ECO365 FINAL EXAM questions


ECO365 FINAL EXAM  Question The law of diminishing marginal productivity implies that the marginal product of a variable input:

Is constant

Never declines

Eventually declines

Always declines

  1. 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?

Foreign sellers probably are colluding on price to maximize profits.

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

Foreigners have a comparative advantage in shrimping.

Americans have a comparative advantage in shrimping.

  1. 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?

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

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.

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

  1. 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:

Demand for 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.

Supply of airline tickets is perfectly inelastic.

  1. 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:

Monopolistically competitive.

Perfectly competitive.

An oligopoly.

A pure monopoly.

  1. Cartels are organizations that:

Use predatory pricing to monopolize industries.

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

Keep markets contestable.

Encourage price wars.

  1. 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:

Positive externality

Pareto externality

Negative externality

Normative externality

  1. 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 lacks the political infrastructure to support call centers.

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

Indian labor costs are equal to Chinese labor costs.

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

  1. 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 supply

The law of diminishing marginal productivity

The law of diminishing marginal utility

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

The slope and elasticity are the same at all points.

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

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

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

  1. Microeconomics is the study of:


a firm’s pricing policies

business cycles


  1. For a monopolist, the price of a product:

Is less than the marginal revenue.

Equals the marginal revenue.

Exceeds the marginal revenue.

Equals the marginal cost.

  1. 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:

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

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

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

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

  1. 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?

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.

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

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

  1. 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.

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

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

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

  1. Microeconomics and macroeconomics are:

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

Not related because they are taught separately.

Interrelated because both are often taught by the same instructors.

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

  1. Strategic decision making is most important in:

Competitive markets.

Monopolistic markets.

Oligopolistic markets.

Monopolistically competitive markets.

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

Increase and employment to increase.

Decrease and employment to increase.

Decrease and employment to decrease.

Increase and employment to decrease.

  1. The best example of positive externality is:


Roller coaster rides

Alcoholic beverages


  1. Price elasticity of demand is the:

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

Change in the quantity of a good demanded divided by the 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.

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

  1. Graphically, a change in price causes:

both supply and demand to shift.

the supply curve to shift.

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

the demand curve to shift.

  1. 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 left.

supply curve shifting to the right.

demand curve shifting to the right.

demand curve shifting to the left.

  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:

Be equal to the marginal cost of diamonds.

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 average total cost of diamonds.

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

opportunity cost



profit maximization

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

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.

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

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.

  1. 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:

Merger would improve and expand cellular service to consumers.

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

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

Government had guaranteed it exclusive control of cell phone service.

  1. 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:

the law of demand is invalid.

the demand for a college education is positively sloped.

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

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

  1. 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:

Decreasing returns to scale

Increasing returns to scale

Diminishing marginal product

Constant returns to scale

  1. 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:

Shut down

Continue producing 500 widgets

Produce more widgets

Produce fewer widgets

  1. 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 scale

Diseconomies of scale

Economies of scope

Diminishing marginal productivity

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