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ECO 402 Midterm and Final Exam Practice 5 Sets

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ECO 402 Midterm and Final Exam Practice 5 Sets

ECO 402 Midterm and Final Exam Practice 5 Sets

ECO402

(300+Questions and Answers)

1.    The “perfect information” assumption of perfect competition includes all of the following except one. Which one?

  1. Consumers know their preferences.
  2. Consumers know their income levels.
  3. Consumers know the prices available.
  4. Consumers can anticipate price changes.

2.    Incremental cost is the same concept as ______________ cost.

  1. Average
  2. Marginal
  3. Fixed
  4. Variable

3.    A production function assumes a given:

  1. Technology.
  2. Set of input prices.
  3. Ratio of input prices.
  4. Amount of output.

4.    Assume that beer is an inferior good. If the price of beer falls, then the substitution effect results in the person buying ______ of the good and the income effect results in the person buying ______ of the good.

  1. More, more
  2. More, less
  3. Less, more
  4. Less, less

5.    Producer surplus for the whole market can be thought of as:

  1. Total profit.
  2. Variable operating profit plus factor rents.
  3. Total profit minus factor rents earned by lower cost firms.
  4. Total profit plus factor rents earned by lower cost firms.

6.    Baba Burgers has discovered there are economies of scope available to the restaurant. Which is most likely to be a response to this discovery?

  1. Baba expands burger production, focusing on that one good.
  2. Baba contracts burger production.
  3. Baba adds grilled chicken sandwiches to the menu.
  4. Baba cuts back on the diversity of the menu.

7.    The endpoints (horizontal and vertical intercepts) of the budget line:

  1. Measure its slope.
  2. Measure the rate at which one good can be substituted for another.
  3. Measure the rate at which a consumer is willing to trade one good for another.
  4. Represent the quantity of each good that could be purchased if all of the budget were allocated to that good.

8.    The “perfect information” assumption of perfect competition includes all of the following except one. Which one?

  1. Consumers know their preferences.
  2. Consumers know their income levels.
  3. Consumers know the prices available.
  4. Consumers can anticipate price changes.

9.    The difference between the economic and accounting costs of a firm are:

  1. The accountant’s fees.
  2. The corporate taxes on profits.
  3. The opportunity costs of the factors of production that the firm owns.
  4. The sunk costs incurred by the firm.

10. Plastic and steel are substitutes in the production of body panels for certain automobiles. If the price of plastic increases, with other things remaining the same, we would expect:

  1. The price of steel to fall.
  2. The demand curve for steel to shift to the right.
  3. The demand curve for plastic to shift to the left.
  4. The demand curve for steel to shift to the left.

11. Cost-output elasticity can be written and calculated as:

  1. MC/AC.
  2. AC/MC
  3. (AC)(MC)
  4. (AC)2(MC)

12. Fixed costs are fixed with respect to changes in:

  1. Output.
  2. Capital expenditure.
  3. Wages.
  4. Time.

13. The presence of a learning curve may induce a decision maker in a startup firm to choose:

  1. Low levels of output to exploit economies of scale.
  2. High levels of output to exploit economies of scale.
  3. Low levels of output to shift the average cost curve down over time.
  4. High levels of output to shift the average cost curve down over time.

14. Which of the following is true regarding the relationship between returns to scale and economies of scope?

  1. A firm experiencing economies of scope must also experience increasing returns to scale.
  2. Economies of scale and economies of scope must occur together.
  3. A firm experiencing increasing returns to scale must also experience economies of scope.
  4. There is no definite relationship between returns to scale and economies of scope.

15. John would prefer a certain income of $20,000 to a gamble with a 0.5 probability of $10,000 and a 0.5 probability of $30,000. Based on this information:

  1. We can infer that Salman is risk neutral.
  2. We can infer that Salman is risk averse.
  3. We can infer that John is risk loving.
  4. We cannot infer Salman‘s risk preferences.

16. When the average product is decreasing, marginal product:

  1. Equals average product.
  2. Is increasing.
  3. Exceeds average product.
  4. Is less than average product

17. Government intervention can increase total welfare when:

  1. There are costs or benefits that are external to the market.
  2. Consumers do not have perfect information about product quality.
  3. A high price makes the product unaffordable for most consumers.
  4. There are costs or benefits that are external to the market and consumers do not have perfect information about product quality.

18. If a competitive firm’s marginal cost curve is U-shaped then:

  1. Its short run supply curve is U-shaped too.
  2. Its short run supply curve is the downward-sloping portion of the marginal cost curve.
  3. Its short run supply curve is the upward-sloping portion of the marginal cost curve.
  4. Its short run supply curve is the upward-sloping portion of the marginal cost curve that lies above the short run average variable cost curve.

19. Economies of scope refer to:

  1. Changes in technology.
  2. The very long run.
  3. Multiproduct firms.
  4. Single product firms that utilize multiple plants.

20. Although there are many reasons why a market can be non-competitive, the principal economic difference between a competitive and a non-competitive market is:

  1. The extent to which any firm can influence the price of the product.
  2. The size of the firms in the market.
  3. The annual sales made by the largest firms in the market.
  4. The presence of government intervention.

21. Indifference curves that are convex to the origin reflect:

  1. An increasing marginal rate of substitution
  2. A decreasing marginal rate of substitution.
  3. A constant marginal rate of substitution.
  4. A marginal rate of substitution that first decreases, then increases.

22. The endpoints (horizontal and vertical intercepts) of the budget line:

  1. Measure its slope.
  2. Measure the rate at which one good can be substituted for another.
  3. Measure the rate at which a consumer is willing to trade one good for another.
  4. Represent the quantity of each good that could be purchased if all of the budget were allocated to that good.

23. Consider the following statements when answering this question:

I. “In the long run equilibrium of a perfectly competitive market, a firm’s producer surplus equals the sum of the economic rents earned on its inputs to production.”

II. “In the long run equilibrium of a perfectly competitive market, the amount of economic profit earned can differ across firms, but not the amount of producer surplus.”

  1. I and II are true.
  2. I is true, and II is false.
  3. I is false, and II is true.
  4. I and II are false.

24. Suppose that the prices of good A and good B were to suddenly double. If good A is plotted along the horizontal axis:

  1. The budget line will become steeper.
  2. The budget line will become flatter.
  3. The slope of the budget line will not change.
  4. The slope of the budget line will change, but in an indeterminate way.

25. A country’s government would like to raise the price of one its most important agricultural crops, coffee beans. Which of the following government programs will result in higher prices for coffee beans?

Select correct option:

  1. An import quota on coffee beans.
  2. An acreage limitation program which provides coffee bean farmers financial incentives to leave some of their acreage idle.
  3. An import tariff on coffee beans.
  4. All of the given options.

26. Which of the following is NOT a generally accepted measure of the riskiness of an investment?

Select correct option:

  1. Standard deviation.
  2. Expected value.
  3. Variance.
  4. None of the given options.

27. Which of the following is a positive statement?

Select correct option:

  1. When the price of a good goes up, consumers buy less of it.
  2. When the price of a good goes up, firms produce more of it.
  3. When the Federal government sells bonds, interest rates rise and private investment is reduced.
  4. All of the given options.

28. Karen knows average total cost and average variable cost for a given level of output. Which of the following costs can she not determine given this information?

Select correct option:

  1. Average fixed cost
  2. Fixed cost
  3. Variable cost
  4. Karen can determine all of the above costs given the information provided.

29. Which of the following is NOT true about price floors?

Select correct option:

  1. Consumer surplus is always lower than it would be in the competitive equilibrium.
  2. Producer surplus could be lower, higher, or the same as it would be in competitive equilibrium.
  3. Producer surplus could be negative as the result of a price floor.
  4. Producers will often respond to a price floor by cutting production to the point at which price equals marginal cost.

30. For an inferior good:

Select correct option:

  1. The price elasticity of demand is negative; the income elasticity of demand is negative.
  2. The price elasticity of demand is positive; the income elasticity of demand is negative.
  3. The price elasticity of demand is negative; the income elasticity of demand is positive.
  4. The price elasticity of demand is positive; the income elasticity of demand is positive.

31. The short run is:

Select correct option:

  1. Less than a year.
  2. Three years.
  3. However long it takes to produce the planned output.
  4. A time period in which at least one input is fixed.

32. Which of the following is NOT an assumption regarding people’s preferences in the theory of consumer behavior?

Select correct option:

  1. Preferences are complete.
  2. Preferences are transitive.
  3. Consumers prefer more of a good to less.
  4. None of the given options.

33. In 1970s the federal government imposed price controls on natural gas. Which of the following statements is true?

Select correct option:

  1. These price controls caused a chronic excess supply of natural gas.
  2. Consumers gained from the price controls, because consumer surplus was larger than it would have been under free market equilibrium.
  3. Producers gained from the price controls because producer surplus was larger than it would have been under free market equilibrium.
  4. This episode of price controls was unusual, because it resulted in no deadweight loss to society. (Not sure)

34. A production function defines the output that can be produced:

Select correct option:

  1. At the lowest cost, given the inputs available.
  2. With the fewest amount of inputs.
  3. If the firm is technically efficient.
  4. In a given time period if no additional inputs are hired.

35. When a product transformation curve is bowed outward, there are _______________ in production.

  1. Economies of scope
  2. Economies of scale
  3. Diseconomies of scope
  4. Diseconomies of scale

36. The marginal rate of technical substitution is equal to the:

  1. Slope of the total product curve.
  2. Change in output minus the change in labor.
  3. Change in output divided by the change in labor.
  4. Ratio of the marginal products of the inputs.

37. Consider two goods X and Y available for consumption. Assume that the price of X changes while the price of Y remains fixed. For these two goods, the price-consumption curve illustrates the:

  1. Relationship between the price of X and consumption of Y.
  2. Utility-maximizing combinations of X and Y for each price of X.
  3. Relationship between the price of Y and the consumption of X.
  4. Utility-maximizing combinations of X and Y for each quantity of X.

38. Assume that two investment opportunities have identical expected values of $100,000. Investment A has a variance of 25,000, while investment B’s variance is 10,000. We would expect most investors (who dislike risk) to prefer investment opportunity:

  1. because it has less risk.
  2. because it provides higher potential earnings.
  3. because it has less risk.
  4. because of its higher potential earnings.

39. The law of diminishing returns refers to diminishing:

  1. Total returns.
  2. Marginal returns.
  3. Average returns.
  4. All of the given option

40. If the isoquants are straight lines, then:

  1. Inputs have fixed costs at all use rates.
  2. The marginal rate of technical substitution of inputs is constant.
  3. Only one combination of inputs is possible.
  4. There are constant returns to scale.

41. The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the variable cost?

  1. 200
  2. 5Q
  3. 5
  4. 5 + (200/Q)

42. The demand curve facing a perfectly competitive firm is:

  1. The same as the market demand curve.
  2. Downward-sloping and less flat than the market demand curve.
  3. Perfectly horizontal.
  4. Perfectly vertical.

43. The cost-output elasticity is used to measure:

  1. Economies of scope.
  2. Economies of scale.
  3. The curvature in the fixed cost curve.
  4. Steepness of the production function.

44. The budget line in portfolio analysis shows that:

  1. The expected return on a portfolio increases as the standard deviation of that return increases.
  2. The expected return on a portfolio increases as the standard deviation of that return decreases.
  3. The expected return on a portfolio is constant.
  4. The standard deviation of a portfolio is constant.

45. A Rolling Stones song goes: “You can’t always get what you want.” This echoes an important theme from microeconomics. Which of the following statements is the best example of this theme?

  1. Consumers must make the best purchasing decisions they can, given their limited incomes.
  2. Workers do not have as much leisure as they would like, given their wages and working conditions.
  3. Workers in planned economies, such as North Korea, do not have much choice over jobs.
  4. Firms in market economies have limited financial resources.

46. Compared to a tariff, an import quota, which restricts imports to the same amount as the tariff, will leave the country as a whole:

  1. Worse off than a comparable tariff.
  2. Not as bad off as a comparable tariff.
  3. About the same as a comparable tariff.
  4. Any of the above can be true.

47. Any combination of products inside the production possibility frontier is:

  1. Allocatively inefficient
  2. Consumer inefficient
  3. Productively inefficient
  4. None of the given option.

48. In the long run, which of the following is considered a variable cost?

  1. Expenditures for wages.
  2. Expenditures for raw materials.
  3. Expenditures for capital machinery and equipment.
  4. All of the given options.

49. Two firms, each producing different goods, can achieve a greater output than one firm producing both goods with the same inputs. We can conclude that the production process involves:

  1. Diseconomies of scope.
  2. Economies of scale.
  3. Decreasing returns to scale.
  4. Increasing returns to scale

50. The marginal product of an input is

  1. Total product divided by the amount of the input used to produce this amount of output.
  2. The addition to total output that adds nothing to profit.
  3. The addition to total output due to the addition of one unit of all other inputs.
  4. The addition to total output due to the addition of the last unit of an input, holding all other inputs constant.

51. Which of the following would cause a shift to the right of the supply curve for gasoline?

I. A large increase in the price of public transportation.

II. A large decrease in the price of automobiles.

III. A large reduction in the costs of producing gasoline.

Select correct option:

  1. I only.
  2. II only.
  3. III only.
  4. II and III only.

52. Incremental cost is the same concept as ______________ cost.

  1. Average
  2. Marginal
  3. Fixed
  4. Variable

53. Which of the following assets is almost riskless?

  1. Common stocks
  2. Long-term corporate bonds
  3. U.S. treasury bills
  4. Long-term government bonds

54. Consider the following statements when answering this question: I. “In the long run, if a firm wants to remain in a competitive industry then it needs to own resources that are in limited supply.” II. “In this competitive market our firm’s long run survival depends only on the efficiency of our production process.”

  1. I and II are true.
  2. I is true, and II is false.
  3. I is false, and II is true.
  4. I and II are false.

55. Above-normal profits are guaranteed for:

  1. A monopoly, but not a perfectly competitive firm.
  2. A perfectly competitive firm, but not a monopoly.
  3. Both a monopoly and a perfectly competitive firm.
  4. Neither a monopoly nor a perfectly competitive firm.

56. The benefit of a subsidy accrues mostly to consumers:

  1. In every instance.
  2. If Ed/Es is large.
  3. If Ed/Es is small.
  4. If Ed and Es are equal.

57. The cost-output elasticity is used to measure:

  1. Economies of scope.
  2. Economies of scale.
  3. The curvature in the fixed cost curve.
  4. Steepness of the production function.

58. A firm maximizes profit by operating at the level of output where:

  1. Average revenue equals average cost.
  2. Average revenue equals average variable cost.
  3. Total costs are minimized.
  4. Marginal revenue equals marginal cost.

59. A firm’s producer surplus equals its economic profit when:

  1. Average variable costs are minimized.
  2. Marginal costs equal marginal revenue.
  3. Fixed costs are zero.
  4. Total revenues equal total variable costs.

60. The price of good A goes up. As a result the demand for good B shifts to the left. From this we can infer that

  1. Good A is used to produce good B.
  2. Good B is used to produce good A.
  3. Goods A and B are substitutes.
  4. Goods A and B are complements.

61. Deadweight loss refers to:

  1. Losses in consumer surplus associated with excess government regulations.
  2. Situations where market prices fail to capture all of the costs and benefits of a policy.
  3. Net losses in total surplus.
  4. Losses due to the policies of labor unions.

62. Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the vertical axis). If the wage rate is $20 per hour and the rental cost of capital is $25 per hour, the slope of the isocost curve will be:

  1. 500
  2. 25/500
  3. – 4/5
  4. 25/20 or ¼

63. Which of the following is true regarding income along a price consumption curve?

Select correct option:

  1. Income is increasing.
  2. Income is decreasing.
  3. Income is constant.
  4. The level of income depends on the level of utility.

64. Good A is a normal good. The demand curve for good A:

  1. Slopes downward.
  2. Usually slopes downward, but could slope upward.
  3. Slopes upward.
  4. Usually slopes upward, but could slope downward.

65. The function which shows combinations of inputs that yield the same output is called a(n):

  1. Isoquant curve.
  2. Isocost curve.
  3. Production function.
  4. Production possibilities frontier.

66. The price elasticity of demand for a demand curve that has a zero slope is:

  1. Zero.
  2. One.
  3. Negative but approaches zero as consumption increases.
  4. Infinity.

67. The concept of a risk premium applies to a person that is:

  1. Risk averse.
  2. Risk neutral.
  3. Risk loving.
  4. All of the given options.

68. Price ceilings:

  1. Always increase consumer surplus.
  2. May decrease consumer surplus if demand is sufficiently elastic.
  3. May decrease consumer surplus if demand is sufficiently inelastic.
  4. Always decrease consumer surplus.

69. The demand for books is:

Qd = 120 – P

The supply of books is: Qs = 5P

Refer to the above scenario, if

P=$15,

Which of the following is true?

  1. There is a surplus equal to 30.
  2. There is a shortage equal to 30.
  3. There is a surplus, but it is impossible to determine how large.
  4. There is a shortage, but it is impossible to determine how large

70. A firm maximizes profit by operating at the level of output where:

Average revenue equals average cost.

Average revenue equals average variable cost.

Total costs are minimized.

Marginal revenue equals marginal cost.

71. If Px = Py, then when the consumer maximizes utility:

  1. X must equal Y.
  2. MU(X) must equal MU(Y).
  3. MU(X) may equal MU(Y), but it is not necessarily so.
  4. X and Y must be substitutes.

72. An investment opportunity is a sure thing; it will pay off $100 regardless of which of the three possible outcomes comes to pass. The variance of this investment opportunity:

  1. Is 0.
  2. Is 1.
  3. Is 2.
  4. Is -1.

73. If X and Y are perfect substitutes, which of the following assumptions about indifference curves is not satisfied?

  1. Completeness.
  2. Transitivity.
  3. More is preferred to less.
  4. Diminishing marginal rate of substitution.

74. If the market price for a competitive firm’s output doubles then:

  1. The profit maximizing output will double.
  2. The marginal revenue doubles.
  3. At the new profit maximizing output, price has increased more than marginal cost.
  4. At the new profit maximizing output, price has risen more than marginal revenue.

75. The long run supply curve in a constant-cost industry is linear and:

  1. Upward-sloping.
  2. Downward-sloping.
  3. Horizontal.
  4. Vertical.

76. Marginal revenue, graphically, is:

  1. The slope of a line from the origin to a point on the total revenue curve.
  2. The slope of a line from the origin to the end of the total revenue curve.
  3. The slope of the total revenue curve at a given point.
  4. The vertical intercept of a line tangent to the total revenue curve at a given point.

77. Elasticity measures:

The slope of a demand curve.

The inverse of the slope of a demand curve.

The percentage change in one variable in response to a one percent increase in another variable.

Sensitivity of price to a change in quantity.

Which of the following is a positive statement?

Select correct option:

  1. The minimum wage should not be increased, because to do so would increase unemployment.
  2. Smoking should be restricted on all airline flights.
  3. All automobile passengers should be required to wear seatbelts in order to protect them against injury.
  4. None of the given options.

78. The “perfect information” assumption of perfect competition includes all of the following except one. Which one?

Select correct option:

  1. Consumers know their preferences.
  2. Consumers know their income levels.
  3. Consumers know the prices available.
  4. Consumers can anticipate price changes.

79. In 1970s the federal government imposed price controls on natural gas. Which of the following statements is true?

Select correct option:

  1. These price controls caused a chronic excess supply of natural gas.
  2. Consumers gained from the price controls, because consumer surplus was larger than it would have been under free market equilibrium.
  3. Producers gained from the price controls because producer surplus was larger than it would have been under free market equilibrium.
  4. This episode of price controls was unusual, because it resulted in no deadweight loss to society.

80. Our economy is characterized by:

Select correct option:

  1. Unlimited wants and needs
  2. Unlimited material resources
  3. No energy resources
  4. Abundant productive labor

81. A Rolling Stones song goes: “You can’t always get what you want.” This echoes an important theme from microeconomics. Which of the following statements is the best example of this theme?

Select correct option:

  1. Consumers must make the best purchasing decisions they can, given their limited incomes.
  2. Workers do not have as much leisure as they would like, given their wages and working conditions.
  3. Workers in planned economies, such as North Korea, do not have much choice over jobs.
  4. Firms in market economies have limited financial resources.

82. The slope of the total product curve is the:

Select correct option:

  1. Average product.
  2. Slope of a line from the origin to the point.
  3. Marginal product.
  4. Marginal rate of technical substitution.

83. A firm never operates:

Select correct option:

  1. At the minimum of its ATC curve.
  2. At the minimum of its AVC curve.
  3. On the downward-sloping portion of its ATC curve.
  4. On the downward-sloping portion of its AVC curve.

84. Indifference curves that are convex to the origin reflect:

Select correct option:

  1. An increasing marginal rate of substitution.
  2. A decreasing marginal rate of substitution.
  3. A constant marginal rate of substitution.
  4. A marginal rate of substitution that first decreases, then increases.

85. What does it mean when the CPI is higher this year than last?

Select correct option:

  1. The rate of inflation has increased.
  2. There has been inflation since last year.
  3. Real prices have increased.
  4. Real prices have decreased.

86. The presence of a learning curve may induce a decision maker in a startup firm to choose:

Select correct option:

  1. Low levels of output to exploit economies of scale.
  2. High levels of output to exploit economies of scale.
  3. Low levels of output to shift the average cost curve down over time.
  4. High levels of output to shift the average cost curve down over time.

87. Assume that beer is an inferior good. If the price of beer falls, then the substitution effect results in the person buying ____ of the good and the income effect results in the person buying ____ of the good.

Select correct option:

  1. More, more
  2. More, less
  3. Less, more
  4. Less, less

88. The change in the price of one good has no effect on the quantity demanded of another good. These goods are:

Select correct option:

  1. Complements.
  2. Substitutes.
  3. Both inferior.
  4. None of the given options.

89. If indifference curves cross, then: Figure Based on figure given above, it can be inferred that:

Select correct option:

  1. The assumption of a diminishing marginal rate of substitution is violated.
  2. The assumption of transitivity is violated.
  3. The assumption of completeness is violated.
  4. Consumers minimize their satisfaction.

90. Prospective sunk costs:

Select correct option:

  1. Are relevant to economic decision-making.
  2. Are considered as investment decisions.
  3. Rise as output rises.
  4. Do not occur when output equals zero.

91. The variance of an investment opportunity:

Select correct option:

  1. Cannot be negative.
  2. Has the same unit of measure as the variable from which it is derived.
  3. Is a measure of central tendency.
  4. Is unrelated to the standard deviation.

92. The shutdown decision can be restated in terms of producer surplus by saying that a firm should produce in the short run as long as:

  1. Revenue exceeds producer surplus.
  2. Producer surplus is positive.
  3. Producer surplus exceeds fixed cost.
  4. Producer surplus exceeds variable cos

93. In an unregulated, competitive market consumer surplus exists because some:

  1. Sellers are willing to take a lower price than the equilibrium price.
  2. Consumers are willing to pay more than the equilibrium price.
  3. Sellers will only sell at prices above equilibrium price (or actual price).
  4. Consumers are willing to make purchases only if the price is below the actual price.

94. Rabia and Samina are shopping for new cars (one each). Rabia expects to pay $15,000 with 1/5 probability and $20,000 with 4/5 probability. Samina expects to pay $12,000 with 1/4 probability and $20,000 with 3/4 probability. Refer to the above scenario, Rabia’s expected expense for his car is:

  1. $20,000.
  2. $19,000.
  3. $18,000.
  4. $17,500.

95. An individual consumes only two goods, X and Y. Which of the following expressions represents the utility maximizing market basket?

  1. MRSxy is at a maximum.
  2. Px/Py = money income.
  3. MRSxy = money income.
  4. MRSxy = Px/Py.

96. When the price of wood (which is an input in the production of furniture) falls, the consumer surplus associated with the consumption of furniture:

  1. Increases.
  2. Decreases.
  3. Does not change.
  4. Insufficient information for judgment

97. The profit maximizing rule MC = MR is followed by:

  1. A monopoly, but not a perfectly competitive firm.
  2. A perfectly competitive firm, but not a monopoly.
  3. Both a monopoly and a perfectly competitive firm.
  4. Neither a monopoly nor a perfectly competitive firm.

98. To find the profit maximizing level of output, a firm finds the output level where:

  1. Price equals marginal cost.
  2. Marginal revenue and average total cost.
  3. Price equals marginal revenue.
  4. None of the given options.

99. Which of the following statements is true regarding the differences between economic and accounting costs?

  1. Accounting costs include all implicit and explicit costs.
  2. Economic costs include implied costs only.
  3. Accountants consider only implicit costs when calculating costs.
  4. Accounting costs include only explicit costs.

100. Which of the following is true concerning the income effect of a decrease in price?

  1. It will lead to an increase in consumption only for a normal good.
  2. It always will lead to an increase in consumption.
  3. It will lead to an increase in consumption only for an inferior good.
  4. It will lead to an increase in consumption only for a Giffen good.

101. Economies of scope refer to:

  1. Changes in technology.
  2. The very long run.
  3. Multiproduct firms.
  4. Single product firms that utilize multiple plants.

ECO 402 Solved MCQs

ECO 402 Mid and Final Exam Practice set 2

1. What do economists mean when they state that a good is scarce?

  1. There is a shortage or insufficient supply of the good at the existing price.
  2. It is impossible to expand the availability of the good.
  3. People will want to buy more of the good regardless of price.
  4. The amount of the good that people would like tohave exceeds the supply that is freely available from nature.

2. Economic choice and competitive behavior are the result of

  1. basic human greed.
  2. poverty.
  3. private ownership of resources.
  4. scarcity.

3. Rationing is

  1. the allocation of a limited supply of a good or resource among users who would like to have more of it.
  2. a function that can only be performed by market prices.
  3. a  function  that  is  unnecessary  except  in  cases  where  markets  are  used  to allocate goods and resources.
  4. essential only when the price of a product is set above market equilibrium.

4. The  expression,  “There’s  no  such  thing  as  a  free  lunch”  implies that

  1. everyone has to pay for his own lunch.
  2. the person consuming a good must always pay for it.
  3. costs  are  incurred  when  resources  are  used  to  produce  goods  and services.
  4. no one has time for a good lunch anymore.

5. Which one of the following states a central element of the economic way of thinking?

  1. Scarce goods are priceless.
  2. Incentives  matter–if  the  personal  cost  of  a  choice  increases,  individuals  will  be less likely to choose it.
  3. The realism of the assumptions is the best test of an economic theory.
  4. When deciding how to allocate time, the concept of opportunity cost is meaningless.

6. Which of the following is most clearly consistent with the basic postulate of economics with regard to human decision making?

  1. People will never choose work over leisure.
  2. People will buy less gas if the gasoline tax decreases 20 cents per gallon.
  3. People will buy more orange juice at $2 per gallon than at $1 per gallon.
  4. People will consume less beef if the price increases from $1 to $2 per pound.

7.  Which one of the following is a positive economic statement?

  1. An increase in the price of butter causes consumers to buy less butter.
  2. Social conscience demands that we increase the minimum wage.
  3. Taxes should be raised to halt inflation.
  4. The sales tax on food should be repealed.

8. The basic difference between macroeconomics and microeconomics is that

  1. macroeconomics looks at the forest (aggregate markets), while microeconomics is concerned with the individual trees (subcomponents).
  2. macroeconomics  is  concerned  with  policy  decisions,  while  microeconomics applies only to theory.
  3. microeconomics  is  concerned  with  the  forest  (aggregate  markets), while macroeconomics is concerned with the trees (components).
  4. opportunity cost is applicable to macroeconomics, and the fallacy of composition relates to microeconomics.

9. Economic analysis assumes that

  1. for the most part, individuals act out of selfish motives, and it is realistic to assume this is always true.
  2. although  individuals  are  at  times  selfish  and  at  times  altruistic,  only  their selfish actions may be predicted.
  3. people are basically humanitarian and their actions are therefore difficult to predict.
  4. changes in the personal benefits and costs associated with an activity will exert a predictable influence on human behavior.

10. Adam Smith believed that if people were free to pursue their own interests, then

  1. greed and cheating would prevail in the market.
  2. less would be produced than if altruism were our guiding principle.
  3. they would generally be encouraged to produce goods and services that others valued highly (relative to their costs).
  4. the public interest would be best served, but the interests of employers would be hurt.

11. Which of the following sayings best reflects the concept of opportunity cost?

  1. “You can’t teach an old dog new tricks.”
  2. “Time is money.”
  3. “I have a baker’s dozen.”
  4. “There’s no business like show business.”

12. If an economy is operating at a point inside the production possibilities curve,

  1. its resources are being wasted.
  2. the curve will begin to shift inward.
  3. the curve will begin to shift outward.
  4. This is a trick question because an economy cannot produce at a point inside the curve.

13. The  primary  benefit  that  results  when  a  nation  employs  its  resources  in accordance with the principle of comparative advantage is

  1. an expansion in capital investment resulting from a reallocation of resources away from consumption.
  2. a larger output resulting from a more efficient use of resources.
  3. greater equality of income resulting from an increase in the number of workers.
  4. an increase in the profitability of business enterprises resulting from an increase in capital formation.

14. The price of an airline ticket from Denver to Washington, D.C., is $600. A bus ticket is $150. Traveling by plane takes six hours, compared with 36 hours by bus.

Other things constant, an individual would gain by choosing air travel if, and only if, his time were valued at more than

  1. $6 per hour.
  2. $8 per hour.
  3. $10 per hour.
  4. $15 per hour.

15.  Does voluntary exchange create wealth (value)?

  1. No, exchange does not expand output.
  2. No, if one person gains, the other party must lose an equal amount.
  3. Uncertain,  it  does  when  it  results  in  the  creation  of  additional  goods  and services; otherwise it does not.
  4. Yes, trade generally permits the trading partners to gain more of what they value; this is why they agree to the terms of the exchange.

16. “Now that Blake paints the broad surfaces and I do the trim work, we can paint a house  in  three-fourths  the  time  that  it  took  for  each  of  us  to  do  both.”  This statement most clearly reflects http://vustudents.ning.com

  1. the importance of secondary effects.
  2. the fallacy of composition.
  3. the law of comparative advantage.
  4. behavior inconsistent with economizing.

17.  Which of the following will most likely occur under a system of clearly defined and enforced private property rights?

  1. Resource  owners  will  fail  to  conserve  vital  resources,  even  if  they  expect their scarcity to increase.
  2. Resource owners will ignore the wishes of others, including others who would like to use the resource that is privately owned.
  3. Resource owners will fail to consider the wishes of potential future buyers when they decide how to employ privately owned resources.
  4. Resource owners will gain by discovering and employing their resources in ways that are highly valued by others.

18. Three basic decisions must be made by all economies. What are they?

  1. how much will be produced; when it will be produced; how much it will cost
  2. what  the  price  of  each  good  will  be;  who will  produce  each  good; who will consume each good
  3. what will be produced; how goods will be produced;  for whom goods will be produced
  4. how the opportunity cost principle will be applied; if and how the law of comparative advantage will be utilized; whether the production possibilities constraint will apply

19. If  a  firm  or  a  nation  desires  to  maximize  its  output,  each  productive assignment should be carried out by those persons who

  1. have the highest opportunity cost.
  2. have a comparative advantage in the productive activity.
  3. can complete the productive activity most rapidly.
  4. least enjoy performing the productive activity.

20.  “The economic wealth of this country is primarily the result of the profit made by some individuals at the expense of others.” The person who made this statement

ECO 402 Mid and Final Exam Practice set 3

ECO 402 Mid and Final Exam Practice set 4

ECO 402 Mid and Final Exam Practice set 5