ECO 365 final exam questions with answers

1). The DeBeers company is a profit-maximizing monopolist that exercises monopoly power in the distribution of diamonds. If the company earns positive economic profits this year, the price of diamonds will:        

·         Exceed the marginal cost of diamonds but equal to the average total cost of diamonds. 

·         Exceed both the marginal cost and the average total cost of diamonds.      

·         Be equal to the marginal cost of diamonds.       

·         Be equal to the average total cost of diamonds.

2). Using 100 workers and 10 machines, a firm can produce 10,000 units of output; using 250 workers and 25 machines, the firm produces 21,000 units of output. These facts are best explained by:       

·         Economies of scope

·         Diseconomies of scale

·         Diminishing marginal productivity

·         Economies of scale

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3). Suppose that college tuition is higher this year than last and that more students are enrolled in college this year than last year.  Based on this information, we can best conclude that:     

·         despite the increase in price, quantity demanded rose due to some other factors changing.

·         the demand for a college education is positively sloped.

·         the law of demand is invalid.

·         this situation has nothing to do with the law of demand.

4). A monopoly firm is different from a perfectly competitive firm in that:          

·         A monopolist’s demand curve is perfectly inelastic whereas a perfectly competitive firm’s demand curve is perfectly elastic.

·         A competitive firm has a u-shaped average cost curve whereas a monopolist does not.

·         A monopolist can influence market price whereas a perfectly competitive firm cannot.

·         There are many substitutes for a monopolist’s product whereas there are no substitutes for a competitive firm’s product.

 

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5). The best example of positive externality is:         

·         Alcoholic beverages

·         Pollution

·         Education

·         Roller coaster rides

6). The theory that quantity supplied and price are positively related, other things constant, is referred to as the law of:  

·         supply

·         profit maximization

·         opportunity cost

·         demand

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7). A reduction in the supply of labor will cause wages to:

·         Decrease and employment to decrease.

·         Increase and employment to increase.

·         Decrease and employment to increase.

·         Increase and employment to decrease.

8). Other things held constant in a competitive labor market, if workers negotiate a contract in which the employer agrees to pay an hourly of $17.85 while the market equilibrium hour rate is $16.50, the:

·         Quantity of workers demanded will exceed the quantity of workers supplied.

·         Quantity of workers supplied will exceed the quantity of workers demanded.

·         Supply of labor will decrease until the equilibrium wage rate is $17.85.

·         Demand for labor will increase until the equilibrium wage rate is $17.85.

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9). Alex is playing his music at full volume in his dorm room. The other people living on his floor found this to be a nuisance, but Alex doesn’t care. Alex’s music playing is an example of:

·         Pareto externality

·         Positive externality

·         Negative externality

·         Normative externality

10). Oligopoly is probably the best market for technological change because:          

·         The typical oligopoly has the funds to carry out research and development and believe that its competitors are innovating, which motivates it to conduct research and development.

·         The typical oligopoly lacks the funds to carry out research and development and therefore will use basic research from universities.

·         Research and development occurs only if government subsidizes such activity, and government tends to subsidize oligopolies.

·         The typical oligopoly keeps price very close to average total cost because it fears the entry of new rivals if its profits are excessively high.

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11). A perfectly competitive firm facing a price of $50 decides to produce 500 widgets. Its marginal cost of producing the last widget is $50. If the firm’s goal is to maximize profit, it should:    

·         Produce more widgets

·         Produce fewer widgets

·         Continue producing 500 widgets

·         Shut down

12). Graphically, a change in price causes:

·         the demand curve to shift.

·         both supply and demand to shift.

·         a movement along a given supply curve, not a shift.

·         the supply curve to shift.

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13). In 1997, the federal government reinstated a 10 percent excise tax on airline tickets. The industry tried to pass on the full 10 percent ticket tax to consumers but was able to boost fares by only 4 percent. From this you can conclude that the:

·         Supply of airline tickets is perfectly inelastic.

·         Supply elasticity of airline tickets is less than infinity.

·         Demand elasticity for airline tickets is greater than zero in absolute value.

·         Demand for airline tickets is perfectly inelastic.

14). In 2011, the Department of Justice sued AT&T to block its merger with the cell phone service provider T-Mobile. To defend itself against the charge, AT&T argued that the:

·         Combined company could raise prices, allowing it to survive in a rapidly changing market.

·         Government had no authority to block mergers in the telephone industry.

·         Government had guaranteed it exclusive control of cell phone service.

·         Merger would improve and expand cellular service to consumers.

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15). The law of diminishing marginal productivity implies that the marginal product of a variable input:

·         Never declines

·         Always declines

·         Is constant

·         Eventually declines

16). Suppose OPEC announces it will increase production. Using supply and demand analysis to predict the effect of increased production on equilibrium price and quantity, the first step is to show the:

·         supply curve shifting to the right.

·         demand curve shifting to the left.

·         demand curve shifting to the right.

·         supply curve shifting to the left.

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17). Many call centers that provide telephone customer services for U.S. companies have been established in India, but few or none have been established in China. Why?

·         China is at a more advanced stage of economic development than India.

·         China lacks the political infrastructure to support call centers.

·         Indian labor costs are equal to Chinese labor costs.

·         Chinese labor lacks the specific language skills needed to make call centers profitable in China.

18). Suppose people freely choose to spend 40 percent of their income on health care, but then the government decides to tax 40 percent of that person’s income to provide the same level of coverage as before. What can be said about deadweight loss in each case?

·         There is no difference because the total spending remains the same and the health care purchased remains the same.

·         Taxing income results in less deadweight loss because government knows better what health care coverage is good for society.

·         Taxing income results in deadweight loss, and purchasing health care on one’s own doesn’t result in deadweight loss.

·         There is no difference between goods that are purchased in the market in either case.

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19). At one time, sea lions were depleting the stock of steelhead trout. One idea to scare sea lions away from the Washington coast was to launch fake killer whales, which are predators of sea lions. The cost of making the first whale is $16,000 ($5,000 for materials and $11,000 for the mold). The mold can be reused to make additional whales, and so additional whales cost $5,000 each. Based on these numbers, the production of fake killer whales exhibits:

·         Diminishing marginal product

·         Decreasing returns to scale

·         Constant returns to scale

·         Increasing returns to scale

20). There are many restaurants in the city of Raleigh, each one offering food and services that differ from those of its competitors.  There is also free entry of sellers into the market, and each seller serves a very small fraction of the total number of meals served each day.  The restaurant industry in Raleigh is best characterized as:

·         Perfectly competitive.

·         Monopolistically competitive.

·         A pure monopoly.

·         An oligopoly.

 

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21). Suppose foreign shrimp prices drop by 32 percent and importers gain a 90 percent market share.  From this information, what would economists strongly suspect about this industry?

·         Foreigners have a comparative advantage in shrimping.

·         The large sales of foreigners indicate they are better strategic business bargainers than Americans are.

·         Americans have a comparative advantage in shrimping.

·         Foreign sellers probably are colluding on price to maximize profits.

22). For a monopolist, the price of a product:

·         Is less than the marginal revenue.

·         Exceeds the marginal revenue.

·         Equals the marginal cost.

·         Equals the marginal revenue.

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23). When Ross Perot ran for president as a third party candidate in 1992, he argued that free trade with Mexico would result in massive job losses in the United States because Mexican wages were so low. Which of the following is the best explanation of why few economists agreed with Perot?

·         Although economics predicted that unemployment would rise, the increased profits of corporations would raise stock prices enough to compensate for the lost jobs.

·         Economists did not believe any jobs would be lost in the United States.

·         Although economists believed that in some areas the United States would lose jobs, they expected the United States would gain jobs in other areas.

·         Economics believed that the U.S. unemployment would rise.

24). Mr. Woodward’s cabinet shop is experiencing rapid growth in sales. As sales have increased, Mr. Woodward has found it necessary to hire more workers. However, he has observed that doubling the number of workers has less than doubled his output. What is the likely explanation?

·         The law of demand

·         The law of diminishing marginal productivity

·         The law of supply

·         The law of diminishing marginal utility

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25). Price elasticity of demand is the:

·         Change in the quantity of a good demanded divided by the change in the price of that good.

·         Percentage change in price of that good divided by the percentage change in the quantity of that good demanded.

·         Percentage change in quantity of a good demanded divided by the percentage change in the price of that good.

·         Change in the price of a good divided by the change in the quantity of that good demanded.

26). Which of the following statements is true about a downward-sloping demand curve that is a straight line?

·         The slope remains the same, but elasticity falls as you move down the demand curve.

·         The slope remains the same, but elasticity rises as you move down the demand curve.

·         The slope and the elasticity fall as you move down the demand curve.

·         The slope and elasticity are the same at all points.

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27). Strategic decision making is most important in: 

·         Monopolistically competitive markets.

·         Monopolistic markets.

·         Oligopolistic markets.

·         Competitive markets.

28). Cartels are organizations that:

·         Encourage price wars.

·         Keep markets contestable.

·         Use predatory pricing to monopolize industries.

·         Coordinate the output and pricing decisions of a group of firms.

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29). Microeconomics and macroeconomics are:

·         Interrelated because what happens in the economy as a whole is based on individual decisions.

·         Interrelated because both are often taught by the same instructors.

·         Not related because they are taught separately.

·         Virtually identical, though one is much more difficult than the other.

30). Microeconomics is the study of:

·         a firm's pricing policies

·         inflation

·         unemployment

·         business cycles

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