ECO 561 Final Exam

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ECO 561 Week 1 Quiz or Knowledge

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01.Revenue increases when

producer surplus increases

producer surplus decreases
consumer surplus increases
consumer surplus decreases

2. An increase in the price of an inelastic good

decreases revenues
decreases the percentage change in quantity less
than the percentage change in price
increases revenues
increases the percentage change in quantity more
than the percentage change in price
3. Price elasticity of Demand increases when

the number of complementary goods decreases

the number of substitute goods decreases
people become more price sensitive over time
people become less price sensitive over time

4. The purpose of a market in a market system is to

allow government to control what is sold

set constraints between buyers and sellers
bring buyers and sellers into contact
allow an organization to set prices in relation to their
products

5. By specializing in the production of one good, a company is

able to benefit from economies of scale which increases its
revenue. Which of the following is an attribute of specialization?

Reducing costs by creating a surplus

Saving time by allowing a worker to focus on one task
Encouraging workers to learn new skills
Encouraging workers to learn a number of different
skills

6. The market system promotes progress by

creating incentive to continue to do things in the
same way
restricting the amount of capital directed to specific
goods
slowly adjusting to changes in the prices of resources
providing incentive for technological advances
7. Productive efficiency is achieved when

the most valued combination of resources is used

the best technology is used
when production occurs at a fair cost per unit
fewer resources are left for production of other goods

8. The market is said to be in equilibrium when

there is potential for a shortage but not a surplus

there is potential for a surplus but not a shortage
neither a shortage nor a surplus exists
the quantity sold equals the quantity purchased

9. The market will move to a higher equilibrium price if

the decrease in supply is equal to the decrease in
demand
the increase in supply is greater than the increase in
demand
the decrease in demand is greater than the decrease
in supply
the increase in demand is greater than the increase in
supply
10. The intersection of supply and demand will be at a lower
equilibrium price but a higher equilibrium quantity if

supply is constant and demand

supply is constant and demand
demand is constant and supply
demand is constant and supply

increases
decreases
decreases
increases

11. When a price ceiling occurs

the market price will be lower than the equilibrium
price
the market price will be higher than the equilibrium
price
the supply will exceed the demand
buyers will not be willing to pay more than the ceiling
price
12.Purely competitive firms increase total revenue by

increasing production
decreasing production
increasing price
decreasing price

13.What are two ways for a competitive firm to determine the

optimal level of production, that is, the level of production that
will maximize profit or minimize losses?
Comparing total revenue to total cost or marginal
revenue to marginal costs
Comparing average revenue to average costs or
marginal revenue to marginal costs
Comparing average variable costs to price or
marginal revenue to price
Comparing total revenue to average variable costs
or price to average variable costs
14.Suppose that a firm determines that its marginal revenue is
greater than its marginal cost, it would be better to

increase production
decrease production
keep production the same
increase price

15.Marginal cost can be defined as the addition to _____ of one

more unit of output.

total variable costs

average total costs
average variable costs
total fixed costs

16.It is profitable for a firm to continue employing additional

resources as long as
Marginal
Cost
Marginal
Cost
Marginal
Marginal

Revenue Product >= Marginal Resource

Revenue Product <= Marginal Resource
revenue >= Marginal cost
Revenue Product >= Price

17.As additional units are produced, the marginal revenue

product falls for all firms because marginal product decreases.
For firms operating in industries that are not perfectly
competitive, marginal revenue product also falls because

product
product
product
product

price
price
price
price

falls as output increases

falls as output decreases
increases as outputincreases
increases as outputdecreases

18.All things being equal, an increase in demand for a product,

increases demand for the resources usedin its
production
decreases demand for the resources usedin its
production
increases the supply of a product
decreases the supply of resources used in
19.Demand for resources, including labor, depend on its

productivity
profitability
availability
accessibility

20.When adding labor or other factors of production,

businesses may see their total product rise, but see their perunit increase in returnfor each additional unit diminish. This
phenomenon
occurs only for firms that do not eff
iciently use their factors of production
applies only to capital-intensive industries
is known as diminishing marginal product and has
general market application
depends on how abundant or scarce labor is in
existing factor-markets

21.If a firm stars small and, over time, builds successively

larger plantsizes or adds additional work space in an office,
average total costare most likely to

initially decrease, then begin to rise

initially rise, then begin to decrease
remain constant over time
continually increase

22.The primary difference between increasing- and decreasingcost industries lies in

fixed-cost components: only increasing-cost
industries have significant fixed costs
variable-cost components: only decreasing-cost
industries have significant variable costs
the fact that the average total cost (ATC) of firms in
increasing-cost industries will first decline and then
eventually increasewith output, while decreasing-cost
firms experience progressively lower ATC with
increased output
efficiency of production
23.In the short run, firms should shut down if

AVC > P
ATC > P > AVC
P > ATC
P > MC

24.When you are considering the value of a resource in its next

best use, you are considering its

opportunity cost
production cost
marginal cost
price

25.Of the four major market structuresperfectly competitive,

monopolistic competition, oligopoly, monopolyreducing
variable costs of production
is not a viable option for perfectly competitive firms
or price- takersbecause the per-unit profit margin is
fixed by the equilibrium price
can enhance profit for all but the monopoly firm,
which, because it has no competition, has little
financial incentive tolower its per-unit costs
will result in significant increases in profit-margin,
regardless of market structure, if coupled with
significant increases inproduct price
enhance profit per-unit, because profit equals
revenue minus cost
26.A purely- or perfectly-competitive firm would be
characterized by which of the following?
Large number of firms, price taker, free entry and
exit, and standardized product
Large number of firms, price maker, free entry and
exit, and a differentiated product
Small number of firms, price maker, limited entry
and exit, and a standardized product
One firm, price maker, limited entry and exit, and a
unique product
27.Oligopolies are characterized by a small number of firms
where the top three firms hold the majority of the market. If in
an oligopoly market, firm A is almost twice as big as firm B and
firm C then
firm A is perfectly free to price however it chooses,
since it is by far the most dominant firm in the
market
firm C has to beware of pricing collusionby A and B
to avoid being picked off in a price war
firms A, B, and C will tend to use non-price strategies
to maintain their profits or market share.

 firms B and C will try to observe nonprice strategies taken by firm A and follow similar
strategies to maintain their profits.
28.Regulated monopolies are empowered by public authority
for which specific reason?
The provision of a good or service that, if left to the
free market system, would require additional
government regulation
to prevent negative externalities to consumers as
well as the public.
The need to avoid the unnecessary use of duplicate
resources that could be more efficiently employed by
a single supplier to meet the needs of the broadest
range of consumers.
The public policy of protecting consumers from the
excesses of unrestricted, demand-driven pricing.
The governments goal of maintaining artificially low
prices for particular goods or services.
29.For a purely-competitive firm, price must be
equal to marginal revenue and average revenue
greater than marginal revenue and average revenue
greater than marginal revenue, and equal to average
revenue
less than both marginal revenue and average
revenue

30. Business cycles occur when output

falls below its potential

rises above its potential
is fixed at its potential
fluctuates around its growth trend

31.Which of the following equals the market value of all final

goods and services produced in an economy, stated in the
prices of a specific base year?

Nominal GNP
Nominal GDP
Real GDP
Real GNP

32. Because the goals of firms, entrepreneurs, and workers

have different incentives, which of the following principles
applies?

Self-interest
Invisible hand
Moral hazard
Free enterprise

33. Imagine a country has a population of 210 million. Within

the country there are 95 million people who are employed
workers, 50 million people incapable of working, and 60 million
people capable of working, but not actively looking. Based on
this information, what is the unemployment rate?

3%
5%
7%
9%

34. A good real-world example of monopolistic competition is

lawyers
gas stations
Time Warner Cable
groceries store

35.An industry comprising a small number of firms, each of

which considers the potential reactions of its rivals in making
price-output decisions, is called

monopolistic competition
oligopoly
pure monopoly
pure competition

36.Price is constant or given to the individual firm selling in a

purely competitive market because
the firm's demand curve is downward sloping
of product differentiation reinforced by extensive
advertising
each seller supplies a negligible fraction of total
supply
there are no good substitutes for its product
37. The most important pricing strategy for a perfectly
competitive firm is

minimizing cost
maximizing sales
product differentiation
advertising

38. Which of the following is a nonprice barrier of entry?

Huge sunk cost

Discounts
Product differentiation
Advertising

39. A third-degree price discrimination can be applied to which

of the following market structures?

A monopoly
An oligopoly
A monopolistic competition
A perfect competition

40. An economys aggregate demand curve shifts leftward or

rightward by more than changes in initial spending because of
the

net export effect

wealth effect
real-balances effect
multiplier effect

41. Suppose productivity rises in a particular economy, but

wages stay the same. Other things equal,

the demand curve will shift leftward

the supply curve will shift rightward
the supply curve will shift leftward
expenditures curve will shift rightward

42. If personal taxes were decreased and resource productivity

increased simultaneously, the equilibrium

output would rise

output would fall
price level would necessarily fall
price level would necessarily rise

43. Expansionary fiscal policy is so named because it

involves an expansion of the nation's money supply
can only be attained by expanding government
consumption
is aimed at achieving greater price stability
can motivate an expansion of real GDP
44. Suppose the price level is fixed, the MPC is .5, and the GDP
gap is a negative$100 billion. To achieve full-employment
output (exactly), government should
increase government expenditures by $100 billion
increase government expenditures by $50 billion

 reduce taxes by $50 billion

reduce taxes by $200 billion
45. GDP understates the value of output produced by an
economy because it
includes transactions that do not take place in
organized markets, such as home cooked meals
includes environmental degradation caused by
increased output production
excludes value added from the underground
economy, such as tips taken under the table
excludes the value of the wages and benefits of
government employee
46. Other things equal, a decrease in the real interest rate will
shift the investment demand curve to the right
shift the investment demand curve to the left
move the economy upward along its existing
investment demand curve
move the economy downward along its existing
investment demand curve
47. Other things equal, a decrease in corporate income taxes
will
decrease the market price of real capital goods
have no effect on the location of the investment
demand curve
shift the investment demand curve to the right
shift the investment demand curve to the left
48. Inflation in U.S. prices will cause
an increase in the demand for U.S. dollars and an
appreciation in the exchange rate
an increase in the supply of U.S. dollars and a
depreciation in the exchange rate
a decrease in the demand for U.S. dollars and a
depreciation in the exchange rate

 a decrease in the supply of U.S. dollars and an

appreciation in the exchange rate
49. Suppose that U.S. prices rise 4% over the next year while
prices in Mexicorise 6%. According to the purchasing power
parity theory of exchange rates,what should happen to the
exchange rate between the dollar and the peso?

The
The
The
The

dollar should depreciate.

peso should appreciate.
peso should depreciate.
dollar will be revalued.

50. A rise in the domestic interest rate leads to capital

outflows and exchange rate appreciation

outflows and exchange rate depreciation
inflows and exchange rate depreciation
inflows and exchange rate appreciation

51. A firm under monopolistic competition will earn

a positive economic profit as it has some monopoly
power
zero economic profit as it sets P = MC
zero economic profit as its P = ATC
a positive economic profit as it sets MC = MR

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