Rift valley University model exam preparation for exit exam

Multiple Choice Questions:

Instruction: Choose the Best Answer from the given Alternatives. (1 point each)

[Link] are the factors that leads the demand curve for a product shift to the left, except

A. An increase in the price of a complementary good

B. A decrease in the price of a substitute good

C. A decrease in taste of the product

D. An increase in income for buyer

2. For which one of the following market structure, economists use game theory to show how

one firm can make strategic decision to gain a competitive advantage over its rival firm/s?

A. Monopoly. B. Monopolistic competitlve

C. Oligopoly. D. Perfectly competitive

3. Suppose an individual 's current consumption choices is willing to give up 2 beers to get an

extra steak (MRS of steak for beer is 2:1). Suppose also that the price of a steak is $1 and a

beer is $25. Then in order to increase utility the individual should

A. Buy more steak and less beer. B. Continue with current consumption plans.

C. Buy more beer and less steak. D. Not enough information to answer the question.

4. If decreasing returns to scale are present and all inputs are increased by 10% then:

A. Output will also decrease by 10%. B. Output will increase by less than 109%.

C. Output will increase by 10%. D. Output will increase by more than 10%.

5. If the marginal product of labour is below the average product of labour, it must be true that:

A. The marginal product of labour is negative. B. The average product of labour is falling.

C. The marginal product of labour is zero. D. The average product of labour is negative.

6. Which one of the following is TRUE about the characteristics of indifference curve of

commodities of perfect complements?

B. The indifference curve is straight line with a negative slope.

C. Both MRSyx and MRxy is the same, i.e. zero

D. The two goods are directly substitable for each other on the same indifference curve.

7. Which of the following is an example of a sunk cost?

A. The cost of purchasing materials for a future project

B. The cost of labor for past work on a project

C. The cost of rent for a current facility

D. The cost of marketing for a new product

8. The law of diminishing marginal returns states that:

A. As the quantity of a good produced increases, the opportunity cost of producing an

additional unit increase

B. As the quantity of a good produced increases, the marginal cost of producing an

additional unit decrease

C. As the quantity of a good produced increases, the marginal product of an additional unit

decreases

D. As the quantity of a good produced increases, the demand for the good also increases

9. The cross-price elasticity of demand for two goods is negative. This means that the two

goods are:

A. Complementary goods. B. Normal goods

C. Substitute goods. D. Inferior goods

10. Which one of the following is NOT TRUE about a risk lover consumer?

A. Their expected utility is greater than utility on hand.

B. They have convex utility of wealth curve.

C. They prefer a certain income than a risky uncertain income with high possible return.
D. The marginal utility of generating income is increasing.

11. A firm is considered a monopoly if satisfies all of the following conditions except?

A. If it is the sole seller of its product

B. If its product has close substitutes

If there is a Single seller and many buyers

D. If the firms are facing a down ward sloped demand curve for its product

12. Selling cost does not include

A. Costs incurred by the firm for advertisements. B. Salesmen salaries

C. Expenses of sales department. D. Costs of purchasing inputs

13. The monopoly behavior of monopolistic competitive firm arises from

A. Product differentiation. B. Homogeneity of product

C. Price of factors of production. D. Advertising

14. Which one of the following is CORRECT about the similarity between monopoly and

monopolistic competition?

A. The exİstence of large number of sellers. B. Both cause social welfare loses

C. homogeneity of products

D. They have the same degree of monopoly power

15. Price discrimination refers to:

A. Selling a given product for different prices at two different points in time.

B. The selling of a given product at different prices that reflect cost differences.

C. The selling of a given product at different prices that do not reflect cost differences.

D. The difference between the prices a purely competitive seller and a purely monopolistic

seller would charge.

16. Which of the following statement is NOT TRUE about monopoly market?

A. Monopolist firm have no unique supply curve.

C. The consumer with low price elasticity of demand is charged low price.

D. In long run the firm can only get either positive or zero profit

17. What is the reason for a monopolistically competitive firm reduces price by targeting to sale

more but ends selling less than the intended. This is because

A. Perceived demand curve is elastic and the firm loses its customers

B. All other firms simultaneously reduce their price

C. The firms anticipated demand curve shifts outwards

D. Other firms simultaneously increase their price

18. The production cost (TC) of monopoly firm is given by TC=10+3Q and estimated price

elasticity is -3. What is profit maximizing price for firm?

A. 5.5. B. 4.5. C. 5.4. D. 3.5

19. In a perfectly competitive labor market, firms should hire workers until the wage is equal

A. The price of the output

B. The marginal revenue of the product

C. The price multiplied by the marginal physical product of labor

D. The marginal physical product of labor

20. Which one is NOT TRUE about the determination of factor prices in a perfectly competitive

market?

A. The equilibrium price is determined by the intersection of market demand and market supply

B. The demand for a factor is a derived demand

C. The supply of labor is determined like the supply of commodities

D. The supply of labor involves the attitudes of individuals towards work and leisure

21. _____________is the situation where low-quality product drive high quality product out of the

market because of the existence of asymmetric information between buyers and sellers.
A. Moral hazard. B. Adverse selection.

C. Signaling. D. Negative externality

22. Under monopoly market VMPL > MRPL since

A.P< MR. B. P-MR. C.P >MR. D. MPPL = MR

23. Why the demand for a factor is called a derived DD? This is because

A. The demand for the service of a factor is based on the supply (Price) of the commodities.

B. The equilibrium price is determined by the intersection of market demand and supply of a

factor.

C. the intersection of demand and supply determine the price of the factor and the level of its

employment

D. The demand commodities.

24. Which one of the following supply curve of labor is backward bending?

A. Short run supply curve of unskilled labor. B. Long run market supply curve of labor

C.A single individuals supply curve. D. Long run supply curve of unskilled labor

25. If a monopolist demand for the product is P=25-20, and the short-run production function is the
service of a factor is based on the demand Price) of the given by Q = 4L, then firm's demand for labor
can be written as:

A. W=100-41. B. W=25-4L. C. W=100-64L. W-25-8L

26. Which of the following is NOT a potential outcome of a collusion agreement between firms in an
oligopoly market structure?

A. Increased competition among firms. B. Lower output at higher prices for consumers

C. Higher profits for firms. D. Decreased uncertainty for the existing firms

27. Which of the following is NOT a component of the incomes approach to GDP?

A. Wages and salaries. B. Net exports. C. Corporate profits. D. Proprietors income

28. Which one of the following is INCORRECT about Modigliani's life time hypothesis?

A. The hypothesis emphasizes that income varies somewhat predictably over a person's life

B. Consumers use saving and borrowing to smooth their consumption over their lifetimes.
C. Consumption depends on both income and wealth.

D. Consumption depends on average current incomes rather than lifetime incomes

29. Assume that the IS-LM model of a certain economy is given as: C=60 +0.8(Y-T); P =1; M (D) = 40 +
0.1Y - 10r. Based

30.G= 250, T - 200 :I= 150 - 10r M= 100 :on the above information, what are the equations that
describes the IS curve and LM curve, respectively?

A. Y=250-10r and r= 50-0.8Y. B.Y-60-1Or and 40- 0.01Y

C. Y=+300-10r and r= 10- 0.01Y. D. Y=1500-50r and r= -6+0.01Y

30. One of macroeconomic school of thought, Monetarist, emphasizes

A. the importance of money supply in determining economic activity

B. the importance of supply side factors in determining economic growth

C. the importance of rational expectations

D. the importance of government intervention in stabilizing the economy

31. All are components of Gross Domestic Product (GDP), except

A. Consumption. B. Intermediate goods

C. Government spending. D. Exports

32. Which of the following is a measure of the total income earned by households after taxes and
transfer payments?

A. Gross Domestic Product (GDP). B. Gross National Product (GNP)

C. Personal Income. D. Disposable Income

33. The overall price level in a given economy can be measured by.

A. GDP deflator. B. Consumer Price Index (CPI)

C. Nominal GDP. D. Real GDP

34. Which of the following is TRUE about the Friedman Modigliani hypothesis?

A. Permanent consumption is independent of both current and expected future income

B. Current consumption is determined solely by expected future incomne

C. Permanent consumption is determined by both current and expected future income

35. According to the Tobin's q theory of investment, firms are most likely to invest when:

A. The market value of their assets is lower than the cost of replacing them

B. The market value of their assets is higher than the cost of replacing them

C. The cost of financing investment projects is low

D. The expected return on investment is higher than the cost of financing it

36. According to Keyes, all are the component of the demand for money, except

A. Transactions demand. B. Precautionary demand

C. Speculative demand. D. Investment demand

37. The efficiency wage theory suggests that:

A. Higher wages can lead to higher productivity

B. Higher wages can lead to lower productivity

C. Employers always pay their workers the minimum wage

D. Workers are always willing to work harder for higher wages

38. The short run Phillips curve indicates the trade-off between

A. Output and unemployment. B. Interest rates and inflation

C. Inflation and unemployment. D. Savings and investment

39. Which one of the following is NOT TRUE about Supply-side policies?

A. It is designed to stimulate economic growth by increasing aggregate demand

B. It is designed to stimulate economic growth by increasing the supply of goods and services

C. Decreasing taxes on businesses could be an example of supply side policy

D. It can lower prices and increase real GDP.

40. Which one of the following models argues that countries that are rich in natural resources,

such as oil or minerals, may experience slower economic growth and development due to

factors such as corruption, political instability, and economic dependence on a single

A. Harrod-Domar model. B. Solow growth model

C. The resource curse model. D. Neo-classical growth model

41. Which one of the following is INCORRECT about the difference of GDP deflator and

Consumer Price Index (CPI)?

A. The GDP deflator measures the price level of all products and services in a country, while

the CPI only measures consumer goods

B. the GDP deflator only includes domestic goods, while the CPI includes anything bought

by consumers like imported goods.

C. Prices of capital goods that are produced within the national territory are included in GDP

deflator but it is excluded from CPI.

D. The CPI uses a changing basket of goods that reflects people's consumption and

investment patterns, while the GDP deflator uses a fixed basket of goods.

42. What does the LM curve represent in the IS-LM model?

A. Interest rate and saving equilibrium. B. Investment and saving equilibrium

C. Inflation and supply equilibrium. D. Money supply and demand equilibrium

43. Suppose that Ethiopian Government increases duties against the Kenyan products exported to
Ethiopia, and Kenya will react and levy duty on goods imported from Ethiopia. This

Kenyan's tariffs are described as

A. Protective tariffs. B. Discriminatory tariffs

C. Revenue tariffs. D. Retaliatory tariffs

44. Which one of the following regional economic integrations achieved the status of a common

market?

A. European Union (EU) since 1993

B. the European Free Trade Association (EFTA) since 1960

C. the North American Free Trade Agreement (NAFTA) since 1933

45. Which trade theory contends that a country that initially develops and exports a new product

may eventually become an importer of it, and may no longer manufacture the product:

A. Theory of factor endowments. B. Theory of overlapping demands

C. Economies of scale theory. D. Product life cycle theory

46. According to the factor endowment model of Heckscher and Ohlin, countries heavily

endowed with land will:

A. Devote excessive amounts of resources to agricultural production.

B. Devote insufficient amounts of resources to agricultural production.

C. Export products that are land-intensive.

D. Import products that are land-intensive.

47. The comparative advantage model of Ricardo was based on

A. intraindustry specialization and trade

B. interindustrv soecialization and trade

48. Wassily Leontief used an input-output table in order to test the

C. demand conditions underlying specialization and trade

D. income conditions underlying specialization and trade

A. Ricardian theory of comparative advantage

B. Heckscher Ohlin theory of comparative advantage

C. Linder theory of overlapping demand

D. Product life cycle theory

49. Assume that Country A is relatively abundant in labor and Country B is relatively abundant

in land. According to the factor price equalization theorem, once Country A begins

specializing according to comparative advantage and trading with Country B; which one of

the following is true about wage and rent in country A if wages are the returns to labor and
rents are the returns to land?

A. wages and rents should fall in Country A

B. wages and rents should rise in Country A

C. wages should rise and rents should fall in Country A

D. wages should fall and rents should rise in Country A

50.____________is a summary statenment in which all the transactions of the residents of nation

with the residents of all other nations are recorded during a particular period of time.

A. National GDP. B. National income accounting

C. The balance of payments. D. Net National income

51. What is a current account deficit?

[Link] country's imports exceed its exports

B. When a country's exports exceed its imports

[Link] a country's income exceeds its expenditure

D. When a country's expenditure exceeds its income

52. According to the Interest Rate Parity theory, what would happen if the domestic interest rate

is higher than the foreign interest rate?

A. The domestic currency would appreclate

B The domestic currency would depreciate

C. The exchange rate would remain the same

D. It depends on other factors affecting the exchange rate

53. According to the Balance of Payments Theory, which of the following would cause a

country's currency to appreciate?

A. An increase in exports. B. An increase in imports

[Link] increase in foreign investment