Business Economics
Exam Solutions
Course Introduction
Business Economics explores the application of economic theory and analytical tools to real-world business decision-making. The course examines how firms operate within different market structures, make pricing and output decisions, and allocate resources efficiently while considering factors such as profit maximization, cost analysis, and competitive strategy. Students will gain insight into how economic forces such as supply and demand, elasticity, and market equilibrium impact organizations, and learn to interpret economic data to inform business strategy and policy. Ethical issues, government intervention, and international economic dynamics are also discussed to provide a comprehensive understanding of the business environment.
Recommended Textbook Microeconomics 7th Edition by R. Glenn Hubbard
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18 Chapters
4654 Verified Questions
4654 Flashcards
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Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) Which of the following statements is true?
A)Any time you have to decide which action to take you are experiencing economic equity.
B)Trade-offs do not apply when the consumers purchase a product for which there is excess supply, such as with a stock clearance sale.
C)Every individual, no matter how rich or poor, is faced with situations that require trade-offs.
D)Economics is a social science that studies the trade-offs we are forced to make because resources are unlimited.
Answer: C
Q2) At a recent company meeting, Ravi Batra, sales manager of Life's a Beach, a surfboard producer, announced, "We have increased our sales by 13 percent in just 9 months." Suppose 9 months ago, its sales amounted to $245,000.What is the value of its sales today?
A)$31,850
B)$207,638
C)$276,850
D)$359,905
Answer: C
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Chapter 2: Trade-Offs, Comparative Advantage, and the Market System
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Sample Questions
Q1) Refer to Table 2-3.Assume Dina's Diner only produces sliders and hot wings.A combination of 80 sliders and 50 hot wings would appear
A)along Dina's production possibilities frontier.
B)inside Dina's production possibilities frontier.
C)outside Dina's production possibilities frontier.
D)at the vertical intercept of Dina's production possibilities frontier.
Answer: B
Q2) The production possibilities frontier model assumes which of the following?
A)Labor, capital, land, and natural resources are unlimited in quantity.
B)The economy produces only two products.
C)Production of any level of the two products that the economy produces is currently possible.
D)The level of technology is variable.
Answer: B
Q3) For a person to have a comparative advantage in producing a product, she must be able to produce that product at a lower opportunity cost than her competitors.
A)True
B)False
Answer: True
Page 4
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) Refer to Figure 3-8.The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D and S (point A). If there is a shortage of apples, how will the equilibrium point change?
A)The equilibrium point will move from A to B.
B)The equilibrium point will move from A to C.
C)There will be no change in the equilibrium point.
D)The equilibrium point will move from A to E.
Answer: C
Q2) A decrease in quantity supplied is represented by a leftward shift of the supply curve.
A)True
B)False
Answer: False
Q3) An inferior good is a good for which the quantity demanded decreases as the price increases, holding everything else constant.
A)True
B)False
Answer: False
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Chapter 4: Economic Efficiency, Government Price Setting, and Taxes
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Sample Questions
Q1) If the price of chewing gum is represented by P in equation P = 25 - 0.5 Q , then the corresponding quantity of chewing gum demanded is represented by the demand equation
A)Q = 2P - 0.5.
B)Q = 0.5P + 25.
C)Q = 50 -2P.
D)Q = -5 + 10P.
Q2) What is the difference between scarcity and a shortage?
Q3) Marginal cost is the additional cost to a firm of producing one more unit of a good or service.
A)True
B)False
Q4) Refer to Figure 4-7 which shows the market for vitamins.Suppose the government imposes a price ceiling of P .How will the price ceiling affect the quantity supplied, quantity demanded, and quantity exchanged?
Q5) The total amount of producer surplus in a market is equal to A)the difference between quantity supplied and quantity demanded. B)the area above the market supply curve and below the market price. C)the area above the market supply curve.
D)the area between the demand curve and the supply curve below the market price.
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Chapter 5: Externalities, Environmental Policy, and Public Goods
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Sample Questions
Q1) Medical research that results in a cure for a serious disease produces positive externalities.What is the impact of this positive externality on economic efficiency?
A)At the market equilibrium, less than the economically efficient quantity of medical research is produced.
B)A deadweight loss occurs because at the market equilibrium the marginal social cost of medical research is greater than the marginal social benefit.
C)At the market equilibrium, more than the economically efficient quantity of medical research is produced.
D)A deadweight loss occurs because at the market equilibrium the marginal social cost equals the marginal social benefit.
Q2) A market supply curve reflects the
A)external costs of producing a good or service.
B)external benefits of producing a good or service.
C)marginal social costs of producing a good or service.
D)marginal private costs of producing a good or service.
Q3) State the Coase theorem.
Q4) What are some of the limitations of the Coase theorem in practice?
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Chapter 6: Elasticity: the Responsiveness of Demand and Supply
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Sample Questions
Q1) Refer to Figure 6-12.Suppose the diagram shows the supply curves for a product in the short run and in the long run.Which supply curve represents supply in the short run and which curve represents supply in the long run?
A)S<sub>B</sub> represents supply in the short run and S<sub>A</sub> represents supply in the long run.
B)Either S<sub>A</sub> or S<sub>B</sub> could represent supply in the short run; in the long run the supply curve must be a vertical line.
C)Either S<sub>A</sub> or S<sub>B</sub> could represent supply in the long run; in the short run the supply curve must be a horizontal line.
D)S<sub>A</sub> represents supply in the short run and S<sub>B</sub> represents supply in the long run.
Q2) According to the Apply the Concept feature in the textbook, in the alcohol industry, both wine and spirits are considered to be substitutes for beer.
A)True B)False
Q3) Explain the economic concept of price elasticity of supply.How is price elasticity of supply calculated?
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Page 8
Chapter 7: The Economics of Health Care
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Sample Questions
Q1) Refer to Figure 7-1.At the market equilibrium, the deadweight loss is equal to A)$0.
B)$250,000.
C)$500,000.
D)$1,000,000.
Q2) Refer to Figure 7-1.Marginal social benefit is represented by which curve?
A)D
B)D
C)Supply
D)All of the above represent marginal social benefit.
Q3) Most doctors and hospitals operate as private businesses in all of the following countries except A)Canada.
B)Japan.
C)the United Kingdom.
D)the United States.
Q4) In most circumstances, employees do not pay taxes on the value of health insurance their employers provide them.
A)True
B)False
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Chapter 8: Firms, the Stock Market, and Corporate Governance
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Sample Questions
Q1) Jake sells Star Wars memorabilia on eBay.His annual revenue is $42,000 per year, and the explicit costs of his business are $10,000.What is his accounting profit?
A)$10,000
B)$22,000
C)$32,000
D)$42,000
Q2) How is economic profit calculated?
Q3) The profits a corporation keeps to finance future expansion are known as A)retained earnings.
B)preferred stock.
C)dividends.
D)capital gains.
Q4) Briefly describe the Sarbanes-Oxley Act and explain why it was passed.
Q5) A corporation's board of directors
A)hire the managers of the corporation.
B)control the day-to-day activities of the corporation.
C)are personally liable for the debts of the corporation.
D)are the sole owners of the corporation.
Q6) How does a firm raise external funds through direct finance?
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Chapter 9: Comparative Advantage and the Gains From International Trade
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Sample Questions
Q1) Refer to the Article Summary.All else equal, if the Trump administration decides to enact protectionist measures, such as a tariff, against foreign solar panels, the price of solar panels in the United States will ________ and the quantity of solar panels demanded in the United States will ________.
A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease
Q2) Refer to Table 9-3.Select the statement that accurately interprets the data in the table.
A)Bryce has an absolute advantage in making candles and soap.
B)Tina has an absolute advantage in making candles and soap.
C)Neither Bryce nor Tina has an absolute advantage in making candles.
D)Neither Bryce nor Tina has an absolute advantage in making soap.
Q3) NAFTA refers to a 1994 agreement that eliminated most tariffs among which countries?
A)Canada, the United Kingdom, and Mexico
B)the United States, the United Kingdom, and Mexico
C)the United States, Canada, and Mexico
D)the United States, Mexico, and Cuba
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Chapter 10: Consumer Choice and Behavioral Economics
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Sample Questions
Q1) Most people would prefer to drive a luxury car that has all the options, but more people buy less expensive cars even though they could afford the luxury car because A)car buyers are irrational.
B)the total utility of less expensive cars is greater than that of luxury cars.
C)the marginal utility per dollar spent on the less expensive car is higher than that spent on luxury cars.
D)luxury cars cost a lot more than non-luxury cars.
Q2) Which of the following correctly describes the result of a price increase for an inferior good?
A)Both the substitution effect and the income effect cause the consumer to buy less of the good.
B)The substitution effect causes the consumer to buy less of the good and the income effect causes the consumer to buy more of the good.
C)The substitution effect causes the demand for the good to decrease; the income effect causes the demand for the good to increase.
D)The substitution effect causes the demand for the good to increase; the income effect causes the demand for the good to decrease.
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Chapter 11: Technology, Production, and Costs
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Sample Questions
Q1) State the law of diminishing marginal returns.
Q2) Refer to Table 11-1.What is the marginal product of the 4th worker?
A)137 pounds
B)50 pounds
C)12.5 pounds
D)5 pounds
Q3) Suppose the total cost of producing 40,000 flash drives is $120,000, and the fixed cost is $30,000.
a.What is the variable cost?
b.When output is 40,000, what are the average variable cost and the average fixed cost?
c.Assuming the cost curves have the usual shape, is the dollar difference between the average total cost and the average variable cost greater when the output is 40,000 flash drives or when the output is 60,000 flash drives? Explain.
Q4) The production function shows
A)the total cost of producing a given quantity of output.
B)the maximum output that can be produced from a set of inputs.
C)the technology used to produce output.
D)the incremental output gained by improving the production process.
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Page 13
Chapter 12: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) The marginal revenue curve for a perfectly competitive firm
A)is downward-sloping.
B)is the same as its demand curve.
C)is perfectly inelastic.
D)is the same as its marginal cost curve.
Q2) Refer to Figure 12-1.If the firm is producing 700 units, what is the amount of its profit or loss?
A)loss of $280
B)loss equivalent to the area A
C)profit equivalent to the area A
D)There is insufficient information to answer the question.
Q3) A perfectly competitive firm's short-run supply curve is
A)upward sloping and is the portion of the marginal cost curve that lies above the average total cost curve.
B)upward sloping and is the portion of the marginal cost curve that lies above the average variable cost curve.
C)perfectly elastic at the market price.
D)horizontal at the minimum average total cost.
Q4) What is meant by the term "long-run competitive equilibrium"?
Q5) Under what conditions should a competitive firm shut down in the short run?
Page 14
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Chapter 13: Monopolistic Competition: the Competitive
Model in a
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Sample Questions
Q1) Refer to Figure 13-14.Which of the following statements describes the firm depicted in the diagram?
A)The firm is making no economic profit and will exit the industry.
B)The firm is suffering an economic loss by producing at Q but will break even if it increases its output to Q .
C)The firm achieves productive efficiency by producing at Q .
D)The firm is in long-run equilibrium and is breaking even.
Q2) Refer to Table 13-1.What portion of the marginal revenue of the 5th unit is due to the output effect and what portion is due to the price effect?
A)output effect = $3.00; price effect = $0.50
B)output effect = $1.50; price effect = $2.00
C)output effect = $5.50; price effect = -$2.00
D)output effect = $4.00; price effect = -$0.50
Q3) If the demand curve for a firm is downward-sloping, its marginal revenue curve
A)will lie above the demand curve.
B)will lie below the demand curve.
C)is the same as the demand curve.
D)is horizontal.
Q4) What is the difference between the terms "marketing" and "advertising"?
Page 15
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Chapter 14: Oligopoly: Firms in Less Competitive Markets
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Sample Questions
Q1) A supplier of paper napkins to the fast food industry is unlikely to have significant bargaining power.
A)True
B)False
Q2) When Walmart decides to build a new retail store in a town, it will decide to build a large store rather than a small store if the large store is expected to earn a greater economic profit.What other motive would Walmart have for choosing to build a large store?
A)A larger store will help Walmart maintain its position as the leading retail company in the world more than a smaller store would.
B)A larger store will give Walmart greater political influence in the community.
C)A larger store may deter entry into the town by a rival firm.
D)Because of economies of scale, the average total cost of production is less for a larger store than a smaller store.
Q3) Which of the following is not one of the five competitive forces?
A)the threat from potential entrants
B)the bargaining power of buyers
C)the firm's ability to differentiate its product
D)the bargaining power of suppliers
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Page 16
Chapter 15: Monopoly and Antitrust Policy
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Sample Questions
Q1) The Clayton Act prohibited
A)all vertical mergers.
B)all horizontal mergers.
C)any merger if its effect was to substantially lessen competition or create a monopoly.
D)all conglomerate mergers.
Q2) A monopoly is the only seller of a product
A)with many substitutes.
B)without a close substitute.
C)with a perfectly inelastic demand.
D)without a well-defined demand curve.
Q3) For which of the following firms is patent protection of vital importance?
A)furniture producers
B)software firms
C)pharmaceutical firms
D)auto makers
Q4) U.S.antitrust laws are designed to prohibit monopolization and encourage competition.Why, then, does the government erect barriers to entry and create monopoly power by granting firms patents?
Q5) Identify two ways by which the government controls monopolies?
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Chapter 16: Pricing Strategy
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Sample Questions
Q1) Why is it necessary for a firm that practices price discrimination be a price maker rather than a price taker?
Q2) Refer to Figure 16-7.The owners of the Lizard Lounge are considering the following four pricing options:
A.A single price scheme where the cocktail price equals the monopoly price.
B.A single price scheme where the cocktail price equals the competitive price.
C.A two-part tariff: a monopoly cocktail price and a cover charge that will generate total revenue equal to the area X.
D.A two-part tariff: a competitive cocktail price and whatever cover charge that will generate a total revenue equivalent to the area X + Y + Z. Which pricing scheme(s)achieve the economically efficient outcome?
A)schemes a and c
B)scheme b
C)schemes b and d
D)scheme d only
Q3) Are restaurant coupons a form of price discrimination? Why or why not?
Q4) Why might an amusement park switch from charging admission to the park and charging for the rides to charging for admission but not charging for the rides?
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Chapter 17: The Markets for Labor and Other Factors of Production
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Sample Questions
Q1) An increase in a perfectly competitive firm's demand for labor could be caused by
A)a decrease in the market wage rate.
B)an increase in the market demand for the firm's product.
C)a decrease in the marginal product of workers.
D)an increase in the quantity of labor supplied.
Q2) Suppose that Hawaii legalizes casino gambling.By imposing a tax on casino revenues, the state government is able to eliminate the state income tax on wages.What is likely to be the effect on the labor supply curve in Hawaii?
Q3) Which of the following will not cause the labor demand curve to shift to the right?
A)an increase in the price of the firm's product
B)a technological improvement that increases labor productivity
C)an increase in human capital in the labor force
D)an increase in the market wage rate
Q4) If the labor supply curve shifts to the right and the labor demand curve remains unchanged, what will happen to the equilibrium wage and the equilibrium level of employment? Illustrate your answer with a graph.
Q5) What is personnel economics?
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Chapter 18: Public Choice, Taxes, and the Distribution of Income
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Sample Questions
Q1) The marginal tax rate is
A)the amount of taxes paid as a percentage of income.
B)the amount of per-capita taxes paid.
C)the amount of taxes paid as a percentage of gross domestic product (GDP).
D)the fraction of each additional dollar of income that must be paid in taxes.
Q2) What is the voting paradox?
A)the observation that less than 60 percent of those eligible to vote actually vote
B)the observation that majority voting may not always result in consistent choices
C)the idea that wealthy corporations are able to sway politicians to act in ways contrary to the desires of the majority
D)people are aware that their votes will not change the political outcome since these outcomes are predetermined by a group of influential politicians
Q3) Refer to Figure 18-1.Area E + H represents
A)the portion of sales tax revenue borne by consumers.
B)the portion of sales tax revenue borne by producers.
C)the excess burden of the sales tax.
D)sales tax revenue collected by the government.
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