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Final Examination Study Guide ECO/365 Version 4

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.

Use each week’s questions as a self-test at the start of a new week to reflect on the previous week’s concepts. When you come across concepts that you are unfamiliar with, refer to the Student Guide for that particular week.

Week One: Fundamentals of Microeconomics

Objective: Differentiate between macroeconomics and microeconomics.

1. Macroeconomics is
2. the study of individual choice and how that choice is influenced by economic forces
3. the study of the pricing policies of firms and the purchasing decisions of households
4. the study of aggregate economic relationships
5. an analysis of economic reality that proceeds from the parts to the whole

2. The invisible hand theorem comes from
3. microeconomics
4. macroeconomics
5. sociology
6. 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
4. up, the quantity demanded goes up
5. up, the quantity demanded goes down
6. down, the quantity demanded goes down
7. down, the quantity demanded stays the same

4. Which of the following situations best demonstrates the law of demand?
5. Moviegoers react to an increase in the price of a ticket by seeing fewer movies per year.
6. Moviegoers see fewer movies per year due to an overall decrease in the quality of newly released motion pictures.
7. A drought causes a decrease in the availability of pumpkins, resulting in fewer jack-o-lanterns displayed on Halloween.
8. 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
6. is elastic
7. is inelastic
8. has unit elasticity
9. 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?
7. Gasoline is a luxury good.
8. Gasoline is an inferior good.
9. Demand for gasoline is elastic.
10. 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?
8. The law of diminishing marginal utility
9. The law of diminishing marginal productivity
10. The law of supply
11. The law of demand

8. Marginal product eventually
9. declines because some inputs are fixed
10. increases because some inputs are fixed
11. declines because some inputs are variable
12. 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
10. average total cost of production is $500
11. average variable cost of production is $40
12. average variable cost of production is $50
13. marginal cost of production is $40,000

10. The average variable cost curve is a mirror image of the
11. total product curve
12. marginal product curve
13. average product curve
14. 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)
12. decline in immigration
13. increase in emigration
14. increase in the working age population
15. decline in business activity in the economy

12. The incentive effect refers to how much a person will change his or her
13. hours worked in response to a change in the wage rate
14. wage rate in response to a change in productivity
15. quantity demanded of a taxed good in response to a change in the tax rate
16. 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
14. only the expenses incurred for office space, equipment, and supplies
15. only her foregone salary of $42,000 per year
16. both the expenses incurred for office space, equipment, and supplies, and her foregone salary of $42,000 per year
17. 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
15. $0.13
16. $0.27
17. $40
18. $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
16. a monopoly
17. perfect competition
18. an oligopoly
19. 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
17. an oligopoly
18. monopolistically competitive
19. a pure monopoly
20. perfectly competitive

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

17. The difference between a monopolist and a monopolistic competitor is that
18. a monopolist equates marginal revenue and marginal cost while a monopolistic competitor equates price and marginal cost
19. 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
20. 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
21. 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
19. not adjust output if marginal cost equals price
20. shut down immediately
21. increase output until price equals marginal cost
22. 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
20. produce more widgets
21. produce fewer widgets
22. continue producing 100 widgets
23. shut down

20. If a firm has a monopoly over the sale of photographic paper and seeks to maximize profits, it
21. adjusts the price of the product until demand becomes perfectly inelastic
22. will set the price of the product equal to the marginal cost of production
23. will set the price of the product equal to the average total cost of production
24. 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
22. roller coaster rides
23. pollution
24. alcoholic beverages
25. 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
23. marginal private costs
24. marginal social costs
25. the difference between marginal social costs and marginal private costs
26. 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
24. horizontal merger
25. vertical merger
26. conglomerate merger
27. diagonal merger

24. KMart^® acquired Sears^® so both companies could better compete with Walmart^®. This acquisition is an example of a
25. vertical merger
26. conglomerate merger
27. horizontal merger
28. 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
26. increases by the amount of the per unit tax
27. increases by less than the amount of the per unit tax
28. decreases by the amount of the per unit tax
29. 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
27. demand for airline tickets is perfectly inelastic
28. supply of airline tickets is perfectly inelastic
29. demand for airline tickets is price elastic
30. 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
28. keep production diversified
29. specialize according to their comparative advantage
30. produce only those goods for which they have a relatively high opportunity cost
31. use trade restrictions to reduce competition for domestic producers

28. Technological changes in telecommunications have
29. reduced the importance of services in the world economy
30. allowed increased foreign trade in many services
31. reduced the need for foreign trade in many services
32. 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?
30. It helps both countries in the long run.
31. It hurts both countries, because the US loses jobs and the employees of the call center are exploited with low wages.
32. It helps the US, but hurts the country with the low-cost labor.
33. 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
31. outsourcing, a form of importing services
32. outsourcing, a form of exporting services
33. insourcing, a form of importing services
34. insourcing, a form of exporting services