Economic Analysis
Final Exam
Course Introduction
Economic Analysis is a course that explores the fundamental concepts and tools used to evaluate economic decisions at both the micro and macro levels. Students learn to apply economic theories and quantitative methods to analyze how individuals, firms, and governments allocate resources and respond to incentives. The course covers key topics such as supply and demand, market structures, consumer and producer behavior, cost analysis, and the impact of government interventions. Through problem solving and case studies, students develop the skills necessary to interpret real-world economic issues and make informed decisions in a variety of professional contexts.
Recommended Textbook
Modern Principles Microeconomics 3rd Edition by Tyler Cowen
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Page 2
Chapter 1: The Big Ideas
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Sample Questions
Q1) As the FDA uses ______ time and resources to ensure the safety of new drugs,
A) more; more people will die from taking unsafe drugs
B) less; fewer people will die waiting for access to life-saving medicine
C) more; fewer people will die waiting for access to life-saving medicine
D) less; fewer people will die from taking unsafe drugs
Answer: B
Q2) From 2007 to 2009, the inflation rate in Zimbabwe could be characterized as:
A) negative.
B) zero.
C) positive but low.
D) positive and high.
Answer: D
Q3) An example of a case in which free markets do not align self-interest with social interest is pollution-emitting production:
A)True
B)False
Answer: True
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Chapter 2: The Power of Trade and Comparative
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Sample Questions
Q1) Babe Ruth could produce two home runs in a week of play as a fielder or one win in a week of play as a pitcher. What was his opportunity cost of a week of fielding?
A) one win
B) two wins
C) one home run
D) two home runs
Answer: A
Q2) Which of the following explains why someone with an absolute advantage in painting houses may NOT spend their time painting houses?
A) They may have a comparative advantage in painting houses, as well.
B) Even though they have the absolute advantage in painting houses, they still may not be very good at it.
C) In an efficient market, someone with an absolute advantage in painting houses will always spend their time painting houses.
D) They may be relatively better at something else than painting houses.
Answer: D
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Chapter 3: Supply and Demand
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Sample Questions
Q1) (Figure: Producer Surplus) Refer to the figure. What is the producer surplus at a price of $2 per unit?
A) $5
B) $6
C) $10
D) $20
Answer: A
Q2) If romaine lettuce and iceberg lettuce are substitutes, a(n) _____ in the price of romaine lettuce will ______ the demand for iceberg lettuce.
A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; not change
Answer: B
Q3) When the price of a good goes down, demand for the good goes down.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Equilibrium
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Sample Questions
Q1) A shortage occurs when:
A) the price of a good is too high.
B) a market is at equilibrium.
C) the quantity supplied is zero.
D) the quantity demanded is greater than the quantity supplied.
Q2) If the equilibrium quantity in a market is 200, resources will be wasted and society made poorer if 250 units are produced.
A)True
B)False
Q3) A free market can be described by the equations Q<sub>d </sub>= 180 - 3P and Q<sub>s</sub> = -50 + 2P. What are the equilibrium conditions in this market (i.e., find equilibrium P and Q) and what are the maximum gains from trade in this market?
Q4) In a free market setting where quantity supplied is 40 units and quantity demanded is 50 units, price will:
A) rise.
B) fall.
C) remain the same.
D) move in an indeterminate direction.
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Chapter 5: Elasticity and Its Applications
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Sample Questions
Q1) If the price of gasoline in this country were expected to rise due to a permanent increase in the tax on gasoline, which of the following would you expect to happen?
A) The demand for gasoline would become more elastic.
B) The demand for gasoline would decrease as a result of the higher price.
C) Producers will have less of an incentive to supply gasoline as a result of the higher taxes.
D) The elasticity of demand will not change since gasoline is a necessary good.
Q2) If an increase in the price of oil by 10 percent would cause the quantity demanded for oil to fall by 5 percent, the elasticity of demand for oil in absolute terms is:
A) 10.
B) 5.
C) 2.
D) 0.5.
Q3) If the price of a good increases from $200 to $250 and quantity supplied increases from 200 units to 400 units, the supply would be classified as elastic.
A)True
B)False
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Chapter 6: Taxes and Subsidies
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Sample Questions
Q1) (Figure: Tax on Buyers 2) In the diagram, the sellers receive _____ without the tax and receive _____ with the tax.
A) $8.50; $6.50
B) $6.50; $8.50
C) $7.00; $6.50
D) $7.00; $5.00
Q2) (Figure: Tax on Consumers of Gadgets) Refer to the figure. What is the amount of the deadweight loss caused by the imposition of the tax on gadgets?
A) $800
B) $3,200
C) $400
D) $200
Q3) (Figure: Tax on Buyers 2) In the diagram, the size of the tax is:
A) $1.00.
B) $2.00.
C) $3.00.
D) $4.00.
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8
Chapter 7: The Price System
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Sample Questions
Q1) A market might have a small quantity traded at a high price in one year, and a larger quantity traded at a low price in another year. If one has data on the quantities traded each year in a market, one can compute the average quantity traded over time. Using appropriate demand and supply graphs, explain how speculators act as a sort of "averaging" effect on markets.
Q2) The high prices for ice in hurricane-devastated areas:
A) is not justified by the laws of supply and demand.
B) makes it difficult for consumers to find ice to buy.
C) signals entrepreneurs around the country that it is profitable to supply ice to these devastated areas.
D) provides an example of self-interested behavior in direct conflict with public interest.
Q3) If the price of ice in a hurricane-devastated area suddenly skyrockets, then ice suppliers will:
A) enjoy high profits at the expense of consumers.
B) limit the supply of ice in the area to sustain the skyrocketing price.
C) ship more ice to the area and the price will fall.
D) have an incentive to direct ice to its highest-valued uses.
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Page 9
Chapter 8: Price Ceilings and Floors
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Sample Questions
Q1) For a price floor to prevent market forces from finding the equilibrium price, it must be set:
A) above the equilibrium price, causing a market shortage.
B) below the equilibrium price, causing a market shortage.
C) below the equilibrium price, causing a market surplus.
D) above the equilibrium price, causing a market surplus.
Q2) The minimum wage is an example of a price floor in the labor market.
A)True
B)False
Q3) Although a minimum wage increases unemployment, it doesn't create a deadweight loss.
A)True
B)False
Q4) The U.S. Congress first instituted the minimum wage in:
A) 1914.
B) 1974.
C) 1938.
D) 1925.
Q5) Using a supply and demand diagram as a reference, discuss the way a price ceiling causes a reduction in gains from trade.
Page 10
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Chapter 9: International Trade
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Sample Questions
Q1) Which of the following results from a tariff on imported goods?
I. domestic production increases
II. domestic consumption increases
III. government revenues increase
A) I and III only
B) II and III only
C) I and II only
D) I, II, and III
Q2) Import trade tends to ______ domestic quantity of a good exchanged.
A) increase
B) decrease
C) hold constant
D) have an indeterminate effect on
Q3) (Figure: International Trade 1) Refer to the figure. With the international trade in this figure, domestic consumption is ______ units, and ______ of those units are imported.
A) 9; 5
B) 13; 5
C) 13; 8
D) 20; 9
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Chapter 10: Externalities- When the Price Is Not Right
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Sample Questions
Q1) The text discusses private solutions for resolving externalities using the honey market. Among the reasons why the market solution works well in the honey market is the fact that:
A) bees don't fly far, and thus it is easy to identify which farmers are getting the benefits of their pollination activities.
B) the owners of the beehives can clearly be identified.
C) the market limits the beneficial activities of the bees to those farmers who have very small farms.
D) All of the answers are correct.
Q2) External benefits lead to inefficient market outcomes.
A)True
B)False
Q3) Which would be the MOST likely place to find an internalized externality? (Keep transaction costs in mind.)
A) a factory polluting the air surrounding a large suburb
B) a wind farm slightly disturbing the mountain view of a nearby city
C) a paper mill polluting a stream that only flows into a single farm
D) roadwork operating on a major highway, but only operating at night
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Chapter 11: Costs and Profit Maximization Under Competition
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Sample Questions
Q1) If price is less than average cost,:
A) the firm may still make profits as long as marginal cost is low.
B) the firm's maximum profit is a loss.
C) there is no profit-maximizing rate of output.
D) marginal cost must be high.
Q2) In a perfectly competitive market, firm level demand is:
A) flat.
B) vertical.
C) positively sloped.
D) negatively sloped.
Q3) A firm should exit an industry if price is less than average cost.
A)True
B)False
Q4) Suppose there is a large and permanent increase in the demand for a good produced in a competitive industry. We should expect that:
A) existing firms will face lower sunk costs.
B) competition in the industry will decrease.
C) existing firms' average cost curves will shift upward.
D) firms will enter the industry because the market price will rise.
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Chapter 12: Competition and the Invisible Hand
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Sample Questions
Q1) In markets lacking competition, the invisible hand concept works in society's best interest.
A)True
B)False
Q2) The elimination principle illustrates the idea that:
A) above-normal profits will be eliminated by decreases in demand due to high prices.
B) losses will be eliminated by the innovation of new products.
C) above-normal profits will be eliminated by the entry of new firms into the industry.
D) losses will be eliminated by firms decreasing their costs.
Q3) Overall production costs will be minimized when the marginal costs of production across firms are equal.
A)True
B)False
Q4) According to Joseph Schumpeter, firms face more competition from innovations that have not been discovered yet than from other firms.
A)True
B)False
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Page 14
Chapter 13: Monopoly
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Sample Questions
Q1) Economies of scale are:
A) countries that specialize in selling devices for measuring weight.
B) the advantages of large-scale production that reduce average cost as quantity increases.
C) the advantages of small-scale production that reduce average cost as quantity decreases.
D) regulations that specify a minimum firm size.
Q2) (Figure: Monopoly Markup) Refer to the figure. Consumer surplus under competition is represented by:
A) triangle abc.
B) triangle cef.
C) square bcde.
D) triangle adf.
Q3) There have been a number of states in the United States deregulating the generation of electricity. Using your understanding of monopolies, discuss the likely effect of deregulation on prices in the industry.
Q4) The primary reason that AIDS drugs are priced well above cost is monopoly power.
A)True
B)False
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Chapter 14: Price Discrimination
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Sample Questions
Q1) 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.
Q2) Which of the following best explains why it is so difficult for firms to perfectly price discriminate?
A) It is illegal.
B) It is very difficult to know exactly every consumer's willingness to pay.
C) It is difficult to measure the marginal cost of producing an additional unit.
D) Perfect price discrimination often lowers the overall profits of a monopolist.
Q3) Bundling is most likely to be beneficial when fixed costs are ______ and marginal costs are ______.
A) high; high
B) high; low
C) low; high
D) low; low
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Chapter 15: Oligopoly and Game Theory
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Sample Questions
Q1) A dominant strategy is a strategy that:
A) results in the highest payoff for all parties no matter what.
B) has a higher payoff than another strategy some of the time and lower payoff than another strategy the rest of the time.
C) has a lower payoff than any other strategy, no matter what the other player does.
D) has a higher payoff than any other strategy, no matter what the other player does.
Q2) In an oligopolistic market, prices will tend to be closer to the competitive price:
A) the more government regulation there is in the market.
B) when the product is more distinguishable from its competitors.
C) the fewer the number of firms there are in the industry.
D) the fewer number of sales.
Q3) By 1985, OPEC had:
A) sustained effectiveness as a cartel.
B) largely failed as a cartel.
C) disbanded.
D) not yet formed.
Q4) When does "tactic collusion" apply?
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Chapter 16: Competing for Monopoly
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Sample Questions
Q1) Which statement is TRUE regarding network goods?
A) Producers of network goods typically sell their product at a price below marginal cost.
B) Competition among companies producing network goods drives the price down to equal marginal cost.
C) Network goods typically sell at a price higher than marginal cost.
D) Marginal cost always equals average cost for network goods.
Q2) 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
Q3) Social networking sites are network goods, so the benefits of using them diminish as they become more popular.
A)True
B)False
Q4) 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) (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.
Q2) Bottled water is produced in a ______ manner.
A) oligopolistic
B) monopolistically competitive
C) perfectly competitive
D) monopolistic
Q3) Which of the following is NOT true about advertising?
A) Advertising brings businesses and customers together.
B) Advertising helps promote many useful goods and services.
C) Advertising improves the incentive to make low-cost, high-quality items.
D) Advertising lowers the social surplus by costing businesses a lot of money with no corresponding benefit.
Q4) What are the features that describe monopolistic competition?
Q5) Products can be differentiated along many dimensions. Explain.
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Chapter 18: Labor Markets
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Sample Questions
Q1) Suppose that firms can hire whites for $10 an hour or equally productive blacks for $8 an hour. Which of the following is the most likely hiring practice for most firms?
A) All firms would follow the wage rates paid for respective white and black.
B) Firms that want to minimize cost would prefer to hire whites.
C) Firms that want to maximize profit would prefer to hire blacks.
D) All firms would hire an equal number of white and black workers.
Q2) Is there an incentive for businesses to make jobs safer for workers?
A) No. It costs money to make safety improvements, which lowers profits.
B) Yes, but only if the government levies fines and penalties against businesses for unsafe working conditions.
C) No, because injured workers receive workers compensation or disability insurance, which is paid by the state or federal government.
D) Yes. When firms make jobs safer, they can pay lower wages.
Q3) When labor supply decreases, the wage is expected to:
A) increase.
B) decrease.
C) remain the same.
D) change in an indeterminate direction.
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Page 20
Chapter
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Sample Questions
Q1) Many individuals refer to education as a public good. How is education NOT a public good?
A) Its acquisition is rival.
B) Its acquisition is excludable.
C) Its acquisition is both rival and excludable.
D) Its acquisition is usually rival and rarely excludable.
Q2) Which of the following is a list of nonrival private goods only?
A) cable Internet service, toll highways, public roads, soup kitchen meals
B) a public beach, soup kitchen meals, public roads, smog reduction
C) online video games, a private beach, toll highways, cable Internet service
D) national defense, a lighthouse, smog reduction, cable Internet service
Q3) Wealthy industrialist Henry Hawk fears an asteroid hitting Earth and is willing and able to pay $15 billion to develop an asteroid deflection system. Suppose asteroid deflection only costs $10 billion and Hawk makes asteroid deflection a reality. What type of good has Henry Hawk provided?
A) public good
B) private good
C) nonrival private good
D) commons resource
Q4) Does equal sharing in farm output lead to free riders? Explain.
Page 21
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Chapter 20: Political Economy and Public Choice
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Sample Questions
Q1) Much to the chagrin of some Americans, conventional light bulbs were effectively banned in 2014 leaving only compact florescent lights (CFLs) on store shelves. The ban was encouraged, in part, by the makers of the more expensive CFLs. Which concept is best captured in this story?
A) rational ignorance
B) opportunity cost
C) diffused costs and concentrated benefits
D) median voter theorem
Q2) Suppose that a special interest group makes up 0.5% of the population. If a policy transfers $600 to the special interest at a cost of $100,000 to society, will the special interest group lobby for this policy?
A) Yes, the benefits of $600 outweigh the costs of $500.
B) No, the benefits of $30 are less than the costs of $100,000.
C) No, the benefits of $30 are less than the costs of $50,000
D) They'll be indifferent since the benefits equal the costs.
Q3) Voters are myopic so they most likely focus on the economic conditions over a president's entire term.
A)True
B)False
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Page 22
Chapter 21: Economics, Ethics, and Public Policy
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Sample Questions
Q1) The French cultural policy once required all movies on television and all music on rock-and-roll radio to be "French."
A)True
B)False
Q2) Which is a normative economic statement?
A) Raising the price of new textbooks will lead students to seek more used textbooks.
B) Raising the price of new textbooks will lead students to buy fewer new textbooks.
C) Publishers should not raise the price of new textbooks.
D) The price of new textbooks will rise if transportation costs and costs of paper rise.
Q3) It is difficult to see the dividing line that separates exploitation from exchange.
A)True
B)False
Q4) List the six practical problems of economic reasoning that need to be examined.
Q5) Briefly describe the three views that have proven influential in judging the distribution of wealth in economies.
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Chapter 22: Managing Incentives
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Sample Questions
Q1) Planning where, when, and how choices are made is sometimes called choice architecture.
A)True
B)False
Q2) Careful design of an incentive scheme can narrow the gap between:
A) what you pay for and what you want.
B) effort and output.
C) what you pay for and what you do not pay for.
D) what you want and what you do not pay for.
Q3) Piece rates do not work well when:
A) workers use tools in production.
B) quality is not important.
C) quality control is important and simple to perform.
D) quality is important but quality control is expensive.
Q4) The closer "what you pay for" is to "what you want," then the more you can rely on strong incentives.
A)True
B)False
Q5) What are the benefits and problems of piece rate systems?
Q6) What is meant by the term corporate culture?
Page 24
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Chapter 23: Stock Markets and Personal Finance
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Q1) Since for every buyer of a stock there is a seller of that stock, someone can likely become very rich acting on public information.
A)True
B)False
Q2) A mutual fund is:
A) an investment fund that pools money from many investors and invests that money in the stocks of many firms.
B) generally a share of company stock owned by multiple people.
C) a company that specializes in lending new businesses money.
D) the source of funds that banks use to make home and automobile loans.
Q3) Which statement is TRUE?
A) Investing in art is more lucrative than investing in stocks and bonds.
B) Investing in bonds is more lucrative than investing in stocks.
C) Investing in real estate is more lucrative than investing in stocks.
D) Because there is a fun factor associated with owning art, the returns to investing in art are reduced by this fun factor.
Q4) Mutual funds primarily offer the service of diversification of investments.
A)True
B)False
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Chapter 24: Price Discrimination
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Sample Questions
Q1) What market institutions have developed in used car markets to reduce adverse selection?
Q2) Possible results of asymmetric information include all of the following EXCEPT:
A) new sellers will enter the market sensing profit opportunities.
B) less informed buyers will leave the market.
C) mutually beneficial trades may not occur.
D) trades may occur that are not mutually beneficial.
Q3) Signaling creates benefits by:
A) increasing information but also creates inefficiencies.
B) increasing information without creating inefficiencies.
C) decreasing moral hazard.
D) reducing inefficiencies.
Q4) When the buyer of a house pays for a home inspection, this reduces:
A) mutually beneficial trades.
B) the principal-agent problem.
C) moral hazard.
D) adverse selection.
Q5) Moral hazard can be found in many areas because self-interest is everywhere.
A)True
B)False
26
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Chapter 25: Consumer Choice
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Sample Questions
Q1) Consumers maximize their utility when:
A) the total benefits are greater than total costs.
B) the marginal utility per dollar is equal across all goods consumed and all income is spent.
C) they consume the good on which they place the highest overall value.
D) they diversify their consumption across goods.
Q2) (Figure: Optimal Choice 2) Refer to the figure. This figure represents indifference curves of a consumer who purchases flip-flops and sneakers. If the dotted line represents this consumer's budget constraint, then bundle D on the graph:
A) results in a lower level of overall utility than bundle E.
B) is preferred to point E but is unattainable.
C) has a higher marginal rate of substitution than bundle E.
D) maximizes total utility.
Q3) When the price of a good changes, ______ influence(s) the change in consumption.
A) the income effect alone
B) the substitution effect alone
C) both the income effect and the substitution effect
D) neither the income effect nor the substitution effect
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