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ECO 365 Week 5 Final Exam (Latest - August
2015)
1). The DeBeers company is a profit-maximizing monopolist that exercises monopoly power
in the distribution of diamonds. If the company earns positive economic profits this year,
the price of diamonds will:
Exceed the marginal cost of diamonds but equal to the average total cost of diamonds.
Exceed both the marginal cost and the average total cost of diamonds.
Be equal to the marginal cost of diamonds.
Be equal to the average total cost of diamonds.

2). Using 100 workers and 10 machines, a firm can produce 10,000 units of output; using
250 workers and 25 machines, the firm produces 21,000 units of output. These facts are
best explained by:
Economies of scope
Diseconomies of scale
Diminishing marginal productivity
Economies of scale
3). Suppose that college tuition is higher this year than last and that more students are
enrolled in college this year than last year. Based on this information, we can best conclude
that:
despite the increase in price, quantity demanded rose due to some other factors changing.
the demand for a college education is positively sloped.
the law of demand is invalid.
this situation has nothing to do with the law of demand.
4). A monopoly firm is different from a perfectly competitive firm in that:
A monopolist’s demand curve is perfectly inelastic whereas a perfectly competitive
firm’s demand curve is perfectly elastic.
A competitive firm has a u-shaped average cost curve whereas a monopolist does not.
A monopolist can influence market price whereas a perfectly competitive firm cannot.
There are many substitutes for a monopolist’s product whereas there are no substitutes
for a competitive firm’s product.
5). The best example of positive externality is:
Alcoholic beverages
Pollution
Education
Roller coaster rides
6). The theory that quantity supplied and price are positively related, other things constant,
is referred to as the law of:

supply
profit maximization
opportunity cost
demand
7). A reduction in the supply of labor will cause wages to:
Decrease and employment to decrease.
Increase and employment to increase.
Decrease and employment to increase.
Increase and employment to decrease.
8). Other things held constant in a competitive labor market, if workers negotiate a
contract in which the employer agrees to pay an hourly of $17.85 while the market
equilibrium hour rate is $16.50, the:
Quantity of workers demanded will exceed the quantity of workers supplied.
Quantity of workers supplied will exceed the quantity of workers demanded.
Supply of labor will decrease until the equilibrium wage rate is $17.85.
Demand for labor will increase until the equilibrium wage rate is $17.85.
9). Alex is playing his music at full volume in his dorm room. The other people living on his
floor found this to be a nuisance, but Alex doesn’t care. Alex’s music playing is an example
of:
Pareto externality
Positive externality
Negative externality
Normative externality
10). Oligopoly is probably the best market for technological change because:
The typical oligopoly has the funds to carry out research and development and believe
that its competitors are innovating, which motivates it to conduct research and
development.
The typical oligopoly lacks the funds to carry out research and development and therefore
will use basic research from universities.

Research and development occurs only if government subsidizes
such activity, and government tends to subsidize oligopolies.
The typical oligopoly keeps price very close to average total cost because it fears the
entry of new rivals if its profits are excessively high.
11). A perfectly competitive firm facing a price of $50 decides to produce 500 widgets. Its
marginal cost of producing the last widget is $50. If the firm’s goal is to maximize profit, it
should:
Produce more widgets
Produce fewer widgets
Continue producing 500 widgets
Shut down
12). Graphically, a change in price causes:
the demand curve to shift.
both supply and demand to shift.
a movement along a given supply curve, not a shift.
the supply curve to shift.
13). In 1997, the federal government reinstated a 10 percent excise tax on airline tickets.
The industry tried to pass on the full 10 percent ticket tax to consumers but was able to
boost fares by only 4 percent. From this you can conclude that the:
Supply of airline tickets is perfectly inelastic.
Supply elasticity of airline tickets is less than infinity.
Demand elasticity for airline tickets is greater than zero in absolute value.
Demand for airline tickets is perfectly inelastic.
14). In 2011, the Department of Justice sued AT&T to block its merger with the cell phone
service provider T-Mobile. To defend itself against the charge, AT&T argued that the:
Combined company could raise prices, allowing it to survive in a rapidly changing
market.
Government had no authority to block mergers in the telephone industry.
Government had guaranteed it exclusive control of cell phone service.
Merger would improve and expand cellular service to consumers.

15). The law of diminishing marginal productivity implies that the marginal product of a
variable input:
Never declines
Always declines
Is constant
Eventually declines
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Knowledge Check | ECO 365 Week 5 Final Exam
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