ECO/365 Final Examination Study Guide

This study guide prepares you for the Final Examination you complete in the last week of the course. It contains practice questions, which are related to each week’s objectives. Highlight the correct response, and then refer to the answer key at the end of this Study Guide to check your answers.

Week One: Fundamentals of Microeconomics
Objective: Differentiate between macroeconomics and microeconomics. 1. Macroeconomics is
the study of individual choice and how that choice is influenced by economic forces the study of the pricing policies of firms and the purchasing decisions of households the study of aggregate economic relationships an analysis of economic reality that proceeds from the parts to the whole

2. The invisible hand theorem comes from
microeconomics
macroeconomics
sociology
political science

Objective: Analyze the effect of changes in supply and demand on the equilibrium price and quantity. 3. The law of demand states that the quantity demanded of a good is inversely related to the price of that good. Therefore, as the price of a good goes up, the quantity demanded goes up

up, the quantity demanded goes down
down, the quantity demanded goes down
down, the quantity demanded stays the same

4. Which of the following situations best demonstrates the law of demand?

Moviegoers react to an increase in the price of a ticket by seeing fewer movies per year.
Moviegoers see fewer movies per year due to an overall decrease in the quality of newly released motion pictures.
A drought causes a decrease in the availability of pumpkins, resulting in fewer jack-o-lanterns displayed on Halloween.
An increase in the number of people writing economics textbooks results in a decrease in average textbook prices.
Objective: Determine how elasticities affect pricing and purchasing decisions.

5. If quantity demanded does not change when the price changes, the demand

is elastic
is inelastic
has unit elasticity
is perfectly inelastic

6. High gasoline prices hit commuters who live far from their jobs in areas with little public transportation hard. With few alternatives, they have to bear the higher cost. Based on this information, how would you characterize demand for gasoline by these commuters?

Gasoline is a luxury good.
Gasoline is an inferior good.
Demand for gasoline is elastic.
Demand for gasoline is inelastic.

Week Two: Production and Cost Analysis

Objective: Describe the relationship between the number of inputs and the law of diminishing marginal productivity.

7. Mr. Woodard 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 diminishing marginal utility
The law of diminishing marginal productivity
The law of supply
The law of demand

8. Marginal product eventually

declines because some inputs are fixed
increases because some inputs are fixed
declines because some inputs are variable
increases because some inputs are variable

Objective: Analyze the relationship between productivity and the cost of production.

9. Suppose you operate a factory that produces gadgets. Your current output is 1,000 gadgets. If your fixed cost is $10,000 and your total cost is $50,000, then the

average total cost of production is $500
average variable cost of production is $40
average variable cost of production is $50
marginal cost of production is $40,000

10. The average variable cost curve is a mirror image of the

total product curve
marginal product curve
average product curve
marginal cost curve

Objective: Analyze the effect of changes in the supply of and demand for factors of production on the price of inputs.

11. Suppose wages and employment decrease. These changes were most likely caused by a(n)

decline in immigration
increase in emigration
increase in the working age population
decline in business activity in the economy

12. The incentive effect refers to how much a person will change his or her

hours worked in response to a change in the wage rate
wage rate in response to a change in productivity
quantity demanded of a taxed good in response to a change in the tax rate
wage rate in response to a change in the tax rate on earnings

Objective: Analyze the effect of changes in marginal revenues and costs on a firm’s profit-making potential.

13. Rachel left her job as a graphic artist, where she earned $42,000 per year, to open her own graphic arts firm. Her explicit costs for the new business include

only the expenses incurred for office space, equipment, and supplies
only her foregone salary of $42,000 per year
both the expenses incurred for office space, equipment, and supplies, and her foregone salary of $42,000 per year
neither the expenses incurred for office space, equipment, and supplies, nor her foregone salary of $42,000 per year

14. If your company cell phone bill is either $40 when you use up to 300 minutes per month or $80 when you use between 300 to 400 minutes per month, the marginal cost of the 301st minute is

$0.13
$0.27
$40
$80

Week Three: Market Structure

Objective: Compare various market structures and their characteristics.

15. A market structure in which one firm makes up the entire market is

a monopoly
perfect competition
an oligopoly
monopolistic competition

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

an oligopoly
monopolistically competitive
a pure monopoly
perfectly competitive

Objective: Evaluate the effectiveness of competitive strategies within market
structures.

17. The difference between a monopolist and a monopolistic competitor is that
a monopolist equates marginal revenue and marginal cost while a monopolistic competitor equates price and marginal cost

the average total cost curve of a monopolistic competitor is tangent to the demand curve in long-run equilibrium, but the average total cost curve of a monopolist can be in a position below the price in long-run equilibrium;
the average total cost curve of a monopolist is tangent to the demand curve in long-run equilibrium, but the average total cost curve of a monopolistic competitor can be in a position below the price in long-run equilibrium;
the average total cost curve of a monopolist is tangent to the demand curve in long-run equilibrium, but the average total cost curve of a monopolistic competitor can be in a position above the price in long-run equilibrium

18. If a perfectly competitive firm finds that price is less than the average variable cost, it should

not adjust output if marginal cost equals price
shut down immediately
increase output until price equals marginal cost
decrease output until price equals marginal cost

Objective: Determine profit-maximizing strategies based on market structure analysis.

19. A perfectly competitive firm facing a price of $10 decides to produce 100 widgets. If its marginal cost of producing the last widget is $12 and it seeks to maximize profit, the firm should

produce more widgets
produce fewer widgets
continue producing 100 widgets
shut down

20. If a firm has a monopoly over the sale of photographic paper and seeks to maximize profits, it

adjusts the price of the product until demand becomes perfectly inelastic
will set the price of the product equal to the marginal cost of production
will set the price of the product equal to the average total cost of production
will set the price of the product so its marginal revenue equals its marginal cost

Week Four: Public Policy in Economics

Objective: Analyze the effect of externalities on market outcomes.

21. The best example of a positive externality is

roller coaster rides
pollution
alcoholic beverages
education

22. The cost of running an electrical utility includes costs for fuel, labor, and capital. In addition, there are sometimes costs associated with pollution from the utility, such as increased health care costs for people living near the utility. To an economist, the costs associated with the pollution resulting from additional electricity are

marginal private costs
marginal social costs
the difference between marginal social costs and marginal private costs
the sum of marginal social costs and marginal private costs

Objective: Differentiate among horizontal, vertical, and conglomerate mergers.

23. When Turner Network, producer and owner of movies, bought a local cable company, it was an example of a

horizontal merger
vertical merger
conglomerate merger
diagonal merger

24. KMart® acquired Sears® so both companies could better compete with Walmart®. This acquisition is an example of a

vertical merger
conglomerate merger
horizontal merger
hostile takeover

Objective: Analyze the effect of government interventions, taxation, and regulations on economic behavior.

25. When government imposes a per unit tax on a product, the net price producers receive for the product after all taxes typically

increases by the amount of the per unit tax
increases by less than the amount of the per unit tax
decreases by the amount of the per unit tax
decreases by less than the amount of the per unit tax

26. In 1997, the federal government reinstated a 10% excise tax on airline tickets. The industry tried to pass on the full 10% ticket tax to consumers, but was only able to boost the price per plane ticket by 4%. From this, you can conclude that the

demand for airline tickets is perfectly inelastic
supply of airline tickets is perfectly inelastic
demand for airline tickets is price elastic
supply elasticity of airline tickets is less than infinity

Week Five: Global Competition

Objective: Determine the effect of global competition on an organization’s strategies for maximizing profits.

27. Countries can expect to gain from international trade as long as they

keep production diversified
specialize according to their comparative advantage
produce only those goods for which they have a relatively high opportunity cost
use trade restrictions to reduce competition for domestic producers

28. Technological changes in telecommunications have

reduced the importance of services in the world economy
allowed increased foreign trade in many services
reduced the need for foreign trade in many services
profoundly affected trade in manufactured goods with little effect on trade in services

Objective: Analyze the effect of global competition on the relationship between management and labor.

29. In the US, the outsourcing of service jobs, such as those in call centers, has become a political issue. How do economists typically view outsourcing?

It helps both countries in the long run.
It hurts both countries, because the US loses jobs and the employees of the
call center are exploited with low wages.
It helps the US, but hurts the country with the low-cost labor./
It helps the country getting the jobs, but hurts the US.

30. When a U.S. company establishes a call center in India that answers its customer service calls, the US is

outsourcing, a form of importing services
outsourcing, a form of exporting services
insourcing, a form of importing services
insourcing, a form of exporting services

Answer Key

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