prices in the economy as a whole,it is a macroeconomic concern.
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Chapter 2: Scarcity and the World of Trade-Offs
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Q1) Refer to the above figure.Which of the following would allow society to move to point d?
A)Producing efficiently
B)Concentrating production in wheat
C)Increasing the quantity of labor
D)Using the best land to produce wheat and the lower quality land to produce beans.
Answer: C
Q2) Opportunity cost is defined as
A)the value of the next-best alternative that must be sacrificed to attain a want.
B)the least-costly means to produce output.
C)the value of the output currently received by an individual or a corporation.
D)the return from a given unit of labor.
Answer: A
Q3) What does a production possibilities curve show?
Answer: A production possibilities curve shows the combinations of maximum outputs that can be produced with a fixed amount of resources.
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Chapter 3: Demand and Supply
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Q1) The equilibrium or market clearing price occurs at the point at which
A)quantity demanded equals quantity supplied.
B)the supply curve intersects the horizontal axis.
C)the demand curve intersects the vertical axis.
D)there is a shortage of the desired good.
Answer: A
Q2) According to the above figure for a gasoline market,an increase in the price from $2 to $4 will result in
A)a shortage of 30 million gallons.
B)an increase in quantity demanded of 10 million gallons.
C)an increase in quantity supplied of 20 million gallons.
D)an increase in demand of 20 million gallons.
Answer: C
Q3) If the price of a product increases,we would expect
A)the level of demand to decrease.
B)quantity supplied to increase.
C)the level of supply to increase.
D)an increase in quantity demanded.
Answer: B
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Chapter 3: Extensions of Demand and Supply Analysis
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Q1) A severe drought has devastated cocoa plants,causing an increase in the price of chocolate.In the market for chocolate chip cookies,
A)a surplus will arise.
B)supply has decreased and price has increased.
C)quantity has decreased and price has decreased.
D)quantity demanded has increased.
Q2) A price floor above the market clearing price typically results in I.an excess quantity supplied
II.a shortage
III.an excess quantity demand
A)I only
B)II only
C)III only
D)II and III only
Q3) Price controls
A)do not include black markets.
B)are another name for the price system.
C)do not include rent controls.
D)interfere with the rationing function of prices.
Q4) Who gains and who loses from rent controls?
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Chapter 4: Public Spending and Public Choice
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Q1) One way that the government encourages the production of a good with positive externalities is to offer
A)an effluent fee.
B)a market to pollute.
C)a subsidy.
D)a pollution tax.
Q2) Refer to the above figure.An external benefit exists.The amount of that benefit is represented by
A) \(\mathrm { P } _ { 4 }\) .
B)the vertical distance between D<sub>1</sub> and D<sub>2</sub>.
C)the distance between G and F.
D)P<sub>3</sub>.
Q3) Fred receives a $14,000.00 per year grant by the federal government because he is disabled.This is a A)demerit good.
B)transfer payment.
C)non-rival good.
D)free rider problem.
Q4) What is an effluent fee? Graphically,show how an effluent fee can correct an externality.
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Chapter 5: Funding the Public Sector
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Q1) Ad valorem taxation means
A)that only the value added by a service provider is taxed.
B)that the tax rate is a percentage of the price paid for a product.
C)a negative income tax.
D)a progressive property tax imposed in some states.
Q2) The government budget constraint implies that
A)government borrowings = government spending+ transfers - taxes and user charges.
B)government borrowings = taxes and user charges + government spending - transfers
C)government spending = transfers - taxes and user charges - government borrowing.
D)government spending = government borrowing - transfers - taxes and user charges
Q3) A capital gain is defined as
A)the tax paid when one sells an asset.
B)the positive difference between the sale price and the purchase price of an asset.
C)the tax rate one pays when one moves into a higher tax bracket.
D)an unanticipated increase in income.
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Chapter 6: Demand and Supply Elasticity
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Q1) The price elasticity of demand is measured by the
A)percentage change in quantity demanded divided by the percentage change in price.
B)percentage change in price divided by the percentage change in quantity demanded.
C)change in quantity demanded divided by the change in price.
D)change in price divided by the change in quantity demanded.
Q2) A decrease in total revenue will result if
A)demand is inelastic and price increases.
B)demand is elastic and price decreases.
C)demand is inelastic and price decreases.
D)demand is unitary elastic and price decreases.
Q3) When very few substitutes for a good exist,demand will be A)elastic.
B)unit-elastic.
C)inelastic.
D)perfectly elastic.
Q4) What is the price elasticity of demand? How is the price elasticity of demand calculated?
Q5) Which has a more elastic demand: hamburger or beef?
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Chapter 7: Consumer Choice
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Q1) Along an indifference curve
A)every combination of goods the consumer can purchase with their income is given.
B)the prices of goods will change.
C)utility increases as you move to the right.
D)every combination of the goods give the same level of satisfaction.
Q2) If a consumer chooses a combination of goods that are inside of her budget line,than
A)the consumer is maximizing her satisfaction.
B)the consumer is spending more than her current income.
C)the consumer has a constant marginal rate of substitution for the two goods.
D)the consumer is not maximizing her satisfaction.
Q3) Use the law of diminishing marginal utility to explain the diamond-water paradox.
Q4) To derive the law of demand,we assume that
A)prices are constant.
B)real prices are constant.
C)marginal utility is constant.
D)tastes are constant.
Q5) Discuss the substitution and real-income effects of a price decrease.
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Chapter 8: Rents, profits, and the Financial Environment of Business
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Q1) If the entrepreneur is also the manager of the firm,we would expect
A)the manager to work hard because he or she is also the residual claimant.
B)the manager to not work hard since there is no possibility of further advancement.
C)the firm to operate poorly because the specialization of labor is not adequate.
D)the firm to operate poorly because the entrepreneur is not as good at managing workers as a professional manager would be.
Q2) Suppose a firm wanted to go out of business.The firm sells all its assets and pays off everything it owes to creditors.The stockholders would receive
A)nothing.
B)their annual dividend payment.
C)one half of the funds; the other half of the funds goes to bondholders.
D)the rest of the funds,after everyone who has a claim against the firm is paid.
Q3) If a corporation fails,the first recipients of funds that may remain are
A)preferred stockholders.
B)common stockholders.
C)bond holders.
D)no one.
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Chapter 9: The Firm: Cost and Output Determination
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Q1) In the above figure,point B is called
A)the maximum efficient scale.
B)the minimum efficient scale.
C)the planning horizon.
D)the point of diminishing marginal product.
Q2) Refer to the above table.What is AVC at an output of 2 units?
A)$7
B)$16
C)$45
D)$61
Q3) Refer to the above table.What does the marginal product equal when the quantity of labor goes from 3 to 4?
A)9
B)18
C)72
D)216
Q4) What is the relationship between the marginal cost curve and marginal product? Explain.
Q5) What are the relationships between the marginal cost curve and the average cost curves? Explain in words.
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Chapter 10: Perfect Competition
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Q1) When price equals marginal cost
A)firms make zero profits.
B)firms make positive profits.
C)the industry is in long-run equilibrium.
D)the marginal benefits of consuming an extra unit of the good exactly equals the marginal cost to society of producing the good.
Q2) In the above figure,the long-run equilibrium price and output are
A)$10 and 10.
B)$10 and 12.
C)$7 and 8.
D)$8 and 10.
Q3) The perfectly competitive firm cannot influence the market price because
A)it has market power.
B)its production is too small to affect the market.
C)it is a price maker.
D)its costs are too high.
Q4) What is marginal cost pricing? Why is marginal cost pricing important?
Q5) Why is the pricing outcome of a perfectly competitive firm efficient in economic sense?
Q6) Why does the industry short-run supply curve slope upward?
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Chapter 11: Monopoly
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Q1) Price discrimination is more likely in the case of services than in the case of goods because
A)producers of goods usually do not face downward sloping demand curves.
B)it is easier to distinguish customers with different elasticities of demand with respect to services than with goods.
C)elasticities of demand vary more with services than with goods.
D)it is more difficult to resell services.
Q2) A monopoly will maximize profits at the level of output at which
A)MR = MC.
B)MR = AFC.
C)MC = ATC.
D)MC = P.
Q3) A monopolist can earn economic profits in the long run because
A)a monopoly is by definition large,and this gives it the ability to make large profits.
B)a monopoly makes the good or service better than anyone else.
C)barriers to entry prevent new firms from entering the industry.
D)monopolies can legally force people to buy their products and to pay more for them than they are worth.
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Chapter 12: Monopolistic Competition
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Q1) The marginal revenue curve of a monopolistically competitive firm is
A)downward sloping and above the demand curve.
B)downward sloping and below the demand curve.
C)identical to the demand curve as there are many small firms in the market.
D)perfectly elastic.
Q2) The ATC curve for a firm that produces an information product
A)slopes downward,because AVC is constant,AFC slopes downward,and ATC = AVC + AFC.
B)slopes upward,because AFC is constant,AVC slopes upward,and ATC = AFC + AVC.
C)is U-shaped,because AVC is U-shaped,AFC slopes downward,and ATC = AVC + AFC.
D)slopes downward,because MC slopes downward,AVC is constant,and ATC = AVC +MC.
Q3) Use the above figure.The total profit earned by this monopolistically competitive firm is
A)$2,560.
B)$1,600.
C)$480.
D)$1,900.
Q4) For an information product,why a profit-maximizing firm unable to practice marginal cost pricing? How is its price determined in the long run?
Q5) Why can't a monopolistic competitor earn economic profits in the long run?
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Chapter 13: Oligopoly and Strategic Behavior
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Q1) When managers in oligopolistic firms make decisions that affect output or price,they must
A)also be sure they erect barriers to entry to prevent new entrants from affecting their plans.
B)anticipate the reactions of their rivals and plan accordingly.
C)register with the Antitrust Division of the Department of Justice.
D)inform the regulators of their industry about their plans.
Q2) In game theory,actions such as cheating that focus solely on short-run gains are referred to as
A)territorial behavior.
B)tit-for-tat strategic behavior.
C)predatory behavior.
D)opportunistic behavior.
Q3) An example of a positive market feedback is
A)the emergence of the iPod.
B)routine maintenance on a car.
C)the declining use of land-line telephones for long distance calls.
D)the use of telegraph services in the twenty-first century.
Q4) Why would a member of a cartel cheat?
Q5) Distinguish between a horizontal merger and a vertical merger.
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Chapter 14: Regulation and Antitrust Policy in a Globalized Economy
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Q1) The first major law created to control the growth of monopoly power was the A)Sherman Act.
B)Clayton Act.
C)FTC Act.
D)Robinson-Patman Act.
Q2) The hypothesis that regulators eventually are controlled by the regulated firms and their special interests is the
A)share-the-gains,share-the-pains hypothesis.
B)capture hypothesis.
C)public interest theory.
D)control-group hypothesis.
Q3) In a natural monopoly situation,
A)there are large economies of scale relative to demand.
B)the firm has an upward sloping average cost curve.
C)producers try to differentiate their product with advertising.
D)there is no need for government regulation.
Q4) What are the major rationales for consumer protection in nonmonopolistic industries?
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Q5) "As compared to the benefits of economic and social regulation,the costs are minimal." Do you agree or disagree? Why?
Chapter 15: The Labor Market: Demand, supply and Outsourcing
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Q1) Suppose firms in an industry hire unskilled labor and skilled labor.Unskilled labor is a substitute for capital and skilled labor is a complement with capital.A decrease in the real price of capital would
A)cause the demand for labor to increase,raising wages of both skilled and unskilled labor.
B)cause the demand for unskilled labor to increase and the demand for skilled labor to decrease.The wage of unskilled labor would rise relative to the wage of skilled labor.
C)cause the demand for unskilled labor to decrease and the demand for skilled labor to increase.The wage of unskilled labor would decrease relative to the wage of skilled labor.
D)cause the demand for both kinds of labor to decrease.Wages rates of both kinds of labor would decrease too.
Q2) A monopolist will hire an additional unit of labor as long as
A)the additional cost of the worker is outweighed by the additional revenues made from selling the output of theses workers.
B)the marginal revenue curve is above the demand curve.
C)the marginal revenue product is larger than the marginal factor cost.
D)the marginal revenue product is less than the marginal factor cost.
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Chapter 16: Unions and Labor Market Monopoly Power
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Q1) A bilateral monopoly means
A)that a monopsonistic employer bargains with two unions.
B)that a monopsonistic employer bargains with both an industrial and a craft union.
C)that a monopsonistic employer bargains with a monopoly.
D)that an industrial union bargains with a two-firm oligopoly.
Q2) If the goal of the union is to maximize member income,then
A)a wage rate will be set in the inelastic portion of the demand curve.
B)a wage rate will be set at the point at which the elasticity of demand equals 1 and marginal revenue is positive.
C)a wage rate will be set at the point at which marginal revenue equal zero.
D)the supply of labor must be inelastic.
Q3) Use the above table.The MFC of the 3rd worker is
A)$5.
B)$30.
C)$20.
D)$6.7.
Q4) "Unions in the United States have helped raise the incomes of union workers as compared to nonunion workers." Do you agree or disagree? Why?
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Chapter 17: Income, poverty, and Health Care
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Q1) If we were to pay everyone exactly the same income
A)there would be a large amount of economic growth.
B)there would be no incentive to invest in human capital.
C)more people would seek an education.
D)productivity would increase.
Q2) The more bowed the Lorenz curve,the A)richer the society.
B)more unequal the distribution of money income.
C)poorer the society.
D)more equal the distribution of income.
Q3) A diagonal straight line on a Lorenz curve represents
A)a perfectly unequal distribution of income (one person has everything).
B)a perfectly equal distribution of income.
C)a high level of inequality in the distribution of income.
D)an oblique distribution of income.
Q4) The age-earning cycle predicts that a typical person will
A)be earning $50,000 in the year 2010.
B)be earning the lowest income right before retirement.
C)be earning the highest income right before retirement.
D)be earning the highest income at about the age 45-50.
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Chapter 18: Environmental Economics
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Q1) Refer to the above figure.If the marginal cost curve for pollution abatement shifts to the right,everything considered,the
A)degree of air quality or cleanliness will also decrease.
B)the degree of air quality or cleanliness will stay unchanged.
C)the degree of air quality will improve.
D)the marginal cost of pollution abatement has nothing to do with air quality.
Q2) If a good is produced by firms that incur all private and external costs,the price consumers pay
A)will be efficient since it includes all social costs.
B)will be too low.
C)will be too high because the consumers end up paying all of the costs instead of the firm.
D)will be the correct price,but inefficient.
Q3) An externality
A)may be positive or negative.
B)means a rapidly rising cost borne by consumers.
C)is the cost of producing a good outside the United States.
D)is the indirect cost,the overhead,of producing a product.
Q4) Why are most endangered species belong to common property?
Q5) "The optimal level of pollution is zero." Do you agree or disagree? Why?
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Chapter 19: Comparative Advantage and the Open Economy
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Q1) A tariff is
A)a subsidy on domestically produced goods.
B)the difference between the world market price and the domestic price when a group of firms in an industry collude successfully.
C)a tax on imported goods.
D)a government imposed restriction on the quantity of a specific good that can be imported into the country and sold.
Q2) "Everybody has a comparative advantage in something." Do you agree or disagree? Why?
Q3) The infant-industry argument is often criticized because
A)it is difficult to determine which industry merits protection.
B)it reduces government revenues in the short term.
C)it reduces the employment rate.
D)it reduces labor productivity in the short term.
Q4) Goods that are produced domestically and then sold in other countries are called A)exports. B)imports.
C)tariffs.
D)quotas.
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Chapter 20: Exchange Rates and the Balance of Payments
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Q1) Which of the following is an advantage of fixing exchange rates?
A)limiting foreign exchange risk
B)making residents more mobile across countries
C)eliminating trade deficits
D)making the prices of foreign goods more flexible in the domestic market
Q2) In the market for euros,the demand for euros ( )is
A)downward sloping,because at lower dollar prices for the euro,U.S.residents will buy more European goods and services.
B)upward sloping,because at higher dollar prices for the euro,U.S.residents will buy more European goods and services.
C)upward sloping,because at higher dollar prices for the euro,Europeans will buy more U.S.goods and services.
D)horizontal,because dollar prices of euros and euro prices of dollars are directly related.
Q3) The International Monetary System was established
A)by the United Nations.
B)by the Bretton Woods Agreement.
C)by the United States,in cooperation with Great Britain.
D)during the Great Depression by the League of Nations.
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