Course Introduction
Business Economics
Pre-Test Questions
Business Economics explores the application of economic theory and methodologies to business decision-making and strategy. This course examines how firms operate within various market structures, analyze costs, revenues, and profits, and respond to changes in economic variables such as demand, supply, pricing, and competition. Students will gain insights into market equilibrium, the impact of government intervention, and the macroeconomic environment affecting business operations. Special emphasis is placed on interpreting economic data, forecasting market trends, and using economic tools to solve real-world business problems.
Recommended Textbook
Managerial Economics Theory Applications and Cases 8th Edition by W. Bruce Allen
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19 Chapters
693 Verified Questions
693 Flashcards
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) Economic profits may result from:
A) innovation.
B) risk taking.
C) exploiting market inefficiencies.
D) all of the above.
E) a and b
Answer: D
Q2) Which of the following would a manager NOT use to create market inefficiencies?
A) Establishing a brand name.
B) Sophisticated pricing strategies.
C) Diversification efforts.
D) Output decisions.
E) Building market entry barriers.
Answer: A
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Page 3
Chapter 2: Demand Theory
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Sample Questions
Q1) The constant price elasticity of demand for cigarettes has been estimated to be -0.5.To reduce smoking by 50%,approximately how much tax needs to be added to a $1 pack?
A) $1.00
B) $2.00
C) $3.00
D) $0.50
E) $4.00
Answer: A
Q2) The demand for fashion watches is Q = 9 - 0.7P + 2I.Assume that per capita income I is $13.When the price of fashion watches is P = $30,the price elasticity of demand is:
A) -0.66.
B) -1.0.
C) -2.0.
D) -0.5.
E) -1.5.
Answer: E
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Chapter 3: Consumer Behavior and Rational Choice
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Sample Questions
Q1) A budget constraint:
A) must be convex to the origin if consumers prefer more to less.
B) will be upward-sloping if consumers consider one good a "bad."
C) must be downward-sloping if both goods have positive prices.
D) will be concave to the origin if the consumer's budget is fixed.
E) will always have slope equal to -1.
Answer: C
Q2) At equilibrium,the marginal rate of substitution describes:
A) the slope of the budget constraint.
B) the number of units of one good that a consumer is willing to trade for an additional unit of another good, holding utility fixed.
C) the slope of the demand curve.
D) the number of units of one good that a consumer is willing to trade for an additional unit of another good in order to increase utility by 1 unit.
E) a and b
Answer: B
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Chapter 4: Estimating Demand Functions
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Sample Questions
Q1) The estimated mathematical relationship between dependent and independent variables derived using ordinary least squares is called the:
A) covariance.
B) sample regression line.
C) residual demand curve.
D) goodness of fit.
E) coefficient of determination.
Q2) If an analyst were confident that all factors that shift the supply curve were constant when observing changing prices and quantities traded:
A) the analyst would be confident that the demand curve had been identified.
B) neither the supply nor the demand curve would have been identified.
C) the analyst should gather more data to find shifts in both curves.
D) both the supply and demand curves would have been identified.
E) the analyst would be confident that the supply curve had been identified.
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6
Chapter 5: Production Theory
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Sample Questions
Q1) When total product is at its maximum:
A) average product is greater than marginal product.
B) average product is maximized.
C) average product equals marginal product.
D) marginal product equals 1.
E) average product equals 1.
Q2) The average product of labor is defined as the:
A) change in output divided by the change in labor input usage.
B) change in labor input usage divided by the change in output.
C) output divided by the labor input usage.
D) labor input usage divided by the output level.
E) output divided by the marginal product of labor.
Q3) The marginal rate of technical substitution between two inputs:
A) shows the rate at which one input can be traded for another, holding output constant.
B) shows the efficient combination of inputs.
C) increases as we move down an isoquant.
D) shows the rate at which output can be increased by using more of both inputs.
E) shows the rate at which output decreases when using less of one of the inputs.
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Chapter 6: The Analysis of Costs
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Sample Questions
Q1) Lot's Wife Manufacturing produces rear-view video systems for buses.The firm's cost function is TC = 2,000 + 120Q.If the systems sell for $145,what is the break-even rate of production?
A) 200.
B) 120.
C) 80.
D) 55.
E) None of the above.
Q2) Economies of scale are said to exist whenever:
A) the learning curve is upward-sloping.
B) increases in output bring about higher output.
C) increases in output bring about higher input prices.
D) the elasticity of total cost with respect to output is greater than 1.
E) the long-run average cost curve is downward-sloping.
Q3) The long-run average cost curve slopes upward if there are:
A) some factors without diminishing marginal returns.
B) diseconomies of scope in the management of multiplant operations.
C) economies of scale.
D) diseconomies of scale.
E) no factors without diminishing marginal returns.
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Chapter 7: Perfect Competition
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Sample Questions
Q1) If the demand increases for the product of a decreasing-cost industry:
A) short-run price goes up, but long-run price falls.
B) long-run output goes up, but long-run price may go up or down.
C) short-run output goes up, but long-run output may go up or down.
D) long-run output goes up, but short-run price remains constant.
E) long-run price goes up, but short-run price may go up or down.
Q2) A constant-cost industry is one in which:
A) input prices do not change over time.
B) technology does not change over time.
C) input prices and technology do not change as firms enter or exit the industry.
D) input prices and technology do not change over time.
E) firms have reached the maturity phase of the industry's life cycle.
Q3) If price is above the average variable cost but below the average total cost of a representative firm in a competitive industry:
A) there will be entry to the industry over time.
B) there will be exit from the industry over time.
C) the firms in the industry are just earning a normal rate of return.
D) the firms in the industry are earning a supranormal rate of return.
E) the industry is in long-run equilibrium.
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Page 9
Chapter 8: Monopoly and Monopolistic Competition
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Sample Questions
Q1) If revenues from selling quantities x and y of jointly produced goods X and Y were TR<sub>X</sub> = 300 - xy + 50x and TR<sub>Y</sub> = 1,000 - xy + 2y,and 10 units of y were produced,then marginal revenue with respect to X would be:
A) $10.
B) $20.
C) $30.
D) $40.
E) $50.
Q2) The Frank Failing Company has an average variable cost of $8,average fixed cost of $16,marginal cost of $12,and elasticity of demand -3.Frank should: A) shut down.
B) charge $8.
C) charge $16.
D) charge $18.
E) charge $36.
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10
Chapter 9: Managerial Use of Price Discrimination
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Sample Questions
Q1) When an electrical utility charges higher prices during the day than at night,it is practicing:
A) peak load pricing.
B) first-degree price discrimination.
C) second-degree price discrimination.
D) third-degree price discrimination.
E) fourth-degree price discrimination.
Q2) Price discrimination is defined as:
A) selling a product at the same price to each and every consumer.
B) selling a product at more than one price.
C) selling a product at its marginal cost plus a markup.
D) selling more than one version of a product.
E) producing goods and services for sale within the firm.
Q3) When a utility charges homeowners less than big industrial users,it is practicing:
A) first-degree price discrimination.
B) fourth-degree price discrimination.
C) third-degree price discrimination.
D) markup pricing.
E) tying.
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Page 11
Chapter 10: Bundling and Intrafirm Pricing
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Sample Questions
Q1) Play It Again Sam is a producer of high-end CD burners.It requires customers to purchase high-quality blank CDs from it in order to maintain warranty agreements.This is an example of a:
A) bundle.
B) two-part tariff.
C) tying contract.
D) transfer price.
E) joint product.
Q2) Transfer prices are needed when:
A) firms purchase raw materials from other firms.
B) consumers sell goods and services to one another.
C) markets must be simulated within firms.
D) products are bundled and sold as a package.
E) firms charge different prices to customers where there are no differences in production costs.
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12
Chapter 11: Oligopoly
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Sample Questions
Q1) Glyde Air Fresheners is the dominant firm in the solid room aromatizer industry,which has a total market demand given by Q = 80 - 2P.Glyde has competition from a fringe of four small firms that produce where their individual marginal costs equal the market price.The fringe firms each have total costs given by TC<sub>i</sub> = 10Q<sub>i</sub> + 2Q<sup>2</sup><sub>i </sub>.If Glyde's total costs are given by TC<sub>G</sub> = 100 + 6Q<sub>G</sub>,what is Glyde's maximum profit?
A) $148.
B) $184.
C) $240.
D) $332.
E) $362.
Q2) In the model of oligopoly,there:
A) are many firms producing differentiated products.
B) is one firm producing undifferentiated products.
C) are a few firms producing differentiated or undifferentiated products.
D) are many firms producing undifferentiated products.
E) is one firm producing a highly differentiated product.
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Page 13
Chapter 12: Game Theory
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Sample Questions
Q1) If a firm has a dominant strategy:
A) its optimal strategy depends on the play of rivals.
B) its optimal strategy is always the same, even if payoffs change.
C) it is determined by the behavior of only one key rival.
D) it receives the same profits regardless of the strategy of rivals.
E) its optimal strategy is independent of the play of rivals.
Q2) Getting to a Nash equilibrium requires:
A) each knowing the opponent's payoffs and cooperation.
B) knowing the opponent's payoffs but not cooperation.
C) cooperation but not knowing the opponent's payoffs.
D) neither cooperation nor knowing the opponent's payoffs.
E) either cooperation or knowing the opponent's payoffs, depending on the game.
Q3) By definition,a Nash equilibrium in a duopoly is the situation in which each player:
A) plays a dominant strategy.
B) plays the best strategy given the other's strategies.
C) gets the highest possible payoff.
D) gets the highest payoff possible without lowering the opponent's payoff.
E) is happy with the outcome.
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Chapter 13: Auctions
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Sample Questions
Q1) As far as we know,auctions first emerged:
A) as e-commerce exploded in recent years.
B) when capitalism became a popular form of economic organization.
C) after the emergence of communism, because black markets were popular in centrally planned economies.
D) in Babylonian marriage markets.
E) to increase efficiency in the trading of commodities.
Q2) What is the optimal bid for a descending-price auction if the bidder's reservation price is 8,the lowest possible bid is 2,and there are three bidders?
A) 2.
B) 6.
C) 7.
D) 8.
E) None of the above.
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Page 15
Chapter 14: Risk Analysis
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Sample Questions
Q1) A frequency definition of probability is:
A) a weighted average of different peoples' degrees of certainty of an event's occurring.
B) a theoretical probability distribution.
C) a person's degree of certainty of an event's occurring.
D) an expected value of a particular outcome.
E) the number of occurrences of an event in a large number of repetitions of an experiment.
Q2) A project could yield a profit of $1,$2,$3,or $6,with equal probability.Then the variance \(\sigma\)<sup>2</sup>,is:
A) 1.
B) 3/2.
C) 7/2.
D) 9/2.
E) 14.
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Chapter 15: Principalagent Issues and Managerial Compensation
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Sample Questions
Q1) Suppose that Wilma's utility function is given by U(E)= 100 - 2E<sup>2</sup>,
Where E = Wilma's work effort in producing homemade dinners,measured in hours per day.The marginal utility of effort for Wilma is:
A) 2E<sup>2</sup>.
B) -2E.
C) 100.
D) -4E.
E) none of the above.
Q2) If effort is unobservable and revenues are riskless,firms can design incentive-compatible compensation schemes by offering workers:
A) profit shares.
B) increased nonmonetary benefits.
C) increased fixed salary.
D) decreased effort requirements.
E) increased future compensation in the form of retirement pay.
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Chapter 16: Adverse Selection
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Sample Questions
Q1) Suppose the Ajax Insurance Company provides insurance for skydivers whose wealth before diving is $400.An accident will leave divers with a wealth of $100.The company divides the divers into two classes: safe (probability of an accident = 0.2)and unsafe (probability of an accident = 0.5).The utility of wealth for all divers is given by the function: U(w)= w<sup>0.5</sup>.If only the unsafe divers buy insurance and the premium is $100,the insurance company will:
A) earn a profit of $100 per unsafe diver.
B) break even.
C) incur a loss of $200 per unsafe diver.
D) incur a loss of $300 per unsafe diver.
E) experience none of the above.
Q2) The signaling model of education would be ineffective if:
A) skills learned in school were useful in employment and could be effectively tested.
B) the costs of acquiring education were equal for individuals of different abilities.
C) individuals could not identify their own abilities.
D) b and c.
E) all of the above.
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Page 18
Chapter 17: Government and Business
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Sample Questions
Q1) A public good is any good that:
A) is provided by the federal government.
B) can be consumed by everyone.
C) can be consumed by any person without reducing the amount available to be consumed by everyone else.
D) can be easily withheld from consumers.
E) citizens demand of their public institutions.
Q2) When setting rates that natural monopolists can charge,regulatory commissions attempt to establish a maximum price:
A) at the minimum long-run average cost of the monopolist.
B) at the minimum short-run average cost of the monopolist.
C) where price equals average total cost plus a fair rate of return on the invested capital of the monopolist.
D) where price equals average variable cost plus a fair rate of return on the invested capital of the monopolist.
E) at the minimum long-run average variable cost of the monopolist.
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19
Chapter 18: Optimization Techniques
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Sample Questions
Q1) Maximum profit occurs wherever:
A) the slope of the total revenue function equals marginal revenue.
B) the slope of the total revenue function equals marginal cost.
C) the slope of the total revenue function is maximized.
D) the total revenue is maximized.
E) none of the above.
Q2) The constant rule of differentiation is:
A) Y = a + bX \(\rarr\) dY/dX = a + b
B) Y = a + bX \(\rarr\) dY/dX = a
C) Y = a + bX\(\rarr\)dY/dX = b
D) Y = a + bX \(\rarr\)dY/dX = ab
E) Y = a + bX\(\rarr\) dY/dX = ab
Q3) When average profit is increasing with increases in output,marginal profit must be:
A) increasing.
B) less than average profit.
C) greater than average profit.
D) decreasing.
E) constant.
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Chapter 19: Appendix Problems
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Q1) You borrow money from Fast Eddie's Fast Cash at 20% per year interest and agree to pay $500 at the end of each of the next four years.You must have borrowed approximately:
A) $2,000.
B) $1,595.
C) $1,295.
D) $1,095.
E) $895.
Q2) Your mortgage requires that you pay $12,000 at the end of each of the next 30 years.If the annual interest rate is 12%,then you must have borrowed approximately:
A) $117,660.
B) $96,660.
C) $78,660.
D) $63,660.
E) $133,660.
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