ECONOMICS FINAL EXAM REVIEW GUIDE QUESTIONS AND ANSWERS WITH SOLUTIONS LATEST UPDATE

1. What is the fundamental economic problem that every society faces? a) Unemployment b) Inflation c) Scarcity d) Income inequality ANSWER: c) Scarcity 2. The term "opportunity cost" refers to: a) The financial cost of a good or service. b) The cost of producing one more unit of a good. c) The value of the next best alternative forgone when a choice is made. d) The total cost of all alternatives not chosen. ANSWER: c) The value of the next best alternative forgone when a choice is made. 3. A point inside a production possibilities curve (PPC) indicates: a) Efficient use of resources. b) Unattainable combination with current resources. c) Inefficient use of resources or unemployment. d) Economic growth. ANSWER: c) Inefficient use of resources or unemployment. 4. An outward shift of the production possibilities curve is caused by: a) A decrease in unemployment. b) An increase in the quality or quantity of resources. c) A shift from producing capital goods to consumer goods. d) A decline in inflation. ANSWER: b) An increase in the quality or quantity of resources. 5. The law of demand states that, other things being equal: a) As price increases, quantity demanded increases. b) As price decreases, quantity demanded decreases. c) As price increases, quantity demanded decreases. d) Price and quantity demanded are unrelated. ANSWER: c) As price increases, quantity demanded decreases. 6. Which of the following would cause the demand curve for a product to shift to the right? a) A decrease in the price of the product. b) An increase in the price of a substitute good. c) A decrease in consumer income (for a normal good). d) An unfavorable change in consumer tastes. ANSWER: b) An increase in the price of a substitute good. 7. If two goods are complements, an increase in the price of one will lead to: a) An increase in demand for the other. b) A decrease in demand for the other. c) An increase in quantity demanded for the other. d) No change in demand for the other. ANSWER: b) A decrease in demand for the other. 8. The law of supply states that, other things being equal: a) As price increases, quantity supplied increases. b) As price decreases, quantity supplied increases. c) As price increases, supply increases. d) Price and quantity supplied are unrelated. ANSWER: a) As price increases, quantity supplied increases. 9. A technological improvement in the production of smartphones will: a) Increase the supply of smartphones. b) Decrease the supply of smartphones. c) Increase the quantity supplied of smartphones. d) Decrease the demand for smartphones. ANSWER: a) Increase the supply of smartphones. 10. Equilibrium in a market is achieved when: a) Quantity demanded equals quantity supplied. b) The price is at its lowest point. c) Supply equals demand. d) The government sets an effective price ceiling. ANSWER: a) Quantity demanded equals quantity supplied. 11. If a market is in equilibrium and then demand increases, what happens to equilibrium price and quantity? a) Price increases, quantity decreases. b) Price decreases, quantity increases. c) Price and quantity both increase. d) Price and quantity both decrease. ANSWER: c) Price and quantity both increase. 12. A price ceiling set below the equilibrium price will result in: a) A surplus. b) A shortage. c) No change in the market. d) An increase in quality. ANSWER: b) A shortage. 13. Price elasticity of demand measures the: a) Responsiveness of quantity demanded to a change in price. b) Responsiveness of price to a change in demand. c) Slope of the demand curve. d) Responsiveness of quantity supplied to a change in price. ANSWER: a) Responsiveness of quantity demanded to a change in price. 14. If demand is perfectly inelastic, the demand curve is: a) Horizontal. b) Vertical. c) Downward sloping. d) Upward sloping. ANSWER: b) Vertical. 15. If a 10% increase in price leads to a 5% decrease in quantity demanded, demand is: a) Elastic. b) Inelastic. c) Unit elastic. d) Perfectly elastic. ANSWER: b) Inelastic. 16. Total revenue for a seller will increase after a price hike if demand is: a) Elastic. b) Inelastic. c) Unit elastic. d) Perfectly elastic. ANSWER: b) Inelastic. 17. The income elasticity of demand for an inferior good is: a) Positive. b) Negative. c) Zero. d) Greater than one. ANSWER: b) Negative. 18. The cross-price elasticity of demand for substitutes is: a) Positive. b) Negative. c) Zero. d) Infinite. ANSWER: a) Positive. 19. The additional satisfaction gained from consuming one more unit of a good is called: a) Total utility. b) Marginal utility. c) Average utility. d) Budget utility. ANSWER: b) Marginal utility. 20. The law of diminishing marginal utility states that: a) As consumption increases, total utility eventually decreases. b) As consumption increases, the additional utility from each unit decreases. c) Consumers should diversify their consumption. d) Marginal utility is always negative. ANSWER: b) As consumption increases, the additional utility from each unit decreases. 21. A consumer maximizes utility when: a) The marginal utility per dollar is equal for all goods. b) The total utility from all goods is equal. c) The price of all goods is equal. d) The marginal utility of all goods is equal. ANSWER: a) The marginal utility per dollar is equal for all goods. 22. In the short run, at least one input is: a) Variable. b) Fixed. c) Zero. d) Negative. ANSWER: b) Fixed. 23. The marginal product of labor is: a) The total output produced by labor. b) The output produced by the last worker hired. c) The average output per worker. d) The cost of hiring an additional worker. ANSWER: b) The output produced by the last worker hired. 24. The law of diminishing returns occurs when: a) Marginal product becomes negative. b) Marginal product begins to decline. c) Total product begins to decline. d) Average product is maximized. ANSWER: b) Marginal product begins to decline. 25. Fixed costs are: a) Costs that vary with the level of output. b) Costs that are zero when output is zero. c) Costs that do not vary with the level of output. d) The costs of variable inputs. ANSWER: c) Costs that do not vary with the level of output. 26. If total variable cost is rising, then: a) Marginal cost is positive. b) Marginal cost is negative. c) Average fixed cost is rising. d) Total fixed cost is rising. ANSWER: a) Marginal cost is positive. 27. The average total cost curve is typically: a) U-shaped. b) Upward sloping. c) Downward sloping. d) Horizontal. ANSWER: a) U-shaped. 28. Economies of scale occur when: a) Long-run average total cost decreases as output increases. b) Short-run marginal cost decreases. c) Long-run average total cost increases as output increases. d) Management becomes inefficient. ANSWER: a) Long-run average total cost decreases as output increases. 29. A perfectly competitive market is characterized by: a) A few large firms. b) Differentiated products. c) Many buyers and sellers. d) Significant barriers to entry. ANSWER: c) Many buyers and sellers. 30. For a firm in perfect competition, the demand curve it faces is: a) Downward sloping. b) Upward sloping. c) Perfectly elastic (horizontal). d) Perfectly inelastic (vertical). ANSWER: c) Perfectly elastic (horizontal). 31. A perfectly competitive firm maximizes profit by producing where: a) Price equals average total cost (P = ATC). b) Price equals marginal cost (P = MC). c) Total revenue equals total cost. d) Marginal revenue is minimized. ANSWER: b) Price equals marginal cost (P = MC). 32. In the long run, in a perfectly competitive market, firms will earn: a) Positive economic profit. b) Negative economic profit. c) Zero economic profit. d) Super-normal profit. ANSWER: c) Zero economic profit. 33. A pure monopoly exists when: a) There are many firms selling similar products. b) One firm is the sole seller of a product with no close substitutes. c) There are two firms dominating a market. d) The government regulates an industry. ANSWER: b) One firm is the sole seller of a product with no close substitutes. 34. A monopolist maximizes profit by producing where: a) Price equals marginal cost. b) Marginal revenue equals marginal cost. c) Average revenue equals average cost. d) Price equals average total cost. ANSWER: b) Marginal revenue equals marginal cost. 35. Compared to a perfectly competitive market, a monopoly will produce ______ output and charge a ______ price. a) Less; higher b) More; higher c) Less; lower d) More; lower ANSWER: a) Less; higher 36. A market structure with a few large interdependent firms is called: a) Perfect competition. b) Monopolistic competition. c) Oligopoly. d) Monopoly. ANSWER: c) Oligopoly. 37. Product differentiation is a key feature of: a) Perfect competition. b) Monopolistic competition. c) Oligopoly. d) Pure monopoly. ANSWER: b) Monopolistic competition.