ECO/561 Version 8 / 6
ECO/561 Final Examination Study Guide
This study guide will prepare you for the Final Examination you will complete in the final week. It contains practice questions, which are related to each week’s objectives. In addition, refer to each week’s readings and your student guide as study references for the Final Examination.
Week One: Increasing Revenue
Objective: Choose methods to increase revenue in an organization.
1. In a market economy the distribution of output will be determined primarily by
a. consumer needs and preferences
b. the quantities and prices of the resources that households supply
c. government regulations that provide a minimum income for all
d. social consensus as to what distribution of income is most equitable
2. In a competitive market, economy firms will select the least-cost production technique because
a. such choices will result in the full employment of available resources
b. doing so will maximize the firm’s profits
c. this will prevent new firms from entering the industry
d. dollar voting by consumers mandates such a choice
3. The advent of DVDs has virtually demolished the market for videocassettes. This is an example of
a. creative destruction
b. derived demand
c. capital accumulation
d. the difference between normal and economic profits
Objective: Explain the market equilibrating process.
4. If price is above the equilibrium level, competition among sellers to reduce will result in
a. a surplus which will increase quantity demanded and decrease quantity supplied.
b. shortage which will decrease quantity demanded and increase quantity supplied.
c. surplus which will decrease quantity demanded and increase quantity supplied.
d. shortage which will increase quantity demanded and decrease quantity supplied.
5. Equilibrium is achieved when
a. supply equals demand
b. supply is greater than demand
c. demand is greater than supply
d. there is a surplus of market
6. Suppose that in 2007 Ford sold 500,000 Mustangs at an average price of $18,800 per car; in 2008, 600,000 Mustangs were sold at an average price of $19,500 per car. These statements suggest
a. that the demand for Mustangs decreased between 2007 and 2008
b. that the supply of Mustangs must have increased between 2007 and 2008
c. that the demand for Mustangs increased between 2007 and 2008
d. an upward-sloping demand curve, which constitutes an exception to the law of demand
Week Two: Cost Concepts
Objective: Identify production level to maximize profits.
7. If a profit-seeking competitive firm is producing its profit-maximizing output and its total fixed costs fall by 25%, the firm should
a. use more labor and less capital to produce larger output
b. not change its output
c. reduce its output
d. increase its output
8. A firm is producing an output such that the benefit from one more unit is more than the cost of producing that additional unit. This means the firm is
a. producing more output than allocative efficiency requires
b. producing less output than allocative efficiency requires
c. achieving productive efficiency
d. producing an efficiency output, but one cannot say whether output should be increased or decreased
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 lower prices
c. the marginal products of successive workers can be sold at higher prices
d. the marginal products of successive workers can be sold at a constant price
Objective: Explain how to balance fixed and variable costs.
10. 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.
11. Suppose that a business incurred implicit costs of $200,000 and explicit costs of $1 million in a specific year. If the firm sold 4,000 units of its output at $300 per unit, its accounting profits were
a. $100,000 and its economic profits were zero
b. $200,000 and its economic profits were zero
c. $100,000 and its economic profits were $100,000
d. zero and its economic loss was $200,000
12. Which of the following represents a long-run adjustment?
a. A farmer uses an extra dose of fertilizer on his corn crop.
b. A U.S. watch manufacturer sells one of its branch plants and is unable to meet foreign competition.
c. A steel manufacturer cuts back on its purchases of coke and iron ore.
d. A supermarket hires four additional clerks.
Objective: Apply economic cost concepts in making business decisions.
13. A profit-maximizing firm will
a. expand employment if marginal revenue product exceeds marginal resource cost
b. reduce employment if marginal revenue product exceeds marginal resource cost
c. expand employment if marginal revenue product equals marginal resource cost
d. reduce employment if marginal revenue product equals marginal resource cost
14. 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. $9
b. $10
c. $15
d. $21
Week Three: Market Structure
Objective: Determine pricing strategy to meet organizational goals.
15. 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
16. Price exceeds marginal revenue for the pure monopolist because the
a. law of diminishing returns is inapplicable
b. demand curve is downward sloping
c. monopolist produces a smaller output than a purely competitive firm would
d. demand curve lies below the marginal revenue curve
Objective: Determine ways to create nonprice barriers to entry based on market structure.
17. Pure monopolists may obtain economic profits in the long run because
a. of advertising
b. marginal revenue is constant as sales increase
c. of barriers to entry
d. of rising average fixed costs
18. The practice of price discrimination is associated with pure monopoly because
a. it can be practiced whenever a firm’s demand curve is downsloping
b. monopolists have considerable ability to control output and price
c. monopolists usually realize economies of scale
d. most monopolists sell differentiated products
Objective: Determine ways to increase product differentiation based on market structure.
19. Monopolistic competition means
a. a market situation where competition is based entirely on product differentiation and advertising
b. a large number of firms producing a standardized or homogeneous product
c. many firms producing differentiated products
d. a few firms producing a standardized or homogeneous product
20. A monopolistically competitive industry combines elements of both competition and monopoly. The monopoly element results from
a. the likelihood of collusion
b. high entry barriers
c. product differentiation
d. mutual interdependence in decision making
Objective: Determine ways to reduce costs for an organization.
21. In the long run, a pure monopolist will maximize profits by producing that output at which marginal cost is equal to
a. average total cost
b. marginal revenue
c. average variable cost
d. average cost
22. The profit-maximizing output of a pure monopoly is economically inefficient because in equilibrium
a. price equals minimum average total cost
b. marginal revenue equals marginal cost
c. marginal cost exceeds price
d. price exceeds marginal cost
Week Four: Macroeconomic Conditions
Objective: Determine the economy’s stage in the business cycle.
23. 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. services and nondurable consumer goods
c. clothing and education
d. capital goods and durable consumer goods
Objective: Evaluate current macroeconomic conditions based on key indicators.
24. Kara recently graduated with an MBA and is now searching for a position, which implies she is now
a. cyclically unemployed
b. structurally unemployed
c. frictionally unemployed
d. not a member of the labor force
25. Given the annual rate of inflation, the “rule of 70” allows one to
a. determine whether the inflation is demand-pull or cost-push
b. calculate the accompanying rate of unemployment
c. determine when the value of a real asset will approach zero
d. calculate the number of years required for the price level to double
26. Real GDP measures
a. current output at current prices
b. current output at base year prices
c. base year output at current prices
d. base year output at base year prices
Week Five: Credit Markets and Globalization
Objective: Project the effect of the credit markets on the economy.
27. In a fractional reserve banking system
a. bank panics cannot occur
b. the monetary system must be backed by gold
c. banks can create money through the lending process
d. the Federal Reserve has no control over the amount of money in circulation
Objective: Project the effect of global economic conditions regarding trade and specialization business decisions.
28. ______purchasing power parity states that the difference between changes over time in product-price levels in two countries will be offset by the change in the exchange rate over this time
a. Full
b. Partial
c. Relative
d. Absolute
29. Exchange rates are determined in the long-run by
a. interest rate differentials
b. real growth rates
c. purchasing power parity
d. financial asset pricing
30. An unexpected increase in the money supply of 10% will cause the short-run exchange rate to
a. depreciate by more than 10%
b. depreciate by less than 10%
c. appreciate by more than 10%
d. appreciate by less than 10%
Answer Key
1. b
2. b
3. a
4. a
5. a
6. c
7. b
8. b
9. b
10. b
11. b
12. b
13. a
14. c
15. a
16. b
17. c
18. b
19. c
20. c
21. b
22. d
23. d
24. c
25. d
26. b
27. c
28. c
29. c
30. a