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ECO 561 Final Exam Guide (UOP)
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ECO 561 Final Exam Guide (UOP)

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1) In a market economy the distribution of output will be determined primarily by: 

A. a social consensus as to what distribution of income is most equitable. B. 

consumer needs and preferences. C. the quantities and prices of the resources 

that households supply. D. government regulations that provide a minimum 

income for all. 

2) In a competitive market economy firms will select the least-cost production 

technique because: A. "dollar voting" by consumers mandates such a choice. B. such 

choices will result in the full employment of available resources. C. to do so will 

maximize the firms' profits. D. this will prevent new firms from entering the 

industry. 

3) A leftward shift in the supply curve of product X will increase equilibrium price to 

a greater extent the: A. more inelastic the demand for the product. B. more 

elastic the supply curve. C. larger the elasticity of demand coefficient. D. more elastic 

the demand for the product. 

4) Which of the following statements is true about productive and allocative 

efficiency? A. Realizing allocative efficiency implies that productive efficiency 

has been realized. B. Productive efficiency can only occur if there is also allocative 

efficiency. C. Productive efficiency and allocative efficiency can only occur together; 

neither can occur without the other. D. Society can achieve either productive 

efficiency or allocative efficiency, but not both simultaneously. 

5) Since their introduction, prices of DVD players have fallen and the quantity 

purchased has increased. This statement: A. suggests that the supply of DVD 

players has increased. B. suggests that the demand for DVD players has increased. 

C. constitutes an exception to the law of supply in that they suggest a downward 

sloping supply curve. D. constitutes an exception to the law of demand in that they 

suggest an upward sloping demand curve. 

6) 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 increase their 

quantity supplied. D. lower their price and reduce their quantity supplied. 

7) If a firm in a purely competitive industry is confronted with an equilibrium price 

of $5, its marginal revenue: A. may be either greater or less than $5. B. will also be 

$5. C. will be greater than $5. D. will be less than $5. 

8) If technology dictates that labor and capital must be used in fixed proportions, an 

increase in the price of capital will cause a firm to use: A. more labor as a 

consequence of the substitution effect. B. more labor as a consequence of the output 

effect. C. less labor as a consequence of the output effect. D. less labor as a 

consequence of the substitution effect. 

9) If a firm is selling in an imperfectly competitive product market, then: A. 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 a constant price. D. the 

marginal products of successive workers can be sold at higher prices. 

10) In the short run the Sure-Screen T-Shirt Company is producing 500 units of 

output. Its average variable costs are $2.00 and its average fixed costs are $.50. The 

firm's total costs: A. are $2.50. B. are $1,250. C. are $1,100. D. are $750. 

11) 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. 

12) Which of the following represents a long-run adjustment? A. a steel 

manufacturer cuts back on its purchases of coke and iron ore B. a farmer uses an 

extra dose of fertilizer on his corn crop C. unable to meet foreign competition, a 

U.S. watch manufacturer sells one of its branch plants D. a supermarket hires 

four additional clerks 

13) If the wage rate increases: A. a purely competitive and an imperfectly 

competitive producer will both hire less labor. B. a purely competitive producer 

will hire less labor, but an imperfectly competitive producer will not. C. an 

imperfectly competitive producer will hire less labor, but a purely competitive 

producer will not. D. an imperfectly competitive producer may find it profitable to 

hire either more or less labor.

14) 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. increase the demand for construction workers. B. restrict the supply of 

construction workers. C. increase the elasticity of demand for construction workers. 

D. increase the price of substitute inputs. 

15) 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. $15. B. $9. C. $10. D. $21. 

16) Oligopoly is difficult to analyze primarily because: A. output may be either 

homogenous or differentiated. B. the number of firms is too large to make collusion 

understandable. C. the price and output decisions of any one firm depend on the 

reactions of its rivals. D. neither allocative nor productive efficiency is achieved. 

17) 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. 

18) An industry comprised of 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. 

19) Advertising can impede economic efficiency when it: A. increases entry barriers. 

B. reduces brand loyalty. C. enables firms to achieve substantial economies of scale. 

D. increases consumer awareness of substitute products. 

20) Nonprice competition refers to: A. advertising, product promotion, and 

changes in the real or perceived characteristics of a product. B. competition 

between products of different industries, for example, competition between 

aluminum and steel in the manufacture of automobile parts. C. reductions in 

production costs that are not reflected in price reductions. D. price increases by a 

firm that are ignored by its rivals. 

21) Which of the following is not a possible source of natural monopoly? A. greater 

use of specialized inputs B. large-scale network effects C. rent-seeking behavior D. 

simultaneous consumption 

22) A monopolistically competitive industry combines elements of both competition 

and monopoly. The monopoly element results from: A. product differentiation. B. 

the likelihood of collusion. C. mutual interdependence in decision making. D. high 

entry barriers. 

23) The term oligopoly indicates: A. a few firms producing either a differentiated 

or a homogeneous product. B. a one-firm industry. C. an industry whose four-firm 

concentration ratio is low. D. many producers of a differentiated product. 

24) Suppose that an industry is characterized by a few firms and price leadership. 

We would expect that: A. price would exceed both marginal cost and average 

total cost. B. price would equal marginal cost. C. marginal revenue would exceed 

marginal cost. D. price would equal average total cost. 

25) When economists view technological change as internal to the economy, they 

mean that it: A. arises deliberately from the profit motive and competition. B. 

occurs randomly. C. arises mainly from government subsidies. D. occurs 

accidentally. 

26) Firm X develops a new product and gets a head start in its production. Other 

firms try to produce a similar product but discover they have higher average total 

costs than the existing firm. This situation illustrates: A. learning-by-doing. B. 

diseconomies of scale. C. spillover costs. D. diminishing marginal returns. 

27) In the long run a pure monopolist will maximize profits by producing that 

output at which marginal cost is equal to: A. average variable cost. B. average total 

cost. C. average cost. D. marginal revenue.

28) If the U.S. unemployment rate is 9 percent, we can infer that: A. the economy is 

in the expansion phase of the business cycle. B. actual GDP is equal to potential GDP. 

C. potential GDP is in excess of actual GDP. D. actual GDP is in excess of potential 

GDP. 

29) 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. capital 

goods and durable consumer goods. C. services and nondurable consumer goods. 

D. clothing and education. 

30) Inflation is undesirable because it: A. arbitrarily redistributes real income 

and wealth. B. reduces everyone's standard of living. C. invariably leads to 

hyperinflation. D. usually is accompanied by declining real GDP. 

31) Kara voluntarily quit her job as an insurance agent to return to school full-time 

to earn an MBA degree. With degree in hand she is now searching for a position in 

management. Kara presently is: A. cyclically unemployed. B. not a member of the 

labor force. C. structurally unemployed. D. frictionally unemployed.

32) Expansionary fiscal policy is so named because it: A. involves an expansion of 

the nation's money supply. B. is designed to expand real GDP. C. necessarily 

expands the size of government. D. is aimed at achieving greater price stability. 

33) 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. reduce taxes by $200 billion. 

C. increase government expenditures by $50 billion. D. reduce taxes by $50 

billion. 

34) Assume the Standard Internet Company negotiates a loan for $5,000 from the 

Metro National Bank and receives a checkable deposit for that amount in exchange 

for its promissory note (IOU). As a result of this transaction: A. the supply of 

money is increased by $5,000. B. the Metro Bank acquires reserves from other 

banks. C. the supply of money declines by the amount of the loan. D. a claim has been 

"demonetized." 

35) If the Fed were to purchase government securities in the open market, we 

would anticipate: A. higher interest rates, a contracted GDP, and depreciation of the 

dollar. B. lower interest rates, a contracted GDP, and appreciation of the dollar. C. 

lower interest rates, an expanded GDP, and appreciation of the dollar. D. lower 

interest rates, an expanded GDP, and depreciation of the dollar. 

36) Other things equal, a 10 percent decrease in corporate income taxes will: A. 

shift the investment-demand curve to the right. B. shift the investment-demand 

curve to the left. C. have no effect on the location of the investment-demand curve. 

D. decrease the market price of real capital goods.

37) The quantity theory of the demand for money states that a country’s money 

supply is proportional to: A. The exchange rate. B. The money value of gross 

domestic product. C. The real level of gross domestic product. D. The domestic 

interest rate. 

38) Suppose that US prices rise 4 percent 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 peso 

should depreciate. B. The dollar will be revalued. C. The peso should appreciate. D. 

The dollar should depreciate.

39) Exchange rates are determined in the long-run by: A. Purchasing power parity. 

B. Financial asset pricing. C. Real growth rates. D. Interest rate differentials.

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