ECON 528 FINAL EXAM UPDATED ACTUAL QUESTIONS
AND CORRECT ANSWERS
Question:
1. If the marginal product of labor is 2, the marginal product of capital is 4, the wage rate is $3, the rental
price of capital is $6, and the price of output is $1.50, then the firm should . Increase output by hiring more
labor, more capital, or both.
b. Hold output constant, but hire more labor and less capital.
c. Decrease output by reducing the quantity of capital, reducing the number of units of labor, or both.
d. None of the above is correct.
Answer:
D. None of the above
Question:
2. When adding another unit of labor leads to an increase in output that is smaller than the increases in
output that resulted from adding previous units of labor, the firm is experiencing
a. diminishing labor.
b. diminishing output.
c. diminishing marginal product.
d. negative marginal product
Answer:
diminishing marginal product.
Question:
3. Which of the following explains why long-run average cost at first decreases as output increases?
a. diseconomies of scale
b. less-efficient use of inputs
c. fixed costs becoming spread out over more units of output
d. gains from specialization of inputs.
Answer:
gains from specialization of inputs
Question:
4. In the long run a company that produces and sells dog beds incurs total costs of $1,200 when output is
30 beds and $1,600 when output is 40 beds. Firm A exhibits
Answer:
constant returns to scale because average total cost is constant as output rises.
,Question:
5. Which of the following is a reason why a firm would experience diseconomies of scale?
A) To finance an increase in the size of its plant a firm must borrow more money or sell more shares of
stock.
B) As the size of the firm increases, it becomes more difficult to find markets where it doesn't already have
operations.
C) As the size of the firm increases it becomes more difficult to coordinate the operations of its
manufacturing plants.
D) As the size of the firm increases, it must operate in other countries where differences in language,
customs and laws increase its average costs.
Answer:
As the size of the firm increases it becomes more difficult to coordinate the operations of its manufacturing
plants.
Question:
6. Which of the following would cause an increase in the equilibrium price and an increase in the
equilibrium quantity of watermelons?
A) an increase in demand and an increase in supply
B) an increase in supply
C) an increase in supply and an increase in demand greater than the increase in supply
D) a decrease in demand and an increase in supply
Answer:
an increase in supply and an increase in demand greater than the increase in supply
Question:
7. Which of the following characteristics is common to monopolistic competition and perfect competition?
A) Firms produce identical products.
B) Entry barriers into the industry are low.
C) Each firm faces a downward -sloping demand curve.
D) Firms take market prices as given.
Answer:
Entry barriers into the industry are low.
Question:
8. In a monopolistically competitive market, a successful new restaurant
A) can earn economic profits in the long run if it uses barriers to restrict entry by new restaurants.
B) will earn zero economic profit in the long run because of free entry, but competition will lead
restaurants to offer different versions of the same product.
C) will face high entry barriers because of health and safety regulations to which all restaurants are subject.
D) must obtain a trademark to ensure that it will break even in the long run.
Answer:
will earn zero economic profit in the long run because of free entry, but competition will lead restaurants to
offer different versions of the same product.
, Question:
9. A member of a cartel like OPEC has an incentive to
A) argue for larger production quotas for each member of the cartel.
B) agree to a low cartel production level and then produce more than its quota.
C) abide by its individual production quota.
D) support equal production quotas for each member.
Answer:
agree to a low cartel production level and then produce more than its quota.
Question:
10. If firms are in Cournot equilibrium:
Answer:
Firms could increase profits by jointly reducing output.
Question:
11. An industry has a 4-firm concentration ratio of 85. We would call this industry a:
Answer:
oligopoly.
Question:
12. 15) Which of the following is an example of bundling?
A)A shoe store doesn't sell shoes for just one foot; it sells shoes for the left foot and right foot packaged
together.
B)An automobile manufacturer includes Michelin tires on its new cars.
C)A $95 ticket to the Magic Kingdom gives you entrance to the park and free access to all the rides.
D)HP includes a toner cartridge with the purchase of a new laser printer.
Answer:
A $95 ticket to the Magic Kingdom gives you entrance to the park and free access to all the rides.
Question:
13. Selling tickets in the orchestra region of the Metropolitan Opera for $55 and selling tickets in the upper
balcony for $28 to listen to Luciano Pavoratti describes which type of price discrimination
Answer:
third-degree price discrimination
Question:
14. Mr. Leghorn lives next door to Mr. Fudd. During hunting season, Mr. Fudd likes to shoot rabbits in his
backyard, which activity he values at $900. The noise from the shooting disturbs Mr. Leghorn and prevents
him from taking afternoon naps, which he values at $500. If Mr. Leghorn has the legal right to stop Mr.
Fudd from hunting, the socially optimal outcome is for:
Answer:
Mr. Fudd to pay Mr. Leghorn between $500 and $900 to continue hunting.
Question:
15. Which of the following statements is (are) TRUE? I. Public goods tend to be underprovided. II. One
person's consumption of a public good diminishes its use to another person. III. The marginal cost of
providing a public good to another consumer is infinite.
AND CORRECT ANSWERS
Question:
1. If the marginal product of labor is 2, the marginal product of capital is 4, the wage rate is $3, the rental
price of capital is $6, and the price of output is $1.50, then the firm should . Increase output by hiring more
labor, more capital, or both.
b. Hold output constant, but hire more labor and less capital.
c. Decrease output by reducing the quantity of capital, reducing the number of units of labor, or both.
d. None of the above is correct.
Answer:
D. None of the above
Question:
2. When adding another unit of labor leads to an increase in output that is smaller than the increases in
output that resulted from adding previous units of labor, the firm is experiencing
a. diminishing labor.
b. diminishing output.
c. diminishing marginal product.
d. negative marginal product
Answer:
diminishing marginal product.
Question:
3. Which of the following explains why long-run average cost at first decreases as output increases?
a. diseconomies of scale
b. less-efficient use of inputs
c. fixed costs becoming spread out over more units of output
d. gains from specialization of inputs.
Answer:
gains from specialization of inputs
Question:
4. In the long run a company that produces and sells dog beds incurs total costs of $1,200 when output is
30 beds and $1,600 when output is 40 beds. Firm A exhibits
Answer:
constant returns to scale because average total cost is constant as output rises.
,Question:
5. Which of the following is a reason why a firm would experience diseconomies of scale?
A) To finance an increase in the size of its plant a firm must borrow more money or sell more shares of
stock.
B) As the size of the firm increases, it becomes more difficult to find markets where it doesn't already have
operations.
C) As the size of the firm increases it becomes more difficult to coordinate the operations of its
manufacturing plants.
D) As the size of the firm increases, it must operate in other countries where differences in language,
customs and laws increase its average costs.
Answer:
As the size of the firm increases it becomes more difficult to coordinate the operations of its manufacturing
plants.
Question:
6. Which of the following would cause an increase in the equilibrium price and an increase in the
equilibrium quantity of watermelons?
A) an increase in demand and an increase in supply
B) an increase in supply
C) an increase in supply and an increase in demand greater than the increase in supply
D) a decrease in demand and an increase in supply
Answer:
an increase in supply and an increase in demand greater than the increase in supply
Question:
7. Which of the following characteristics is common to monopolistic competition and perfect competition?
A) Firms produce identical products.
B) Entry barriers into the industry are low.
C) Each firm faces a downward -sloping demand curve.
D) Firms take market prices as given.
Answer:
Entry barriers into the industry are low.
Question:
8. In a monopolistically competitive market, a successful new restaurant
A) can earn economic profits in the long run if it uses barriers to restrict entry by new restaurants.
B) will earn zero economic profit in the long run because of free entry, but competition will lead
restaurants to offer different versions of the same product.
C) will face high entry barriers because of health and safety regulations to which all restaurants are subject.
D) must obtain a trademark to ensure that it will break even in the long run.
Answer:
will earn zero economic profit in the long run because of free entry, but competition will lead restaurants to
offer different versions of the same product.
, Question:
9. A member of a cartel like OPEC has an incentive to
A) argue for larger production quotas for each member of the cartel.
B) agree to a low cartel production level and then produce more than its quota.
C) abide by its individual production quota.
D) support equal production quotas for each member.
Answer:
agree to a low cartel production level and then produce more than its quota.
Question:
10. If firms are in Cournot equilibrium:
Answer:
Firms could increase profits by jointly reducing output.
Question:
11. An industry has a 4-firm concentration ratio of 85. We would call this industry a:
Answer:
oligopoly.
Question:
12. 15) Which of the following is an example of bundling?
A)A shoe store doesn't sell shoes for just one foot; it sells shoes for the left foot and right foot packaged
together.
B)An automobile manufacturer includes Michelin tires on its new cars.
C)A $95 ticket to the Magic Kingdom gives you entrance to the park and free access to all the rides.
D)HP includes a toner cartridge with the purchase of a new laser printer.
Answer:
A $95 ticket to the Magic Kingdom gives you entrance to the park and free access to all the rides.
Question:
13. Selling tickets in the orchestra region of the Metropolitan Opera for $55 and selling tickets in the upper
balcony for $28 to listen to Luciano Pavoratti describes which type of price discrimination
Answer:
third-degree price discrimination
Question:
14. Mr. Leghorn lives next door to Mr. Fudd. During hunting season, Mr. Fudd likes to shoot rabbits in his
backyard, which activity he values at $900. The noise from the shooting disturbs Mr. Leghorn and prevents
him from taking afternoon naps, which he values at $500. If Mr. Leghorn has the legal right to stop Mr.
Fudd from hunting, the socially optimal outcome is for:
Answer:
Mr. Fudd to pay Mr. Leghorn between $500 and $900 to continue hunting.
Question:
15. Which of the following statements is (are) TRUE? I. Public goods tend to be underprovided. II. One
person's consumption of a public good diminishes its use to another person. III. The marginal cost of
providing a public good to another consumer is infinite.
