Business Economics
Exam Review
Course Introduction
Business Economics explores the application of economic theory and methodology to business decision-making and strategy. The course covers fundamental concepts such as demand and supply analysis, production and cost functions, market structures, pricing strategies, and the impact of government policies on businesses. Students learn how firms operate in different competitive environments, assess economic variables influencing organizational performance, and make informed choices to maximize profits and efficiency. By integrating economic principles with real-world business scenarios, the course equips students with analytical tools essential for solving complex business problems and developing effective corporate strategies.
Recommended Textbook Microeconomics 1st Canadian Edition by B.
Douglas Bernheim
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Page 2
Chapter 1: Introduction
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Q1) A theory
A) Is usually based on a set of value judgments
B) Cannot be tested
C) Is a possible explanation for a natural phenomenon
D) Always fits with real-world data
Answer: C
Q2) Suppose that two economists reach different positive conclusions based on the same evidence.Most likely,the two economists
A) Have different values judgments
B) Are using different assumptions
C) Are using different subjective criteria
D) Are not using the scientific method
Answer: B
Q3) Positive economic questions
A) Involve value judgments
B) Address what ought to happen
C) Are potentially testable
D) Cannot be tested
Answer: C
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Page 3
Chapter 2: Supply and Demand3
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Q1) Suppose the demand function for the Toyota Camry is given by Q<sub>d</sub> = 500 - 12P<sub>C</sub> + 10P<sub>H</sub> - 5P<sub>G</sub> + 0.0001M,where P<sub>C</sub> is the price of the Toyota Camry (in thousands),P<sub>H</sub> is the price of the Honda Accord (in thousands),P<sub>G</sub> is the price of gas (per gallon)and M is income.Further,suppose the supply curve for the Toyota Camry is given by Qs = 20P<sub>C</sub> - 55.
a.What is the demand curve for the Toyota Camry if the price of the Accord is $25,000,gas is $2 per gallon and income is $50,000?
b.What is the equilibrium price and quantity in the market for Toyota Camrys?
c.Is demand elastic or inelastic at the equilibrium price?
d.What is the cross price elasticity of demand at equilibrium?
e.What is the income elasticity of demand for Camrys at equilibrium?
Answer: a)Q<sub>d</sub> = 745 - 12P<sub>C</sub>.b)P = $25,000,Q = 445.c)- 12 x (25/445)= -0.67,which implies that demand is inelastic.d)10 x (25/445)= 0.56.e)0.0001 x (50,000/445)= 0.011
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Page 4
Chapter 3: Balancing Benefits and Costs
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Q1) How would a local government use marginal analysis to determine whether or not to undertake a new highway construction project?
Answer: The decision whether or not to pursue a new highway construction project requires a comparison of the MC and MB of the project.The primary costs of the project would be the expenditures on labor,capital and raw materials required to build the highway.One of the major benefits of the project would be the time savings that result from reduced traffic congestion.This benefit to commuters would be measured to a large extent by the opportunity cost of the time they spend commuting.People typically allocate their time between work and leisure activities.According to the No Marginal Improvement Principle,the value of an extra hour of leisure must equal the value of an extra hour spent working.Therefore,the opportunity cost of the foregone leisure that results from commuting can be measured by the commuter's hourly wage rate.
Q2) A sunk cost
A) Causes a decision maker to choose to pursue less of an activity
B) Causes a decision maker to choose to pursue more of an activity
C) Increases the marginal cost of an activity
D) Has no effect on a decision maker's best choice
Answer: D
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Chapter 4: Principles and Preferences
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Q1) The marginal rate of substitution between two goods is given by
A) The inverse of the slope of an indifference curve
B) The slope of a line tangent to an indifference curve
C) Negative one times the inverse of the slope of an indifference curve
D) Negative one times the slope of a line tangent to an indifference curve
Q2) Stewie enjoys watching DVDs and listening to his iPod.Suppose his utility function is given by U(D,I)= 3D + 4(D x I),where D is the number of hours he spends watching DVDs and I is the number of hours he spends listening to his iPod.Which of the following combination will provide Stewie with the greatest amount of satisfaction?
A) 4 hours of watching DVDs and 8 hours of listening to his iPod
B) 6 hours of watching DVDs and 6 hours of listening to his iPod
C) 2 hours of watching DVDs and 10 hours of listening to his iPod
D) 8 hours of watching DVDs and 6 hours of listening to his iPod
Q3) Refer to Figure 4.3,which relates to two consumers shopping for a new car.Which of the following statements is true?
A) Fuel efficiency is more important to Gina than it is to Greg
B) Horsepower is just as important to Gina as it is to Greg
C) Fuel efficiency is more important to Greg than it is to Gina
D) Indifference curves cannot be used to compare consumers' tastes
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Page 6
Chapter 5: Constraints, Choices, and Demand
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Q1) Suppose a consumer buy books and DVDs.The price of a book is $10,the price of a DVD is $20 and the consumer's income is $400.If books are measured on the vertical axis and DVDs are measured on the horizontal axis,then the budget line intersects the vertical axis at
A) 40
B) 20
C) 10
D) 400
Q2) Refer to Figure 5.1.Which graph represents an increase in the price of DVDs?
A) A
B) B
C) C
D) D
Q3) A utility function is a mathematical function that assigns values to consumption bundles to represent the
A) Consumer's income
B) Consumer's preferences
C) Marginal rate of substitution
D) Prices of the goods in the consumption bundle
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Chapter 6: Rom Demand to Welfare
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Q1) Madison has an income of $50,which she spends on Pizza (P)and soft drinks (S).Her marginal rate of substitution is MRS<sub>PS</sub> = S/P.The price of pizza (P<sub>P</sub>)is $5 and the price of soft drinks (P<sub>S</sub>)is $2.50.Finally,the formula for her indifference curves is given by S = 2U/P.
a)Find Madison's uncompensated demand curve for pizza.
b)Find Madison's compensated demand curve for pizza.
Q2) Refer to Figure 6.4.What area represents the change in consumer surplus when the price increases from $1,000 to $1,500?
A) b
B) b + e
C) b + c
D) a + b
Q3) The demand curve for leisure will slope upward if leisure is a ______ good and the income effect of a wage change is relatively _______.
A) Normal; large
B) Inferior; large
C) Normal; small
D) Inferior; small
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Chapter 7: Technology and Production
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Q1) According to the Law of Diminishing Marginal Returns,as additional units of one input are employed as all other inputs are held constant,total output will eventually ______.
A) Decrease
B) Increase at an increasing rate
C) Increase at a decreasing rate
D) Increase at a constant rate
Q2) Which of the following formulas measures the rate of substitution for labour with capital?
A) - L/ K
B) - K/ L
C) K/ L
D) L/ K
Q3) Refer to Figure 7.3.The marginal rate of technical substitution for labour with capital at 120 workers is represented by the slope
A) Of line ac
B) Of line ed
C) Of line ab times negative one
D) Of line ed times negative one
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9
Chapter 8: Cost
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Q1) Use an isocost-isoquant diagram to explain how a firm determines the least cost combination of labour and capital to produce a given level of output.What is true of the marginal product per dollar at the least cost combination of capital and labour? Why?
B. In fact, point B is on the lowest isocost line. Since the isocost line and isoquant are tangent at point B, their slopes are equal at that point. The slope of the isocost line is(wage rate/rental rate of capital) and the slope of the isoquant is equal to MP<sub>L</sub>/MP<sub>K</sub>. Thus, at point B
MP<sub>L</sub>/MP<sub>K</sub> = wage rate/rental rate of capital
MP<sub>L</sub>/wage rate = MP<sub>K</sub>/rental rate of capital
This last equation implies that, at the least-cost combination of capital and labour, the marginal product per dollar spent on labour must equal the marginal product per dollar spent on capital.
C. Since combinations A and C are on a higher isocost line, they would cost more than the combination represented by point
Q2) Using a graph,explain the relationship between average cost and marginal cost.
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Chapter 9: Rofit Maximization
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Q1) Since sunk costs are incurred no matter what,
A) They are relevant in deciding how much to produce
B) They are essential in the profit-maximizing sales quantity formula
C) They can generally be ignored in making economic decisions
D) They are considered fixed costs
Q2) When a firm's demand curve is downward sloping,its marginal revenue at any positive sales quantity is ______ its price.
A) Greater than
B) Less than
C) Equal to
D) Less than or equal to
Q3) A firm's profit is denoted by the Greek letter
A) Rho
B) Delta
C) Chi
D) Pi
Q4) Graphically illustrate the quantity rule and the shut down rule for a price-taking firm.
Q5) Using a graph,explain why the law of supply holds for a competitive firm.
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Chapter 10: Choices Involving Time
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Q1) When the interest rate rises,saving becomes ______ rewarding and borrowing becomes ______ costly.
A) Less, less
B) Less, more
C) More, less
D) More, more
Q2) Suppose you are looking to add more capacity to your current manufacturing plant.The new project will cost $6 million up front and is projected to increase revenue $1.5 million a year for each of the next 5 years.If the interest rate is 8%,what is this project's NPV and is it a profitable investment?
A) -$10,934.94, Yes it is profitable
B) -$10,934.94, No it is not profitable
C) $944,444.44, Yes it is profitable
D) $944,444.44, No it is not profitable
Q3) If you were to invest $10,000 for two years and the interest rates for each of those years are 4.5% and 4.65% respectively,how much interest would you earn from the end of year one until the end of year two? Assume interest compounds annually.
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Page 12
Chapter 11: Choices Involving Risk
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Q1) A person is risk averse if
A) His consumption bundle lies at the tangency of the indifference curve and the constant expected consumption line
B) He views variability as a bad thing
C) For a given level of expected consumption, he prefers the risk less bundle to the risky one
D) All of the above
Q2) Refer to Figure f.A benefit function,W(F),is plotted in Figure f.Point A represents the A) Risk premium of the consumption bundle
B) Expected utility of the consumption bundle
C) Certainty equivalent of the consumption bundle
D) Expected consumption
Q3) Two variables are uncorrelated if
A) They move in the same direction
B) They move in the opposite direction
C) Their movements tend to be unrelated
D) One is simply a multiple of the other
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Chapter 12: Choices Involving Strategy
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Q1) The iterative deletion of dominated strategies refers to the following process:
A) Continue removing the weakly dominated strategies until there are no more weakly dominated strategies left to remove
B) Continue removing the dominant strategies until there are no more dominant strategies left to remove
C) Continue removing the dominated strategies until there are no more dominated strategies left to remove
D) Continue removing the best responses until there are no more best responses left to remove
Q2) In a Nash equilibrium
A) The strategy played by an individual depends upon the strategy played by other players
B) The strategy played by each individual is a best response to the strategies played by everyone else
C) There is no incentive for any player to deviate
D) All of these
Q3) Use the concepts of reputation and asymmetric information to explain why some faculty members become less productive after gaining tenure.
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14
Chapter 13: Behavioral Economics
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Q1) Gabby flips a fair coin and it comes up heads.Gabby suffers from the hot-hand fallacy if
A) She thinks the coin will come up heads on the next flip because it came up heads on the previous flip
B) She thinks the coin will come up tails on the next flip because it came up heads on the previous flip
C) She thinks the coin is less likely to come up heads because it came up heads on the previous flip
D) She thinks the coin is equally likely to come up heads or tails on the next flip
Q2) In the trust game
A) Game theory tells us that trustees will be untrustworthy and trustees will forego potentially profitable investments
B) Both players divides up the principle and earnings together
C) One player (the trustee) decides both how much money to invest and how the principle and earnings are divided between himself and the other players
D) Both players decide how much to invest together
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Chapter 14: Equilibrium and Efficiency
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Q1) The market supply of a product
A) Is the same as the supply curve of an individual seller
B) Graphically is the vertical sum of the individual supply curves
C) Graphically is the horizontal sum of the individual supply curves
D) A and C
Q2) With free entry
A) There is a known and limited number of potential suppliers that can produce a good in the long run
B) There is an unlimited number of firms that can produce a good in the long run
C) The long run market demand curve is horizontal at the market price
D) Firms will always enter the market
Q3) Discuss some of the changes in the organization of the economic systems of countries transitioning from communism to capitalism.How does this type of market reform increase economic efficiency?
Q4) Aggregate surplus
A) Is maximized under perfect competition
B) Is minimized under perfect competition
C) Is the sum of consumer and producer surpluses
D) A and C
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Chapter 15: Market Intervention
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Q1) The incidence of a tax
A) Indicates how much of the tax burden is borne by suppliers
B) Indicates how much of the tax burden is borne by consumers
C) Indicates how much of the tax burden is borne by various market participants
D) Depends upon the shape of the supply curve only
Q2) A subsidy
A) Is a payment that increases the amount that buyers pay for a good
B) Is a payment that reduces the amount that buyers pay for a good
C) Is a payment that reduces the amount that sellers receive
D) A and C
Q3) With a price floor
A) Consumer surplus falls and producer surplus falls
B) Consumer surplus increases and producer surplus falls
C) Consumer surplus falls and producer can increase or decrease
D) Consumer surplus increases and producer surplus increases
Q4) The deadweight loss from a tax
A) Is zero when demand is perfectly elastic
B) Is zero when supply is perfectly elastic
C) Is zero when demand is perfectly inelastic
D) Is unavoidable
Page 17
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Chapter 16: General Equilibrium, Efficiency, and Equity
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Q1) The first welfare theorem
A) Tells us that, in a general equilibrium with imperfect competition, the allocation of resources is Pareto efficient
B) Clarifies how the "invisible hand" of the market guides people toward privatly desirable choices
C) Tells us that a general equilibrium with perfect competition is not Pareto efficient
D) Tells us that, in a general equilibrium with perfect competition, the allocation of resources is Pareto efficient
Q2) The Edgeworth box
A) Is a diagram that shows two consumers' opportunities and choices in a single figure
B) Can be used to illustrate equilibrium in a simple exchange economy
C) Was first introduced by Francis Ysidro Edgeworth
D) All of these
Q3) Discuss the second welfare theorem.How can societies use competitive markets to achieve both efficiency and equity?
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Chapter 17: Monopoly
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Q1) A firm's markup over its marginal cost is greater
A) The more elastic is the demand curve
B) The less elastic is the demand curve
C) The lower its fixed costs
D) The lower its average costs
Q2) The more elastic is the demand for a product
A) The greater the difference between marginal revenue and price
B) The closer is marginal revenue to the price
C) The more a firm must reduce its price to increase its sales
D) The more a firm must reduce its cost to increase its sales
Q3) A firm's Lerner Index
A) Is the amount by which its price exceeds its marginal cost, expressed as a percentage of its price
B) Is the amount by which its marginal cost exceeds its average cost
C) Is the amount by which its average cost exceeds its marginal cost
D) Is the value of its profit
Q4) Discuss the difference between first-best and second-best price regulation.In your answer,you should address why governments regulate markets and the difficulties faced when doing so.
Q5) Explain the difference between a monopoly and a monophony.
Page 19
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Chapter 18: Pricing Policies
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Q1) Mixed bundling
A) Is the practice of selling several products together as a package
B) Is the practice of selling the same good to different types of consumers at different prices
C) Is the practice of selling several products together as a package while also offering those products for sale individually
D) Is the practice of selling goods in bulk at a reduced per unit price
Q2) When a supermarket charges more per ounce for a small bottle of ketchup than a larger one,it is engaging in
A) Price discrimination based on observable customer characteristics
B) Perfect price discrimination
C) Quantity-dependent pricing
D) Quality-dependent pricing
Q3) Explain bundling and mixed bundling and the benefits to a multi product monopolist of such packaging schemes.
Q4) Discuss the differences between perfect and imperfect price discrimination and the benefits of each to a monopolist.
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Chapter 19: Oligopoly
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Q1) Define the Bertrand model and its assumptions.Explain why the model predicts the perfectly competitive outcome despite the number of sellers.Discuss the limitations of the model.
Q2) When consumers do not view similar products as perfect substitutes,those products are called
A) Homogenous
B) Complements
C) Differentiated
D) Normal
Q3) A residual demand curve
A) Shoes the relationship between the market price and the quantity demanded by consumers at each price
B) Shows the relationship between a firm's output and the market price given the prices charged by the firm's rivals
C) Shows the relationship between a firm's output and the market price given the outputs of the firm's rivals
D) Shows the remaining demand for a good after a firm's rivals have sold their output
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Page 21
Chapter 20: Externalities and Public Goods
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Q1) The economist who won the Nobel Prize in Economics for his path-breaking analysis of the ways in which property rights,transaction costs and institutions affect the allocation of economic resources is
A) John Nash
B) Arthur Cecil Pigou
C) Ronald Coase
D) Theodore Groves
Q2) Pigouvian taxation
A) Involves the use of taxes or fees to remedy negative externalities
B) Involves the use of subsidies to remedy negative externalities
C) Is a legal principles requiring a party who takes an action that harms others to compensate the affected parties for some or all of their losses
D) Requires that victims of an externality pay a tax to the producers of the externality
Q3) A public good
A) Is a good that is nonrival
B) Is a good that is nonexcludable
C) Is often provided by the government
D) All of these
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