Foundations of Economics Final Exam
Course Introduction
Foundations of Economics introduces students to the basic principles and concepts that form the core of economic theory. The course covers fundamental topics such as scarcity, opportunity cost, supply and demand, market equilibrium, and the role of government in the economy. It examines both microeconomic and macroeconomic perspectives, providing an understanding of how individual choices and market forces impact the allocation of resources, production, and distribution of goods and services. Through real-world examples and analytical tools, students gain essential insights into how economies operate and the factors that influence economic decision-making on a local and global scale.
Recommended Textbook
Principles of Economics 5th Edition by Robert Frank
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Chapter 1: Thinking Like an Economist
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Sample Questions
Q1) You paid $35 for a ticket (which is non-refundable)to see SPAM,a local rock band,in concert on Saturday.(Assume that you would not have been willing to pay any more than $35 for this concert. )Your boss called and she is looking for someone to cover a shift on Saturday at the same time as the concert.You will have to work 4 hours and she will pay you time and a half,which is $9/hr.
What is the opportunity cost of going to the concert?
A)$1
B)$9
C)$35
D)$36
Answer: D
Q2) The study of individual choices and group behavior in individual markets defines: A)microeconomics.
B)economics.
C)the scarcity principle.
D)macroeconomics.
Answer: A
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Chapter 2: Comparative Advantage
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Sample Questions
Q1) The benefits of specialization can be used to explain why:
A)workers prefer to work on a variety of tasks during the day.
B)machines are more productive than human workers.
C)trade can make both parties to the trade better off.
D)big companies take advantage of smaller ones.
Answer: C
Q2) Economic growth can result from a(n):
A)increase in the amount of productive resources.
B)increase in number of the minimum wage jobs.
C)increase in the amount of consumer goods produced.
D)decrease in the number of workers available.
Answer: A
Q3) Larry has a comparative advantage in writing a term paper if he:
A)can write a paper faster than the other students in class.
B)has an absolute advantage in writing a term paper.
C)always earns an A on his papers.
D)has the lowest opportunity cost for writing a term paper.
Answer: D
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Chapter 3: Supply and Demand
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Sample Questions
Q1) A seller's reservation price is generally equal to:
A)the buyer's reservation price.
B)the seller's average cost.
C)the seller's marginal cost.
D)the market price.
Answer: C
Q2) Efficiency is an important goal in economics because it:
A)assures a fair outcome.
B)assures a normative outcome.
C)assures a higher level of output.
D)takes into consideration the distribution of income.
Answer: C
Q3) In general,when the demand curve shifts to the right and supply remains constant then:
A)quantity demanded will rise.
B)the equilibrium price will fall.
C)the equilibrium quantity will rise.
D)the market cannot reestablish an equilibrium.
Answer: C
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Chapter 4: Elasticity
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Sample Questions
Q1) As one moves down along a linear demand curve (i.e. ,from high price,low quantity pairs to low price,high quantity pairs),the demand:
A)becomes more price elastic.
B)increases.
C)decreases.
D)becomes less price elastic.
Q2) Suppose that the demand for electricity has been found to be inelastic.The most likely explanation for this finding is that:
A)electricity is a luxury commodity.
B)the fraction of income spent on electricity is large.
C)few substitutes exist for electricity.
D)electricity is a monopoly market.
Q3) At the price of $20 each,demand for T-shirts for students group's fundraising activity is unitary elastic.Total expenditure for T-shirts reaches ______ at a price of $20 each.
A)zero
B)its minimum
C)its maximum
D)its maximum profit
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Chapter 5: Demand
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Sample Questions
Q1) Ten years ago you had never even heard of wireless internet.Now you complete assignments for class on a laptop that accesses the Internet using wireless technology.This is evidence that A)things that were once wants can become needs.
B)needs remain the same,but wants change.
C)needs and wants both increase with increases in technology. D)needs decrease with technology,but wants increase.
Q2) According to the law of diminishing marginal utility,
A)if you consume less of something,your total utility from that consumption increases.
B)if you consume less of something,your marginal utility from that consumption increases.
C)you should never consume any more of something after marginal utility has begun to diminish.
D)if total utility is increasing as you consumer more,then marginal utility must be increasing as well.
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Chapter 6: Perfectly Competitive Supply
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Sample Questions
Q1) Which of the following is a condition that is necessary for a market to be perfectly competitive?
A)The firms face inelastic demand for their product.
B)Market demand for the product is perfectly elastic.
C)Firms can easily buy and sell the productive resources necessary to compete in the market.
D)Consumers display strong brand loyalty.
Q2) To produce 150 units of output,the firm must use 3 employee-hours.To produce 300 units of output,the firm must use 8 employee-hours.Apparently,the firm is:
A)in the long run.
B)experiencing diminishing marginal returns.
C)not using any fixed factors of production.
D)failing to profit maximize.
Q3) If a perfectly competitive firm produces an output level where price is greater than marginal costs,then the firm should:
A)pay more to its variable factors of production.
B)reduce output to earn greater profits or smaller losses.
C)expand output to earn greater profits or smaller losses.
D)leave its output decision unchanged.
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Chapter 7: Efficiency, Exchange, and the Invisible Hand in Action
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Sample Questions
Q1) If buyers and sellers are free to pursue their own selfish interests,according to the invisible hand theory,the result would be:
A)anarchy.
B)exploitation of workers and natural resources.
C)an equitable allocation of resources.
D)an efficient allocation of resources.
Q2) The sum of the economic surpluses accruing to buyers and sellers is:
A)producer surplus.
B)equal to profit.
C)total economics surplus.
D)consumer surplus.
Q3) Barriers to entry are _____,and one effect of barriers to entry is to _____ the ability of the invisible hand to allocate resources efficiently.
A)uncommon today due to antitrust enforcement;improve
B)forces that limit new firms from joining an industry;reduce C)forces that limit new firms from joining an industry;irrelevant to D)uncommon today due to antitrust enforcement;reduce
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Chapter 8: Monopoly, Oligopoly, and Monopolistic Competition
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Sample Questions
Q1) Consider an industry with two firms producing similar products. Mega Corp's total costs are TC = $5,000 + 100 × Quantity. Big Inc's total costs are TC = $4,000 + 200 × Quantity.
Refer to the information given above.If each firm produces 10 units,Mega Corp will have total costs of _____ and Big Inc will have total costs of _____.
A)$6,000;$6,000
B)$5,000;$4,000
C)$5,100;$4,200
D)$15,000;$14,200
Q2) If a natural monopoly decreases the quantity of output it produces:
A)its average costs will decrease.
B)its average costs will increase.
C)it will have to decrease the price that it charges.
D)its profits will increase.
Q3) Which of the following is NOT an example of a good with network economies?
A)Text messaging capabilities
B)An internet connection
C)A computer printer
D)Computer operating systems
Page 10
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Chapter 9: Games and Strategic Behavior
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Sample Questions
Q1) Cartels would be more stable if:
A)firms that cheat on the agreement could be legally punished.
B)firms that cheat on the agreement were better informed about the value of agreement.
C)demand for the output was more variable.
D)the cartel profit were higher than the profit each individual firm could earn without the cartel.
Q2) OPEC is an example of a:
A)monopsony.
B)cartel.
C)monopoly.
D)duopoly.
Q3) The three elements of a game are:
A)the firm,the consumers,and the profit.
B)the players,the strategies,and the payoffs.
C)the model,the graph,and the costs.
D)the costs,the revenue,and the profit.
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Chapter 10: Externalities and Property Rights
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Sample Questions
Q1) When one's performance is judged relative to others' performance and not by an absolute standard:
A)players will over invest in performance enhancements.
B)players will under invest in performance enhancements.
C)the incentive to sabotage the other players is lessened.
D)a positional externality is not possible.
Q2) Suppose there are ten people playing cards in a room.One of them wants to smoke a cigar;nine of them dislike the smell of cigar smoke.The smoker values the privilege of smoking at $5,and each of the other nine occupants of the room would be willing to pay fifty cents for clean air in the room.The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking.
Refer to the information given above.If the cigar smoker paid each other occupant fifty cents for the right to smoke,the cigar smoker would be ______ and the other occupants would be _______.
A)better off;worse off
B)better off;just as well off as before the payment
C)better off;better off
D)worse off;just as well off as before the payment
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Chapter 11: The Economics of Information
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Sample Questions
Q1) According to the textbook,national advertising campaigns
A)should be discounted because they provide no real basis for choice.
B)are a credible signal of the company's belief that its product is superior.
C)are only credible signals of quality if they mention a money-back guarantee.
D)are a waste of resources.
Q2) Which one of the following policies mitigates the negative effects of moral hazard?
A)Mandatory car insurance for car owners
B)Lowering everyone's insurance premium
C)Increasing everyone's insurance premium
D)Insurance policies with large deductible provisions
Q3) Grace and Will are moving to LA at the same time and both wish to find apartments to rent.Grace is staying with her aunt while Will is at the Best Western motel.One can predict that
A)Grace and Will will spend the same amount of time searching.
B)Will will search more than Grace.
C)Grace will search more than Will.
D)Will will have better information.
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Page 13
Chapter 12: Labor Markets, Poverty, and Income Distribution
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Sample Questions
Q1) Males major in engineering much more frequently than females.Starting salaries for engineers (male or female)are very high.As a result,the observed wage gap for all college grads is __________ than wage gaps in specific majors because of
A)larger;employer discrimination
B)smaller;academic discrimination
C)larger;customer discrimination
D)larger;choices made by male and female students
Q2) Suppose the elasticity of labor demand is less than 1 in absolute value.Imposing a minimum wage in the labor market will
A)increase the incomes of all current workers.
B)result in no unemployment.
C)increase the size of the firms' total wage bill.
D)make few workers better off.
Q3) According to the textbook,Aid to Families with Dependent Children encouraged
A)women to have an excessive number of children.
B)men and women to stay together to raise children.
C)men to return home to the mother and children.
D)the breakup of families since the presence of a man terminated benefits.
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Chapter 13: The Environment, Health, and Safety
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Sample Questions
Q1) The advantage to selling pollution permits rather than using a fixed percent reduction for all firms is
A)government raises additional revenue.
B)reductions in pollution are accomplished by those firms that can do so at least cost.
C)enforcement costs are eliminated.
D)pollution is driven to zero.
Q2) Public schools require proof that a child has been immunized against several diseases before enrolling.Why?
A)It serves as an entry barrier and so screens out children who are harder to educate.
B)It is a costly to fake signal that a child is healthy.
C)Since most children attend school,it is an efficient way to publicize the need for immunizations.
D)Failure to be immunized imposes external costs on other children and teachers.
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Chapter 14: Public Goods and Tax Policy
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Sample Questions
Q1) According to the textbook,the private provision of radio and television may not achieve a socially efficient outcome because
A)consumers don't pay for the entertainment.
B)the government strictly regulates the market.
C)increasingly,radio and television stations are monopolies.
D)programs are chosen on the basis of audience size rather than the value to the audience.
Q2) Logrolling refers to
A)legislation that affects the timber industry.
B)the practice whereby legislators support each other's pork barrel spending.
C)the practice of introducing many similar bills hoping that one of the versions will become law.
D)the practice of attaching a controversial bill to a large appropriations bill.
Q3) When private firms cancel investment programs because of increases in the interest rate caused by government borrowing it is called
A)the reason for a balanced budget amendment.
B)crowding out.
C)monetary policy.
D)fiscal policy.
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Chapter 15: Spending, Income, and GDP
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Sample Questions
Q1) Summing the value added of all firms yields the value of final goods and services produced because both measures:
A)exclude the value of capital goods.
B)exclude the value of intermediate goods and services.
C)use constant prices.
D)are adjusted for population growth.
Q2) Suppose that the total production of an economy consists of 10 oranges and 5 candy bars,each orange sells for $0.20,and each candy bar sells for $1.00.Which expression of the output of this economy is most consistent with the concept of GDP?
A)This economy produces two-thirds oranges and one-third candy bars.
B)This economy produces food valued at $1.20.
C)This economy produces 15 food items.
D)This economy produces $7.00 worth of food.
Q3) Capital goods are
A)long-lived goods used for producing other goods and services.
B)the end products of production.
C)publicly provided.
D)excluded from GDP.
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Chapter 16: Inflation and the Price Level
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Sample Questions
Q1) Suppose that the total expenditures for a typical household in 2000 equaled $2,500 per month,while the cost of purchasing exactly the same items in 2005 was $3,000.If 2000 is the base year,the CPI for 2000 equals:
A)0.83
B)1.00
C)1.20
D)1.25
Q2) Suppose manufacturers introduce a new model car to replace a car currently included in the CPI basket.The price of the new car is 10 percent higher than the discontinued model,but the new car also includes additional safety features.In this situation the CPI will tend to ______ inflation as a result of ______ bias.
A)overstate;substitution
B)understate;quality adjustment
C)accurately measure;substitution
D)overstate;quality adjustment
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Chapter 17: Wages and Unemployment
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Sample Questions
Q1) A long-term mismatch between the skills of some workers and the jobs available is a principal cause of ______ unemployment.
A)cyclical
B)structural
C)global
D)frictional
Q2) As the real wage decreases,the quantity of labor demanded ______ and the quantity of labor supplied _______.
A)increases;increases
B)increases;decreases
C)decreases;decreases
D)decreases;increases
Q3) Assume the union contract wage exceeds the market-clearing wage.If there is an increase in the labor supply,then the number of unemployed workers will ______ and the number of employed workers will _______.
A)increase;increase
B)increase;decrease
C)increase;not change
D)decrease;increase
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Page 19
Chapter 18: Economic Growth
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Sample Questions
Q1) Long-run increases in living standards,as measured by real GDP per person,are primarily the result of increases in:
A)population.
B)the money supply.
C)government budget surpluses.
D)average labor productivity.
Q2) In the long run,increases in output per person arise primarily from:
A)increases in female labor force participation.
B)increases in male labor force participation.
C)an increasing proportion of the population retiring.
D)increases in average labor productivity.
Q3) An example of a government policy to provide a framework within which the private sector can operate productively is:
A)the taxation of savings.
B)the suppression of political dissent.
C)maintaining a well-functioning legal system.
D)government ownership of capital.
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Chapter 19: Saving, Capital Formation, and Financial Markets
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Sample Questions
Q1) An explanation for the low saving rate in the United States consistent with the demonstration effect includes:
A)relatively generous government assistance for the elderly and large down payments required for home purchases.
B)households spending beyond their means to keep up with community standards.
C)well-developed financial markets making it easy to borrow against home equity.
D)large and persistent capital gains.
Q2) The opportunity cost of capital investment is the:
A)value of the marginal product of capital.
B)value of the marginal product of labor.
C)real interest rate.
D)price of new capital goods.
Q3) Where Y is GDP,C is consumption,I is investment,G is government spending,and there is no international trade,national saving equals:
A)C + I +G.
B)Y - C -G.
C)Y + C +G.
D)Y - C - I.
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Chapter 20: Money, Prices, and the Financial System
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Sample Questions
Q1) Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade.Each company's stock currently sells for $100 per share.If the temperature next year is lower than average,the stock price for ABC will increase by $20,and the stock price for XYZ will not change.If the temperature next year is higher than average,the stock price for XYZ will increase by $20,and the stock price for ABC will not change.There is a 50% chance that it will be colder than average next year,and a 25% chance that it will be warmer than average.If you purchase two shares of XYZ stock and no shares of ABC stock,there is a ______ chance that your gain will be $40.Otherwise,your gain will be ______.
A)50%;$30
B)25%;$0
C)75%;$20
D)50%;$20
Q2) When a baker exchanges a pie for dollars,this is an example of dollars serving as: A)barter.
B)a medium of exchange.
C)a unit of account.
D)a store of value.
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Chapter 21: Short-Term Economic Fluctuations
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Sample Questions
Q1) The duration of an expansion is from:
A)peak to trough.
B)trough to peak.
C)peak to peak.
D)trough to trough.
Q2) According to Okun's Law,when the output gap is positive,cyclical unemployment:
A)equals structural unemployment.
B)equals frictional unemployment.
C)equals zero.
D)is negative.
Q3) If the frictional rate of unemployment equals 2 percent,the structural rate of unemployment equals 3 percent,and the cyclical rate of unemployment equals 1 percent,then the natural rate of unemployment equals:
A)6%.
B)1%.
C)3%.
D)5%.
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Chapter 22: Spending, Output, and Fiscal Policy
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Sample Questions
Q1) Data on output and planned aggregate expenditure in Macroland are given below. \[\begin{array} { c c } & \underline{ \text { Planned Aggregate } } \\ \underline{\text { Output (Y) }} & \underline{ \text { Expenditure (PAE) } } \\
2,000 & 2,300 \\
3,000 & 3,200 \\ 4,000 & 4,100 \\ 5,000 & 5,000 \\ 6,000 & 5,900 \end{array}\]
Based on these data,the short-run equilibrium level of output is _____.
A)2,000
B)3,200
C)4,100
D)5,000
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24
Chapter 23: Monetary Policy and the Federal Reserve
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Q1) Federal Reserve actions that increase nominal interest rates and decrease the money supply:
A)close a recessionary gap.
B)close an expansionary gap.
C)raise the rate of inflation.
D)raise bond prices.
Q2) The Federal Reserve System is:
A)a group of twelve commercial banks.
B)the central bank of the United States.
C)the agency of the U.S.government that insures commercial bank deposits.
D)the branch of the U.S.Treasury that keeps the U.S.gold reserves.
Q3) For the past 40 years,the Federal Reserve has expressed policy in terms of a target value for:
A)bank reserves.
B)the Federal Reserve discount rate.
C)the federal funds rate.
D)open market operations.
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Chapter 24: Aggregate Demand,
Supply, and Business Cycles
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Sample Questions
Q1) When the economy is in short-run equilibrium,there will be ______ output gap.
A)no
B)only a recessionary
C)either a recessionary or an expansionary
D)only an expansionary
Q2) Inflation inertia is the result of the behavior of ____ and the existence of ______.
A)the central bank;automatic stabilizers
B)real and nominal interest rates;an output gap
C)autonomous aggregate demand;the Fed's policy reaction function
D)inflation expectations;long-term wage and price contracts
Q3) Starting from potential output,if consumer confidence increases and consumers decide to spend more,then this will generate a(n)_____ gap and inflation will _____.
A)recessionary;increase
B)recessionary;decrease
C)expansionary;decrease
D)expansionary;increase
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Chapter 25: Macroeconomic Policy
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Q1) Starting from full employment at the initial target inflation rate,if there is an adverse inflation shock,then the Federal Reserve must _____ in order to avoid a recession.
A)increase the target inflation rate.
B)decrease the target inflation rate.
C)maintain the initial target inflation rate.
D)shift the short-run aggregate supply curve up.
Q2) All of the following central banks have announced numerical targets for inflation EXCEPT the:
A)United States Federal Reserve System.
B)Bank of Canada.
C)Bank of England.
D)Central Bank of Brazil.
Q3) Shocks to aggregate demand ______ require the Fed to choose between inflation and output stability;shocks to aggregate supply ______ require the Fed to choose between inflation and output stability.
A)do;do
B)do;do not
C)may or may not;may or may not
D)do not;do
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Chapter 26: Exchange Rates, International Trade, and Capital Flows
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Sample Questions
Q1) The following table provides nominal exchange rates for the U.S.dollar. \[\begin{array} { l c c }
\underline { \text { Country } } & \underline { \text { Foreign currency/dollar } }&\underline { \text { Dollar/foreign currency } }\\ \text { Poland (zloty) } & 4.367 & .229 \\
\text { South Africa (rand) } & 6.944 & .144 \end{array}\]
Based on these data,the nominal exchange rate equals approximately ______ zloty per South African rand or,equivalently,______ rand per Polish zloty.
A)1.590;0.629
B)0.629;1.590
C)0.021;47.640
D)47.640;0.021
Q2) International capital flows are:
A)purchases of foreign goods or services.
B)sales of domestic goods or services to foreigners.
C)exports plus imports.
D)purchases or sales of real and financial assets across international borders.
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