Final Exam Principles of Economics & Business 1, 27 February 2021

The following 40 multiple-choice questions each have four answer options, of which only one
is the correct one.

1. Government corruption is found to hinder economic prosperity of a country. What is an

important way in which it can affect productivity?

a) Resources "invested" in bribing politicians go towards increasing productivity.

b) Corrupt government officials reduce regulations to force entrepreneurs to be more
competitive.
c) Bribes are an informal tax that crowds out official taxation.
d) Under a corrupt government, investments in human and physical capital are less secure.

2. Alex runs a flower shop. Each month he spends 5 000 euros buying flowers. Also, he pays
his employees a total of 3 000 euros per month. Alex has a total revenue of 12 000 euros
every month. If Alex didn’t have this flower job, he would work as an economics consultant,
earning 6000 euros per month. Consider these statements.

I. Alex’s economic profits from running the flower shop are -2000 euros.

II. Alex’s opportunity costs of running the flower shop are 6000 euros.

a) Both statements are true.

b) Both statements are false.
c) Statement I is true, Statement II is false.
d) Statement I is false; Statement II is true.

3. Which of the following statements is true, according to Bagehot?

I. Rumors of a bank going bankrupt might cause a bank run, which will in return increase the
likelihood of the bank going bankrupt.

II. By increasing interest rates, a cash outflow from foreign bankers is caused.

a) Both statements are true.

b) Both statements are false.
c) Statement I is true, Statement II is false.
d) Statement I is false; Statement II is true.

4. Which of the following is NOT a benefit of trade?

a) Trade makes people better off when preferences differ.

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b) Trade increases productivity through specialization and the division of

knowledge.

c) Trade increases the price of consumer goods.

d) Trade increases productivity through comparative advantage

5. What’s the correct definition of a production possibilities frontier (PPF)?

a) The PPF shows all the combinations of goods that a country can produce. A PPF
illustrates trade-offs.

b) The PPF shows all the combinations of costs that a country can have. A PPF illustrates
budgets.

c) The PPF shows the labor productivity of an entire economy. A PPF illustrates the
workforce.

d) The PPF shows the total comparative advantage of a country. A PPF illustrates
productivity advantages.

6. According to Bagehot, what should be used as a remedy to replenish the cash reserves in
the times of the foreign and domestic extra demand for cash?

a) Stop lending and increase interest rates for the deposits.

b) Keep lending with high interest rates.

c) Stop lending and keep interest rates stable.

d) Request investments from the shareholders.

7. Consider these statements:

I: A permanent cut in income tax can generate a larger fiscal stimulus than a temporary cut.

II: A permanent investment tax credit produces a smaller fiscal than a temporary investment
tax credit.

a) Statement I is true, Statement II is false.

b) Statement II is true, Statement I is false.

c) Both statements are true.

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 d) Both statements are false.

8. Consider this graph, which represents a market for batteries in perfect competition.

Suppose that a government subsidy of 2 is introduced on batteries, that is initially given to the
producers. How does this change the graph and the equilibrium?

a) The supply curve shifts up, increasing the price.

b) The supply curve shifts down, decreasing the price.

c) The supply curve shifts down, decreasing the price to 2.

d) The supply curve shifts up, decreasing the price to 2.

9. In a competitive market:

a) The sellers have more power than the buyers.

b) The buyers affect the prices by competing with other buyers.

c) The sellers will always cooperate to have prices above the equilibrium.

d) It is beneficial for sellers to set the price below the equilibrium level.

10. Which of the following statements is false?

a) The classic cost curve is not sufficient to explain the size of the firm for companies that are
producing multiple products.

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b) Entrepreneurs can more efficiently allocate resources if a firm grows larger and there are
diminishing returns to management.

c) Inventions that bring factors of production closer together tend to increase the size of the
firm.

d) Firms can grow when the entrepreneur is able to coordinate a transaction at a lower cost
than the price mechanism.

11. What is an economic force that works with the Invisible Hand property?

a) The tendency of firms to make anticompetitive agreements.

b) The power of labor unions.

c) The presence of asymmetric information.

d) Entrepreneurs seeking profit and avoiding losses.

12. Which of the following statements about public goods is incorrect?

a) Non-excludable goods will be underprovided by markets.

b) Non-excludable but rival resources tend to be overused in the absence of appropriate
institutions.
c) Public goods are excludable and rival.
d) By taxing everyone to pay for the public good, governments can make people better off.

13. Consider the following two statements.

I. Upward-sloping supply curves are generated when costs increase with greater industry
output.

II. Decreasing costs remain the norm in industry clusters even after the cluster is established.

a) Both I and II are true.

b) I is true, II is false.

c) I is false, II is true.

d) Both I and II are false.

14. Which of the following statements is incorrect?

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a) There is no incentive to enter or exit an industry if P=AC, because the price of output is
just enough to pay all input factors their opportunity cost.

b) If the price is below the minimum of the AVC curve, then the firm should exit the industry
as soon as possible.

c) If the price is above AC, the firm should remain in the industry where P=MC or enter if it
is not already in the industry.

d) The AVC curve has a similar shape to the AC curve, and it gets closer and closer to the
AC curve as the quantity produced increases.

15. ‘Creative destruction’ is an inevitable process and a consequence of innovation. Which of

these statements below best define this mechanism?

a) There are always people who seek to destroy well-functioning production processes in
creative ways.

b) Entrepreneurs have incentives to find creative new ways to make economic profits
with new products and services that replace existing markets.

c) Industries are constantly changing through the elimination principle.

d) Ronald Coase identified ‘creative destruction’ as a result of marketing cost.

16. In the graph below, what do Scenario 1 and Scenario 2 relate to?

a) Scenario 1 is a loss in value; Scenario 2 is a larger gain in value

b) Scenario 1 is a gain in value; Scenario 2 is a larger loss in value.

c) Scenario 1 is a decrease in quantity; Scenario 2 is a larger increase in quantity.

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d) Scenario 1 is an increase in quantity; Scenario 2 is a larger decrease in quantity.

17. Which of the following statements about COVID vaccination is correct?

a) COVID vaccination is a public good because it is offered by the government.

b) The protection from wide vaccination against COVID is excludable.

c) The protection from wide vaccination against COVID is a public good.

d) It would be more efficient to make people pay for their own COVID vaccination.

18. Which of the following statements about fiscal policy is correct?

a) Fiscal policy is difficult to time, so that its effects are often too late or too early.
b) Policy instruments such as government spending and taxes tend not to affect business
fluctuations.
c) A decrease in government spending or borrowing may lead private agents to reduce their
spending.
d) A tax-cut may lead to decreased savings through the notion of Ricardian Equivalence.

19. Who advocated the claim that: “The essence of strategy formulation is coping with
competition”?

a) Adam Smith.
b) Michael E. Porter.
c) Joseph Schumpeter.
d) John Maynard Keynes.

20. Dominika could acquire a zero-coupon bond for 950 euros. It has a face value of 1000
euros and maturity date one year from now. The interest rate on a savings account with
comparable risks is 7%. What is a wise for Dominika to do?

a) Dominika should buy the zero-coupon bond, because the rate of return is higher than the
interest rate.

b) Dominika should buy the zero-coupon bond, because the rate of return is lower than the
interest rate.

c) Dominika should not buy the zero-coupon bond, because the rate of return is higher than
the interest rate.

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d) Dominika should not buy the zero-coupon bond, because the rate of return is lower than
the interest rate.

21. Which of the following is not a function that banks perform?

a) Evaluating business ideas to decide who to lend to.

b) Spreading an investment’s risk among many different projects.

c) Regulating the tax on saving accounts.

d) Making it easier for people to make payments through electronic transfers.

22. Consider the following statements:

I. Friedrich von Hayek criticized economists for not acknowledging the importance of
change.

II. Friedrich von Hayek criticized central planners for not being able to incorporate the
knowledge of the particular circumstances of time and place.

a) I is true, II is false.
b) II is true, I is false.
c) Both are true.
d) Both are false.

23. We are given a market with the inverse demand and supply curves:

𝑃𝑃𝑠𝑠 = 30 + 𝑄𝑄𝑠𝑠

𝑃𝑃𝑑𝑑 = 50 − 𝑄𝑄𝑑𝑑

For this market, the consumer surplus is:

a) 150.
b) 200.
c) 100.
d) 50.

24. What did Coase mean with the term ‘marketing costs’?

a) All expenses companies make to promote their brands.

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b) All fixed costs that are made to increase the demand of customers for a company’s good.
c) All costs that are made if transactions are organized through markets.
d) All costs that are made to arrange transactions within the firm.

25. Which of the following statements about arbitrage is true?

a) Arbitrage is buying a product at a low price and selling it at a higher price.

b) Arbitrage facilitates price discrimination.
c) Arbitrage can be encouraged by raising import tariffs.
d) Arbitrage harms total welfare by creating deadweight-losses.

26. Consider a firm on point A in the graph below (where MR and MC cross). The firm will:

Figure 1

a) Enter the market.

b) Exit the market and shut down.
c) Make the least possible loss.
d) Shut down but not exit the market.

27. Which of the following statements about the theory of savings is incorrect?

a) People tend to save during the early years of their lifetime, dissave during their prime
working years, and borrow during the retirement age.

b) The demand to borrow increases when the interest rate decreases.

c) If government taxes on investment returns are raised, the demand for loanable funds and
the equilibrium interest rate will decrease.

d) Time preference influences the supply of savings.

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28. Buying an existing company’s stock is ______

a) considered a saving.

b) considered GDP growth.

c) considered a transfer of ownership rights.

d) considered a purchase of debt.

29. Increasingly, consumers are becoming conscious of their carbon footprint and demand
more sustainably produced goods and services, for which they are willing to pay extra. Which
of the following statements is correct?

a) It is impossible for a firm to offer more sustainably produced goods and services and
profit.
b) The only way in which companies can be made to produce more sustainably is through
government intervention.
c) Even though consumers say they appreciate more sustainable products, in practice almost
everybody keeps buying unsustainably produced goods and services.
d) Sustainability awareness of buyers offers business opportunities for entrepreneurs and
companies.

30. Consider a long-run equilibrium in a AD-AS model of a country in which money grows
at a yearly rate of 4%, velocity is constant, and inflation is 1%.

What is the real GDP growth rate in this country, according to the model?

a) 5%.
b) 3%
c) 4%
d) 1%.

31. Futures are standardized contracts to buy or sell specified quantities of a commodity or
financial instrument at a specified price, with delivery set at a specified time in the future.
What is not an example of a future contract?

a) Airlines hedging fuel costs to reduce exposure to possible conflict in the Middle East.

b) Farmers selling their future harvest ahead of time to reduce yield risk.

c) Firms acquiring currency obligations to avoid exchange rate risk.

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d) Financial institutions purchasing cryptocurrencies to diversify their portfolios.

32. In a competitive market with n firms, the marginal cost for each firm is equal to:

a) P = MC1 = MC2 = … = MCn

b) P = MC1 < MC2 < … < MCn

c) P = MC1 ≠ MC2 ≠ … ≠ MCn

d) P = MC1 > MC2 > … > MCn

33. Consider the following statements:

I. All consumers benefit from price discrimination if it allows those who would not have been
able to afford the product at a uniform price to buy it at the lower price.

II. Producers maximize their profit by setting a higher price in countries with a more elastic
demand curve.

a) Only statement 1 is true.

b) Only statement 2 is true.

c) Both statements are true.

d) Both statements are false.

34. Consider the following two statements:

I. A dependable legal system leads to an increase in physical capital.

II. A lack of property rights in a country decreases the possibility that workers will free ride.

a) Both statements are correct

b) Statement I is correct; Statement II is incorrect

c) Statement I is incorrect; Statement 2 is correct.

d) Both statements are incorrect.

35. Which of the following statements about absolute and comparative advantage is false?

a) Everyone always has a comparative advantage in something.

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b) A country’s wealth is the result of exploiting its absolute advantages.
c) A comparative advantage is dependent on opportunity costs.
d) An absolute advantage is dependent on the inputs necessary for production.

36. Which is not one of the limitations of the division of labor, according to Smith?

a) The extent of the market, such as geography and information.

b) Work alienation, such as becoming bored of repeating a task.
c) Work exploitation due to dependence and reduced labor mobility.
d) Technical limitations such as the extent of technology.

37. Whistler, a pharmaceutical company, has recently been the only company to deliver a
ground-breaking vaccine in Europe to market, and hence became a monopolist. It wants to
sell also in the African market, and it therefore considers price-discrimination between the
two markets. Whistler knows that the demand for Africa is 𝑄𝑄𝐴𝐴 = 120 − 1.5𝑃𝑃 and the demand
for European market is 𝑄𝑄𝐸𝐸 = 100 − 0.5𝑃𝑃. If Whistler would price discriminate, it would set
European price to 𝑃𝑃𝐸𝐸 = 50 and 𝑃𝑃𝐴𝐴 = 25. If it would not discriminate, it would set a world
price 𝑃𝑃𝑊𝑊 = 35. Arbitrage can be prevented with health and safety regulation. If Whistler
price discriminated:

a) Consumer welfare would be largest.

b) Consumers is Africa would suffer relative to the uniform world price.
c) Consumers in Europe would benefit relative to the uniform world price.
d) Whistler would obtain a lower profit relative to the uniform world price.

38. In which situation will the fiscal policy of the government be most effective?

a) Increased government spending financed by taxes when there are lower rates of private
spending.

b) People buying more government bonds and fewer private bonds.

c) Increased government spending financed by taxes when there are higher rates of private
spending.

d) The government borrowing money though bonds to fund a tax rebate, so that tax payers
can use this money to reduce their debt.

39. An important social problem with Bigtech companies is that:

a) They generate positive externalities from each user on the others.

b) They benefit from network effects to grow ever larger and more efficient.
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c) Their natural big size gives them market power.

d) They offer ‘free services’ that are really paid for through advertisements.

40. Which of the following policy options is not a proven effective way of reducing CO2
emissions and fight climate change?

a) Introducing carbon taxes.

b) Reducing the supply of CO2 emissions rights.

c) Requiring companies to buy off-setting carbon permits.

d) Allowing companies to make joint agreements about internalizing the social costs of their
carbon emissions.

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