QUEEN’S ECON 110 FINAL EXAM -SPRING NEWEST EXAM PREPARATION WITH
COMPLETE QUESTIONS AND CORRECT ANSWERS WITH RATIONALES | ALREADY
GRADED A+||BRAND NEW VERSION!!
Question 1
Which of the following describes a basic function of government that allows citizens to safely
carry out economic activities?
A) The provision of luxury goods to all citizens
B) The secure monopoly of violence with restrictions against arbitrary use
C) The complete elimination of all market competition
D) The setting of all prices for consumer commodities
E) The mandatory redistribution of all private property
Correct Answer: B) The secure monopoly of violence with restrictions against arbitrary use
Rationale: According to economic theory regarding the functions of government, the state
must maintain a monopoly on the use of force. However, for an economy to thrive, this
power must be secure and function with effective restrictions against arbitrary use. When
citizens are safe from random violence or state seizure of assets, they have the stability
required to engage in long-term economic and social planning.
Question 2
The "informal defense" of free markets is based on which three primary arguments?
A) Equity, efficiency, and total government control
B) High taxation, innovation, and centralized planning
C) Automatic coordination, innovation/growth, and decentralization of power
D) Price ceilings, price floors, and market power
E) Social responsibility, paternalism, and public provision
Correct Answer: C) Automatic coordination, innovation/growth, and decentralization of
power
Rationale: Defenders of market economies argue that free markets are superior because
they coordinate decentralized decisions through the price mechanism (automatic
coordination), encourage new products through the pursuit of profit (innovation), and
prevent any single entity from holding too much economic influence (decentralization of
power).
Question 3
In a free market, how does "automatic coordination" typically respond to a sudden increase in the
price of a resource like oil?
A) The government mandates that people stop driving cars.
B) The price mechanism signals consumers to reduce use and producers to find alternatives.
C) Producers are forced by law to lower the price back to original levels.
D) Coordination fails completely without a central planner’s intervention.
E) Consumers increase their consumption to protest the higher prices.
, 2
Correct Answer: B) The price mechanism signals consumers to reduce use and producers to
find alternatives
Rationale: Automatic coordination refers to the market's ability to adjust quickly to
changes. When oil prices rise, the "invisible hand" coordinates millions of decentralized
actors: consumers choose to drive less or use less heat, and firms seek more efficient
production methods, all without needing a government directive.
Question 4
Which concept describes the process where the pursuit of profits leads to new products and
processes that displace older, less efficient ones?
A) Market Failure
B) Creative Destruction
C) Paternalism
D) Adverse Selection
E) The Leaky Bucket
Correct Answer: B) Creative Destruction
Rationale: Innovation and growth are driven by firms seeking profits. "Creative
destruction" is the process by which innovation leads to economic growth as new, superior
technologies and business models replace obsolete ones. This is a key argument in favor of
free markets despite the temporary displacement of old industries.
Question 5
Why is the "decentralization of power" considered an advantage of the free market?
A) It allows the government to control all aspects of trade.
B) It ensures that only one firm makes all economic decisions.
C) It restricts power through competition and the voluntary nature of trade.
D) It eliminates the need for any competition policy.
E) It concentrates economic power in the hands of the wealthiest individuals.
Correct Answer: C) It restricts power through competition and the voluntary nature of
trade
Rationale: In a free market, trade is voluntary. If a seller attempts to exert too much power
by raising prices or lowering quality, consumers can switch to competitors or new products.
This decentralized nature of decision-making prevents any single firm or individual from
dictating the economic life of others.
Question 6
Market failure is best defined as a situation where:
A) The government intervenes and causes a deficit.
B) A firm goes bankrupt due to poor management.
C) The free market fails to achieve allocative efficiency without intervention.
, 3
D) Consumers refuse to buy a product because the price is too high.
E) Profits are distributed equally among all citizens.
Correct Answer: C) The free market fails to achieve allocative efficiency without
intervention
Rationale: Market failure occurs when the price mechanism fails to allocate resources in a
way that maximizes total social surplus. This provides the economic justification for
government intervention to correct issues like externalities, market power, or public goods.
Question 7
How does competition policy assist in correcting market failures related to "Market Power"?
A) By encouraging firms to form monopolies.
B) By minimizing deadweight loss (DWL) while encouraging innovation.
C) By setting all prices to zero for essential goods.
D) By preventing any new firms from entering the market.
E) By providing subsidies to every failing business.
Correct Answer: B) By minimizing deadweight loss (DWL) while encouraging innovation
Rationale: Firms with market power (monopolies or oligopolies) tend to restrict output and
raise prices, leading to allocative inefficiency and deadweight loss. Competition policy seeks
to prevent monopolistic practices to ensure a more efficient allocation of resources while
still allowing firms enough profit motive to innovate.
Question 8
What is an externality in economic terms?
A) An internal cost paid by the firm for labor.
B) The total revenue generated from an international trade deal.
C) An effect on parties not directly involved in the production or use of a commodity.
D) A tax imposed by the government on imported goods.
E) The profit made by a company after paying all its expenses.
Correct Answer: C) An effect on parties not directly involved in the production or use of a
commodity
Rationale: Externalities are "side effects" of economic activity. For example, if a factory
pollutes a river, the people living downstream suffer a cost they did not agree to. Because
these effects are not reflected in market prices, the market produces an inefficient quantity
of the good.
Question 9
"Private cost" refers to the value of the best alternative use of resources used in production, while
"Social cost" includes:
A) Only the costs of government regulation.
B) The private cost plus any external costs imposed on third parties.
, 4
C) Only the profit margins of the company.
D) The cost of advertising to the general public.
E) The taxes paid by the consumer.
Correct Answer: B) The private cost plus any external costs imposed on third parties
Rationale: Social cost is the total cost to society of an economic activity. It consists of the
private costs (labor, materials) paid by the producer and the external costs (like pollution
damage) borne by others. Market failure occurs when social cost differs from private cost.
Question 10
In the presence of a negative externality, a competitive free market will:
A) Produce too little of the good.
B) Produce exactly the efficient amount of the good.
C) Produce too much of the good.
D) Not produce the good at all.
E) Achieve allocative efficiency automatically.
Correct Answer: C) Produce too much of the good
Rationale: With a negative externality (like pollution), the producer does not pay for the
damage caused to others. Consequently, the marginal private cost is lower than the
marginal social cost. This leads the firm to produce a quantity higher than the socially
optimal level, causing an over-allocation of resources to that good.
Question 11
In the presence of a positive externality, a competitive free market will:
A) Produce too little of the good.
B) Produce too much of the good.
C) Charge a price that is too low.
D) Eliminate all deadweight loss.
E) Maximize social welfare without help.
Correct Answer: A) Produce too little of the good
Rationale: A positive externality (like education or vaccinations) provides benefits to third
parties that the consumer/producer does not capture in the form of revenue. Because the
marginal social benefit is higher than the marginal private benefit, individuals will under-
consume the good relative to the socially efficient level.
Question 12
A "rivalrous" good is one for which:
A) It is easy to prevent people from using it if they don't pay.
B) Use by one individual makes it less available for use by others.
C) The government must provide it for free.
COMPLETE QUESTIONS AND CORRECT ANSWERS WITH RATIONALES | ALREADY
GRADED A+||BRAND NEW VERSION!!
Question 1
Which of the following describes a basic function of government that allows citizens to safely
carry out economic activities?
A) The provision of luxury goods to all citizens
B) The secure monopoly of violence with restrictions against arbitrary use
C) The complete elimination of all market competition
D) The setting of all prices for consumer commodities
E) The mandatory redistribution of all private property
Correct Answer: B) The secure monopoly of violence with restrictions against arbitrary use
Rationale: According to economic theory regarding the functions of government, the state
must maintain a monopoly on the use of force. However, for an economy to thrive, this
power must be secure and function with effective restrictions against arbitrary use. When
citizens are safe from random violence or state seizure of assets, they have the stability
required to engage in long-term economic and social planning.
Question 2
The "informal defense" of free markets is based on which three primary arguments?
A) Equity, efficiency, and total government control
B) High taxation, innovation, and centralized planning
C) Automatic coordination, innovation/growth, and decentralization of power
D) Price ceilings, price floors, and market power
E) Social responsibility, paternalism, and public provision
Correct Answer: C) Automatic coordination, innovation/growth, and decentralization of
power
Rationale: Defenders of market economies argue that free markets are superior because
they coordinate decentralized decisions through the price mechanism (automatic
coordination), encourage new products through the pursuit of profit (innovation), and
prevent any single entity from holding too much economic influence (decentralization of
power).
Question 3
In a free market, how does "automatic coordination" typically respond to a sudden increase in the
price of a resource like oil?
A) The government mandates that people stop driving cars.
B) The price mechanism signals consumers to reduce use and producers to find alternatives.
C) Producers are forced by law to lower the price back to original levels.
D) Coordination fails completely without a central planner’s intervention.
E) Consumers increase their consumption to protest the higher prices.
, 2
Correct Answer: B) The price mechanism signals consumers to reduce use and producers to
find alternatives
Rationale: Automatic coordination refers to the market's ability to adjust quickly to
changes. When oil prices rise, the "invisible hand" coordinates millions of decentralized
actors: consumers choose to drive less or use less heat, and firms seek more efficient
production methods, all without needing a government directive.
Question 4
Which concept describes the process where the pursuit of profits leads to new products and
processes that displace older, less efficient ones?
A) Market Failure
B) Creative Destruction
C) Paternalism
D) Adverse Selection
E) The Leaky Bucket
Correct Answer: B) Creative Destruction
Rationale: Innovation and growth are driven by firms seeking profits. "Creative
destruction" is the process by which innovation leads to economic growth as new, superior
technologies and business models replace obsolete ones. This is a key argument in favor of
free markets despite the temporary displacement of old industries.
Question 5
Why is the "decentralization of power" considered an advantage of the free market?
A) It allows the government to control all aspects of trade.
B) It ensures that only one firm makes all economic decisions.
C) It restricts power through competition and the voluntary nature of trade.
D) It eliminates the need for any competition policy.
E) It concentrates economic power in the hands of the wealthiest individuals.
Correct Answer: C) It restricts power through competition and the voluntary nature of
trade
Rationale: In a free market, trade is voluntary. If a seller attempts to exert too much power
by raising prices or lowering quality, consumers can switch to competitors or new products.
This decentralized nature of decision-making prevents any single firm or individual from
dictating the economic life of others.
Question 6
Market failure is best defined as a situation where:
A) The government intervenes and causes a deficit.
B) A firm goes bankrupt due to poor management.
C) The free market fails to achieve allocative efficiency without intervention.
, 3
D) Consumers refuse to buy a product because the price is too high.
E) Profits are distributed equally among all citizens.
Correct Answer: C) The free market fails to achieve allocative efficiency without
intervention
Rationale: Market failure occurs when the price mechanism fails to allocate resources in a
way that maximizes total social surplus. This provides the economic justification for
government intervention to correct issues like externalities, market power, or public goods.
Question 7
How does competition policy assist in correcting market failures related to "Market Power"?
A) By encouraging firms to form monopolies.
B) By minimizing deadweight loss (DWL) while encouraging innovation.
C) By setting all prices to zero for essential goods.
D) By preventing any new firms from entering the market.
E) By providing subsidies to every failing business.
Correct Answer: B) By minimizing deadweight loss (DWL) while encouraging innovation
Rationale: Firms with market power (monopolies or oligopolies) tend to restrict output and
raise prices, leading to allocative inefficiency and deadweight loss. Competition policy seeks
to prevent monopolistic practices to ensure a more efficient allocation of resources while
still allowing firms enough profit motive to innovate.
Question 8
What is an externality in economic terms?
A) An internal cost paid by the firm for labor.
B) The total revenue generated from an international trade deal.
C) An effect on parties not directly involved in the production or use of a commodity.
D) A tax imposed by the government on imported goods.
E) The profit made by a company after paying all its expenses.
Correct Answer: C) An effect on parties not directly involved in the production or use of a
commodity
Rationale: Externalities are "side effects" of economic activity. For example, if a factory
pollutes a river, the people living downstream suffer a cost they did not agree to. Because
these effects are not reflected in market prices, the market produces an inefficient quantity
of the good.
Question 9
"Private cost" refers to the value of the best alternative use of resources used in production, while
"Social cost" includes:
A) Only the costs of government regulation.
B) The private cost plus any external costs imposed on third parties.
, 4
C) Only the profit margins of the company.
D) The cost of advertising to the general public.
E) The taxes paid by the consumer.
Correct Answer: B) The private cost plus any external costs imposed on third parties
Rationale: Social cost is the total cost to society of an economic activity. It consists of the
private costs (labor, materials) paid by the producer and the external costs (like pollution
damage) borne by others. Market failure occurs when social cost differs from private cost.
Question 10
In the presence of a negative externality, a competitive free market will:
A) Produce too little of the good.
B) Produce exactly the efficient amount of the good.
C) Produce too much of the good.
D) Not produce the good at all.
E) Achieve allocative efficiency automatically.
Correct Answer: C) Produce too much of the good
Rationale: With a negative externality (like pollution), the producer does not pay for the
damage caused to others. Consequently, the marginal private cost is lower than the
marginal social cost. This leads the firm to produce a quantity higher than the socially
optimal level, causing an over-allocation of resources to that good.
Question 11
In the presence of a positive externality, a competitive free market will:
A) Produce too little of the good.
B) Produce too much of the good.
C) Charge a price that is too low.
D) Eliminate all deadweight loss.
E) Maximize social welfare without help.
Correct Answer: A) Produce too little of the good
Rationale: A positive externality (like education or vaccinations) provides benefits to third
parties that the consumer/producer does not capture in the form of revenue. Because the
marginal social benefit is higher than the marginal private benefit, individuals will under-
consume the good relative to the socially efficient level.
Question 12
A "rivalrous" good is one for which:
A) It is easy to prevent people from using it if they don't pay.
B) Use by one individual makes it less available for use by others.
C) The government must provide it for free.
