Business Economics
Midterm Exam
Course Introduction
Business Economics explores the application of economic principles and methodologies to decisions made by individuals and organizations within the business environment. The course examines key concepts such as supply and demand, production and cost analysis, market structures, pricing strategies, and the role of government in economic activity. Through theoretical models and real-world case studies, students learn how economic tools can be used to analyze business problems, optimize resource allocation, and forecast the impact of market forces on organizational performance. The course provides a foundation for informed decision-making and strategic planning in both domestic and global markets.
Recommended Textbook
Managerial Economics and Organizational Architecture 5th Edition by James Brickley
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Chapter 1: Introduction
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Q1) If the market for a product improves with increases in both the market demand and the price, then the reaction of companies in that market:
A) will be identical.
B) will depend on the ability of the firm's economists to accurately estimate the supply and demand curve.
C) will depend on whether or not the organization is attuned to market incentives.
D) is dependent on the government regulatory mission.
Answer: C
Q2) Fama and Jensen suggest that "the form of organization that survives in an activity is one that delivers the product demanded by customers at the lowest price while covering costs." This is an example of:
A) market and organizational efficiency.
B) market and organizational equity.
C) economic benchmarking.
D) defective organizational architecture.
Answer: A
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Chapter 2: Economists View of Behavior
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Q1) Marginal utility is the:
A) total happiness obtained from a consumption bundle.
B) additional utility obtained by lower the price of a good.
C) additional utility obtained by consuming one additional unit.
D) total amount spent to purchase one additional unit.
Answer: C
Q2) Wanda Weeks has decided to stay in a lower-paid position with a local electric company rather than accept a much higher-paying job with a new information technology company. Use a risk model to explain her decision.
Answer: Wanda is exhibiting risk-aversion. The risk model shows the trade-offs risk-averse individuals are willing to make between higher average salaries and greater variance in compensation. The more preferred job for a risk-averse individual is the job that offers the best package of both expected compensation and variance of compensation, not the position with the highest expected compensation.
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Chapter 3: Markets, Organizations, and the Role of Knowledge
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Q1) Let Qd = 10 - 2 P and Qs = 3 P be the demand and supply curves for Beer. Then the equilibrium combination in the market is:
A) P<sup>*</sup> = 2; Q<sup>*</sup> = 5
B) P<sup>*</sup> = 5; Q<sup>*</sup> = 0
C) P<sup>*</sup> = 2; Q<sup>*</sup> = 6
D) P<sup>*</sup> = 6; Q<sup>*</sup> = 2
Answer: C
Q2) Let D<sub>0</sub> and S<sub>0</sub> be the initial demand and supply curves for gasoline. Let P<sub>0</sub><sup>*</sup> and Q<sub>0</sub><sup>*</sup> be the initial equilibrium in this market. There is an OPEC cartel that reduces the production of world oil by several million barrels a day. Which ONE of the following correctly captures the effect of this change on the market for gasoline?
A) Both equilibrium quantity and price will increase
B) Both equilibrium quantity and price will decrease
C) Equilibrium quantity will increase, but equilibrium price will decrease
D) Equilibrium quantity will decrease, but equilibrium price will increase
Answer: D
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Chapter 4: Demand
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Q1) If the demand for movie tickets is elastic, then
A) Ed > 1
B) Ed < 1
C) Ed = 1
D) Ed = 0
Q2) FarAwayDrive Inc. has recently increased the price of its golf balls from $4.00 to $6.00. In response to this increase in price, sales decreased from 2,200 to 1,800 units. If no other information concerning the demand is available, which of the following is true about the sensitivity of demand (using the ARC or mid-points formula) for FarAwayDrive's golf balls?
A) The ARC-elasticity (midpoints formula) of demand is 2.0.
B) The ARC-elasticity (midpoints formula) of demand is ½ or .50.
C) The ARC-elasticity (midpoints formula) of demand is 2/3 or .667.
D) The ARC-elasticity (midpoints formula) of demand is 4/11 or .364.
Q3) Price elasticity is defined as the change in quantity demanded relative to a change in:
A) the price of substitute products.
B) consumer income.
C) the price of complementary products.
D) the price of the product.
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Chapter 5: Production and Cost
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Q1) Why do economies of scale and learning curve effects look similar when they are graphed? What different concepts do they represent?
Q2) A firm's average total cost is minimized when it produces 10 units. When it produces 10 units, the average total cost is $5/unit. What is the marginal cost when the firm produces 10 units?
A) less than $5/unit
B) greater than $5/unit
C) $5/unit
D) $10/unit
Q3) A production with the form Q = 150L<sup>.75</sup> K<sup>.50</sup> will have __________ in the long run.
A) increasing returns to scale
B) decreasing returns to scale
C) constant returns to scale
D) diminishing returns to the variable input
Q4) Can a production function with two factors, exhibit increasing returns to scale, while at the same time have diminishing returns to each factor?
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Chapter 6: Market Structure
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Q1) The key to the importance of the marginal cost curve of a company is that it is its:
A) supply curve of product to the marketplace.
B) demand curve for its product to the marketplace.
C) average cost of product in both the short and long run.
D) fixed cost.
Q2) A market where a few firms produce most of the output or sales is called:
A) oligopolistic.
B) monopolistically competitive.
C) perfectly competitive.
D) monopolistic.
Q3) For the perfectly or purely competitive firm, profit maximization occurs at an output level where:
A) P = MC.
B) MC = ATC.
C) P = AVC.
D) P < AVC.
Q4) A monopoly's demand curve is P = 200 - 3 Q. It MC = $20. How many customers should be serviced by this company? What is the price paid by each customer? What will the company's gross revenue be in this venture?
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Chapter 7: Pricing With Market Power
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Q1) Price discrimination is usually defined as selling a product to different customers at:
A) the same price even though costs of service are different.
B) different prices even though costs of service are different.
C) the same price even though the costs of service are the same.
D) different prices even though the costs of service are the same.
Q2) P = 50 - 1/500 Q is the demand curve for tickets. MC = $10 per ticket. What is the optimal price and calculate the consumer surplus at this price?
Q3) Many college basketball programs require alumni to join a booster club before they can buy season tickets. This is an example of:
A) a two-part tariff.
B) first degree price discrimination.
C) block pricing.
D) cost-plus pricing.
Q4) The cost plus pricing formula tends to ignore:
A) incremental costs.
B) customer quantity sensitivity.
C) fixed costs.
D) quotas
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Chapter 8: Economics of Strategy: Creating and Capturing
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Q1) Ready-to-eat products like Kraft Lunchables:
A) decrease producer transactions costs.
B) increase producer transactions costs.
C) decrease consumer transactions costs.
D) increase consumer transactions costs.
Q2) In terms of business strategy, managers will attempt to adopt business strategies that attempt to:
A) maximize transactions costs.
B) stabilize transactions costs.
C) Minimize transactions costs.
D) Invert transactions costs.
Q3) What is the relation between value creation and transactions cost?
Q4) Strategy refers to the general policies that managers adopt to increase: A) costs.
B) the number of customers at the same price.
C) the rate of technological change.
D) the generation of profits.
Q5) What are the key components for creating market power in order to capture value?
Page 10
Q6) What happens to producer surplus and consumer surplus if transactions costs are reduced?
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Chapter 9: Economics of Strategy: Game Theory
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Q1) Though Nash games are noncooperative, a cooperative outcome is more likely if A) long run gains are smaller than short run gains.
B) firms can easily monitor the outcomes from rival's defection.
C) firms expect the market relationship to last a long time.
D) firms expect the market relationship to last only for a short time.
Q2) Wal-Mart built the base of its retailing market power in small cities and towns. In most of those towns, the size of marketplace is so small that only one large retailer can successfully exist. This is known as:
A) adverse selection.
B) first-mover advantage.
C) secure strategy.
D) extension form.
Q3) What is the difference between a repeated and a nonrepeated game and in which form is reputation an important consideration?
Q4) Sealed bid construction contracts are examples of market games that are:
A) simultaneous and non-repeated.
B) simultaneous and repeated.
C) sequential and non-repeated.
D) sequential and repeated.
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Chapter 10: Incentive Conflicts and Contracts
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Q1) Always Round Tire hires Plain Truth Advertising to write copy for its newspaper advertisements. Always Round has a demand for advertising of MB = 400 -2S where S is the number of hours that Plain Truth delivers. If Plain Truth has a fixed supply cost: MC = $150 per hour, what are the number of hours that Always Round purchases from Plain Truth under the assumption of costless monitoring? How much is the contract worth to Always Round? If Always Round offers half of the surplus to Plain Truth as an incentive, how much is Plain Truth paid for the job?
Q2) Jim Range owns a Best Ice Cream store, one of 1,000 franchises across the country. Jim doesn't like to work evenings, so he hires Mary Jo Smith to work the store in the evening for $6.50 per hour. Mary Jo's friends come by each evening and she gives them free cones. Is this an adverse selection problem or an incentive problem? What is the solution?
Q3) Adverse selection in bargaining comes from:
A) lying to one party or another.
B) principals in the bargaining process.
C) agents in the bargaining process.
D) asymmetric information held by the principal or agent.
Q4) What is Adverse Selection? Give an example to illustrate this problem.
Q5) What is an agency relationship? What are agency problems?
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Chapter 11: Organizational Architecture
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Q1) The three legs of the organizational stool are reward systems, performance evaluation systems, and:
A) influence costs.
B) decentralization.
C) decision rights.
D) market technology.
Q2) Corporate takeovers have:
A) increased the wealth of the shareholders by billions.
B) increased the wealth of the shareholders by millions.
C) decreased the wealth of the shareholders by billions.
D) decreased the wealth of the shareholders by millions.
Q3) For benchmarking, the architecture of other firms should be viewed as:
A) competitive.
B) complements.
C) substitutes.
D) empowerment.
Q4) What is corporate culture?
Q5) How do we solve the incentive problem and design optimal architecture?
Q6) How is the architecture within firms usually set up?
Q7) Are organizational changes always needed?
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Chapter 12: Decision Rights: The Level of Empowerment
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Q1) A job in sales - such as a sales representative for an agricultural chemical company - usually represents:
A) many tasks and little sales authority.
B) few tasks and very little sales authority.
C) many tasks and a lot of sales authority.
D) few tasks and a lot of sales authority.
Q2) Which one of the following is not a benefit of decentralization:
A) effective use of local knowledge.
B) possibility to shirk, enjoy the credit from free riding.
C) conservation of management time.
D) possibility to increase motivation and productivity.
Q3) In addition to other factors, the increased use of technology and the reduced costs of information transfer from local office to corporate headquarters has:
A) significantly increased the need for centralized decision making.
B) only brought about increased costs to decentralization.
C) reduced needs for middle managers and increased the scope of local decision making powers.
D) shown that technology has little impact on the centralization issue.
Q4) Under what conditions will decentralization be beneficial?
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Chapter 13: Decision Rights: Bundling Tasks Into Jobs and Subunits
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Q1) Which of the following is not a benefit of the function (U-form) organization?
A) Improved coordination among functional specialists.
B) Functional expertise.
C) Well-defined promotion path.
D) Opportunity costs of senior management.
Q2) What are the recent trends in organization design?
Q3) Specialized task assignment's greatest cost is ignoring the foregone ____________ across tasks.
A) comparative advantage
B) flexibility
C) complementarities
D) lower cross training costs
Q4) During the 1990s, many companies shifted from
A) m-form to functional subunits
B) m-form to product-oriented organizations
C) product-oriented organizations to functional subunits
D) functional subunits towards more product-oriented organizations
Q5) What is a matrix organization?
Q6) What do we mean by U-form?
Q7) What are specialized task assignments and what are their advantages? Page 16
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Chapter 14: Attracting and Retaining Qualified Employees
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Q1) When a firm makes verbal promises about future working conditions, benefits and raises, and promotions, it is offering:
A) an implicit labor contract.
B) an explicit labor contract.
C) a human capital contract.
D) compensating differential.
Q2) The value of human capital is determined by:
A) special team of experts in each college and university.
B) a ranking system of the relative value of different sorts of education to society.
C) the forces of supply and demand in the market.
D) an investment board at the New York Stock Exchange.
Q3) Always Round Tire tries to base its promotions on seniority (where education and training requirements are not necessary). The company finds that this system seems to work most of the time with shop floor supervisors and team managers. But the system breaks down for higher-level positions. Why?
Q4) How can firms survive in the long run if mandatory retirement is illegal, and if firms are stuck with older workers whose productivity might technically have fallen over time?
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Chapter 15: Incentive Compensation
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Q1) The basic incentive problem is that owners and:
A) employees have similar objectives.
B) employees have fundamentally different objectives.
C) employees need government assistance to solve differences.
D) banks provide funding for growth.
Q2) Consider the salary of Mary Sue Nelson, a sales agent for Plain Truth Advertising. She has an effort cost of C = e<sup>2</sup> and she a reservation wage of $1,500 so that wage package is W = 1,500 + .2 Q where the CEO sets the incentive at .2 and Q = 200 e. If the CEO increases the incentive from .2 to .25, what happens to the Nelson's effort? Will profits rise or fall?
Q3) Team production is a limiting factor as a solution to incentive problems since:
A) entire teams may be inefficient.
B) some team members may choose to shirk and let the rest carry the load.
C) some team members never get along and start back biting.
D) some team members may perceive the team leader to be a moron.
Q4) Incentives would not be a problem:
A) as long as employers get what they want.
B) if the interests of the employees and the employers conflict somewhat.
C) if the interests of the employees and the employers conflict.
D) if the interests of the employees and the employers were perfectly aligned.
Page 19
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Chapter 16: Individual Performance Evaluation
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Q1) In a very basic principal-agent model, output is contractible if:
A) output can be observed with some positive cost.
B) the employee produces many products.
C) the employee works in a team.
D) the employee produces a single output.
Q2) Employees often limit their output and engage in soldiering because of the fear that if they exceed output levels this time, management will increase output goals for the next time period. This is called the:
A) incentive effect.
B) ratchet effect.
C) benchmark effect.
D) goal standard effect.
Q3) If output Q = 8.5e (e=units of effort) and Wage W = $6.70 + .25Q, then 20 units of effort are worth _____ to the firm.
A) $170.00
B) $0.425
C) $49.20
D) $35.80
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Chapter 17: Divisional Performance Evaluation
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Q1) Clearly, an economist would like to see a profit center implement a system that most closely approximates the rule of profit maximization, MR = MC, in building a system of prices for other divisions. What are the pluses and minuses of allowing a division to engage in this type of activity?
Q2) In terms of using accounting data to build an effective management control system, what is the nirvana fallacy?
A) It is the tendency to use market-based transfer prices.
B) It is the system of using accounting data for both decision management and decision control.
C) It is the tendency to use cost centers rather than profit centers as the core of business structure.
D) It is the belief that a perfect control system can be invented that will stop all fraud.
Q3) Economists regularly make hostile comments about accounting data. It is purely historical. It is aggregated. It doesn't segment by levels of capacity usage. It often is not formatted for information on incremental change. So why is it the key data source for decision control and important in decision management?
Q4) What are the measures of performance for investment centers? How do they work?
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Chapter 18: Corporate Governance
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Q1) In 2003, Sony Corporation announced reform in its management structure. The reform included an increase in the number of outside directors on the Board of Directors, a requirement to separate the Chairman of the Board from the CEO, and greater inclusion of outside directors on the Nomination Committee. Analyze these changes from the perspective of separation of decision control from decision management.
Q2) Board members act in the best interest of the firm:
A) because they are required to by law.
B) when they do not own stock in the firm.
C) when they take an extremely cautious approach to ratifying decisions.
D) in part because they wish to maintain a good reputation in order to be offered other board positions.
Q3) Bebchuk and Fried's managerial power theory states that:
A) the typical corporate board is not captured by managers.
B) all firms have about the same quality of governance.
C) product, labor, and takeover markets help limit executive pay but do not work perfectly.
D) managers want performance-based pay.
Q4) What is managerial power theory and what are its implications?
Q5) What are the shareholder incentives within a corporation?
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Chapter 19: Vertical Integration and Outsourcing
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Q1) Agri-Tech supplies a patented sweetener to various food processors. It has noticed that the value of the sweetener varies dramatically from one buyer to another, depending on the end-use demand. But its experiments with charging higher prices to some buyers have failed. The demand for the juices is supplies are highly price elastic while the demand for sweetened medicine is relatively less elastic. Can Agri-Tech find a way to successfully price discriminate?
Q2) Specific assets can create problems for a company. If a supplier invests in new machinery to deliver a part useful only to its biggest and best customer, it can find itself with:
A) a low cost delivery output.
B) a holdup problem.
C) significant externalities.
D) an outsourcing dilemma.
Q3) Tasty Chicken, Inc. is a large producer of chicken for grocery stores. It usually engages in a long-term contract with these stores to maintain demand for its product. However, Tasty Chicken is regularly plagued with rising and falling prices for its supplies: particularly chicken feed and new chicks. Should Tasty Chicken vertically integrate upstream, building or buying a hatching company and an animal feed company? What are the pluses and minuses of such a decision?
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Chapter 20: Leadership: Motivating Change Within Organizations
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Q1) The problem with logrolling is
A) nobody wins in the long run
B) all other proposals go through only after yours goes through
C) your proposal will be supported only after all other proposals go through
D) once you support someone's proposal, they can turn their back on yours
Q2) Logrolling consists of:
A) building of coalition of individuals who support one another's proposals.
B) the art of marketing a business proposal with external resources.
C) changing the architecture to capture numerous employees at once.
D) a sport engaged in many rural areas.
Q3) Sometimes a person has a number of successes and people tend to think that this manager always presents good new proposals for ratification. If a manager does not work hard at proposal design or marketing, then they are:
A) getting sloppy after all the years of success.
B) relying on reputation.
C) working hard to lay the groundwork of proposal.
D) going to change the architecture during the monitoring phase.
Q4) Why are academics way off base when it comes to organizational politics?
Page 24
Q5) What are the three issues related to proposal design?
Q6) What are the two tasks of good leadership?
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Chapter 21: Understanding the Business Environment: The Economics of Regulation
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Q1) The 1890 Sherman Act was legislated by the:
A) SEC.
B) EPA.
C) FDA.
D) FTC.
Q2) For politician or regulator of an industry, there is a clear trade-off between:
A) supply and demand.
B) profits and costs of the regulated company.
C) prices charged consumers and profits earned by producers.
D) publicly spirited and self-interested individuals,
Q3) Public Goods:
A) are goods for a few, by a few and of a few.
B) are goods whose consumption by a few reduces the amount for the rest.
C) are goods whose consumption by one reduces the amount for others.
D) are goods whose consumption by one does not diminish the amount for others.
Q4) In the 1980s, "voluntary restrictions" on automobile imports raised prices of Japanese cars $1,000, European cars by $2,000 and American cars by $500. During the period following these restrictions, both Japanese and European automakers opened parts and assembly plants in the US. Why did this happen? How is it related to regulation?
Page 26
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Chapter 22: Ethics and Organizational Architecture
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Q1) That corporations have obvious and simplistic written code of honor only to defend themselves from legal action is:
A) the correct view.
B) the most common view.
C) a perfectly understandable view.
D) a cynical view.
Q2) Corporate ethics problem is basically:
A) a problem of controlling CEO salaries.
B) a problem of controlling shirking.
C) a problem of controlling opportunism.
D) a problem of controlling incentives.
Q3) Ethics can be defined as:
A) virtuous behavior.
B) following the letter of the law.
C) employing people with minority status.
D) a philosophy that believes the "ends justify the means."
Q4) What are some mechanisms for encouraging ethical behavior?
Q5) Ethics might be defined as virtuous behavior. Clearly, over time, a market economy perceives wealth creation as one form of virtuous behavior. What can go wrong in this process?
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Chapter 23: Organizational Architecture and the Process of Management Innovation
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Q1) A key to understanding the difference between TQM and other management innovations is TQM's emphasis on:
A) one-time reengineering of production processes.
B) a reorganization of inventory control.
C) outsourcing.
D) continuous improvement.
Q2) Value maximizing managers will undertake quality improvements only where:
A) the total benefits exceed total costs of enhancement.
B) the incremental benefits equal the incremental costs of enhancement.
C) the incremental benefits fall below the incremental costs of enhancement.
D) the incremental benefits exceed the incremental costs of enhancement.
Q3) Provide some examples of management innovations that came and went.
Q4) A key factor in TQM is the:
A) reduction of defects.
B) increase in management inspection stations.
C) reduction of the price of supplies.
D) movement away from technology advance and a reliance on simple production techniques.
Q6) Phillip Crosby asserts that, "Quality is free". Is he right? Page 28
Q5) Why do innovations in management techniques fail so often?
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