Final Exam Principles of Economics & Business 1, 24 October 2023, 9:00-11:00 hours
The following 40 multiple-choice questions each have four answer options, of which only one
is the correct one.
1. What does Keynes identify as the primary driver for increased leisure time in the future?
a) Technological advancements and increased productivity. (Correct)
b) Reduced interest in work and career pursuits.
c) Government-mandated shorter work hours.
d) Cultural shifts towards leisure-oriented societies.
2. In a liberalized market for marijuana, the economic profits of growers should be expected
to converge to zero if, …
a) … there are economies of scale in marijuana growing.
b) … the legality of consumption is not certain, since there remain jurisdictions in which
marijuana production and/or consumption is illegal.
c) … marijuana is a homogenous product and there will be entry and exit in growing.
(Correct)
d) … accounting profits are positive, due to the special nature of the industry causing high
transaction costs for growers.
3. A high-end hifi company sells stereo equipment and speakers separately as complements.
Due to chip shortage, the stereo tower price increased. What happens to the price of
speakers?
a) The price increases.
b) The price decreases. (Correct)
c) The price elasticity increases.
d) The price elasticity decreases.
4. Economists argue some inflation is useful, and Central Banks have a positive inflation
target of 2-3%. What is NOT an argument for this?
a) Inflation decreases the real interest rate, so that policy does not need to decrease interest
rates below zero in order to stimulate the economy.
b) Having some inflation counters the downward rigidity of prices.
c) A low level of inflation redistributes wealth from borrowers to lenders. (Correct)
d) Inflation does not need to affect the relative prices.
5. Doris runs a hair salon from her own store. She pays $500 per month for electricity and
heating. Moreover, she incurs monthly payments for supplies of $700. Doris’s monthly revenue
is equal to $1,500. Instead of running the hair salon, she could work as a boats woman on a
sailing yacht, where she would earn a monthly salary of $800. Consider the following
statements about this case:
I. From an accounting point of view, Doris’s hair salon is profitable.
II. From an economic point of view, Doris’s hair salon is profitable.
a) Statement I is true, statement II is false (correct).
b) Statement II is true, statement I is false.
c) Both statements are true.
d) Both statements are false.
6. Consider the graph below (the numbers shown in the graph are to be used and you should
interpret other relevant numbers yourself). The maximum profit is closest to or approximately
equal to:
a) $120. (Correct)
b) $160.
c) $400.
d) $150.
7. Which of the following statements is TRUE about an Edgeworth-box representation of two
individuals looking to trade two products.
a) Allocations that are Pareto efficient are those in which the indifference curves of the two
individuals are tangent. (Correct)
b) Both individuals are worse off with allocations that are further in the upper-right corner of
the box.
c) Trade cannot take place against prices, like in the standard model of market supply and
demand, but takes place through barter instead.
d) The initial allocation is exactly in the middle of the box.
8. What key factor differentiates a decreasing cost industry from other industry types?
a) Each producer’s costs continue to increase as its output increases.
b) Industry revenue increases indefinitely, leading to a limitless supply.
c) A decreasing cost industry can expand without limits.
d) Subsequent firms benefit from cost reductions resulting from technological advancements.
(Correct)
9. How can arbitrage improve consumer welfare in a market in which a firm engages in price
discrimination?
a) Arbitrage reallocates the goods from consumers with a low willingness to pay to
consumers with a high willingness to pay. (Correct)
b) Arbitrage reallocates the goods so as to equate the marginal willingness to pay across all
consumer groups.
c) Arbitrage has no effect on a firm's ability to engage in price discrimination.
d) Arbitrage reallocates the goods from consumers with a high willingness to pay to
consumers with a low willingness to pay.
10. Consider the following statements about price discrimination:
I. To maximize profits, a monopolist should set a higher price in markets with more inelastic
demand.
II. Price discrimination can increase total surplus when it increases output and when there are
large fixed costs of development.
a) Statement I is true, statement II is false.
b) Statement II is true, statement I is false.
c) Both statements are true. (Correct)
d) Both statements are false.
11. Which of the following best represents a public good?
a) A subscription-based online newspaper.
b) A national defence system protecting all citizens. (Correct)
c) A private tutoring session for individual students.
d) A limited edition artwork in a gallery.
12. During the COVID-19 pandemic, many regions in the world experienced shortages of
certain medical supplies. Which economic concepts are particularly relevant for
understanding this situation?
a) Sudden increased demand; slow increase in production and entry. (Correct)
b) Sudden decrease in supply; stockpiling.
c) A Tragedy of the Commons; rivalry in demand.
d) Nonexcludable public goods; free riding.
13. Which of the following statements best characterizes a nonexcludable and nonrival
resource in the context of global warming?
a) A patented emission-reducing process that is costly to implement and improves with
economies of scale.
b) A carbon offset program where participation is limited to specific industries, but the
benefits are shared by all.
c) A (future) technology that captures emissions, which is available for use by any
corporation, and does not diminish in effectiveness with increased use. (Correct)
d) A local community initiative to reduce street litter, which benefits the participating
neighbourhoods.
14. In an economy with sticky wages and money illusion, which of the following scenarios is
most likely to lead to an increase in GDP growth?
a) A decrease in consumer confidence, leading to more household savings.
b) A reduction in government spending.
c) A decrease in the growth of the money supply.
d) None of the above. (Correct)
15. The "Parable of the Angry Professor" is an illustrative story that emphasizes:
a) The importance of supply and demand equilibrium.
b) The concept of rational decision-making by individuals.
c) The role of information asymmetry in market transactions.
d) The possibility of unintended consequences of government interventions. (Correct)
16. During the Great Depression, which of the following factors is most likely to have
contributed to a decrease in short-run aggregate supply?
a) A sudden increase in the velocity of money.
b) Technological advancements that boosted productivity.
c) Rapidly eroding consumer confidence and spending power. (Correct)
d) Expansionary fiscal policies aimed at stimulating demand.
17. Amidst a recession, a country with an island economy contemplates a substantial increase
in government spending to stimulate the economy. Critics argue that this measure might be
ineffective because of Ricardian equivalence. What does this argument imply?
a) The increase in government spending will lead to off-setting crowding out in private
consumption.
b) Consumers will anticipate future tax hikes and save the additional income received to pay
for it. (Correct)
c) The government's deficit will be offset by increased private investment.
d) The multiplier effect will increase the government debt and reduce the impact of
government spending.
18. Consider a standard model of supply and demand of a homogeneous good in a
competitive market. Suppose there is an increase in demand. Which of the following
statements describes the consequences of this increase in demand correctly?
a) An increase in the price and the quantity supplied. (Correct)
b) An increase in the price and the supply curve.
c) An increase in the price and the quantity demanded.
d) An decrease in the price and the quantity supplied.
19. Ronald Coase provides a conceptual explanation for why firms do not expand indefinitely
to internalize all transactions and avoid the market altogether that is based on:
a) Transaction costs.
b) Diseconomies of scale. (Correct)
c) Network externalities.
d) Monopoly power.
20. Why do property rights matter for economic development?
a) Because they ensure that all resources are evenly distributed among the population.
b) Because they encourage government control over economic activities.
c) Because they provide individuals and businesses with incentives to invest, innovate, and
create wealth. (Correct)
d) Because they safeguard the interests of multinational corporations.
21. Why did communal property in agricultural land during the "Little Leap Forward" and
"Great Leap Forward" in China lead to decreased productivity?
a) It increased individual incentives for extra work.
b) It aligned individual’s self-interest with social interest.
c) It separated effort from payment, encouraging free riding. (Correct)
d) It discouraged investment in land.
22. Consider a new technology that has made the production of solar panels more efficient
and less expensive. How is this likely to affect the market for solar panels?
a) The demand curve for solar panels will shift up.
b) The supply curve of solar panels will shift up.
c) The demand curve for solar panels will shift down.
d) The supply curve of solar panels will shift down. (Correct)
23. Which of the following best describes the function of the bond market in the economy?
a) Bond markets primarily focus on trading stocks and other equity securities.
b) Bond markets connect borrowers with investors in the debt market through the issuance
and trading of bonds. (Correct)
c) Bond markets primarily deal with the buying and selling of physical commodities.
d) Bond markets are responsible for major initial public offerings (IPOs).
24. What is the primary role of financial intermediaries in the financial system?
a) To regulate and oversee financial markets.
b) To provide loans to individuals and businesses.
c) To facilitate the flow of funds between savers and borrowers. (Correct)
d) To issue bank accounts on behalf of the government.
25. In a local market for fresh strawberries, heavy rain damages a significant portion of the
strawberry crop. What is the likely short-run effect on the equilibrium price and quantity of
strawberries in this market?
a) The equilibrium price and quantity both decrease.
b) The equilibrium price increases, but the quantity decreases. (Correct)
c) The equilibrium quantity decreases, but the price remains unchanged.
d) The equilibrium price remains unchanged, but the quantity decreases.
26. Friedrich von Hayek argues that competitive pressure in a “free” enterprise system leads
to:
a) A monopoly.
b) Efficient resource allocation. (Correct)
c) Government intervention.
d) Income inequality.
27. How does Milton Friedman's proposal in his 1948 AER article aim to achieve economic
stability?
a) By increasing discretionary government actions in response to cyclical movements.
b) By eliminating government contributions to the current income streams.
c) By fixing government responses to offset changes in aggregate demand by adjusting the
money supply. (Correct)
d) By implementing extraneous and procyclical reactions in monetary and fiscal policies.
28. Which of the following four examples best illustrates the Tragedy of the Commons?
a) An over-crowded zoo on a special ticket price day.
b) A gated garden with abundant resources that is not accessible for the public.
c) A public beach where people leave litter behind. (Correct)
d) A overfull train during rush hour.
29. What is the purpose of increasing government spending during an economic downturn as
part of counter-cyclical fiscal policy?
a) To increase tax revenues and a government budget surplus.
b) To reduce price spikes and excessive inflation.
c) To stimulate aggregate demand and economic activity. (Correct)
d) To encourage saving and investment.
30. Imagine a nation invests heavily in renewable energy technology, which results in
improved productivity. How will this impact its long-run aggregate supply curve?
a) It will shift leftward due to increased production costs.
b) It will shift rightward due to a higher Solow growth rate. (Correct)
c) It will remain unaffected .
d) It depends on other factors.
31. Speculators anticipate there may be unrest in Southern Africa and thus a future change in
the price of lithium that is mined there. For that reason, they buy lithium today and hold it in
storage to sell later, at the higher expected prices. Consider the following two statements:
I. Through their actions, speculators will decrease welfare.
II. Speculators will benefit if there is indeed a disruption in lithium supply.
a) Both statement are correct.
b) Both statements are incorrect.
c) Statement I is correct and statement II is incorrect.
d) Statement II is correct and statement I is incorrect. (Correct)
32. What did the Austrian economist Joseph Schumpeter mean by the "eliminationprinciple"?
a) Above-normal profits are eliminated by market entry and below-normal profits are
eliminated by market exit. (Correct)
b) Above-normal profits are caused by market regulation and below-normal profits are
caused by market deregulation.
c) Above-normal profits are eliminated by expansionary fiscal policy and below-normal
profits are caused by contractionary fiscal policy.
d) Above-normal profits are caused by technological development and below-normal profits
are caused by technological stagnation.
33. The figure below depicts two farms belonging to the same owner, each producing bushels
of corn. A change in the quantity supplied by each farm is shown.
Which of the following statements are correct?
I. The area under the MC curve up to the level of production is equal to the average cost of
production for that output level.
II. When marginal costs for both farms are made equal, the total production costs are
minimized.
a) Both statements are correct.
b) Both statements are incorrect.
c) Statement I is correct and statement II is incorrect.
d) Statement II is correct and statement I is incorrect. (Correct)
34. Find the right completion of the following statement: “In deciding whether or not to
purchase a good, a potential buyer compares the value of the good to ...”
a) … its marginal production costs.
b) … its cost of transportation.
c) … its opportunity cost. (correct)
d) … its average production costs.
35. According to ‘The Invisible Hand Property 1’, P = MC(1) = MC(2) =….= MC(N),
essentially because ….
a) … the government taxes and subsidizes firms to choose production accordingly.
b) … all producers take the same price as a given in a perfectly competitive market. (Correct)
c) … consumers are careful not to pay too high prices.
d) … only then can firms make profits.
36. If the nominal interest rate on a safe bank account is 10% per year and there is perfect
arbitrage, the face value of a triple-A 1-year government bond that sells at 909 must be:
a) 999,90. (Correct)
b) 1010.
c) 990.
d) 1001.
37. The principal reason why interest rates and bond prices move in opposite direction is:
a) Governments are less trustworthy than banks and have a higher default risk.
b) Banks are securitized, so that they can attract savings away from the bond market.
c) The rate of return on equal type of wealth storage is equalized through arbitrage. (Correct)
d) Governments adjust bond prices to commercial interest rate movements.
38. Consumer welfare can increase when a monopolist bundles different products together if:
a) Bundling allows for the sale of larger volumes than uniform prices. (Correct)
b) Firms profit from asking a higher price for one of the products.
c) The bundle is of inferior quality.
d) Total producer surplus increases.
39. Uber may be applying price-discrimination. Which statement about this practice is
correct?
a) This practice allows the company to equilibrate supply and demand.
b) This practice decreases the supply of taxi rides where there is a higher demand.
c) This practice increases demand for taxi rides where it is higher than supply.
d) This practice requires that Uber has some market power over its customers. (Correct)
40. Suppose that the growth rate of the money supply is 9%, the growth in the velocity of
money is 1% and the real GDP growth rate is given by a Solow growth rate of 4%. What does
this imply about the long-run inflation rate?
a) The inflation rate is 2%.
b) The inflation rate is 4%.
c) The inflation rate is 6%. (Correct)
d) The inflation rate is 8%.