Business Economics
Final Exam Questions
Course Introduction
Business Economics provides an in-depth exploration of how economic theories and principles apply to decision-making within businesses and organizations. The course examines topics such as market structures, demand and supply analysis, production and cost functions, pricing strategies, and the impact of government policies on business operations. Students will develop analytical skills to interpret market trends, evaluate competitive strategies, and understand the economic environment affecting business performance. The course aims to equip learners with the tools to make informed managerial decisions and understand the economic forces driving business success and challenges.
Recommended Textbook
Microeconomics A Modern Approach 1st Edition by Andrew Schotter
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Page 2
Chapter 1: Economics and Institutions: a Shift of Emphasis
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Q1) Laura Ramos developed an economic theory and tested it in a lab experiment. The lab data did not match the behavior predicted by her theory. Laura should rethink the validity of her theory.
A)True
B)False Answer: True
Q2) Economic models are abstract representations of reality that economists use to study economic and social phenomena.
A)True
B)False Answer: True
Q3) A statement that we should increase the minimum wage is an example of positive economics.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Consumers and Their Preferences
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Sample Questions
Q1) In Experimental Teaser 1, what action can the divider choose?
A) Keep all the $10
B) Give some to the receiver
C) Both options are available
Answer: C
Q2) The assumption on utility functions that states that, if two bundles are close to each other in the feasible set, then they will be assigned utility numbers that are close to each other as well is called
A) convexity
B) continuity
C) ordinality
Answer: B
Q3) Reflexivity is an example of a
A) psychological assumption
B) rationality assumption
C) psychiatric assumption
Answer: B
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Chapter 3: Utilities Indifference Curves
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Sample Questions
Q1) Refer to Exhibit 3-2. Which figure illustrates goods for which the consumer has nonconvex preferences?
A) (a)
B) (b)
C) (c)
D) (d)
Answer: A
Q2) What is the name of the axiom that states that, if bundle x is revealed to be preferred to bundle y (either directly or indirectly) and bundle y is different from x, then bundle y
cannot be directly or indirectly revealed to be preferred to x?
A) Weak Axiom of Revealed Preference (WARP)
B) Strong Axiom of Revealed Preference (SARP)
C) Generalized Axiom of Revealed Preference (GARP)
Answer: B
Q3) Two goods are perfect substitutes if they have right-angle indifference curves.
A)True
B)False
Answer: False
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5
Chapter 4: Demand and Behavior in Markets
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Sample Questions
Q1) Refer to Exhibit 4-2. This income expansion path depicts a(n)
A) superior good
B) normal good
C) inferior good
Q2) Refer to Exhibit 4-4. Which curve represents the uncompensated demand function?
A) (a)
B) (b)
C) There is not enough information to give an answer.
Q3) The price-consumption path is the curve
A) representing how consumption will vary when one price changes but all other prices and the consumer's income remain constant
B) connecting optimal consumption bundles that shows how a consumer changes the quantity demanded of specified goods as income changes and prices remain constant
C) that represents the relationship between the quantity of good demanded by a consumer and the price of that good as the price varies
Q4) A normal is a good whose demand curve is downward sloping.
A)True
B)False
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6
Chapter 5: Some Applications of Consumer Demand, and Welfare Analysis
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Q1) Refer to Exhibit 5-1. Which demand curve is perfectly inelastic?
A) (a)
B) (b)
C) (c)
Q2) A measure of consumer surplus determined by the area under the compensated demand curve is the approximate measure of consumer surplus.
A)True
B)False
Q3) Researchers studying labor supply decisions of New York City cab drivers discovered that the time horizons of the drivers are
A) day-by-day
B) intertemporal
C) multi-year
Q4) The Slutsky equation portrays
A) only the substitution effect
B) only the income effect
C) both the income and substitution effects
Q5) Describe how society can lower the dishonest wage.
Q6) List the three properties of demand functions.
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Chapter 6: Uncertainty and the Emergence of Insurance
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Q1) Refer to Exhibit 6-3. Which utility function is risk averse?
A) (a)
B) (b)
C) (c)
Q2) A risk-averse agent will
A) reject a "fair gamble"
B) be indifferent to a "fair gamble"
C) accept a "fair gamble"
Q3) An agent who buys high-priced insurance is most likely
A) risk neutral
B) risk averse
C) risk preferring
Q4) The hypothesis that states that, when people are faced with risk, they assess the possible payoffs in terms of utility and then choose the gamble that yields the payoff with the highest expected utility is known as the expected utility hypothesis.
A)True
B)False
Q5) Consider the test in Experimental Teaser 7 at the beginning of the chapter. How would you predict a risk preferring agent to behave in this experiment?
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Chapter 7: Uncertainty Applications and Criticisms
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Q1) Expected utility theory requires that people
A) assess probabilities in an unbiased manner
B) obey all of the theory's axioms for assigning utilities to outcomes
C) Both answers are correct
Q2) The proposition that states that, if a risk-averse agent is faced with two gambles, both of which have the same expected monetary return but different variances, the agent will choose the gamble whose variance is smaller is known as the mean-preserving spread proposition.
A)True
B)False
Q3) In a survey of university hospital employees, when the insurance causes are broken down to individual cases, people tend to overestimate the probability of each case happening. This is an example of
A) the effect of isolating vivid causes
B) status quo bias
C) the mean-preserving spread proposition
Q4) People are more likely to buy insurance if they are
A) risk averse
B) risk preferring
C) risk neutral
Page 9
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Chapter 8: The Discovery of Production and Its Technology
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Q1) The no free lunch assumption states that you cannot get any output from a production process without inputs.
A)True
B)False
Q2) The assumption that states that, if we can produce a cetain output with a given combination of inputs, then with those inputs we can always produce strictly less is called the subtractivity assumption.
A)True
B)False
Q3) Decreasing returns to scale is a feature of a technology that is such that, when all inputs are increased by a fixed multiple , output increases by less than that multiple.
A)True
B)False
Q4) The marginal rate of technical substitution measures the ratio between the resulting change in the output level and the proportionate change in the levels of all the inputs.
A)True
B)False
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Chapter 9: Cost and Choice
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Q1) Refer to Exhibit 9-3. Which graphs shows a cost function for a Cobb-Douglas production function with decreasing returns to scale?
A) (a)
B) (b)
C) (c)
Q2) Refer to Exhibit 9-3. Which graphs shows a cost function for a Cobb-Douglas production function with constant returns to scale?
A) (a)
B) (b)
C) (c)
Q3) In order to produce any given amount of output in the least-cost way, choose the combination of inputs that is located on the lowest ___________ curve ___________ to the ___________ associated with the desired level of output.
A) isocost, tangent, isoquant
B) isocost, perpendicular, isoquant
C) isoquant, tangent, isocost
Q4) What is the difference between finding the optimal combination of inputs in the short run versus in the long run?
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Chapter 10: Cost Curves
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Q1) The short-run expansion path is the curve containing the tangency points between the isocost curves and the isoquants, presenting the set of input combinations that produces any given output level at the least cost.
A)True
B)False
Q2) When SRMC is greater than SRAC, the average cost curve must be A) horizontal B) falling C) rising
Q3) The short-run total cost function describes the total cost of producing any given level of output with a given fixed amount of capital.
A)True
B)False
Q4) When an entrepreneur produces only a few units of output, much of the cost of each unit must be used to pay fixed costs and, therefore, average cost is A) high
B) low
C) zero
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Page 12
Chapter 11: Game Theory and the Tools of Strategic
Business Analysis
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Q1) The remaining portion of the game tree at a given node of the larger game is known as backward induction.
A)True
B)False
Q2) Extensive form is a
A) matrix showing the players, strategies, and payoffs of a game
B) long game with at least ten strategies and ten players
C) description of a game of strategy that provides a detailed description of the rules of the game
Q3) A threat that, if the game ever progresses to the point where the threat is supposed to be carried out will, in fact, be acted on is known as a(n)
A) noncredible threat
B) credible threat
C) incredible threat
Q4) A state in which no player will wish to change his or her behavior given the behavior of the other players is known as equilibrium.
A)True
B)False
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Chapter 12: Decision Making Over Time
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Q1) Given a positive discounting factor, the best wage stream for a present value maximizing subject is the
A) flat stream
B) declining stream
C) increasing stream
Q2) Describe a commitment device designed to counteract time-inconsistent behavior.
Q3) The idea that, in a dynamic economic problem, at any point in time the decision maker can choose an optimal action by comparing the value of stopping versus continuing in an optimal fashion is known as
A) the Principle of Hyperbolic Preferences
B) Bellman's Principle of Optimality
C) Bellman's Exponential Discounting
Q4) The optimal reservation wage is the idea that, in a dynamic economic problem, at any point in time the decision maker can choose an optimal action by comparing the value of stopping versus continuing in an optimal fashion.
A)True
B)False
Q5) What type of dynamic intertemporal choice problem is solved using backward induction?
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Chapter 13: The Internal Organization of the Firm
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Q1) The person who is acting on behalf of a principal is called the A) vice principal
B) agent
C) employer
Q2) When actions are unobservable, the principal will write contracts in terms of A) actions
B) outcomes
C) efforts
Q3) In a two-person economic tournament, each player's payoff will be a function not only of the player's choice of an effort level, but also of the A) firm's revenue
B) probability of being caught shirking
C) competitor's choice
Q4) A business entity that hires labor and capital to produce a product is known as a(n) A) employee
B) firm
C) resource
Q5) Is there a Nash equilibrium under a revenue-sharing plan?
Q6) Can a firm prevent the moral hazard problem of workers shirking?
Page 15
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Chapter 14: Perfectly Competitive Markets: Short-Run Analysis
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Q1) Refer to Exhibit 14-4. At which price will there be excess demand?
A) p<sup>1</sup>
B) p<sup>e</sup>
C) p<sup>2</sup>
Q2) In a comparative static analysis, the economist examines the equilibrium of the market before and after a policy change to see the effect of the change on the market price and quantity.
A)True
B)False
Q3) In general, the _______ elastic the demand for a product being taxed, the _______ the incidence of the tax will fall on the consumers.
A) more, more
B) more, less
C) less, less
Q4) Perfectly competitive firms must take the market price as A) given
B) being randomly determined
C) whatever the firms want it to be
Page 16
Q5) In the short run, can a perfectly competitive firm earn an extra-normal profit?
Q6) When is a tougher drug enforcement policy beneficial to society on the whole?
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Page 17
Chapter 15: Competitive Markets in the Long Run
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Q1) An industry's long-run supply curve will be flat if inputs are in abundant supply and if the industry consumes only a small share of the inputs in the market. Why?
Q2) In the long run, a firm has enough time to adjust ___________ factors of production to meet any level of demand.
A) all
B) only one
C) no
Q3) Constant-cost rent is the average cost of the firm when economic rent is included as a cost.
A)True
B)False
Q4) Which of the following is the third step in deriving a flat long-run supply curve?
A) market demand increases
B) market supply increases until price returns to the original value
C) firms earn extra-normal profits
Q5) In constant-cost industires, the long-run supply curve is flat.
A)True
B)False
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Chapter 16: Market Institutions and Auctions
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Q1) A sealed-bid auction is an auction in which bidders enter their bids privately and the winner is that bidder whose bid is
A) highest
B) lowest
C) zero
Q2) In a common value auction, the equilibrium bid of bidders in the auction will be
A) zero
B) the socially optimal value
C) the estimated mean of the distribution of estimates
Q3) The resulting price of an English auction will be _______________ the resulting price of a second-price sealed-bid auction.
A) greater than
B) equal to C) less than
Q4) Collusion among firms bidding in an auction is called auction distortion.
A)True
B)False
Q5) Are the buyers or the sellers the active agents in a one-sided oral auction?
Q6) Under what conditions does the Revenue Equivalence Theorem not hold true?
Page 19
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Chapter 17: The Age of Entrepreneurship: Monopoly
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Q1) A monopolist will choose the profit-maximizing quantity and price. Would society as a whole be better off with some other outcome?
Q2) A process of buying a commodity and reselling it at a favorable price is called
A) arbitrage
B) wholesaling
C) market-making
Q3) An inverse demand function indicates the price that would result if any given quantity were placed on the market.
A)True
B)False
Q4) Societal consumer surplus is the difference between what a producer receives for the goods it produces and the cost of producing them.
A)True
B)False
Q5) The price charged by a profit-maximizing monopolist and the elasticity of demand will be
A) inversely related
B) independent
C) directly related
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Chapter 18: Natural Monopoly and the Economics of Regulation
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Q1) A natural monopoly that can erect barriers that keep others out of its market is called a(n)
A) sustainable monopoly
B) unnatural monopoly
C) subadditive monopoly
Q2) If a firm can prevent competitors from entering its market, its ATC will ___________ over a ________ amount of output.
A) decline, large
B) decline, small
C) increase, large
Q3) If an entrepreneur wants a natural monopoly to be sustainable, the entrepreneur must set a price and quantity at which demand equals average A) revenue
B) profit
C) cost
Q4) A game defined by the contestable market assumptions is a contestable market entry game.
A)True
B)False
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Chapter 19: The World of Oligopoly: Preliminaries to
Successful Entry
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Q1) As a government official responsible for commerce, would you prefer to see a market reach the monopolistic, perfectly competitive, or Cournot equilibrium?
Q2) An oligopoly is a market that is dominated by A) one seller
B) a large number of sellers
C) a few sellers
Q3) A model that assumes that the firms are capacity-constrained is the
A) Edgeworth model
B) Cournot model
C) unstable collusion model
Q4) An entrepreneur will be able to make a substantial profit if the entrepreneur
A) can keep competitors out of the market
B) lowers price below average total cost
C) increases costs at all possible quantities of output
Q5) The Stackelberg equilibrium is defined by the equilibrium prices and quantities of a Stackelberg game.
A)True
B)False
Q6) What is the difference between convergent and divergent Cournot equilibria?
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Chapter 20: Market Entry and the Emergence of Perfect Competition
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Q1) A Cournot model is a model where an incumbent firm uses a pricing strategy to make it unprofitable for any potential competitor to enter a market.
A)True
B)False
Q2) Which of the following assumptions is critical to the Bain, Modigliani, Sylos-Labini model?
A) The potential entrant believes that, if it enters the market, the incumbent firm will continue to produce at its pre-entry level of output regardless of any actions the entrant takes and regardless of the prevailing market price
B) There are two periods, the pre-entry period and the entry period
C) Demand does not change over time
Q3) In the entry-prevention game, the incumbent firm makes an implicit threat in period 0
A) and definitely carries out the threat in period 1
B) but may not want to carry out the threat in period 1
C) but absolutely will not carry out the threat in period 1
Q4) In the Dixit-Spence model, the incumbent firm prevents entry by threatening to produce a level of output beyond the limit quantity. What makes this threat credible?
Page 23
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Chapter 21: The Problem of Exchange
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Q1) As we increase the size of an economy by adding more and more agents of each of our two types, the core will
A) shrink
B) increase
C) remain unchanged
Q2) In a primitive, two-person economy, the two agents can A) consume exactly what they pick
B) change the mix of fruit they have by trading with each other C) Both answers are correct
Q3) In Figure 21.4, point z is halfway on a line between the no-trade allocation at point f and the no-advantage allocation at point m. Yet point z has higher utility than the other two points. This is because of which assumption?
A) selfishness
B) convex preferences
C) increasing returns to scale
Q4) An individually rational trade offers a trader a higher level of utility than he or she could receive by not trading.
A)True
B)False
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Chapter 22: General Equilibrium and the Origins of the Free
Market and Interventionist
Ideologies
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Q1) People who feel that there is a flaw in the idea that markets are efficient are A) laissez-faire advocates
B) perfect competition advocates
C) interventionists
Q2) A curve that shows the maximum amounts of goods that an economy can produce if it allocates its inputs efficiently is called the A) contract curve
B) production possibilities frontier
C) Pareto-efficiency frontier
Q3) The first fundamental theorem of welfare economics indicates that
A) every Pareto-optimal allocation for an economy can be achieved as a competitive equilibrium for an appropriately defined distribution of income
B) an economy should be organized so as to maximize the welfare of the least well-off person in society
C) when a competitive equilibrium exists, the allocations of inputs and outputs in the economy define a Pareto-optimal outcome
Q4) Why must the condition for efficiency in production be satisfied?
Q5) List the three beliefs on which the free-market argument rests.
Page 25
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Chapter 23: Moral Hazard and Adverse Selection:
Informational Market Failures
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Q1) Free-market advocates would never suggest using signaling to solve problems of adverse selection.
A)True
B)False
Q2) Assume that an insurance company lacks information about which potential customers fall into the safe group and which fall into the risky group. When an individual wants to purchase insurance, the company will assume that the potential customer is the
A) riskiest person
B) average person
C) safest person
Q3) An equilibrium to a game of incomplete information where players of different types take identical actions so that others are not able to learn their types from observing the actions they take is called a pooling equilibrium.
A)True
B)False
Q4) Explain why we cannot trust that all car repair experts are both competent and honest.
Q5) Explain why insurance markets fail.
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Chapter 24: Externalities: the Free Market Interventionist
Battle Continues
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Q1) A firm with a high marginal cost of abatement is willing to pay a _______ amount to buy a marketable pollution permit.
A) low
B) high C) negligible
Q2) In order to set a Pigouvian tax at the optimal level, the government must know the exact amount of the externality, which is
A) easy to obtain
B) difficult to obtain
C) impossible to obtain
Q3) Marketable pollution permits are a method of government intervention to prevent externalities whereby a government-issued permit allows a firm to pollute the environment
A) by a specified amount
B) not at all
C) by an amount of the its choosing
Q4) Among the interventionist solutions to the externality problem, which requires the least amount of government involvement?
Q5) Why do you think that the Coase theorem depends on costless negotiation?
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Chapter 25: Public Goods, the Consequences of Strategic
Voting Behavior, and the Role of Government
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Q1) What is the key assumption on which the Lindahl solution depends?
Q2) In the Lindahl model, the government's role is as a(n)
A) coordinator or market aid
B) intervener or controller
C) hands-off observer
Q3) When members of a society have incentives to take advantage of a public good by not contributing to paying its costs, society experiences the A) free-rider problem
B) Pareto problem
C) strategic-voting problem
Q4) You like to play loud music at your house. One day you notice your neighbors dancing to your music. What type of good is your music?
Q5) Rival consumption occurs when consumption of a good by one person ____________ the quantity of the good available for consumption by others.
A) has no effect on B) decreases C) increases
Q6) Give some examples that support the Gibbard-Satterthwaite theorem.
Page 28
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Chapter 26: Input Markets and the Origins of Class Conflict
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Q1) One interpretation of the Neelin, Sonnenschein, Spiegel experiment is that the subjects were able to perform backward induction when the horizon of a game was only
A) five periods
B) two periods
C) three periods
Q2) A typical labor supply curve shows that, as the wage rate ____________, a worker will choose to devote _______ hours to labor.
A) increases, less
B) increases, more C) decreases, more
Q3) Demand for loanable funds arises from
A) current or potential producers who need the funds to purchase capital goods
B) individual consumers who save a portion of their income and deposit that portion in a bank
C) Both answers are correct
Q4) In the real world, all markets __________ perfectly competitive.
A) are
B) are not C) must be
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