ECO 561 Final Exam: ECO 561 - If a firm in a purely competitive industry
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<strong>ECO</strong> <strong>561</strong> <strong>F<strong>in</strong>al</strong><br />
<strong>Exam</strong><br />
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1) Suppose that <strong>in</strong> the cloth<strong>in</strong>g market,<br />
production costs have fallen, but the<br />
equilibrium price and quantity purchased<br />
have both <strong>in</strong>creased. Based on this<br />
<strong>in</strong>formation you can conclude that<br />
A. the supply of cloth<strong>in</strong>g has grown faster<br />
than the demand for cloth<strong>in</strong>g<br />
B. demand for cloth<strong>in</strong>g has grown faster than<br />
the supply of cloth<strong>in</strong>g<br />
C. the supply of and demand for cloth<strong>in</strong>g have<br />
grown by the same proportion<br />
D. there is no way to determ<strong>in</strong>e what has<br />
happened to supply and demand with this<br />
<strong>in</strong>formation<br />
2) Camille's Creations and Julia's Jewels<br />
both sell beads <strong>in</strong> a <strong>competitive</strong> market.<br />
<strong>If</strong> at the market price of $5, both are<br />
runn<strong>in</strong>g out of beads to sell (they can't<br />
keep up with the quantity demanded at<br />
that price), then we would expect both<br />
Camille's and Julia's to:<br />
A. raise their price and reduce their quantity<br />
supplied<br />
B. raise their price and <strong>in</strong>crease their<br />
quantity supplied<br />
C. lower their price and reduce their<br />
quantity supplied<br />
D. lower their price and <strong>in</strong>crease their<br />
quantity supplied<br />
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3) In which of the follow<strong>in</strong>g <strong>in</strong>dustries are<br />
economies of scale exhausted at relatively<br />
low levels of output?<br />
A. Aircraft production<br />
B. Automobile manufactur<strong>in</strong>g<br />
C. Concrete mix<strong>in</strong>g<br />
D. Newspaper pr<strong>in</strong>t<strong>in</strong>g<br />
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4) The average cost curves (AVC and ATC)<br />
should be m<strong>in</strong>imized<br />
A. where MC = ATC and MC = AVC<br />
B. where FC = ATC and FC = AVC<br />
C. where TC starts to <strong>in</strong>crease at a faster rate<br />
D. where ATC = AVC<br />
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5) <strong>If</strong> the wage rate <strong>in</strong>creases,<br />
A. a <strong>purely</strong> <strong>competitive</strong> producer<br />
will hire less labour, but an<br />
imperfectly <strong>competitive</strong> producer<br />
will not<br />
B. an imperfectly <strong>competitive</strong><br />
producer will hire less labour, but<br />
a <strong>purely</strong> <strong>competitive</strong> producer<br />
will not<br />
C. a <strong>purely</strong> <strong>competitive</strong> and an<br />
imperfectly <strong>competitive</strong> producer<br />
will both hire less labour<br />
D. an imperfectly <strong>competitive</strong><br />
producer may f<strong>in</strong>d it profitable to<br />
hire either more or less labour<br />
6) The real wage will rise if the<br />
nom<strong>in</strong>al wage<br />
A. falls more rapidly than the general<br />
price level<br />
B. <strong>in</strong>creases at the same rate as labor<br />
productivity<br />
C. <strong>in</strong>creases more rapidly than the<br />
general price level<br />
D. falls at the same rate as the general<br />
price level<br />
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1<br />
7) Construction workers frequently<br />
sponsor political lobby<strong>in</strong>g <strong>in</strong> support<br />
of greater public spend<strong>in</strong>g on<br />
highways and public build<strong>in</strong>gs. One<br />
reason they do this is to<br />
A. restrict the supply of construction<br />
workers<br />
B. <strong>in</strong>crease the elasticity of demand for<br />
construction workers<br />
C. <strong>in</strong>crease the demand for construction<br />
workers<br />
D. <strong>in</strong>crease the price of substitute <strong>in</strong>puts<br />
8) Pay<strong>in</strong>g an above-equilibrium<br />
wage rate might reduce unit<br />
labour costs by<br />
A. permitt<strong>in</strong>g the <strong>firm</strong> to attract<br />
lower-quality labour<br />
B. <strong>in</strong>creas<strong>in</strong>g the cost to workers of<br />
be<strong>in</strong>g fired for shirk<strong>in</strong>g<br />
C. <strong>in</strong>creas<strong>in</strong>g voluntary worker<br />
turnover<br />
D. <strong>in</strong>creas<strong>in</strong>g the supply of labour<br />
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9) A good real-world example of<br />
monopolistic competition is<br />
A. lawyers<br />
B. gas stations<br />
C. Time Warner Cable<br />
D. groceries store<br />
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10) An <strong>in</strong>dustry compris<strong>in</strong>g a<br />
small number of <strong>firm</strong>s, each of<br />
which considers the potential<br />
reactions of its rivals <strong>in</strong> mak<strong>in</strong>g<br />
price-output decisions, is called<br />
A. monopolistic competition<br />
B. oligopoly<br />
C. pure monopoly<br />
D. pure competition<br />
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11) Price is constant or given<br />
to the <strong>in</strong>dividual <strong>firm</strong> sell<strong>in</strong>g<br />
<strong>in</strong> a <strong>purely</strong> <strong>competitive</strong><br />
market because<br />
A. the <strong>firm</strong>'s demand curve is<br />
downward slop<strong>in</strong>g<br />
B. of product differentiation<br />
re<strong>in</strong>forced by extensive<br />
advertis<strong>in</strong>g<br />
C. each seller supplies a<br />
negligible fraction of total<br />
supply<br />
D. there are no good substitutes<br />
for its product<br />
12) The most important pric<strong>in</strong>g<br />
strategy for a perfectly <strong>competitive</strong><br />
<strong>firm</strong> is<br />
A. m<strong>in</strong>imiz<strong>in</strong>g cost<br />
B. maximiz<strong>in</strong>g sales<br />
C. product differentiation<br />
D. advertis<strong>in</strong>g<br />
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13) Which of the follow<strong>in</strong>g is a nonprice<br />
barrier of entry?<br />
A. Huge sunk cost<br />
B. Discounts<br />
C. Product differentiation<br />
D. Advertis<strong>in</strong>g<br />
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14) A third-degree price<br />
discrim<strong>in</strong>ation can be applied to<br />
which of the follow<strong>in</strong>g market<br />
structures?<br />
A. A monopoly<br />
B. An oligopoly<br />
C. A monopolistic competition<br />
D. A perfect competition<br />
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15) Invest<strong>in</strong>g <strong>in</strong> R&D is more likely to<br />
occur <strong>in</strong> markets where<br />
A. <strong>firm</strong>s have monopoly power protected by<br />
regulatory barriers<br />
B. markets are closely <strong>competitive</strong> markets<br />
with close to zero economic profits<br />
C. markets are oligopoly markets with strong<br />
collusion agreements<br />
D. markets are monopolistic <strong>competitive</strong><br />
markets<br />
16) All economies of scale are achieved<br />
at the m<strong>in</strong>imum of<br />
A. average total cost<br />
B. total cost<br />
C. average variable cost<br />
D. average fixed cost<br />
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17) Inflation is undesirable because<br />
it<br />
A. arbitrarily redistributes real<br />
<strong>in</strong>come and wealth<br />
B. <strong>in</strong>variably leads to hyper<strong>in</strong>flation<br />
C. usually is accompanied by<br />
decl<strong>in</strong><strong>in</strong>g real GDP<br />
D. reduces everyone’s standard of<br />
liv<strong>in</strong>g <strong>in</strong> the same proportion<br />
18) An economy’s aggregate<br />
demand curve shifts leftward or<br />
rightward by more than changes<br />
<strong>in</strong> <strong>in</strong>itial spend<strong>in</strong>g because of the<br />
A. net export effect<br />
B. wealth effect<br />
C. real-balances effect<br />
D. multiplier effect<br />
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19) Suppose productivity rises <strong>in</strong> a<br />
particular economy, but wages stay<br />
the same. Other th<strong>in</strong>gs equal,<br />
A. the demand curve will shift leftward<br />
B. the supply curve will shift rightward<br />
C. the supply curve will shift leftward<br />
D. expenditures curve will shift<br />
rightward<br />
20) <strong>If</strong> personal taxes were<br />
decreased and resource<br />
productivity <strong>in</strong>creased<br />
simultaneously, the equilibrium<br />
A. output would rise<br />
B. output would fall<br />
C. price level would necessarily<br />
fall<br />
D. price level would necessarily<br />
rise<br />
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21) Expansionary fiscal policy is so<br />
named because it<br />
A. <strong>in</strong>volves an expansion of the nation's<br />
money supply<br />
B. can only be atta<strong>in</strong>ed by expand<strong>in</strong>g<br />
government consumption<br />
C. is aimed at achiev<strong>in</strong>g greater price<br />
stability<br />
D. can motivate an expansion of real<br />
GDP<br />
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22) Suppose the price level is fixed,<br />
the MPC is .5, and the GDP gap is a<br />
negative$100 billion. To achieve fullemployment<br />
output (exactly),<br />
government should<br />
A. <strong>in</strong>crease government expenditures by<br />
$100 billion<br />
B. <strong>in</strong>crease government expenditures by<br />
$50 billion<br />
C. reduce taxes by $50 billion<br />
D. reduce taxes by $200 billion<br />
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23) GDP understates the value of<br />
output produced by an economy<br />
because it<br />
A. <strong>in</strong>cludes transactions that do not<br />
take place <strong>in</strong> organized markets, such<br />
as home cooked meals<br />
B. <strong>in</strong>cludes environmental degradation<br />
caused by <strong>in</strong>creased output production<br />
C. excludes value added from the<br />
underground economy, such as tips<br />
taken under the table<br />
D. excludes the value of the wages<br />
and benefits of government employee<br />
24) Other th<strong>in</strong>gs equal, a<br />
decrease <strong>in</strong> the real <strong>in</strong>terest rate<br />
will<br />
A. shift the <strong>in</strong>vestment demand<br />
curve to the right<br />
B. shift the <strong>in</strong>vestment demand<br />
curve to the left<br />
C. move the economy upward<br />
along its exist<strong>in</strong>g <strong>in</strong>vestment<br />
demand curve<br />
D. move the economy downward<br />
along its exist<strong>in</strong>g <strong>in</strong>vestment<br />
demand curve<br />
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25) Other th<strong>in</strong>gs equal, a decrease <strong>in</strong><br />
corporate <strong>in</strong>come taxes will<br />
A. decrease the market price of real<br />
capital goods<br />
B. have no effect on the location of the<br />
<strong>in</strong>vestment demand curve<br />
C. shift the <strong>in</strong>vestment demand curve to<br />
the right<br />
D. shift the <strong>in</strong>vestment demand curve to<br />
the left<br />
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26) Inflation <strong>in</strong> U.S. prices will cause<br />
A. an <strong>in</strong>crease <strong>in</strong> the demand for U.S.<br />
dollars and an appreciation <strong>in</strong> the<br />
exchange rate<br />
B. an <strong>in</strong>crease <strong>in</strong> the supply of U.S.<br />
dollars and a depreciation <strong>in</strong> the<br />
exchange rate<br />
C. a decrease <strong>in</strong> the demand for U.S.<br />
dollars and a depreciation <strong>in</strong> the<br />
exchange rate<br />
D. a decrease <strong>in</strong> the supply of U.S.<br />
dollars and an appreciation <strong>in</strong> the<br />
exchange rate<br />
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27) The quantity theory of money<br />
states that<br />
A. the money supply divided by the<br />
velocity of money equals the price level<br />
divided by real output<br />
B. the money supply times the velocity<br />
of money equals the price level times<br />
real output<br />
C. the money supply times the price level<br />
equals real output divided by the velocity<br />
of money<br />
D. the money supply times the price level<br />
equals real output times the velocity of<br />
money<br />
28) Suppose that U.S. prices rise<br />
4% over the next year while<br />
prices <strong>in</strong> Mexicorise 6%.<br />
Accord<strong>in</strong>g to the purchas<strong>in</strong>g<br />
power parity theory of exchange<br />
rates,what should happen to the<br />
exchange rate between the dollar<br />
and the peso?<br />
A. The dollar should depreciate.<br />
B. The peso should appreciate.<br />
C. The peso should depreciate.<br />
D. The dollar will be revalued.<br />
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29) A rise <strong>in</strong> the domestic <strong>in</strong>terest rate<br />
leads to capital<br />
A. outflows and exchange rate<br />
appreciation<br />
B. outflows and exchange rate<br />
depreciation<br />
C. <strong>in</strong>flows and exchange rate depreciation<br />
D. <strong>in</strong>flows and exchange rate appreciation<br />
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30) A <strong>firm</strong> under monopolistic<br />
competition will earn<br />
A. a positive economic profit as it<br />
has some monopoly power<br />
B. zero economic profit as it sets P =<br />
MC<br />
C. zero economic profit as its P =<br />
ATC<br />
D. a positive economic profit as it<br />
sets MC = MR<br />
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