Business Economics
Midterm Exam
Course Introduction
Business Economics explores the practical application of economic concepts and analytical tools to real-world business decision-making. This course covers topics such as demand and supply analysis, production and cost structures, pricing strategies, market forms, and the impact of government policies on business operations. Through case studies and practical examples, students learn how to interpret economic data, forecast market trends, and make informed managerial decisions aimed at achieving organizational objectives in a competitive marketplace.
Recommended Textbook
Economics of Strategy 6th Edition by
David Besanko
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14 Chapters
419 Verified Questions
419 Flashcards
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Chapter 1: The Power of Principles: an Historical Perspective
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Sample Questions
Q1) What mode of long-distance communication first laid the groundwork for today's modern communication forms?
A) U.S. Postal Service
B) Private mail service
C) Telegraph
D) Telephone
E) Railroad
Answer: D
Q2) How has Atlanta been able to grow as a center of commerce despite its poor water and rail connections?
A) Widespread air transportation
B) New government regulations
C) Improved Financing
D) Better Communications
E) Better technology and innovation
Answer: A
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Chapter 2: Economies of Scale and Scope
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Sample Questions
Q1) Which of the following is a source of diseconomies of scale at a large firm?
A) Labor costs
B) Spreading specialized resources too thin
C) Conflicts of interest
D) Incentive processes
E) All of the above
Answer: E
Q2) Which of the following is generally a way that LBOs can help a firm realize its potential value?
A) The synergies created allow for cost savings
B) The transaction reduces the disparity between a firm's actual and potential share price
C) The acquisition reduces the likelihood of competition in the industry
D) The transaction requires debt repayment with future free cash flow leaving management no discretion over the investment of these funds
E) The buyout gives an opportunity to adjust the management structure and makeup
Answer: D
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Chapter 3: The Vertical Boundaries of the Firm
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Sample Questions
Q1) What term describes features that need to relate to each other in a precise fashion otherwise they lose a significant portion of their economic value?
A) Design attributes
B) Critical components
C) Contract factors
D) Coordination factors
E) Relationship attributes
Answer: A
Q2) Which of the following is a method firms can use to counteract price fluctuations and eliminate income risk?
A) Manufacture all needed inputs internally
B) Acquire upsteam firms in the vertical chain
C) Enter into futures contracts to hedge the price of raw materials
D) Eliminate competitors by under-cutting their price
E) None of the above
Answer: C
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Chapter 4: Integration and Its Alternatives
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Sample Questions
Q1) Suppose we have two firms (Firm 1 & Firm 2)enter into a transaction where Firm 1 is upstream of firm 2 in a vertical chain.What term best describes the organization of the transaction where Firm 1 owns the assets of Firm 2?
A) Backward Integration
B) Forward integration
C) Nonintegration
D) Contractually unbound
E) Contractually bound
Q2) Suppose we have two firms (Firm 1 & Firm 2)enter into a transaction where Firm 1 is upstream of firm 2 in a vertical chain.What term best describes the organization of the transaction where the two firms are independent,each with control over its own assets?
A) Backward Integration
B) Forward integration
C) Nonintegration
D) Contractually unbound
E) Contractually bound
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Chapter 5: Competitors and Competition
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Sample Questions
Q1) The average PCM (percentage contribution margin)in a Cournot equilibrium is given by the formula PCM=H/ ,where H is the Herfindahl index and is the price elasticity of market demand.Given this equation,which of the following statements is true?
A) The more concentrated the industry, the smaller the PCMs in equilibrium
B) The industry concentration only raises the PCMs in equilibrium
C) The industry concentration has no bearing on PCM size in equilibrium
D) The less concentrated the industry, the larger the PCMs in equilibrium
E) The less concentrated the industry, the smaller the PCMs in equilibrium
Q2) What group/type of preferences describes when tastes differ markedly from one person to the next and result in horizontal differentiation?
A) Search preferences
B) Horizontal preferences
C) Consumer preferences
D) Spatial preferences
E) Idiosyncratic preferences
Q3) In a two firm market,let the marginal cost of producing a product be $20,the market demand be given by the function Q=60-P/2 and the market quantity be equal to Q +Q .What is the Cournot equilibrium quantity each firm would produce in this market?
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Chapter 6: Entry and Exit
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Sample Questions
Q1) How can incumbents legally erect entry barriers around novel and non-obvious products or production processes?
A) Collusive pricing
B) Predatory pricing
C) Patents
D) Formation of a cartel
E) Price fixing
Q2) When is reputation a most effective entry barrier?
A) When the incumbent has incurred them and the entrant has not
B) When incumbents have long-standing relationships with suppliers and customers
C) When channels are few and hard to replicate
D) When a firm has a reputation for toughness or competes in multiple markets
E) When marginal costs are low and flooding the market causes large price reductions
Q3) What is the term defined as the withdrawal of a product from a market?
A) Shut-down
B) Exit
C) Sale
D) Removal
E) Withdrawal
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Page 8
Chapter 7: The Dynamics Competing Across Time
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Sample Questions
Q1) What term describes a decision that has a long-term impact and is difficult to reverse?
A) Dedicated investment
B) Strategic commitment
C) Critical choice
D) Market investment
E) Firm commitment
Q2) Suppose a firm has $50 million to invest in a new market.Given market uncertainties,the firm forecasts a high-scenario where the present value of the investment is $200 million and a low-scenario where the present value of the investment is $20 million.If the firm believes each scenario is equally likely and invests today,what is the net present value of the investment?
Q3) What type of pricing involves a firm quoting a single delivered price for all buyers with the firm absorbing any freight charges itself?
A) Uniform delivered pricing
B) Uniform FOB pricing
C) Uniform customer pricing
D) Uniform favored pricing
E) Uniform competitive pricing
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Page 9
Chapter 8: Industry Analysis
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Sample Questions
Q1) Which of the following is not a part of the five-forces framework?
A) Supplier Power
B) Internal rivalry
C) Regulation
D) Buyer Power
E) Substitutes and Complements
Q2) Which of the following does not tend to affect the threat of entry?
A) Expectations about pre-entry competition
B) Government protection of incumbents
C) Consumers highly valuable reputation/consumers are brand loyal
D) Experience curve
E) Network externalities
Q3) Who are the most powerful suppliers in professional sports?
A) Players unions
B) Referees
C) Owners
D) Politicians
E) Cities
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Chapter 9: Strategic Positioning for Competitive Advantage
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Sample Questions
Q1) Which of the following is not a common characteristic of capabilities?
A) They are valuable across multiple products or markets
B) They are tacit
C) They are easy to reduce to simple algorithms or procedure guides
D) They are embedded in what Richard Nelson and Sidney Winter call organizational routines - well-honed patterns of performing activities inside an organization
E) They can persist even though individuals leave the organization
Q2) What is the perceived benefit of a product per unit consumed minus the product's monetary price?
A) Value creation
B) Competitive advantage
C) Consumer surplus
D) Maximum willingness-to-pay
E) Value chain
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Chapter 10: Information and Value Creation
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Sample Questions
Q1) Which of the following is measured by a report card that assesses the components of a product?
A) Process
B) Inputs
C) Warrantees
D) Outcomes
E) Longevity
Q2) Unraveling is an economic theory that describes which of the following?
A) Low quality products will be quickly discovered and abandoned by buyers
B) High seller concentration leads to the development of many substitute products
C) Few sellers improve product quality once they have scale in production
D) Even low quality sellers will disclose their product quality
E) Consumers ultimately switch products regardless of quality
Q3) Which of the following serves as a voluntary signal of quality?
A) Warrantee
B) Independent reviews
C) Truth in Advertising
D) Free product financing
E) Public claims
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Page 12
Chapter 11: Sustaining Competitive Advantage
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Sample Questions
Q1) Which of the following terms best describes a place in which a firm can sell its ideas for full value?
A) Industry for ideas
B) Community of ideas
C) Innovation market
D) Market for ideas
E) Idea environment
Q2) What term best describes a resource that cannot "sell itself" to the highest bidder?
A) Isolated
B) Value-creating
C) Scarce
D) Imperfectly mobile
E) Profit maximizing
Q3) Which of the following is not a Legal Restriction?
A) Patent
B) Copyright
C) Trademark
D) Intellectual property
E) Operating rights
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Page 13
Chapter 12: Performance Measurement and Incentives
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Sample Questions
Q1) Which of the following factors is an effective tool for companies to use to mitigate hidden action and hidden information problems in agency relationships?
A) Monitoring
B) Offshoring
C) Coordination
D) Objectives
E) Confrontation
Q2) What is a key factor in determining how a firm resolves coordination problems?
A) Incentive based pay
B) Effective IT systems
C) Firm culture
D) Alignment of goals
E) Organizational structure
Q3) What is a benefit of the de-centralized organization coordination solution?
A) Ensures no coordination opportunities are missed
B) Makes the organization more hierarchical
C) Takes advantage of localized information
D) Improves communication
E) Always encourages collaboration
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Page 14
Chapter 13: Strategy and Structure
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Q1) When firms encounter problems that differ according to their difficulty and frequency it is known as:
A) A problem set
B) Knowledge hierarchy
C) Agency collection
D) Organizational collection
E) None of the above
Q2) What type of organizational structure is one that is comprised of a set of autonomous divisions led by a corporate headquarters office,assisted by a corporate staff that provides information about the internal and external business environment?
A) Unitary functional structure
B) Multidivisional structure
C) Matrix structure
D) Network structure
E) Individual structure
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Chapter 14: Environment, power, and Culture
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Sample Questions
Q1) Which of the following is least true with regard to presidential power?
A) Presidential power is the ability to influence the people who make and implement government policies
B) Presidential power only consists of the president taking direct action on some front
C) The bargaining advantage that comes with the presidential office enables the president to persuade others to work in his interest
D) A source of presidential power is professional reputation, which comprises the expectations of professional politicians, bureaucrats, and others in the political community regarding the president's power and his willingness to use it
E) The president's prestige among the public is a source of presidential power
Q2) Which of the following is true about culture?
A) Culture increases agency costs
B) Culture reduces bargaining costs
C) Culture reduces transactions costs
D) Culture increases economic costs
E) culture has no effect on costs
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