Practice Final Exam
1. A company spends $2 million developing a product. Before launch, a competitor introduces a superior product. What should the company do?
A. Launch the product to recoup the $2 million.
B. Consider whether the product will bring in future revenue greater than future costs.
C. Cancel the launch only if they cannot recover the $2 million.
D. Launch the product because the money was already spent.
2. Jason is considering whether to mow lawns for one more hour. He earns $20 per hour, but in the next hour, it will rain. Which of the following best reflects marginal reasoning?
A. Jason should stop because he has already earned $60 today.
B. Jason should continue because he is making money overall.
C. Jason should consider the extra cost and benefit of mowing one more hour.
D. Jason should continue because he has already committed to the day.
3. During a cold winter, the price of heating oil rises significantly. What is the most likely cause?
A. An increase in demand due to weather conditions.
B. A decrease in demand due to efficiency standards.
C. A surplus in heating oil supply.
D. A price ceiling imposed by the government.
4. A sudden increase in oil prices causes input costs to rise for plastic manufacturers. At the same time, a new health scare reduces demand for plastic bottles. What happens in this market?
A. Price rises; quantity falls.
B. Price falls; quantity falls.
C. Price is ambiguous; quantity falls.
D. Both price and quantity fall.
5. Suppose both demand and supply for bottled water increase due to rising health awareness and improved bottling technology. What happens to the equilibrium quantity and price?
A. Quantity falls; price rises.
B. Quantity rises; price is uncertain.
C. Price rises; quantity is uncertain.
D. Both price and quantity rise.
6. A price ceiling on rent is set below the equilibrium level in a city. What is the likely outcome?
A. A surplus of apartments as landlords want to rent more.
B. No change in the market as landlords adjust supply.
C. A shortage of apartments as quantity demanded exceeds quantity supplied.
D. Higher rents in the long run.
7. A restaurant increases the price of its lunch combo from $10 to $12 and sees a drop in sales from 300 to 240 meals per day. What can be inferred about demand elasticity?
A. Demand is elastic because quantity demanded fell proportionately more than price increased.
B. Demand is inelastic because revenue increased.
C. Demand is perfectly elastic because demand dropped.
D. Demand is unit elastic because the percentage change in quantity equals price.
8. If income rises by 5% and demand for instant noodles falls by 2%, what is the income elasticity of demand for noodles?
A. 0.4
B. -0.4
C. -2.5
D. 2.5
9. A streaming service raises its price by 10%, and revenue rises. What can be concluded about the elasticity of demand?
A. Demand is elastic.
B. Demand is inelastic.
C. Demand is unit elastic.
D. Demand is perfectly elastic.
10. If the cross-price elasticity between eggs and bacon is -0.2, how are the two goods related?
A. Substitutes
B. Complements
C. Inferior goods
D. Luxuries
11. A city imposes a rent ceiling of $800 on apartments where the equilibrium rent is $1,000. What is the likely outcome?
A. A surplus of rental units as landlords supply more.
B. A shortage of apartments as demand exceeds supply.
C. No change because it's above equilibrium.
D. Improved quality of housing.
12. When a tax is imposed on a good with perfectly elastic supply, what happens?
A. Producers bear all of the tax burden.
B. Consumers bear all of the tax burden.
C. Both share the burden equally.
D. Quantity increases.
13. A $3 per-unit tax is levied on a product. The pre-tax equilibrium price is $10. After the tax, buyers pay $11 and sellers receive $8. What is the incidence of the tax?
A. Buyers pay $3, sellers pay $0.
B. Buyers pay $1, sellers pay $2.
C. Buyers and sellers each pay $1.50.
D. Sellers pay $3, buyers pay $0.
14. Suppose Canada can produce either 10 lumber or 5 wheat per day, and Brazil can produce 8 lumber or 4 wheat per day. Who should specialize in lumber if they trade?
A. Brazil, because it produces less of both goods.
B. Canada, because it has the lowest opportunity cost in lumber.
C. Brazil, because its opportunity cost for lumber is lower.
D. Neither, because both have equal productivity.
15. If China has an absolute advantage in both electronics and clothing, should it still trade with Bangladesh?
A. No, China can produce everything more efficiently.
B. Yes, if Bangladesh has the comparative advantage in one good.
C. No, because trade only benefits poorer countries.
D. Yes, because of exchange rate differences.
16. If India can produce 2 units of textiles or 4 units of rice per labor hour, and Vietnam can produce 1 unit of textiles or 2 units of rice, who should specialize in textiles?
A. India, because it has the absolute advantage.
B. Vietnam, because of lower rice opportunity cost.
C. Either, since opportunity costs are equal.
D. Neither, since both produce the same ratio.
17. A country opens to free trade and begins importing textiles. What happens to domestic producers and consumers of textiles?
A. Both benefit from lower prices.
B. Consumers lose; producers gain.
C. Producers lose; consumers gain.
D. Both lose due to foreign competition.
18. If the U.S. removes a tariff on imported solar panels, what is the likely effect?
A. Domestic solar panel prices will rise.
B. Domestic producers will expand production.
C. Imports will increase, lowering market prices.
D. Export demand will shift left.
19. What is one reason economists often oppose tariffs?
A. They create jobs.
B. They raise consumer welfare.
C. They distort market efficiency and create deadweight loss.
D. They improve the trade balance permanently.
20. Fireworks shows are non-excludable and non-rival in large cities. What challenge does this create for private providers?
A. They can easily charge everyone.
B. Marginal cost of an extra viewer is high.
C. The free rider problem discourages provision.
D. The show creates negative externalities.
21. A toll road that is uncongested is best described as:
A. A private good.
B. A common resource.
C. A public good.
D. A club good.
22. A positive externality leads markets to produce:
A. More than the socially optimal level.
B. Less than the socially optimal level.
C. At the efficient level without intervention.
D. Goods that are not excludable.
23. If one person's consumption of a good reduces the amount available to others, the good is said to be:
A. Non-excludable.
B. Non-rival.
C. Rival.
D. A public good.
24. Which of the following is NOT a feature of public goods?
A. Non-rivalry.
B. Non-excludability.
C. Subject to the free-rider problem.
D. High marginal cost of provision.
25. A beekeeper’s hives pollinate a nearby orchard, increasing fruit yield. If the orchard owner does not pay the beekeeper, what may result?
A. Overproduction of bees.
B. Efficient bee population.
C. Underproduction of pollination services.
D. Overuse of the orchard.
26. Which of the following best illustrates the free-rider problem?
A. People avoiding toll roads.
B. Firms charging different prices for movie tickets.
C. People benefiting from streetlights they don’t pay for.
D. Consumers who switch to cheaper substitutes.
27. A patented pharmaceutical firm charges $200 per dose of a life-saving drug, even though marginal cost is only $10. This pricing behavior is due to:
A. Price discrimination.
B. Market power from product differentiation.
C. Monopoly power from patent protection.
D. High fixed costs of production.
28. Which of the following is true about monopolistic competition in the long run?
A. Firms earn positive economic profits.
B. Price equals marginal cost.
C. Firms produce at minimum average total cost.
D. Firms earn zero economic profits and price exceeds marginal cost.
29. A tech company offers basic and premium software versions at different prices. What type of pricing strategy is this?
A. First-degree price discrimination.
B. Cost-plus pricing.
C. Second-degree price discrimination.
D. Bundling.
30. According to Porter’s Five Forces, which force is most directly affected when consumers can easily switch to competitors’ products?
A. Threat of new entrants.
B. Bargaining power of suppliers.
C. Threat of substitutes.
D. Bargaining power of buyers.
31. A monopoly maximizes profit by producing where:
A. Marginal cost = price.
B. Average cost = average revenue.
C. Marginal revenue = marginal cost.
D. Total cost = total revenue.
32. A movie theater offers student tickets at a lower price than general admission. This is an example of:
A. First-degree price discrimination.
B. Second-degree price discrimination.
C. Third-degree price discrimination.
D. Bundling.
33. A software company sells a 'basic' version and a 'premium' version of its product. Which pricing strategy does this represent?
A. Third-degree price discrimination.
B. Second-degree price discrimination.
C. First-degree price discrimination.
D. Loss leader pricing.
34. A ski resort charges lower weekday rates compared to weekends. What kind of pricing is this?
A. Intertemporal pricing.
B. Third-degree price discrimination.
C. Dynamic pricing.
D. Two-part tariff.
35. Why do many companies use online discount codes instead of lowering list prices?
A. To increase advertising costs.
B. To target wealthy consumers.
C. To screen for price-sensitive customers using a hurdle method.
D. To increase prices for regular customers.
36. Two rival airlines are deciding whether to charge high or low prices. If both charge low prices, they make $1M each. If one charges high and the other low, the low-price airline earns $2M while the high-price one earns $0. If both charge high, they earn $1.5M each. What is the Nash equilibrium?
A. Both charge high prices.
B. One charges high, the other low.
C. Both charge low prices.
D. No equilibrium exists.
37. What is a best response strategy in a game?
A. A strategy that guarantees the highest possible payoff in all cases.
B. A strategy that responds optimally to the other player’s choice.
C. A strategy that minimizes regret.
D. A strategy that dominates all others.
38. Two construction firms bid for a contract. Each can choose high or low bid. If both bid high, they split the contract. If one bids low, it wins everything. What is the Nash equilibrium?
A. Both bid high.
B. Both bid low.
C. One bids high, one bids low.
D. Randomize bids.
39. In a coordination game with no dominant strategy, how do players typically coordinate?
A. They rely on focal points, communication or conventions.
B. They randomize strategies.
C. They seek dominant strategies.
D. They choose actions at random.
40. A health insurance company attracts mostly unhealthy customers because they are more likely to buy coverage. This is:
A. Adverse selection of sellers.
B. Moral hazard.
C. Adverse selection of buyers.
D. Principal-agent problem.
41. An apartment landlord requires a large security deposit from new tenants. This is a strategy to address:
A. Adverse selection.
B. Moral hazard.
C. A public good problem.
D. A coordination failure.
42. A job applicant obtains a degree from a top university to demonstrate competence to employers. This is an example of:
A. Signaling to reduce asymmetric information.
B. Adverse selection of workers.
C. Moral hazard.
D. Screening by the employer.
43. An extended warranty is offered for an expensive appliance. Buyers who expect the product to break are more likely to purchase it. This is an example of:
A. Moral hazard.
B. First-degree price discrimination.
C. Adverse selection of buyers.
D. Risk pooling.
44. An individual decides not to buy insurance because they are healthy and unlikely to use it. This leads to:
A. Moral hazard.
B. Economies of scale.
C. Adverse selection.
D. Externalities.
45. A warranty may lead to moral hazard because:
A. It makes products more expensive.
B. Consumers may take less care of the product.
C. Firms are less likely to produce quality goods.
D. Warranties encourage monopolies.
46. On a standard price–quantity graph (with downward‑sloping demand and upward‑sloping MC), the deadweight‑loss triangle from monopoly lies:
A. Between the demand curve and the MC curve, for units the monopolist does not produce
B. Under the MC curve, to the left of the competitive output
C. Between the MR and MC curves, for output actually produced by the monopolist
D. Above the monopoly price line, for all units sold
E. Between the average cost curve and the MC curve
47. Two rival cellphone makers must decide whether to advertise or not. If both advertise, they cancel each other out. If one advertises and the other doesn’t, the advertiser gains market share. What is the Nash equilibrium?
A. Both do not advertise.
B. Only one advertises.
C. Both advertise.
D. No equilibrium.
48. In a three-period finitely repeated Prisoner’s Dilemma, what is the unique backward induction (subgame perfect) equilibrium outcome?
A. Defect in all three periods
B. Cooperate in all three periods
C. Cooperate in only period 1
D. Alternate defection and cooperation
E. No pure strategy equilibrium
49. In a penalty kick contest, if the goalkeeper dives left, the shooter’s payoff is highest by kicking right. What is the shooter's best response to a left dive?
A. Kick right
B. Kick left
C. Indifferent
D. Randomize
E. None of these
50. Two taxi drivers each choose a service region—Urban or Suburban. If both choose the same region, each earns a profit of $50. If they choose different regions, each earns $15. How many pure strategy Nash equilibria exist in this game?
A. Two
B. One
C. Three
D. Four
E. Zero
Solution video:
1. A company spends $2 million developing a product. Before launch, a competitor introduces a superior product. What should the company do?
A. Launch the product to recoup the $2 million.
B. Consider whether the product will bring in future revenue greater than future costs.
C. Cancel the launch only if they cannot recover the $2 million.
D. Launch the product because the money was already spent.
2. Jason is considering whether to mow lawns for one more hour. He earns $20 per hour, but in the next hour, it will rain. Which of the following best reflects marginal reasoning?
A. Jason should stop because he has already earned $60 today.
B. Jason should continue because he is making money overall.
C. Jason should consider the extra cost and benefit of mowing one more hour.
D. Jason should continue because he has already committed to the day.
3. During a cold winter, the price of heating oil rises significantly. What is the most likely cause?
A. An increase in demand due to weather conditions.
B. A decrease in demand due to efficiency standards.
C. A surplus in heating oil supply.
D. A price ceiling imposed by the government.
4. A sudden increase in oil prices causes input costs to rise for plastic manufacturers. At the same time, a new health scare reduces demand for plastic bottles. What happens in this market?
A. Price rises; quantity falls.
B. Price falls; quantity falls.
C. Price is ambiguous; quantity falls.
D. Both price and quantity fall.
5. Suppose both demand and supply for bottled water increase due to rising health awareness and improved bottling technology. What happens to the equilibrium quantity and price?
A. Quantity falls; price rises.
B. Quantity rises; price is uncertain.
C. Price rises; quantity is uncertain.
D. Both price and quantity rise.
6. A price ceiling on rent is set below the equilibrium level in a city. What is the likely outcome?
A. A surplus of apartments as landlords want to rent more.
B. No change in the market as landlords adjust supply.
C. A shortage of apartments as quantity demanded exceeds quantity supplied.
D. Higher rents in the long run.
7. A restaurant increases the price of its lunch combo from $10 to $12 and sees a drop in sales from 300 to 240 meals per day. What can be inferred about demand elasticity?
A. Demand is elastic because quantity demanded fell proportionately more than price increased.
B. Demand is inelastic because revenue increased.
C. Demand is perfectly elastic because demand dropped.
D. Demand is unit elastic because the percentage change in quantity equals price.
8. If income rises by 5% and demand for instant noodles falls by 2%, what is the income elasticity of demand for noodles?
A. 0.4
B. -0.4
C. -2.5
D. 2.5
9. A streaming service raises its price by 10%, and revenue rises. What can be concluded about the elasticity of demand?
A. Demand is elastic.
B. Demand is inelastic.
C. Demand is unit elastic.
D. Demand is perfectly elastic.
10. If the cross-price elasticity between eggs and bacon is -0.2, how are the two goods related?
A. Substitutes
B. Complements
C. Inferior goods
D. Luxuries
11. A city imposes a rent ceiling of $800 on apartments where the equilibrium rent is $1,000. What is the likely outcome?
A. A surplus of rental units as landlords supply more.
B. A shortage of apartments as quantity demanded exceeds quantity supplied.
C. No change because it's above equilibrium.
D. Improved quality of housing.
12. When a tax is imposed on a good with perfectly elastic supply, what happens?
A. Producers bear all of the tax burden.
B. Consumers bear all of the tax burden.
C. Both share the burden equally.
D. Quantity increases.
13. A $3 per-unit tax is levied on a product. The pre-tax equilibrium price is $10. After the tax, buyers pay $11 and sellers receive $8. What is the incidence of the tax?
A. Buyers pay $3, sellers pay $0.
B. Buyers pay $1, sellers pay $2.
C. Buyers and sellers each pay $1.50.
D. Sellers pay $3, buyers pay $0.
14. Suppose Canada can produce either 10 lumber or 5 wheat per day, and Brazil can produce 8 lumber or 4 wheat per day. Who should specialize in lumber if they trade?
A. Brazil, because it produces less of both goods.
B. Canada, because it has the lowest opportunity cost in lumber.
C. Brazil, because its opportunity cost for lumber is lower.
D. Neither, because both have equal productivity.
15. If China has an absolute advantage in both electronics and clothing, should it still trade with Bangladesh?
A. No, China can produce everything more efficiently.
B. Yes, if Bangladesh has the comparative advantage in one good.
C. No, because trade only benefits poorer countries.
D. Yes, because of exchange rate differences.
16. If India can produce 2 units of textiles or 4 units of rice per labor hour, and Vietnam can produce 1 unit of textiles or 2 units of rice, who should specialize in textiles?
A. India, because it has the absolute advantage.
B. Vietnam, because of lower rice opportunity cost.
C. Either, since opportunity costs are equal.
D. Neither, since both produce the same ratio.
17. A country opens to free trade and begins importing textiles. What happens to domestic producers and consumers of textiles?
A. Both benefit from lower prices.
B. Consumers lose; producers gain.
C. Producers lose; consumers gain.
D. Both lose due to foreign competition.
18. If the U.S. removes a tariff on imported solar panels, what is the likely effect?
A. Domestic solar panel prices will rise.
B. Domestic producers will expand production.
C. Imports will increase, lowering market prices.
D. Export demand will shift left.
19. What is one reason economists often oppose tariffs?
A. They create jobs.
B. They raise consumer welfare.
C. They distort market efficiency and create deadweight loss.
D. They improve the trade balance permanently.
20. Fireworks shows are non-excludable and non-rival in large cities. What challenge does this create for private providers?
A. They can easily charge everyone.
B. Marginal cost of an extra viewer is high.
C. The free rider problem discourages provision.
D. The show creates negative externalities.
21. A toll road that is uncongested is best described as:
A. A private good.
B. A common resource.
C. A public good.
D. A club good.
22. A positive externality leads markets to produce:
A. More than the socially optimal level.
B. Less than the socially optimal level.
C. At the efficient level without intervention.
D. Goods that are not excludable.
23. If one person's consumption of a good reduces the amount available to others, the good is said to be:
A. Non-excludable.
B. Non-rival.
C. Rival.
D. A public good.
24. Which of the following is NOT a feature of public goods?
A. Non-rivalry.
B. Non-excludability.
C. Subject to the free-rider problem.
D. High marginal cost of provision.
25. A beekeeper’s hives pollinate a nearby orchard, increasing fruit yield. If the orchard owner does not pay the beekeeper, what may result?
A. Overproduction of bees.
B. Efficient bee population.
C. Underproduction of pollination services.
D. Overuse of the orchard.
26. Which of the following best illustrates the free-rider problem?
A. People avoiding toll roads.
B. Firms charging different prices for movie tickets.
C. People benefiting from streetlights they don’t pay for.
D. Consumers who switch to cheaper substitutes.
27. A patented pharmaceutical firm charges $200 per dose of a life-saving drug, even though marginal cost is only $10. This pricing behavior is due to:
A. Price discrimination.
B. Market power from product differentiation.
C. Monopoly power from patent protection.
D. High fixed costs of production.
28. Which of the following is true about monopolistic competition in the long run?
A. Firms earn positive economic profits.
B. Price equals marginal cost.
C. Firms produce at minimum average total cost.
D. Firms earn zero economic profits and price exceeds marginal cost.
29. A tech company offers basic and premium software versions at different prices. What type of pricing strategy is this?
A. First-degree price discrimination.
B. Cost-plus pricing.
C. Second-degree price discrimination.
D. Bundling.
30. According to Porter’s Five Forces, which force is most directly affected when consumers can easily switch to competitors’ products?
A. Threat of new entrants.
B. Bargaining power of suppliers.
C. Threat of substitutes.
D. Bargaining power of buyers.
31. A monopoly maximizes profit by producing where:
A. Marginal cost = price.
B. Average cost = average revenue.
C. Marginal revenue = marginal cost.
D. Total cost = total revenue.
32. A movie theater offers student tickets at a lower price than general admission. This is an example of:
A. First-degree price discrimination.
B. Second-degree price discrimination.
C. Third-degree price discrimination.
D. Bundling.
33. A software company sells a 'basic' version and a 'premium' version of its product. Which pricing strategy does this represent?
A. Third-degree price discrimination.
B. Second-degree price discrimination.
C. First-degree price discrimination.
D. Loss leader pricing.
34. A ski resort charges lower weekday rates compared to weekends. What kind of pricing is this?
A. Intertemporal pricing.
B. Third-degree price discrimination.
C. Dynamic pricing.
D. Two-part tariff.
35. Why do many companies use online discount codes instead of lowering list prices?
A. To increase advertising costs.
B. To target wealthy consumers.
C. To screen for price-sensitive customers using a hurdle method.
D. To increase prices for regular customers.
36. Two rival airlines are deciding whether to charge high or low prices. If both charge low prices, they make $1M each. If one charges high and the other low, the low-price airline earns $2M while the high-price one earns $0. If both charge high, they earn $1.5M each. What is the Nash equilibrium?
A. Both charge high prices.
B. One charges high, the other low.
C. Both charge low prices.
D. No equilibrium exists.
37. What is a best response strategy in a game?
A. A strategy that guarantees the highest possible payoff in all cases.
B. A strategy that responds optimally to the other player’s choice.
C. A strategy that minimizes regret.
D. A strategy that dominates all others.
38. Two construction firms bid for a contract. Each can choose high or low bid. If both bid high, they split the contract. If one bids low, it wins everything. What is the Nash equilibrium?
A. Both bid high.
B. Both bid low.
C. One bids high, one bids low.
D. Randomize bids.
39. In a coordination game with no dominant strategy, how do players typically coordinate?
A. They rely on focal points, communication or conventions.
B. They randomize strategies.
C. They seek dominant strategies.
D. They choose actions at random.
40. A health insurance company attracts mostly unhealthy customers because they are more likely to buy coverage. This is:
A. Adverse selection of sellers.
B. Moral hazard.
C. Adverse selection of buyers.
D. Principal-agent problem.
41. An apartment landlord requires a large security deposit from new tenants. This is a strategy to address:
A. Adverse selection.
B. Moral hazard.
C. A public good problem.
D. A coordination failure.
42. A job applicant obtains a degree from a top university to demonstrate competence to employers. This is an example of:
A. Signaling to reduce asymmetric information.
B. Adverse selection of workers.
C. Moral hazard.
D. Screening by the employer.
43. An extended warranty is offered for an expensive appliance. Buyers who expect the product to break are more likely to purchase it. This is an example of:
A. Moral hazard.
B. First-degree price discrimination.
C. Adverse selection of buyers.
D. Risk pooling.
44. An individual decides not to buy insurance because they are healthy and unlikely to use it. This leads to:
A. Moral hazard.
B. Economies of scale.
C. Adverse selection.
D. Externalities.
45. A warranty may lead to moral hazard because:
A. It makes products more expensive.
B. Consumers may take less care of the product.
C. Firms are less likely to produce quality goods.
D. Warranties encourage monopolies.
46. On a standard price–quantity graph (with downward‑sloping demand and upward‑sloping MC), the deadweight‑loss triangle from monopoly lies:
A. Between the demand curve and the MC curve, for units the monopolist does not produce
B. Under the MC curve, to the left of the competitive output
C. Between the MR and MC curves, for output actually produced by the monopolist
D. Above the monopoly price line, for all units sold
E. Between the average cost curve and the MC curve
47. Two rival cellphone makers must decide whether to advertise or not. If both advertise, they cancel each other out. If one advertises and the other doesn’t, the advertiser gains market share. What is the Nash equilibrium?
A. Both do not advertise.
B. Only one advertises.
C. Both advertise.
D. No equilibrium.
48. In a three-period finitely repeated Prisoner’s Dilemma, what is the unique backward induction (subgame perfect) equilibrium outcome?
A. Defect in all three periods
B. Cooperate in all three periods
C. Cooperate in only period 1
D. Alternate defection and cooperation
E. No pure strategy equilibrium
49. In a penalty kick contest, if the goalkeeper dives left, the shooter’s payoff is highest by kicking right. What is the shooter's best response to a left dive?
A. Kick right
B. Kick left
C. Indifferent
D. Randomize
E. None of these
50. Two taxi drivers each choose a service region—Urban or Suburban. If both choose the same region, each earns a profit of $50. If they choose different regions, each earns $15. How many pure strategy Nash equilibria exist in this game?
A. Two
B. One
C. Three
D. Four
E. Zero