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1. ECO 561 Final Exam NEW
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1) In a market economy the distribution of output will be determined
primarily by:
A. a social consensus as to what distribution of income is most equitable.
B. consumer needs and preferences.
C. the quantities and prices of the resources that households supply.
D. government regulations that provide a minimum income for all.
2) In a competitive market economy firms will select the least-cost
production technique because: A. dollar voting by consumers mandates such a
choice. B. such choices will result in the full employment of available
resources. C. to do so will maximize the firms' profits. D. this will prevent
new firms from entering the industry.
3) A leftward shift in the supply curve of product X will increase
equilibrium price to a greater extent the: A. more inelastic the demand for
the product. B. more elastic the supply curve. C. larger the elasticity of
demand coefficient. D. more elastic the demand for the product.
4) Which of the following statements is true about productive and allocative
efficiency? A. Realizing allocative efficiency implies that productive
efficiency has been realized. B. Productive efficiency can only occur if
there is also allocative efficiency. C. Productive efficiency and allocative
efficiency can only occur together; neither can occur without the other. D.
Society can achieve either productive efficiency or allocative efficiency,
but not both simultaneously.
5) Since their introduction, prices of DVD players have fallen and the
quantity purchased has increased. This statement: A. suggests that the supply
of DVD players has increased. B. suggests that the demand for DVD players has
increased. C. constitutes an exception to the law of supply in that they
suggest a downward sloping supply curve. D. constitutes an exception to the
law of demand in that they suggest an upward sloping demand curve.
6) Camille's Creations and Julia's Jewels both sell beads in a competitive
market. If at the market price of $5, both are running out of beads to sell
(they can't keep up with the quantity demanded at that price), then we would
expect both Camille's and Julia's to: A. raise their price and reduce their
quantity supplied. B. raise their price and increase their quantity supplied.
C. lower their price and increase their quantity supplied. D. lower their
price and reduce their quantity supplied.
7) If a firm in a purely competitive industry is confronted with an
equilibrium price of $5, its marginal revenue: A. may be either greater or
less than $5. B. will also be $5. C. will be greater than $5. D. will be less
than $5.
8) If technology dictates that labor and capital must be used in fixed
proportions, an increase in the price of capital will cause a firm to use: A.
more labor as a consequence of the substitution effect. B. more labor as a
consequence of the output effect. C. less labor as a consequence of the
output effect. D. less labor as a consequence of the substitution effect.
9) If a firm is selling in an imperfectly competitive product market, then:
A. average product will be less than marginal product for any number of
workers hired. B. the marginal products of successive workers must be sold at

2. lower prices. C. the marginal products of successive workers can be sold at a
constant price. D. the marginal products of successive workers can be sold at
higher prices.
10) In the short run the Sure-Screen T-Shirt Company is producing 500 units
of output. Its average variable costs are $2.00 and its average fixed costs
are $.50. The firm's total costs: A. are $2.50. B. are $1,250. C. are $1,100.
D. are $750.
11) What do wages paid to blue-collar workers, interest paid on a bank loan,
forgone interest, and the purchase of component parts have in common? A. None
are either implicit or explicit costs. B. All are opportunity costs. C. All
are implicit costs. D. All are explicit costs.
12) Which of the following represents a long-run adjustment? A. a steel
manufacturer cuts back on its purchases of coke and iron ore B. a farmer uses
an extra dose of fertilizer on his corn crop C. unable to meet foreign
competition, a U.S. watch manufacturer sells one of its branch plants D. a
supermarket hires four additional clerks
13) If the wage rate increases: A. a purely competitive and an imperfectly
competitive producer will both hire less labor. B. a purely competitive
producer will hire less labor, but an imperfectly competitive producer will
not. C. an imperfectly competitive producer will hire less labor, but a
purely competitive producer will not. D. an imperfectly competitive producer
may find it profitable to hire either more or less labor.
14) Construction workers frequently sponsor political lobbying in support of
greater public spending on highways and public buildings. One reason they do
this is to: A. increase the demand for construction workers. B. restrict the
supply of construction workers. C. increase the elasticity of demand for
construction workers. D. increase the price of substitute inputs.
15) A firm can hire six workers at a wage rate of $8 per hour but must pay $9
per hour to all of its employees to attract a seventh worker. The marginal
wage cost of the seventh worker is: A. $15. B. $9. C. $10. D. $21.
16) Oligopoly is difficult to analyze primarily because: A. output may be
either homogenous or differentiated. B. the number of firms is too large to
make collusion understandable. C. the price and output decisions of any one
firm depend on the reactions of its rivals. D. neither allocative nor
productive efficiency is achieved.
17) A competitive firm will maximize profits at that output at which: A.
total revenue exceeds total cost by the greatest amount. B. total revenue and
total cost are equal. C. price exceeds average total cost by the largest
amount. D. the difference between marginal revenue and price is at a maximum.
18) An industry comprised of a small number of firms, each of which considers
the potential reactions of its rivals in making price-output decisions is
called: A. monopolistic competition. B. oligopoly. C. pure monopoly. D. pure
competition.
19) Advertising can impede economic efficiency when it: A. increases entry
barriers. B. reduces brand loyalty. C. enables firms to achieve substantial
economies of scale. D. increases consumer awareness of substitute products.
20) Nonprice competition refers to: A. advertising, product promotion, and
changes in the real or perceived characteristics of a product. B. competition
between products of different industries, for example, competition between
aluminum and steel in the manufacture of automobile parts. C. reductions in
production costs that are not reflected in price reductions. D. price
increases by a firm that are ignored by its rivals.
21) Which of the following is not a possible source of natural monopoly? A.
greater use of specialized inputs B. large-scale network effects C. rent-
seeking behavior D. simultaneous consumption
22) A monopolistically competitive industry combines elements of both
competition and monopoly. The monopoly element results from: A. product
differentiation. B. the likelihood of collusion. C. mutual interdependence in
decision making. D. high entry barriers.
23) The term oligopoly indicates: A. a few firms producing either a
differentiated or a homogeneous product. B. a one-firm industry. C. an
industry whose four-firm concentration ratio is low. D. many producers of a
differentiated product.

3. 24) Suppose that an industry is characterized by a few firms and price
leadership. We would expect that: A. price would exceed both marginal cost
and average total cost. B. price would equal marginal cost. C. marginal
revenue would exceed marginal cost. D. price would equal average total cost.
25) When economists view technological change as internal to the economy,
they mean that it: A. arises deliberately from the profit motive and
competition. B. occurs randomly. C. arises mainly from government subsidies.
D. occurs accidentally.
26) Firm X develops a new product and gets a head start in its production.
Other firms try to produce a similar product but discover they have higher
average total costs than the existing firm. This situation illustrates: A.
learning-by-doing. B. diseconomies of scale. C. spillover costs. D.
diminishing marginal returns.
27) In the long run a pure monopolist will maximize profits by producing
that output at which marginal cost is equal to: A. average variable cost. B.
average total cost. C. average cost. D. marginal revenue.
28) If the U.S. unemployment rate is 9 percent, we can infer that: A. the
economy is in the expansion phase of the business cycle. B. actual GDP is
equal to potential GDP. C. potential GDP is in excess of actual GDP. D.
actual GDP is in excess of potential GDP.
29) The industries or sectors of the economy in which business cycle
fluctuations tend to affect output the most are: A. military goods and
capital goods. B. capital goods and durable consumer goods. C. services and
nondurable consumer goods. D. clothing and education.
30) Inflation is undesirable because it: A. arbitrarily redistributes real
income and wealth. B. reduces everyone's standard of living. C. invariably
leads to hyperinflation. D. usually is accompanied by declining real GDP.
31) Kara voluntarily quit her job as an insurance agent to return to school
full-time to earn an MBA degree. With degree in hand she is now searching for
a position in management. Kara presently is: A. cyclically unemployed. B. not
a member of the labor force. C. structurally unemployed. D. frictionally
unemployed.
32) Expansionary fiscal policy is so named because it: A. involves an
expansion of the nation's money supply. B. is designed to expand real GDP. C.
necessarily expands the size of government. D. is aimed at achieving greater
price stability.
33) 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: A. increase government expenditures by $100 billion. B.
reduce taxes by $200 billion. C. increase government expenditures by $50
billion. D. reduce taxes by $50 billion.
34) Assume the Standard Internet Company negotiates a loan for $5,000 from
the Metro National Bank and receives a checkable deposit for that amount in
exchange for its promissory note (IOU). As a result of this transaction: A.
the supply of money is increased by $5,000. B. the Metro Bank acquires
reserves from other banks. C. the supply of money declines by the amount of
the loan. D. a claim has been demonetized.
35) If the Fed were to purchase government securities in the open market, we
would anticipate: A. higher interest rates, a contracted GDP, and
depreciation of the dollar. B. lower interest rates, a contracted GDP, and
appreciation of the dollar. C. lower interest rates, an expanded GDP, and
appreciation of the dollar. D. lower interest rates, an expanded GDP, and
depreciation of the dollar.
36) Other things equal, a 10 percent decrease in corporate income taxes
will: A. shift the investment-demand curve to the right. B. shift the
investment-demand curve to the left. C. have no effect on the location of the
investment-demand curve. D. decrease the market price of real capital goods.
37) The quantity theory of the demand for money states that a country’s money
supply is proportional to: A. The exchange rate. B. The money value of gross
domestic product. C. The real level of gross domestic product. D. The
domestic interest rate.
38) Suppose that US prices rise 4 percent over the next year while prices in
Mexico rise 6%. According to the purchasing power parity theory of exchange
rates, what should happen to the exchange rate between the dollar and the

4. peso? A. The peso should depreciate. B. The dollar will be revalued. C. The
peso should appreciate. D. The dollar should depreciate.
39) Exchange rates are determined in the long-run by: A. Purchasing power
parity. B. Financial asset pricing. C. Real growth rates. D. Interest rate
differentials.