Introduction to Finance (Fin 4001)

Potential questions and study guide for exam 1

Any 8 of these questions could be on your exam!

Suggestions:

 Use this document as your starting point.

 As you work your way through each topic, look for information that will help you answer a question.

 When you complete each topic, start preparing answers.

 Include discussion of the related concepts, facts, issues, etc.

 In many cases some additional research will be necessary.

 Consult with other students to get feedback as you work to fine-tune your answers.

 Make sure that you are using an open outline like format in the construction of your answers.

Study Guide stuff is in red font.

The actual question is in black font.

1. Planet Earth is our only home for the time being. As global populations

grow and our resources dwindle, we should worry more about the

issues of

a. Scarcity and Choice.

i. List the 5 most critical nonrenewable resources,

1. Do some quick research on critical nonrenewable

resources and make your list.

ii. Explain their significance to human survival on the planet,

1. Discuss why those nonrenewable resources are so

critical to us.

iii. And discuss 3 choices we need to be making today

relative to those nonrenewable resources, to prolong our

comfortable existence on the planet.

1. Discuss the implications of your choices, both

positive and negative as they relate to our

continued existence on the planet.

b. The theory of rational behavior says that we humans act in our

own self-interest. Given the our actual behavior and the

decisions we have and are continuing to make relative to the

planet, please do the following:

i. Explain how over-pumping aquifers around the world is in

our best interest.

1. What is over-pumping mean?

2. How might the continued over-pumping impact

our ability to survive on the planet? What are the

key results of over-pumping?

ii. Explain the concepts of Utility, Total Utility, Marginal Utility,

and Diminishing Marginal Utility, and how those 3

concepts relate to a yes or no decision to implement the

Keystone Pipeline.

1. You should be able to explain each of these

concepts as they relate to rational behavior.

2. You should be able to discuss the implications of

our not always behaving rationally.

3. You should discuss each concept as it relates to the

Keystone decision.

iii. Explain the Theory of Consumer Behavior and how it has

brought us to where we are today.

1. Note the elements of the Theory of Consumer

Behavior

2. Explain how the theory has brought us to where we

are today in the world.

c. Marginal analysis is a decision-making tool.

i. Please define Marginal Cost and Marginal Benefit, and

how one would decide to increase or decrease an

activity based on the MC – MB assessment.

1. You can get this from the notes.

ii. Please use marginal analysis to explain how to decide the

Keystone Pipeline question.

1. Explain how you would use marginal analysis to

help make the Keystone decision.

2. To a great extent, Economics is about connecting the dots (finding

relationships between seemingly unrelated things).

a. Please pick any 5 Ecosystem Services and connect the dots

between our human behavior and the differences between the

global north and the global south.

i. Our behavior impacts our ecosystem and the ecosystem

services. Those impacted ecosystem services in turn have

impacts on the people and economies of the global

north and global south. Pick 5 ecosystem services, look at

human behavior that has impacted those services, and

discuss those changes to ecosystem services impact the

two different parts of the world.

ii. Discuss what should be done about the problem.

3. The Production Possibilities Model is one of the first Economic Models

students learn about. Thoroughly and completely explain the

Production Possibilities Model. Including but not limited to the

following:

a. What the model shows us?

b. The 4 assumptions of the model

c. The related concepts of:

i. Productive efficiency and how it relates to the ppc.

1. Define it and explain how it relates to the ppc.

ii. Allocative efficiency and how the point of AE is found.

a. Define it,

b. Discuss the significance of allocative

efficiency relative to the model

c. Explain the 2 step process for finding the

point of allocative efficiency on the PPC.

iii. Economic growth – what it means, how it can be

graphically represented, what are the prerequisites to

growth.

a. How do you define it, why is it important, and

how would you represent it graphically?

b. What are the prerequisites for growth?

iv. Explain the Presentville – Futureville case, along with what

that case teaches you.

a. Explain the decision making of Presentville

and Futureville.

b. Explain the impact of those decisions on the

future of each group.

c. Explain the relevance of this case for the U.S.

Economy.

v. Law of increasing opportunity cost – what it means and

how it could be explained graphically.

1. Draw a picture and explain what the picture tells

us.

d. Explain how you could use the Production Possibility Model to

represent the US Economy during 2008 – 2010.

i. Draw a picture and explain what the picture says.

4. Every country has its own unique type of Economic System. Ours is

called Capitalism.

a. Please list and explain 5 “good” things Capitalism has given us

over the years and explain why those things would be

considered good.

i. Pretty straight forward. Make a list of the good things and

discuss why they are good.

b. Please list and explain 5 “bad” things Capitalism has given us

over the years, and explain why those things would be

considered bad.

i. What are some of the “bads” that Capitalism has given us

and why you consider them to be “bad”?

5. The Circular Flow Model with Government is another important model

for students to understand.

a. Please explain what the model shows us.

b. List and explain the assumptions of the model.

i. There are 3 assumptions of the Circular Flow Model with

Government. You should be able to list and explain

each.

c. List and explain the characteristics of each component.

i. Government sector – list and explain the characteristics

ii. Household sector – list and explain the characteristics

iii. Business sector – list and explain the characteristics

iv. Product market – list and explain the characteristics

v. Resource market – list and explain the characteristics

d. Thoroughly explain how each component of the model

interacts with the other components

i. Explain how all of the sectors and markets interact with

each other. You can do this as part of your answer to

part (c) if you like.

6. Please Thoroughly and completely explain the Law of Demand

a. Define demand and state the law of demand.

i. State the definition

ii. State the law of demand

b. List and explain the 3 factors that support the law of demand.

i. List and explain each of the 3 factors discussed in the

slides.

c. List and explain the determinants of demand and how they

either cause an increase in demand or a decrease in demand.

i. List and explain each of the 5 determinants and how they

impact demand.

d. Thoroughly and completely explain the differences between a

change in demand and a change in quantity demanded.

i. You should be able to explain each of these cases and

draw a picture of each case.

7. Thoroughly and completely explain the Law of Supply

a. Define supply and state the law of supply.

b. List and explain the determinants of supply and how they

impact supply.

i. There are 6 determinants of supply listed in the slide set.

You should be able to list and explain how each shifts the

supply curve to the left or right.

c. Thoroughly and completely explain the differences between a

change in supply and a change in quantity supplied.

i. You should be able to explain each of these cases.

8. Thoroughly and completely explain the following graph of market

equilibrium.

a. Explain what market clearing equilibrium means.

i. Explain what this really means. Please be thorough.

b. Discuss what happens at a price above and below the

equilibrium price, and why.

i. What if the price were above the equilibrium price –

Explain what happens.

ii. What if the price were below the equilibrium price –

Explain what happens.

c. Thoroughly and completely explain the two government

intervention cases, price floors and price ceilings and give

examples.

9. In the discussion of the Market System we talked about the

characteristics of the Market system and 4 Fundamental Questions

that every economy must respond to.

a. List and thoroughly and completely explain those 4

fundamental questions and how they are answered.

i. What will be produced?

1. The following information should be included in

your explanation of this first question.

2. products that generate profits and why

3. economic profits – explain

4. economic costs – explain

5. relate normal profit to economic profit

6. define expanding industry

7. define declining industry

8. Consumer sovereignty – explain, what does it really

mean and how does it work to influence what gets

produced?

ii. How will the goods and services be produced?

1. The following information should be included in

your explanation of this second question -

2. Why must firms try to employ the most economically

efficient production techniques?

3. explain some of the Least Cost Production issues:

a. Optimal plant location - implications

b. Resource Prices – implications

c. Resource Productivity - implications

d. Transportation Costs - implications

iii. Who will get the goods and services?

1. The following information should be included in

your explanation of this question.

2. List and explain the 3 components of the answer

iv. How will the system accommodate change?

1. The following information should be included in

your explanation of this fourth question.

2. start with the system in equilibrium

3. shock the system into a disequilibrium condition

a. Use a change in one of the determinants of

demand.

b. Explain in detail, how the system adjusts to

the change.

c. Explain how the system completes the

adjustment process and returns to

equilibrium, and what indicates a return to

equilibrium.

b. List and thoroughly and completely explain 5 characteristics of

the Market system.

i. Select any 5 of the characteristics of the Market system

and explain each of them.

ii. Explain how each characteristic you selected impacts

the 1% versus the 99%.

10. Public goods vs. Private goods.

a. Please thoroughly and completely explain the difference

between public goods and private goods and give 2 examples

of each, including why those examples best fit your definition.

i. You should include the following:

1. Private goods

a. Definition

b. Characteristics

c. 2 examples of private goods and why they

are good examples.

2. Public goods

a. Definition

b. Characteristics

c. 2 examples of public goods and why they

are good examples.

b. Please thoroughly and completely explain the free rider

problem and give two examples and explain why they are

good examples.

i. You should be able to explain the Free Rider problem

including what creates the Free Rider problem.

c. Please thoroughly and completely explain the presence of

quasi-public goods.

i. You should explain what a quasi-public good is and give

2 examples, explaining why they are good examples.

ii. Explain how quasi-public goods are used by the 1% versus

the 99%.

11. Depreciation and Appreciation of currency. a. Please thoroughly and completely explain how the US dollar might

depreciate relative to another currency.

b. Please thoroughly and completely explain how the US dollar might

appreciate relative to another currency.

i. The notes should be sufficient to help you answer parts (a) and

(b).

c. Please thoroughly and completely explain how the

depreciation of the dollar relative to a foreign currency impacts

U.S. GDP. i. Start with an Increase in U.S. demand for another country’s

products. Explain how this could lead to the depreciation of

the U.S. Dollar – and specifically state which direction U.S. GDP

would go.

d. Please thoroughly and completely explain how the

appreciation of the dollar relative to a foreign currency impacts

U.S. GDP. i. Start with An increased foreign demand for U.S. goods. Explain

how this could lead to the appreciation of the U.S. Dollar - and

specifically state which direction U.S. GDP would go.

12. Market Failure.

a. State the definition of a market failure,

i. Define Market Failure

b. List and explain the 4 causes of market failure, including how they

work.

i. List and explain each of the causes of Market Failure included

in the slides.

c. State the definition of spillovers costs and give an example

i. Define and explain spillover cost

ii. Give two example of a spillover cost situation and explain why

your examples are correct.

d. Explain the economic effects of spillover costs

i. Provide specifics starting with the firm avoiding costs (and how

that happens) and conclude with the nature of the market

failure.

e. Thoroughly and completely explain how spillover costs are corrected

and the economic implications of the corrections.

i. Explain the 2 approaches to solving the spillover cost case and

how those 2 approaches actually eliminate the market failure.

f. State the definition of spillover benefits and give an example

i. Define and explain Spillover Benefits

ii. Give two examples of a spillover benefit, and explain why your

examples are correct.

g. Explain the economic effects of spillover benefits.

i. Explain why the market demand curve understates true

demand and what happens next leading to the market failure.

Explain the nature of the market failure.

h. Thoroughly and completely explain how spillover benefits are

corrected and the economic implications of the corrections.

i. Explain the two approaches used to solve the spillover benefit

problem and how they work to solve the problem.

13. Throughout the ages countries have implemented impediments to trade.

a. Why would the U.S. impose steep tariffs on Chinese solar panels?

i. Explain how this would work to accomplish the objective.

b. Why would Brazil impose steep tariffs on shoes from China?

i. Explain how this would work to accomplish the objective of

Brazil.

c. Identify 3 cases where the U.S. has imposed import quotas on another

country and explain why they were implemented.

i. Google can help you.

d. Identify 3 examples of non-tariff barriers imposed by the U.S. and why

they were implemented and their impact on the U.S. and other

countries.

i. Google can help you.

e. What could happen to the domestic economy of a country when

trade barriers are eliminated and why?

i. Explain what would happen to GDP, employment, and

national income, and why.

14. The Smoot – Hawley Tariff Act of 1930 started a tariff war with the rest of the

world.

a. Please thoroughly and completely explain the various events that

followed that 1930 legislation as they relate to the growth of U.S. and

global trade between 1930 and today.

i. Explain the Smoot – Hawley Tariff Act of 1930 and the ultimate

impact it had on the U.S. Economy.

ii. The 1934 - Reciprocal Trade Agreements Act and its impact on the

volume of global trade.

iii. The 1947 General Agreement on Tariffs and Trade (GATT) and

its impact on the volume of global trade.

iv. The 1979 Tokyo Round of GATT and the impacts of non-tariff

barriers on trade.

v. The 1986 Uruguay Round of GATT and its impact of global

trade.

vi. The 1993 European Union and its impact on the volume of

trade in Europe.

vii. The 1994 North American Free Trade Agreement and the

impact it had on trade between the U.S. and Mexico, and the

immigration issues we have today.

viii. The 2001 Doha Round of the WTO and its impact on the ability

of countries to be food secure.

ix. The slides, audio, and Google should be able to help you with

this.

15. Discuss the role of the World Trade Organization and its impact on member

countries.

a. How is the WTO organized?

b. Who runs the WTO?

c. How are policies and regulations established?

d. What are the rights of WTO members and non-members?

e. When and who can file a dispute?

f. Who is in charge of dispute resolutions and how are disputes

resolved?

g. How have WTO policies and regulations impacted the U.S. Economy

h. How have WTO policies and regulations impacted U.S. Citizens?

i. Start with the information provided in the slides and

supplement that with your own research on how the WTO

operates and its rules and regulations.

ii. Discuss the impact of the WTO on the ability of nations to

maintain their sovereignty.

iii. Discuss the impact of the WTO on maintaining the inequalities

between the global north and global south.

iv. Some Google research should help you with this question.