Eco 561 Final Exam 1

1) Suppose that in the clothing market, production costs have fallen, but the equilibrium price and quantity purchased have both increased. Based on this information you can conclude that

A. the supply of clothing has grown faster than the demand for clothing

B. demand for clothing has grown faster than the supply of clothing

C. the supply of and demand for clothing have grown by the same proportion

D. there is no way to determine what has happened to supply and demand with this information

 2) 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 reduce their quantity supplied

D. lower their price and increase their quantity supplied

3) In which of the following industries are economies of scale exhausted at relatively low levels of output?

A. Aircraft production

B. Automobile manufacturing

 C. Concrete mixing

D. Newspaper printing

4) The average cost curves (AVC and ATC) should be minimized

A. where MC = ATC and MC = AVC

B. where FC = ATC and FC = AVC

C. where TC starts to increase at a faster rate

D. where ATC = AVC

 5) If the wage rate increases,

A. a purely competitive producer will hire less labor, but an imperfectly competitive producer will not

B. an imperfectly competitive producer will hire less labor, but a purely competitive producer will not

C. a purely competitive and an imperfectly competitive producer will both hire less labor

D. an imperfectly competitive producer may find it profitable to hire either more or less labor

 6) The real wage will rise if the nominal wage

A. falls more rapidly than the general price level

B. increases at the same rate as labor productivity

C. increases more rapidly than the general price level

D. falls at the same rate as the general price level

7) 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. restrict the supply of construction workers

B. increase the elasticity of demand for construction workers

C. increase the demand for construction workers

D. increase the price of substitute inputs

8) Paying an above-equilibrium wage rate might reduce unit labor costs by

A. permitting the firm to attract lower-quality labor

B. increasing the cost to workers of being fired for shirking

C. increasing voluntary worker turnover

D. increasing the supply of labor

9) A good real-world example of monopolistic competition is

A. lawyers

B. gas stations

C. Time Warner Cable

D. groceries stores

10) 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

A. monopolistic competition

B. oligopoly

C. pure monopoly

D. pure competition

 11) Price is constant or given to the individual firm selling in a purely competitive market because

A. the firm’s demand curve is downward sloping

B. of product differentiation reinforced by extensive advertising

C. each seller supplies a negligible fraction of total supply

D. there are no good substitutes for its product

12) The most important pricing strategy for a perfectly competitive firm is

A. minimizing cost

B. maximizing sales

C. product differentiation

D. advertising

13) Which of the following is a non price barrier of entry?

A. Huge sunk cost

B. Discounts

C. Product differentiation

D. Advertising

14) A third-degree price discrimination can be applied to which of the following market structures?

A. A monopoly

B. An oligopoly

C. A monopolistic competition

D. A perfect competition

15) Investing in R&D is more likely to occur in markets where

A. firms have monopoly power protected by regulatory barriers

B. markets are closely competitive markets with close to zero economic profits

C. markets are oligopoly markets with strong collusion agreements

D. markets are monopolistic competitive markets

16) All economies of scale are achieved at the minimum of

A. average total cost

B. total cost

C. average variable cost

D. average fixed cost

17) Inflation is undesirable because it

A. arbitrarily redistributes real income and wealth

B. invariably leads to hyperinflation

C. usually is accompanied by declining real GDP

D. reduces everyone’s standard of living in the same proportion

18) An economy’s aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the

A. net export effect

B. wealth effect

C. real-balances effect

D. multiplier effect

19) Suppose productivity rises in a particular economy, but wages stay the same. Other things equal,

A. the demand curve will shift leftward

B. the supply curve will shift rightward

C. the supply curve will shift leftward

D. expenditures curve will shift rightward

20) If personal taxes were decreased and resource productivity increased simultaneously, the equilibrium

A. output would rise

B. output would fall

C. price level would necessarily fall

D. price level would necessarily rise

 21) Expansionary fiscal policy is so named because it

. involves an expansion of the nation’s money supply

B. can only be attained by expanding government consumption

C. is aimed at achieving greater price stability

D. can motivate an expansion of real GDP

22) 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. increase government expenditures by $50 billion

C. reduce taxes by $50 billion

D. reduce taxes by $200 billion

23) GDP understates the value of output produced by an economy because it

A. includes transactions that do not take place in organized markets, such as home cooked meals

B. includes environmental degradation caused by increased output production

C. excludes value added from the underground economy, such as tips taken under the table

D. excludes the value of the wages and benefits of government employee

24) Other things equal, a decrease in the real interest rate will

A. shift the investment demand curve to the right

B. shift the investment demand curve to the left

C. move the economy upward along its existing investment demand curve

D. move the economy downward along its existing investment demand curve

25) Other things equal, a decrease in corporate income taxes will

A. decrease the market price of real capital goods

B. have no effect on the location of the investment demand curve

C. shift the investment demand curve to the right

D. shift the investment demand curve to the left

26) Inflation in U.S. prices will cause

A. an increase in the demand for U.S. dollars and an appreciation in the exchange rate

B. an increase in the supply of U.S. dollars and a depreciation in the exchange rate

C. a decrease in the demand for U.S. dollars and a depreciation in the exchange rate

D. a decrease in the supply of U.S. dollars and an appreciation in the exchange rate

27) The quantity theory of money states that

A. the money supply divided by the velocity of money equals the price level divided by real output

B. the money supply times the velocity of money equals the price level times real output

C. the money supply times the price level equals real output divided by the velocity of money

D. the money supply times the price level equals real output times the velocity of money

28) Suppose that U.S. prices rise 4% 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 peso?

A. The dollar should depreciate.

B. The peso should appreciate.

C. The peso should depreciate.

D. The dollar will be revalued.

29) A rise in the domestic interest rate leads to capital

A. outflows and exchange rate appreciation

B. outflows and exchange rate depreciation

C. inflows and exchange rate depreciation

D. inflows and exchange rate appreciation

30) A firm under monopolistic competition will earn

A. a positive economic profit as it has some monopoly power

B. zero economic profit as it sets P = MC

C. Zero economic profit as its P = ATC

D. a positive economic profit as it sets MC = MR

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