ECO 365 Final Exam Guide (New, 2017) Updated
1 During the winter break, Sam decides to go for a skiing vacation in Aspen instead of taking piano lessons. The opportunity cost of the skiing vacation is the:
cost of accommodation and food in Aspen.
value of piano lessons.
cost of buying a piano.
amount paid to the skiing instructor.
2 Which of the following is an example of a negative externality?
Smith reducing the consumption of imported wine following an increase in the price of imported wine
Phoebe refusing to contribute to the building of a children’s park in her neighborhood
Christina accepting a payment in cash rather than in check for her laundry services
Tom playing music loudly in his room, disturbing his roommate who has an exam the next day
3.A perfectly competitive firm sells 10 units of Good X at a price of $2 per unit. It incurs a fixed cost of $5 and a variable cost of $40 to produce the good. Which of the following is true?
The firm should operate in the short run but shut down in the long run.
The marginal cost of the good is $4.
The average revenue of the firm is $20.
The firm should shut down.
4.Squeeze Inc. sells orange juice in a market where there are a large number of consumers and sellers. New firms can enter the market easily and also exit whenever they want to. It sells 40 bottles in a month at a price of $4 per bottle and incurs a cost of $5 per bottle. The average revenue of the firm:
will be less than the marginal revenue.
is $2, which is less than the market price.
will be greater than the marginal revenue.
is $4, which is equal to the marginal revenue.
5.Which of the following is a difference between liberalism and libertarianism?
• Libertarians believe that equality of opportunities is more important than the equality of incomes, while liberals believe in policies that equalize the distribution of income.
• Libertarians argue that the government should maximize total utility, while liberals argue that the average utility of members of society should be maximized.
• Libertarians believe that the government should redistribute income from the rich to the poor, while the liberals believe that the government should not redistribute income.
• Libertarians emphasize the importance of the maximin criterion, while liberals emphasize the importance of an egalitarian society.
6.Bryan is trying to decide whether he should give up his job as a software programmer and invest in a start-up. Bryan earns an annual salary of $80,000 and has a saving of $50,000. The start-up would require an initial investment of $600,000. Bryan plans to take a loan from Trust Bank, a local commercial bank, which charges an interest rate of 5 percent on loans and provides an interest of 7 percent on savings deposits. Which of the following is true in this case?
• The 7 percent interest that Bryan could have earned on his savings will be included in the calculation of his economic profit.
• Bryan should invest in the start-up as he has to pay a lower interest rate on loans than he receives on his savings deposits.
• Bryan should not invest in the start-up as his economic profit is lower than his accounting profit.
• The interest rate of 5 percent on loans is a part of the implicit cost of setting up the start-up and will be included in the calculation of his accounting profit.
7.Color Mate Inc., a company that produces interior and wall paints, dumps its chemical waste in a river. Which of the following is likely to be true in this case?
• The social cost of the company is lower than the private cost, and the equilibrium quantity of paints produced is less than the social optimum.
• The social cost of the company is higher than the private cost, and the equilibrium quantity of paints produced is larger than the social optimum.
• The social cost of the company is higher than the private cost, and the equilibrium quantity of paints produced is less than the social optimum.
• The social cost of the company is lower than the private cost, and the equilibrium quantity of paints produced is larger than the social optimum.
8.Scarcity occurs because of:
• the limited supply of resources.
• overutilization of labor.
• the excess of quantity supplied over quantity demanded.
• limited human needs and wants.
9.The exhibit given below shows the demand curve for Good X, labeled D. At a price of $6 per unit, the quantity demanded of Good X is 5 units. A decrease in price to $4 per unit increases the quantity demanded to 8 units. Assuming that a decrease in price leads to new consumers buying the good, what is the consumer surplus received by the new consumers in the market?
10.Given an increase in the market demand for its product, a firm decides to hire an additional worker. The amount of output produced by 25 workers is 80 units. The marginal product of the 26th worker is 15 units. After the 26th worker is hired, the total output would increase to _____.
• 1,200 units
• 6 units
• 15 units
• 95 units
11.Suppose both Monica and Edith grow roses and make guns. If Monica devotes 10 hours to growing roses, she grows 16 roses, and if she devotes 10 hours to making guns, she produces 4 guns. If Edith divides her 10 hours equally, she produces 12 roses and 6 guns. Identify the correct statement.
• Edith has an absolute advantage in both growing roses and making guns.
• Monica has an absolute advantage in growing roses, and Edith has an absolute advantage in making guns.
• Monica has an absolute advantage in both growing roses and making guns.
• Monica has an absolute advantage in making guns, and Edith has an absolute advantage in growing roses.
12.Penelope has recently started a printing business in Duluth. She had to pay a fee to obtain a trade license from the Minnesota government and took a loan from the local bank to purchase inkjet printers, laser printers, and screen printers. She employs 20 workers who are paid a wage of $30 per hour. She is also a trained ballet dancer who used to earn an average of $50,000 a year. Penelope’s implicit cost of running the business is:
• $72,000 per annum.
• the amount she used to earn as a ballet dancer.
• the interest she has to pay on the loan.
• the fee paid to the government.
13.A sudden increase in the demand for air conditioners increased the earnings of the workers employed in air conditioner-manufacturing firms and attracted workers from other sectors. Which of the following will be true in the market for workers employed in air conditioner-manufacturing firms?
• There will be a leftward shift of the labor supply curve, leading to an increase in the equilibrium wage and a decrease in employment.
• There will be a rightward shift of the labor supply curve, leading to an increase in the equilibrium wage and employment.
• There will be a rightward shift of the labor supply curve, leading to a decrease in the equilibrium wage and an increase in employment.
• There will be a leftward shift of the labor supply curve, leading to a decrease in the equilibrium wage and employment.
14.Moonlife LLC. observed that its total revenue is proportional to the quantity of good sold. It is likely that Moonlife LLC. is a:
• perfectly competitive firm.
• monopolistic competitor.
15.The Rhodes and Samson families, with annual incomes of $100,000 and $120,000, respectively, live in a society where the primary objective of the government is to maximize the sum of the utility attained by everyone in the society. Which of the following is likely to be true in such a society?
• The government will redistribute income between the two families in such a way that the welfare of the Rhodes family improves.
• The government will redistribute income between the two families in such a way that both the families will have the same level of post-tax income.
• The government will tax the Rhodes family and provide income transfers to the Samson family to maximize total utility.
• The government will tax the Samson family and provide income transfers to the Rhodes family, but there will exist an inequality of income between the two families.
16.Which of the following reflects the law of demand?
• Jonathan, a coffee drinker, switching to green tea after a fall in the price of green tea
• John purchasing a bigger apartment after an increase in his salary
• Jacques purchasing 4 bottles of lemonade instead of 3 when its price decreased from $12 to $10 per bottle
• Jimmy’s demand for donuts decreasing from 4 per week to 2 per week after its price decreased from $1 to $0.5 per donut
17.Adrianne and Joanna love watching plays on Broadway. Adrianne values a play at $85, and Joanna values it as $82. When the price of tickets increased from $80 to $83 following the imposition of a tax, Joanna stopped watching plays on Broadway, while Adrianne continued to buy tickets. Identify the correct statement.
The deadweight loss is $3.
The decrease in Adrianne’s consumer surplus is equal to the deadweight loss.
Total consumer surplus decreased by less than the tax revenue.
The decrease in Adrianne’s surplus is equal to the tax revenue.
18 The exhibit given below shows the market for wheat in Zenetia. At a price of p, the profit-18.maximizing quantity for a wheat producer is _____.
between Q and Q’
19.The exhibit given below shows Melanie’s budget constraint for two goods, wine and cheese. The slope of the budget constraint equals:
20.Liz starts driving rashly after buying insurance. This is an example of a(n):
• negative externality.
• free-rider problem.
• common-resource problem.
• moral-hazard problem.
21.The exhibit given below shows the demand curve for and the supply curve of laptops, D and S1. The government decides to impose a price ceiling on the price of laptops. At the same time, the price of inverter boards that provide power to backlight lamps inside laptop screens increases. Identify the correct statement.
• A price of P2 will be binding in this market.
• At a price ceiling of P1, the quantity demand and supplied in the market will be Q2.
• The government should set the price ceiling at P1 to eliminate shortage.
• A price ceiling above P3 will eliminate shortage in the market.
22.The state government of Dalmatia noticed that whenever its baseball team played a match in any of the local stadiums, the prices of tickets became too high. It decided to impose a price ceiling on the ticket prices. The exhibit given below shows the demand curve for and the supply curve of baseball game tickets in Dalmatia. If the government were to impose a binding price ceiling, it should set the price at:
• $120 per ticket, which would give rise to a shortage of 10,000 tickets.
• $120 per ticket, which would give rise to a surplus of 20,000 tickets.
• $80 per ticket, which would give rise to a shortage of 16,000 tickets.
• $80 per ticket, which would give rise to a surplus of 8,000 tickets.
23.Which of the following is an example of adverse selection?
• Patrick uses the service of a mechanic to inspect the condition of a second-hand Dodge he is interested in buying.
• Harry refuses to buy health insurance at high premiums because he feels that he is in good health.
• Thomas refuses to pay for the construction of a swimming pool in his neighborhood that will be open to the public free of cost.
• When the National Museum increased its entry fee, there wa
24.Mike sells navel oranges in a market where there are a lot of other sellers and faces a perfectly elastic demand curve for oranges. He hires 10 workers in a perfectly competitive market to help him with picking oranges. Given this information, it can be said that:
• the demand for workers is a positive function of the prevailing market wage rate.
• the demand curve for orange pickers is vertical.
• Mike can employ only 10 workers as the supply of workers is fixed in a perfectly competitive labor market.
• Mike cannot bargain with the workers over their wage rates
25.Suppose Timothy consumes two goods, soda and chips. The slope of his indifference curve for these two goods reflects:
the relative price of soda.
the total utility he gets from the consumption of the two goods.
the relative price of chips.
the rate at which he is willing to substitute one good for the other.
26.The exhibit given below shows the supply curve of printing machines. At a price of $400 per machine, the producer surplus is:
27.Recent political unrest has caused many citizens of Serria to flee the country. This is likely to:
shift the labor demand curve in Serria to the left.
increase labor employment in Serria.
shift the labor supply curve in Serria to the right.
increase the equilibrium wage rate in the labor market in Serria.
28.Suppose both Ross and Vivian produce butter and cheese. When Ross works for 10 hours a day, he produces 6 pounds of butter and 24 pounds of cheese. When Vivian works for the same hours, she produces 20 pounds of cheese and 40 pounds of butter. Ross’s opportunity cost of producing a pound of butter is:
5 pounds of cheese.
1/4 pounds of cheese.
18 pounds of cheese.
4 pounds of cheese.
29. Paula wants to buy 3 packs of frozen yoghurt when it is priced at $2 per pack. When the price increases to $3.50 per pack, she wants to buy 2 packs. This reflects the:
• maximization of marginal utility by Paula.
• law of diminishing marginal utility.
• law of demand.
• maximization of total utility by Paula.
30. The table given below shows three buyers’ willingness to pay for an antique necklace. At a market price of $25,000, the total consumer surplus in the market is _____.