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ECO 365 Final Exam

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ECO 365 Week 5 Final Exam (Latest - August

1). The DeBeers company is a profit-maximizing monopolist
that exercises monopoly power in the distribution of diamonds.
If the company earns positive economic profits this year, the
price of diamonds will:
Exceed the marginal cost of diamonds but equal to the
average total cost of diamonds.
Exceed both the marginal cost and the average total cost
of diamonds.
Be equal to the marginal cost of diamonds.
Be equal to the average total cost of diamonds.

2). Using 100 workers and 10 machines, a firm can produce

10,000 units of output; using 250 workers and 25 machines, the
firm produces 21,000 units of output. These facts are best
explained by:
Economies of scope

Diseconomies of scale
Diminishing marginal productivity
Economies of scale

3). Suppose that college tuition is higher this year than last and
that more students are enrolled in college this year than last
year. Based on this information, we can best conclude that:
despite the increase in price, quantity demanded rose due
to some other factors changing.
the demand for a college education is positively sloped.
the law of demand is invalid.
this situation has nothing to do with the law of demand.

4). A monopoly firm is different from a perfectly competitive

firm in that:
A monopolists demand curve is perfectly inelastic
whereas a perfectly competitive firms demand curve is
perfectly elastic.
A competitive firm has a u-shaped average cost curve
whereas a monopolist does not.
A monopolist can influence market price whereas a
perfectly competitive firm cannot.
There are many substitutes for a monopolists product
whereas there are no substitutes for a competitive firms

5). The best example of positive externality is:

Alcoholic beverages
Roller coaster rides

6). The theory that quantity supplied and price are positively
related, other things constant, is referred to as the law of:
profit maximization
opportunity cost

7). A reduction in the supply of labor will cause wages to:

Decrease and employment to decrease.

Increase and employment to increase.
Decrease and employment to increase.
Increase and employment to decrease.

8). Other things held constant in a competitive labor market, if

workers negotiate a contract in which the employer agrees to
pay an hourly of $17.85 while the market equilibrium hour rate
is $16.50, the:
Quantity of workers demanded will exceed the quantity of
workers supplied.
Quantity of workers supplied will exceed the quantity of
workers demanded.
Supply of labor will decrease until the equilibrium wage
rate is $17.85.
Demand for labor will increase until the equilibrium wage
rate is $17.85.

9). Alex is playing his music at full volume in his dorm room.
The other people living on his floor found this to be a nuisance,
but Alex doesnt care. Alexs music playing is an example of:
Pareto externality
Positive externality

Negative externality
Normative externality

10). Oligopoly is probably the best market for technological

change because:
The typical oligopoly has the funds to carry out research
and development and believe that its competitors are
innovating, which motivates it to conduct research and
The typical oligopoly lacks the funds to carry out research
and development and therefore will use basic research
from universities.
Research and development occurs only if government
subsidizes such activity, and government tends to
subsidize oligopolies.
The typical oligopoly keeps price very close to average
total cost because it fears the entry of new rivals if its
profits are excessively high.

11). A perfectly competitive firm facing a price of $50 decides

to produce 500 widgets. Its marginal cost of producing the last
widget is $50. If the firms goal is to maximize profit, it should:

Produce more widgets

Produce fewer widgets
Continue producing 500 widgets
Shut down

12). Graphically, a change in price causes:

the demand curve to shift.
both supply and demand to shift.
a movement along a given supply curve, not a shift.

the supply curve to shift.

13). In 1997, the federal government reinstated a 10 percent

excise tax on airline tickets. The industry tried to pass on the
full 10 percent ticket tax to

consumers but was able to boost fares by only 4 percent. From

this you can conclude that the:
Supply of airline tickets is perfectly inelastic.
Supply elasticity of airline tickets is less than infinity.
Demand elasticity for airline tickets is greater than zero in
absolute value.
Demand for airline tickets is perfectly inelastic.

14). In 2011, the Department of Justice sued AT&T to block its

merger with the cell phone service provider T-Mobile. To defend
itself against the charge, AT&T argued that the:
Combined company could raise prices, allowing it to
survive in a rapidly changing market.
Government had no authority to block mergers in the
telephone industry.
Government had guaranteed it exclusive control of cell
phone service.
Merger would improve and expand cellular service to

15). The law of diminishing marginal productivity implies that

the marginal product of a variable input:
Never declines
Always declines
Is constant

Eventually declines

16). Suppose OPEC announces it will increase production. Using

supply and demand analysis to predict the effect of increased
production on equilibrium price and quantity, the first step is to
show the:
supply curve shifting to the right.

demand curve shifting to the left.

demand curve shifting to the right.
supply curve shifting to the left.

17). Many call centers that provide telephone customer

services for U.S. companies have been established in India, but
few or none have been established in China. Why?
China is at a more advanced stage of economic
development than India.
China lacks the political infrastructure to support call
Indian labor costs are equal to Chinese labor costs.
Chinese labor lacks the specific language skills needed to
make call centers profitable in China.

18). Suppose people freely choose to spend 40 percent of their

income on health care, but then the government decides to tax
40 percent of that persons income to provide the same level of
coverage as before. What can be said about deadweight loss in
each case?
There is no difference because the total spending remains
the same and the health care purchased remains the

Taxing income results in less deadweight loss because

government knows better what health care coverage is
good for society.
Taxing income results in deadweight loss, and purchasing
health care on ones own doesnt result in deadweight
There is no difference between goods that are purchased
in the market in either case.

19). At one time, sea lions were depleting the stock of

steelhead trout. One idea to scare sea lions away from the
Washington coast was to launch fake killer whales, which are
predators of sea lions. The cost of making the first whale is
$16,000 ($5,000 for materials and $11,000 for the mold). The

mold can be reused to make additional whales, and so

additional whales cost $5,000 each. Based on these numbers,
the production of fake killer whales exhibits:

Diminishing marginal product

Decreasing returns to scale
Constant returns to scale
Increasing returns to scale

20). There are many restaurants in the city of Raleigh, each one
offering food and services that differ from those of its
competitors. There is also free entry of sellers into the market,
and each seller serves a very small fraction of the total number
of meals served each day. The restaurant industry in Raleigh is
best characterized as:

Perfectly competitive.
Monopolistically competitive.
A pure monopoly.
An oligopoly.

21). Suppose foreign shrimp prices drop by 32 percent and

importers gain a 90 percent market share.
From this
information, what would economists strongly suspect about this
Foreigners have a comparative advantage in shrimping.
The large sales of foreigners indicate they are better
strategic business bargainers than Americans are.
Americans have a comparative advantage in shrimping.
Foreign sellers probably are colluding on price to maximize

22). For a monopolist, the price of a product:

Is less than the marginal revenue.

Exceeds the marginal revenue.

Equals the marginal cost.
Equals the marginal revenue.

23). When Ross Perot ran for president as a third party

candidate in 1992, he argued that free trade with Mexico would
result in massive job losses in the United States because
Mexican wages were so low. Which of the following is the best
explanation of why few economists agreed with Perot?
Although economics predicted that unemployment would
rise, the increased profits of corporations would raise
stock prices enough to compensate for the lost jobs.
Economists did not believe any jobs would be lost in the
United States.
Although economists believed that in some areas the
United States would lose jobs, they expected the United
States would gain jobs in other areas.

Economics believed that the U.S. unemployment would


24). Mr. Woodwards cabinet shop is experiencing rapid growth

in sales. As sales have increased, Mr. Woodward 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?




diminishing marginal productivity
diminishing marginal utility

25). Price elasticity of demand is the:

Change in the quantity of a good demanded divided by
the change in the price of that good.
Percentage change in price of that good divided by the
percentage change in the quantity of that good
Percentage change in quantity of a good demanded
divided by the percentage change in the price of that
Change in the price of a good divided by the change in the
quantity of that good demanded.

26). Which of the following statements is true about a

downward-sloping demand curve that is a straight line?
The slope remains the same, but elasticity falls as you
move down the demand curve.
The slope remains the same, but elasticity rises as you
move down the demand curve.

The slope and the elasticity fall as you move down the
demand curve.
The slope and elasticity are the same at all points.

27). Strategic decision making is most important in:

Monopolistically competitive markets.

Monopolistic markets.
Oligopolistic markets.
Competitive markets.

28). Cartels are organizations that:

Encourage price wars.

Keep markets contestable.
Use predatory pricing to monopolize industries.
Coordinate the output and pricing decisions of a group of

29). Microeconomics and macroeconomics are:

Interrelated because what happens in the economy as a
whole is based on individual decisions.
Interrelated because both are often taught by the same
Not related because they are taught separately.
Virtually identical, though one is much more difficult than
the other.

30). Microeconomics is the study of:

a firm's pricing policies

business cycles

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