Business Economics
Midterm Exam
Course Introduction
Business Economics is an analytical course that explores the application of economic theory and methodology to business decision-making. The course covers fundamental concepts such as supply and demand, market structures, pricing strategies, and cost analysis, providing a framework for understanding how economic forces impact business operations and strategies. Students will examine both microeconomic and macroeconomic environments, assess the effects of government policies, and analyze market trends to make informed managerial decisions. Through real-world case studies and practical exercises, the course emphasizes the critical role of economic insights in shaping successful business outcomes.
Recommended Textbook Microeconomics 7th Edition by
Jeffrey M. Perloff
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) The testing of economic models facilitates
A) proving a model is false.
B) proving a model is true.
C) proving that one person's opinion is morally incorrect.
D) proving that one society's legal structure is better than another country's.
Answer: A
Q2) Economic models are most useful in
A) predicting changes in one variable due to a change in one or more other variables.
B) predicting the direction of the stock market.
C) explaining the future with the past.
D) generating untestable hypotheses.
Answer: A
Q3) Economists tend to judge a model based upon
A) the reality of its assumptions.
B) the accuracy of its predictions.
C) its simplicity.
D) its complexity.
Answer: B
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3
Chapter 2: Supply and Demand
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Q1) Suppose there are 100 identical firms in the rag industry,and each firm is willing to supply 10 rags at any price.The market supply curve will be a
A) vertical line where Q = 10.
B) vertical line where Q = 100.
C) vertical line where Q = 1000.
D) horizontal line where Q = 1000.
Answer: C
Q2) A drought in the Midwest will raise the price of wheat because of a
A) leftward shift in the supply curve.
B) rightward shift in the supply curve.
C) leftward shift in the demand curve.
D) rightward shift in the demand curve.
Answer: A
Q3) Horizontally summing different supply curves assumes
A) that individual firms cannot influence the good's price.
B) that all firms operate in collusion.
C) that only firms who volunteer are included in the summation.
D) all firms produce the same amount of output.
Answer: A
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Page 4
Chapter 3: Applying the Supply and Demand Model
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Sample Questions
Q1) Explain why the price elasticity of demand changes along a linear demand curve.
Answer: The price elasticity of demand depends on BOTH the slope of the demand curve and on the term P/Q which changes as you move along the demand curve.
Q2) An agricultural corn market faces a positive supply shock due to a beneficial rainy season and the use of new genetically modified seeds.As a result,farmers face the largest crop harvest in decades.Which answer below explains how a farm could actually go bankrupt under this scenario.
A) The elasticity of supply for corn is elastic such that a positive shock reduces total revenue.
B) The demand for corn is inelastic such that a positive supply shock reduces total revenue.
C) An inelastic demand curve will cause revenue to fall because price decreases by more than the increase in quantity demanded.
D) B and C
Answer: D
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Chapter 4: Consumer Choice
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Sample Questions
Q1) If both prices decreases by 50%,
A) budget constraint will be unchanged.
B) slope of the budget constraint will increase.
C) slope of the budget constraint will decrease.
D) budget constraint will shift outward in a parallel fashion.
Q2) One reason more sport utility vehicles (SUVs)are driven in the United States than in Europe is
A) different marginal rates of substitution.
B) different marginal rates of transformation.
C) the United States hasn't had a recession since 2000-2001.
D) Either A or B
Q3) If two goods,"x" and "y",are perfect substitutes,then which of the following best represents the utility function for the two goods?
A) U = x + y
B) U = x y
C) U = x<sup>2</sup> + y<sup>2</sup>
D) Any of the above.
Q4) Explain why most indifference curves are convex.
Q5) Indifference curves cannot intersect.
Q6) What is the difference between ordinal and cardinal measurement?
Page 6
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Chapter 5: Applying Consumer Theory
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Sample Questions
Q1) The above figure shows Bobby's indifference map for juice and snacks.Also shown are three budget lines resulting from different prices for snacks.This information could be used to determine
A) the slope of Bobby's demand curve for juice.
B) the amount by which Bobby's demand curve for juice shifts when his income rises.
C) the amount by which Bobby's demand curve for juice shifts when the price of snacks rises.
D) All of the above.
Q2) The above figure shows Bobby's indifference map for juice and snacks.Also shown are three budget lines resulting from different prices for snacks.As the price of snacks rises,the price for juice
A) stays the same.
B) increases.
C) decreases
D) might change, but there is not enough information to determine.
Q3) The above figure shows three different Engel curves.Rank them in terms of income elasticity.
Q4) Why can't all goods be inferior?
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Chapter 6: Firms and Production
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Sample Questions
Q1) The table in the above figure shows the levels of output resulting from different levels of inputs.Which of the following conclusions can be drawn from this information?
A) Increasing returns to scale exist between 100 and 200 units of output.
B) Constant returns to scale exist throughout all levels of production.
C) Labor is subject to diminishing marginal productivity in the short run.
D) No firm conclusions can be drawn.
Q2) The Marginal Product of Labor is
A) the change in total product resulting from an extra unit of labor, holding other factors constant.
B) the ratio of output to the number of workers used to produce that output.
C) the amount of output that can be produced by a given amount of labor.
D) equal to the marginal product of labor when the average product is increasing.
Q3) The above figure shows the isoquants for producing steel.Increasing returns to scale are
A) present when producing less than 10,000 tons.
B) present when producing less than 20,000 tons.
C) present when producing less than 30,000 tons.
D) never present.
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Chapter 7: Costs
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Sample Questions
Q1) Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q.Which of the following statements is TRUE at all levels of production?
A) MC = AVC
B) MC = AC
C) MC > AFC
D) All of the above.
Q2) Which of the following will cause the average fixed cost curve of making cigarettes to shift?
A) a $5 million penalty charged to each cigarette maker
B) a $1 per pack tax on cigarettes
C) a $3 per hour wage increase
D) An increase in the demand for cigarettes.
Q3) The above figure shows the long-run expansion path.The long-run average cost curve will be
A) horizontal.
B) downward sloping.
C) upward sloping.
D) vertical.
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Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) In deciding whether to operate in the short run,the firm must be concerned with the relationship between price of the output and A) total cost.
B) average variable cost.
C) total fixed cost.
D) the number of buyers.
Q2) If consumers view the output of any firm in a market to be identical to the output of any other firm in the market,the demand curve for the output of any given firm
A) will be identical to the market demand curve.
B) will be horizontal.
C) will be vertical.
D) cannot be determined from the information given.
Q3) If a firm sets marginal revenue equal to marginal cost,it will make an economic profit.
A)True
B)False
Q4) Explain why individual firms in competitive markets face more elastic demand curves than the market as a whole.
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10
Chapter 9: Applying the Competitive Model
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Sample Questions
Q1) The above figure shows the market for rice in Japan where price is expressed in dollars.S represents the domestic supply curve,and the horizontal line at P = 1 represents the world supply curve.Suppose a free market exists.If a $1 per unit tariff is imposed on imported rice,the quantity of imported rice will decrease by
A) Q<sub>1</sub> units.
B) Q<sub>2</sub> - Q<sub>1</sub> units.
C) Q<sub>2</sub> units.
D) Q<sub>1</sub> - Q<sub>2</sub> units.
Q2) Consumers often purchase products that,afterward,they regret purchasing.This can be explained by
A) consumers trying products to determine if their consumer surplus increases.
B) consumers trying products to determine if firm advertising is honest.
C) consumers trying to minimize expenditures.
D) consumers trying to maximize choice.
Q3) The above figure shows the demand and supply curves in the market for milk.Currently the market is in equilibrium.If the government establishes a $4 per gallon price support,estimate the change in p,Q,and social welfare.
Q4) Explain why the competitive output maximizes welfare.
Q5) When is the profit a firm earns equal to the producer surplus? Explain.
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Chapter 10: General Equilibrium and Economic Welfare
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Q1) Explain how it is possible for one of two people in a two-good economy to have an absolute advantage in producing both goods,but trade can still benefit both people.
Q2) No clearly defined socially preferred outcome may result when majority voting on outcomes because
A) often voters don't understand the outcomes.
B) voting may violate the independence of irrelevant alternatives.
C) voting may lead to incomplete preferences.
D) voting may lead to non-transitive preference.
Q3) If a society only cares about efficiency and not equity,then
A) all points on the contract curve yield the same level of social welfare.
B) it will not rely on competitive markets to allocate goods.
C) it will maximize the utility of its worst-off member.
D) an equitable outcome is impossible.
Q4) The above figure depicts the Edgeworth box for two individuals,Al and Bruce.Point a is NOT Pareto efficient because
A) Al's MRS exceeds Bruce's MRS.
B) the point is not near the center of the box.
C) Al's indifference curve is not far enough away from the origin.
D) All of the above.
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Chapter 11: Monopoly
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Sample Questions
Q1) The more elastic the demand curve,a monopoly
A) will have a larger Lerner Index.
B) will face a lower marginal cost.
C) will earn more profit.
D) will lose more sales as it raises its price.
Q2) Suppose a monopolist's demand curve is P = 60 - Q,and its cost function is C = 10Q + 50 so its marginal cost is 10.If a governmental agency wished to set the price so that it created the smallest deadweight loss without causing the monopolist to have negative economic profits (thus shutting down),that price would be
A) $10.00.
B) $11.02.
C) $14.57.
D) $35.00.
Q3) A profit maximizing monopolist
A) is guaranteed to lose money because of a lack of competition.
B) is not guaranteed to make a positive profit.
C) is guaranteed to make a positive profit, hence the desire to be a monopolist.
D) is guaranteed to make a non-negative profit, otherwise government would step in to assist.
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Page 13
Chapter 12: Pricing and Advertising
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Sample Questions
Q1) If consumers are identical,then
A) price discrimination is impossible.
B) price discrimination can occur if each consumer has a downward-sloping demand curve for the product.
C) perfect price discrimination is the only form of price discrimination that can increase a monopoly's profit.
D) tie-in sales cannot increase a monopoly's profit.
Q2) A firm's advertising can help rivals
A) if it focuses on a general problem that the product addresses.
B) if it focuses on a secret ingredient that only this firm possesses.
C) if rivals do not advertise.
D) if rivals advertise.
Q3) Consider a car dealership advertises a three-year lease at $250 per month.When you arrive to apply,you discover that the lease requires a downpayment of $3600 dollars.You will undertake the lease if
A) you value the lease at least $350 per month.
B) you value the lease at least $250 per month, the $3600 is a sunk cost.
C) you value the lease less than $350 per month.
D) you value buying a new car at $400 per month.
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Page 14
Chapter 13: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) Product differentiation
A) can be actual or perceived.
B) is only legal if it is perceived.
C) is only important if it is perceived.
D) is only important if it is actual.
Q2) Suppose two Cournot duopolist firms operate at zero marginal cost.The market demand is p = a - bQ.Each firm will produce
A) a/b.
B) a/2b.
C) a/3b.
D) a/4b.
Q3) As compared to the basic Nash-Cournot equilibrium for duopolists where the firms face the same market demand curve and have identical costs,in the situation where the firms produce products which are viewed by consumers as not being identical,
A) there will generally be different prices charged by the two firms.
B) there will generally be different quantities produced by the two firms.
C) one or both of the firms may practice spurious differentiation.
D) All of the above.
Q4) What happens in a duopoly if both firms try to act as the Stackelberg leader?
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Chapter 14: Game Theory
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Sample Questions
Q1) The above figure shows the payoff to two airlines,A and B,of serving a particular route.If the two airlines must decide simultaneously,which one of the following statements is true?
A) Only firm A will enter the market.
B) Only firm B will enter the market.
C) Neither firm entering is a Nash equilibrium.
D) The outcome of the game is unpredictable.
Q2) The above figure shows the payoff matrix facing an incumbent firm and a potential entrant.If the fixed cost of entry were to increase,which of the following would occur?
A) The incumbent chooses the Cournot level of output.
B) The incumbent shuts down.
C) The entry-deterring level of output rises.
D) The entry-deterring level of output falls.
Q3) The above figure shows the payoff matrix facing an incumbent firm.Assuming a fixed cost of entry,will the incumbent deter entry? Why?
Q4) If neither firm has a dominant strategy,a Nash equilibrium cannot exist.
A)True
B)False
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Page 16
Chapter 15: Factor Markets
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Sample Questions
Q1) Firm A is a monopsonist that faces a labor supply elasticity of 2.4 whereas Firm B is a monopsonist that faces a labor supply elasticity of 1.4.Which of these monopsonists has a higher markup over wage?
A) Firm A
B) Firm B
C) They both pay the same.
D) It is impossible to tell which pays a higher wage.
Q2) A firm faces competitive markets for its inputs and its output.Its marginal revenue product of labor
A) is increasing in the output price.
B) is decreasing in the output price.
C) is independent of the output price.
D) has an inverted U-shape.
Q3) The difference between the marginal expenditure and the wage is greater when the supply curve of labor is
A) less elastic at the monopsony optimum.
B) more elastic at the monopsony optimum.
C) more elastic than the demand curve.
D) The difference does not depend on any elasticity.
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Page 17
Chapter 16: Interest Rates, Investments, and Capital Markets
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Sample Questions
Q1) Billy is considering the purchase of a rental house.The house costs $240,000 and it will generate annual revenues of $15,000 and annual expenses of $3,000.What is the internal rate of return of this investment?
A) 5%
B) 7.5%
C) 3.75%
D) 24%
Q2) Suppose a new cost-saving device will forever generate $1,000 net savings per year to a firm.The device costs $10,000.Using the Internal Rate of Return approach,the firm will make the investment
A) definitely.
B) definitely not.
C) if the interest rate exceeds 10%.
D) if the interest rate is less than 10%.
Q3) Four banks are offering the same interest rate of 4%.Where do you invest?
A) Bank A compounds interest on a yearly basis.
B) Bank B compounds interest on a monthly basis.
C) Bank C compounds interest on a daily basis.
D) I am indifferent between banks.
Page 18
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Chapter 17: Uncertainty
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Q1) If a person willingly plays an unfair game that is not in his favor,he is risk loving.
A)True
B)False
Q2) Searching the internet for information to help select a product that is more reliable is most likely to be done by a
A) risk-averse person.
B) risk-neutral person.
C) risk-preferring person.
D) This cannot be determined with the information provided.
Q3) The Friedman-Savage utility function can explain why
A) people buy automobile insurance.
B) somebody becomes addicted to gambling.
C) people become more risk averse as their wealth increases.
D) people place small bets to have a chance at winning a large amount.
Q4) A stock mutual fund is generally
A) less risky than buying individual stocks.
B) more risky than buying individual stocks.
C) just as risky as buying individual stocks.
D) a way for the rich to avoid taxes.
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Chapter 18: Externalities, Open-Access, and Public Goods
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Sample Questions
Q1) Firms that are most likely to buy marketable pollution rights are those that produce the most pollution per unit of output produced.
A)True
B)False
Q2) Fishermen on the East Coast are using lobster traps out of which most of the lobsters that enter can escape.Why?
A) It will make over-fishing less likely.
B) They can't come up with better traps.
C) They are not educated enough to maximize profit.
D) They catch more lobsters this way.
Q3) The median voter votes yes for a project if
A) the value of the project for him is larger than the tax he needs to pay.
B) the value of the project for him is smaller than the tax he needs to pay.
C) the total benefits are positive.
D) the total cost is zero.
Q4) When negative externalities from production exist,the deadweight loss from a competitive market may be larger than with a monopoly.
A)True
B)False
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Chapter 19: Asymmetric Information
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Q1) What role does a company like J.D.Power (which provides product satisfaction reviews)serve?
A) It provides a screening test.
B) It provides a signal of quality.
C) It reduces moral hazard.
D) It reduces costs of giving surveys.
Q2) In the tourist-trap model,a consumer might pay more than marginal cost for a good sold in a competitive market if the cost of possibly finding the good cheaper is more than the markup over marginal cost.
A)True
B)False
Q3) Adverse selection occurs when an agreement encourages undesirable behavior.
A)True
B)False
Q4) How can a warranty at the seller's expense signal that a product is of high quality?
Q5) The XYZ Co.is hiring salespersons.They will be paid a very attractive hourly rate that is independent of how much they sell.Describe an adverse selection that would take place.Describe a moral hazard that would take place.
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Chapter 20: Contracts and Moral Hazards
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Q1) A good salesperson can sell $500,000 worth of goods,while a poor one can sell only $100,000 worth of goods.Job applicants know if they are good or bad,but the firm does not.A firm will offer job applicants a choice between a fixed salary of $10,000 or a 10% commission.Assuming risk-neutral salespersons and no opportunistic behavior,can the firm determine a prospective good salesperson from a poor one?
A) Yes, because a poor salesperson will always choose the fixed salary.
B) Yes, because a good salesperson will always choose the fixed salary.
C) No, because a poor salesperson is indifferent between the two contracts.
D) No, because a good salesperson is indifferent between the two contracts.
Q2) Season tickets entail a certain amount of risk due to unpredictable team quality,injuries,weather,and so forth.Who is most likely to purchase season tickets?
A) Sally, who is a rabid fan and is not wealthy
B) Jim, who is a rabid fan and is risk neutral
C) Roger, who is a rabid fan but is risk averse
D) Jenn, who is a fan and is very wealthy
Q3) Rents for stores at shopping malls are usually tied to the profits of the store.Comment on how this arrangement affects the mall owner's income versus a fixed rent.
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