Business Economics
Pre-Test Questions
Course Introduction
Business Economics explores the application of economic theories and principles to real-world business situations and decision-making. The course examines how businesses operate efficiently within different market structures, analyzing demand, supply, cost structures, production, and pricing strategies. It also covers topics such as competition, market equilibrium, resource allocation, and the impact of government policies on business operations. By integrating micro- and macroeconomic concepts, students gain practical skills to assess economic environments, anticipate market trends, and make informed managerial decisions to enhance business performance.
Recommended Textbook Microeconomics Student Value 4th Edition by R. Glenn Hubbard
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18 Chapters
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Page 2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) Human capital refers to
A)the money people have.
B)the machines workers have to work with.
C)the accumulated skills and training workers have.
D)the wealth people have.
Answer: C
Q2) As population declines,scarcity eventually disappears.
A)True
B)False
Answer: False
Q3) Refer to Table 1-1.Using marginal analysis,determine how many hours should Eva extend her bakery's hours of operations?
A)2 hours
B)3 hours
C)4 hours
D)5 hours
E)6 hours
Answer: C
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Sample Questions
Q1) Refer to Figure 2-7.What is the opportunity cost of producing 1 ton of coconuts in Guatemala?
A)1/2 of a ton of pineapples
B)1 1/3 tons of pineapples
C)2 tons of pineapples
D)90 tons of pineapples
Answer: A
Q2) The slope of a production possibilities frontier measures the ________ of producing one more unit of a good.
A)marginal revenue
B)total revenue
C)marginal cost
D)opportunity cost
Answer: D
Q3) Individuals who have never been the best at doing anything
A)cannot have a comparative advantage in producing any product.
B)can still have a comparative advantage in producing some product.
C)perform all tasks at a higher opportunity cost than others.
D)must have an absolute advantage in at least ones task.
Answer: B
Page 4
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Q1) If a decrease in income leads to in a decrease in the demand for ice cream,then ice cream is
A)a normal good.
B)a neutral good.
C)a complement.
D)a necessity.
Answer: A
Q2) The ________ effect of a price change refers to the impact of a change in the price of a good on a consumer's purchasing power.
A)income
B)substitution
C)demographics
D)ceteris paribus
Answer: A
Q3) If the price of peaches,a substitute for plums,increases the demand for plums will decrease.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Economic Efficiency, government Price Setting, and Taxes
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Sample Questions
Q1) The difference between the ________ for a good and the ________ is called consumer surplus.
A)highest price a consumer is willing to pay; lowest price a consumer is willing to pay
B)lowest price a consumer is willing to pay; price the consumer actually pays
C)highest price a consumer is willing to pay; price the consumer actually pays
D)price the consumer actually pays; actual cost to the producer
Q2) Refer to Figure 4-5.What is the area that represents the portion of producer surplus transferred to consumers as a result of the rent ceiling?
A)D + E
B)D + F
C)D
D)F
Q3) Which term refers to a legally established maximum price that firms may charge?
A)a price ceiling
B)a subsidy
C)a price floor
D)a tariff
Q4) What is deadweight loss? When is deadweight loss equal to zero?
Page 6
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Chapter 5: Externalities, environmental Policy, and Public Goods
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Sample Questions
Q1) Haiti was once a heavily forested country.Today,80 percent of Haiti's forests have been cut down,primarily to be burned to create charcoal.The reduction in the number of trees has lead to devastating floods when it rains heavily.This is an example of A)tragic externalities.
B)the Tragedy of the Commons.
C)human greed.
D)the consequences of not having a market economic system.
Q2) Which of the following is an example of the U.S.government's use of a "command and control" approach to reducing pollution?
A)In 1990 Congress approved measures designed to reduce sulfur dioxide emissions to 8.5 million tons annually by 2010.
B)The U.S.government imposed a tax on electric utilities to reduce damages from acid rain.
C)The government issued electric utilities tradable emissions allowances in other to reduce emissions of nitrogen oxide.
D)In the 1980s the U.S.government required the installation of catalytic converters to reduce emissions from all new automobiles.
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Page 7
Chapter 6: Elasticity: the Responsiveness of Demand and Supply
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Sample Questions
Q1) The U.S.government's focus on supply reduction efforts in its "war on drugs" has been relatively unsuccessful at addressing illegal drug use.Some economists believe that a successful anti-drug program must concentrate on reducing demand; for example,through drug education and voluntary treatment programs for addicts.
a.Suppose the price elasticity of demand for cocaine is -0.5.What will happen to the equilibrium price,quantity and total revenue from cocaine sales if the government succeeds in its efforts to reduce demand? What is likely to happen to the incentive to sell cocaine?
b.Suppose the government continues to concentrate its efforts on supply reduction and is able to reduce the supply of cocaine.As a result of the reduction in supply the price of cocaine increases by 25 percent.If the price elasticity of demand is -0.5,what is likely to happen to the incentive to sell cocaine?
c.Based on your answers,explain why one approach might be preferred over the other.
Q2) Supply is elastic whenever the elasticity value for supply is positive and greater than 1.
A)True
B)False
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Page 8
Chapter 7: The Economics of Health Care
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Sample Questions
Q1) Of the following high-income countries,which has the highest mortality ratio for cancer?
A)Canada
B)Japan
C)the United Kingdom
D)the United States
Q2) "Cost disease" refers to the tendency for high productivity in the service sector to lead to lower costs in those industries.
A)True
B)False
Q3) Suppose you see a 2008 Ford Mustang GT advertised in the local newspaper for $15,000.If you knew the car was reliable,you would be willing to pay $17,000 for it.If you knew the car was unreliable,you would only be willing to pay $12,000 for it.Under what circumstances should you buy the car?
Q4) Under the Patient Protection and Affordable Care Act (PPACA),individuals who do not have health insurance will be subject to a fine.
A)True
B)False
Q5) What is asymmetric information?
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Chapter 8: Firms, the Stock Market, and Corporate Governance
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Sample Questions
Q1) If Abercrombie & Fitch borrows $8 million from a bank to finance the construction of a new store,this is an example of
A)a stock market transaction.
B)direct finance.
C)a bond market transaction.
D)indirect finance.
Q2) A member of a corporate board of directors that is also a manager of the business is known as
A)a shareholder.
B)an inside director.
C)a partner.
D)a corporate governor.
Q3) David Myers,former controller for WorldCom,pleaded guilty to falsely reported costs for WorldCom that were ________ than they actually were,resulting in reported accounting profits for WorldCom that were ________ than their actual level.
A)higher; higher
B)lower; higher
C)lower; lower
D)higher; lower
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Chapter 9: Comparative Advantage and the Gains From International Trade
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Sample Questions
Q1) If the ________ cost of production for two goods is different between two countries then mutually beneficial trade is possible.
A)marginal
B)explicit
C)opportunity
D)implicit
Q2) The United States has developed a comparative advantage in digital computers,airliners and many prescription drugs.The source of its comparative advantage in these products is
A)a favorable climate.
B)technology.
C)abundant supplies of natural resources.
D)a strong central government.
Q3) a.Define the term "globalization."
b.Describe the benefits of globalization.
c.Who is likely to oppose globalization and why?
Q4) How does the U.S.federal government assist workers who have lost their jobs due to international trade?
Q5) What are terms of trade?
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Chapter 10: Consumer Choice and Behavioral Economics
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Sample Questions
Q1) The quantity demanded of tickets to the Super Bowl is always greater than the than the quantity supplied.Which of the following in the best explanation why the National Football League does not raise the price of tickets to the level where the quantity demanded equals the quantity supplied?
A)Raising the price would reduce the demand for tickets; there would then be a surplus and the game would not sell out.
B)The cost of raising the price and printing new tickets would exceed the revenue the NFL would receive from higher ticket prices.
C)The demand for Super Bowl tickets is elastic; raising the price would reduce total revenue.
D)The NFL is concerned that raising ticket prices would be considered unfair.
Q2) The income effect of a decrease in the price of legal services,a normal good,results in
A)a decrease in the demand for legal services.
B)a decrease in the quantity demanded of legal services.
C)an increase in the quantity demanded of legal services.
D)an increase in the demand for legal services.
Q3) Describe the demand curve for a Giffen good.
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Page 12
Chapter 11: Technology, production, and Costs
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Sample Questions
Q1) Refer to Figure 11-6.For output rates greater than 20,000 picture frames per month
A)the firm will not make a profit because the average cost of production will be too high.
B)the firm will experience diseconomies of scale.
C)the firm will experience diminishing returns.
D)the short-run average total cost will equal the long-run average total cost of production.
Q2) The change in a firm's total cost from producing one more unit of a good or service is
A)the result of economies of scale.
B)the definition of marginal product
C)the definition of marginal cost.
D)impossible to observe in large firms with many manufacturing plants.
Q3) Suppose the price of capital and labor remain constant.As a firm's expenditures for capital and labor increase,its isocost line
A)shifts out parallel to the original isocost line.
B)shifts in parallel to the original isocost line.
C)rotates outward on the Y-intercept.
D)rotates outward on the X-intercept.
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Page 13
Chapter 12: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) Which of the following characteristics of a farmers' market make it a good example of a perfectly competitive market?
A)Selling product at a farmers' market was very profitable for farmers in the early 2000s.As result,many farmers sold their farms to larger firms.
B)Farmers who sell product at a farmers' market are similar to other entrepreneurs who introduce products that earn short-run profits but invite competition that drives down prices and profits in the long run.
C)Farmers who sell product at a farmers' market are similar to other business owners who take advantage of the willingness of some consumers to pay high prices for new and different products.
D)Farmers selling product at a farmers' market provide a product that is a necessity,rather than a luxury.
Q2) In a perfectly competitive market the term "price taker" applies to
A)sellers and buyers.
B)firms but not buyers.
C)buyers but not sellers.
D)only the smallest sellers and buyers.
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Page 14
Chapter 13: Monopolistic Competition: the Competitive
Model in a More Realistic Setting
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Q1) Which of the following is not a characteristic of monopolistic competition?
A)There are many buyers and sellers.
B)There are low barriers to entry.
C)Average revenue is equal to price.
D)The products sold by all firms are identical.
Q2) The Jeans Store sells 7 pairs of jeans per day when it charges $100 per pair.It sells 8 pairs of jeans per day at a price of $90 per pair.The marginal revenue of the eighth pair of jeans is
A)$20.
B)$90.
C)$100.
D)$700.
Q3) Refer to Figure 13-5.Which of the graphs in the figure depicts a monopolistically competitive firm that is minimizing its losses?
A)Panel A
B)Panel B
C)Panel C
D)Panel A and Panel C
Q4) What is meant by "excess capacity"? How does it relate to consumer utility?
Q5) Why are many companies concerned about brand management?
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Chapter 14: Oligopoly: Firms in Less Competitive Markets
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Sample Questions
Q1) A patent is a government-imposed entry barrier because
A)it allows a firm to achieve economies of scale.
B)it is a key input owned by the firm that is granted the patent.
C)it limits the quantity of a good that can be imported into a country.
D)it gives a firm the exclusive right to a new product for a period of 20 years from the date the product is invented.
Q2) Which of the following is not a characteristic of oligopoly?
A)the ability to influence price
B)a small number of firms
C)low barriers to entry
D)interdependent firms
Q3) In a Nash equilibrium,all players select non-dominant strategies.
A)True
B)False
Q4) Which of the following is not an example of a government-imposed entry barrier?
A)patents
B)occupational licensing
C)barriers to international trade
D)antitrust legislation
Q5) What is the difference between explicit collusion and implicit collusion?
Page 16
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Chapter 15: Monopoly and Antitrust Policy
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Q1) A virtuous cycle refers to the development of new products that follows when a monopoly earns economic profits.
A)True
B)False
Q2) To have a monopoly in an industry there must be
A)barriers to entry so high that no other firms can enter the industry.
B)a patent or copyright giving the firm exclusive rights to sell a product for 20 years.
C)an inelastic demand for the industry's product.
D)a public franchise,making the monopoly the exclusive legal provider of a good or service.
Q3) Which one of the following is not a possible barrier to entry high enough to keep competing firms out of a monopoly industry?
A)The monopoly firm has control of a key resource necessary to produce a good.
B)There are important network externalities in supplying a good or service.
C)large economies of scale that result in a natural monopoly
D)a high concentration ratio
Q4) What is the difference between a monopoly's marginal revenue curve and a perfect competitor's marginal revenue curve?
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Page 17
Chapter 16: Pricing Strategy
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Sample Questions
Q1) Cost-plus pricing would be consistent with selecting the profit-maximizing price when
A)it results in a price that causes quantity sold to be where marginal revenue equals marginal cost.
B)a firm has no difficulty estimating its demand curve.
C)consumers value the product beyond its marginal cost.
D)the demand for the firm's product is unit-elastic.
Q2) Which of the following is not an advantage of cost-plus pricing?
A)It is easy to calculate.
B)It requires little information.
C)If a firm is selling multiple products,it ensures that the firm's prices will cover costs that are difficult to assign to one product.
D)It ensures that the firm will maximize its profits.
Q3) "Buy low and sell high is advice given to people who want to make a profit by buying and selling shares of stock.Arbitrage is defined as buying a product in one market at a low price and reselling it in another market at a high price.Therefore,when stock brokers buy and sell stocks to earn a profit they are engaging in arbitrage." Evaluate this statement; state whether it is true or false and explain your answer.
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Chapter 17: The Markets for Labor and Other Factors of Production
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Q1) Mel's House of Cars is an automobile dealership that sells both new and used cars.Two other dealerships located nearer Mel's pay their salespeople a straight salarythey receive no commission for each car they sell.Mel has decided to pay all of his salespeople a commission on all car sales.Which of the following is most likely to occur as a result of Mel's decision?
A)Mel will have difficulty finding salespeople.Research by labor economists has found that most employees prefer the security of a salary to the uncertainty of being paid based on how much revenue they generate for their employers.
B)Mel will experience a principal-agent problem.Some of his salespeople will tend to shirk because they will not be paid if they sell no cars,regardless of how hard they work.
C)Mel will be able to hire some of the most productive salespeople who work for the other two dealerships.
D)Mel risks violation of federal law that regulates firms' compensation policies.
Q2) 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.
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Page 19
Chapter 18: Public Choice, taxes, and the Distribution of Income
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Sample Questions
Q1) Refer to Figure 18-1.Area B+C+F+G 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.
Q2) Refer to Table 18-5.The tax system is
A)progressive throughout all levels of income.
B)proportional throughout all levels of income.
C)regressive throughout all levels of income.
D)progressive between $10,000 and $12,000 of income and regressive between $12,000 and $22,000.
Q3) In 2010,over 75 percent of the revenue of the U.S.federal government was raised through
A)individual income and social insurance taxes.
B)property and social insurance taxes.
C)sales and corporate income taxes.
D)individual income and property taxes.
Q4) What is meant by "tax incidence"?
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Q5) If your income is $92,000 and you pay taxes of $19,475,what is your average tax rate? Show your work.