Business Economics
Question Bank
Course Introduction
Business Economics explores the application of economic theory and analysis to business decision-making. The course examines how firms operate within different market structures, the role of supply and demand, pricing strategies, production and cost analysis, and the economic forces that impact organizational profitability and growth. Students will gain an understanding of how both microeconomic and macroeconomic principles influence business behavior, helping them to analyze market trends, forecast outcomes, and make informed managerial decisions in a dynamic economic environment.
Recommended Textbook
Microeconomics A Modern Approach 1st Edition by Andrew Schotter
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1035 Flashcards
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Chapter 1: Economics and Institutions: a Shift of Emphasis
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Sample Questions
Q1) If producers and consumers are not fully knowledgeable about the characteristics of all products produced and consumed in the economy, the people suffer from
A) incomplete information
B) total ignorance
C) perfect information
Answer: A
Q2) Why begin the study of market structures with perfect competition?
Answer: Although an entrepreneur arising from a primitive state of nature will most likely be a monopolist, the study of competitive markets leads to optimal welfare results that provide a benchmark by which to compare other market structures. Also, it is conventional for textbooks to start with perfect competition.
Q3) Abstract representations of reality used by economists to study economic and social phenomena are called
A) fashion models
B) economic models
C) model homes
Answer: B
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Chapter 2: Consumers and Their Preferences
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Q1) In a multiplicative utility function, utility is a function of the products of the various units of goods consumed.
A)True
B)False
Answer: True
Q2) The divisibility assumption is the assumption on consumption sets that states that A) goods are infinitely divisible B) it is possible to add consumption bundles C) it is possible to combine two bundles to produce a third by consuming fractions of them
Answer: A
Q3) A consumption possibility set is the set of bundles feasible for a society's agents to consume.
A)True
B)False
Answer: True
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Chapter 3: Utilities Indifference Curves
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Q1) The optimal consumption bundle is the bundle the consumer chooses in order to maximize utility within the economically feasible set.
A)True
B)False
Answer: True
Q2) The only theory of the economics of tipping considers just the customer's income, while ignoring the server's income.
A)True
B)False
Answer: False
Q3) The optimal allocation of time for studying for final exams is always situated at a tangency point between an indifference curve and the A) time constraint line
B) origin
C) indifference curve with the maximum value of utility
Answer: A
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Chapter 4: Demand and Behavior in Markets
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Sample Questions
Q1) The quantity of a good that people seek to sell at a given price is the quantity demanded.
A)True
B)False
Q2) If a price decrease causes income and substitution effects that work in opposite directions, but the quantity demanded nevertheless increases, the good must be a
A) normal good
B) superior good
C) Giffen good
Q3) A normal is a good whose demand curve is downward sloping.
A)True
B)False
Q4) Is the typical demand curve used in microeconomics compensated or uncompensated?
Q5) A Giffen good is a good whose demand curve
A) is upward sloping
B) is downward sloping
C) jumps from one point on the quantity axis to another, leaving a gap
Q6) Will the income effect always cause an increase in the quantity demanded?
Q7) How is the price-consumption path derived?
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Chapter 5: Some Applications of Consumer Demand, and Welfare Analysis
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Q1) A curve that represents graphically the relationship between the quantity of a good demanded by a consumer and the price of that good as the price varies is called the market demand curve.
A)True
B)False
Q2) If we represent an agent's preferences by a(n) __________ utility function, then the way we number the agent's indifference curves does not affect the demands made by the agent.
A) ordinary
B) cardinal
C) ordinal
Q3) The fact that policies aimed at reducing crime may actually increase it if crime is an inferior enough good and the income effect of the crime prevention policies is big enough is known as the
A) Slutsky paradox
B) opportunity paradox
C) paradox of crime prevention
Q4) Describe the difference between a perfectly inelastic demand curve and a perfectly elastic demand curve.
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Chapter 6: Uncertainty and the Emergence of Insurance
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Q1) Consider the test in Experimental Teaser 7 at the beginning of the chapter. How would you predict a risk preferring agent to behave in this experiment?
Q2) A risk-preferring agent will
A) reject a "fair gamble"
B) be indifferent to a "fair gamble"
C) accept a "fair gamble"
Q3) Refer to Exhibit 6-3. Which utility function is risk neutral?
A) (a)
B) (b)
C) (c)
Q4) A risk-averse agent will
A) reject a "fair gamble"
B) be indifferent to a "fair gamble"
C) accept a "fair gamble"
Q5) If utility is measured in a way that not only the utility numbers assigned to bundles are meaningful, but also their differences, then we say that we are using
A) cardinal utility
B) ordinal utility
C) expected utility
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Chapter 7: Uncertainty Applications and Criticisms
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Q1) The profitability of insurance exists because
A) people have identical attitudes toward risk
B) big insurance companies always charge extremely high rates
C) people have different attitudes toward risk
Q2) As the population in the risk pool grows larger, the variance in the mean loss approaches
A) positive infinity
B) zero
C) negative infinity
Q3) Status quo bias is the term given to the fact that people have resistance to changing their current situations even if the new one offered to them is better.
A)True
B)False
Q4) People are more likely to buy insurance if they are
A) risk averse
B) risk preferring
C) risk neutral
Q5) Explain how a risk-averse buyer of insurance obeys the mean-preserving spread proposition.
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Chapter 8: The Discovery of Production and Its Technology
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Q1) A period of time so short that producers are unable to vary any of their inputs to meet changes in demand or other changes is called the
A) short run
B) momentary run
C) immediate run
Q2) If all inputs are doubled and the resulting output increases by more than a factor to two, the technology features
A) increasing returns to scale
B) decreasing returns to scale
C) constant returns to scale
Q3) A return that is just sufficient to recover an entrepreneur's opportunity cost is known as
A) opportunity profit
B) extra-normal profit
C) normal profit
Q4) An production indifference curve is the set of bundles that most efficiently produce the same output given a production function.
A)True
B)False
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Chapter 9: Cost and Choice
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Sample Questions
Q1) The equation y \(K \mathrm{X}^{\alpha} \text { capital } \mathrm{X}^{\beta} \text { labor }\) is the algebraic for which production function?
A) Leontief
B) Cobb-Douglas
C) short-run
Q2) In order to produce any given amount of output in the least-cost way, choose the combination of inputs that is located on the lowest ___________ curve ___________ to the ___________ associated with the desired level of output.
A) isocost, tangent, isoquant
B) isocost, perpendicular, isoquant
C) isoquant, tangent, isocost
Q3) The function that associates the cost of the least-cost input combination, when all input levels are variable, with each possible level of output is called the A) long-run cost function
B) long-run production function
C) increasing returns to scale function
Q4) What is the difference between finding the optimal combination of inputs in the short run versus in the long run?
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Chapter 10: Cost Curves
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Q1) The _______-run total cost of producing any quantity of output is simply the ___________ possible ________-run total cost of producing that quantity.
A) short, smallest, long
B) long, smallest, short
C) long, greatest, short
Q2) Describe the difference between the short-run average fixed cost function and the short-run average variable cost function.
Q3) The short-run average fixed cost function gives the average fixed cost associated with any level of output.
A)True
B)False
Q4) The short-run total cost function describes the total cost of producing any given level of output with a given fixed amount of capital.
A)True
B)False
Q5) Explain why a long-run production function is three-dimensional and a short-run production function is two-dimensional.
Q6) What can short-run marginal cost tell us about short-run average cost?
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Chapter 11: Game Theory and the Tools of Strategic
Business Analysis
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Q1) Backward induction is a description of a game of strategy that provides a detailed description of the rules of the game.
A)True
B)False
Q2) A 2 × 2 matrix game in which each player has a dominant strategy determining an equilibrium that is Pareto dominated is called the
A) prisoner's dilemma game
B) second-auction game
C) centipede game
Q3) A set of strategies that constitute a Nash equilibrium, where the actions prescribed by these strategies for the players once they reach any subgame constitute a Nash equilibrium for that subgame is called a(n)
A) subgame perfect equilibrium
B) imperfect subgame equilibrium
C) backward equilibrium
Q4) Distinguish between strict and weak domination.
Q5) A dominated strategy is a strategy that is dominated by another strategy.
A)True
B)False
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Chapter 12: Decision Making Over Time
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Q1) Given a positive discounting factor, the best wage stream for a present value maximizing subject is the
A) flat stream
B) declining stream
C) increasing stream
Q2) The slope of a hyperbolic discount function ________________ as we move through time.
A) stays constant
B) equals -\(\delta\)
C) changes
Q3) The first step in solving a problem involving searching for the lowest price or intergenerational giving is to use
A) backward induction
B) backward discounting
C) forward deduction
Q4) Experimental and real world data support
A) hyperbolic discounting models
B) exponential discounting models
C) time-consistent discounting models
Q5) Describe a commitment device designed to counteract time-inconsistent behavior.
Page 14
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Chapter 13: The Internal Organization of the Firm
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Q1) After graduation, you get a job as an editorial assistant in a publishing company. In this entry-level job, you fill out forms, answer the phone, and send emails at the direction of members of an editorial team. Are you an agent or a principal?
Q2) A business entity that hires labor and capital to produce a product is known as a(n) A) employee
B) firm
C) resource
Q3) Sometimes the output of a worker results not just from the amount of effort the worker exerts, but also from some random element such as A) the probability of being caught shirking
B) crime rates
C) luck
Q4) The person who is acting on behalf of a principal is called the A) vice principal
B) agent
C) employer
Q5) Can a firm prevent the moral hazard problem of workers shirking?
Q6) Is there a Nash equilibrium under a revenue-sharing plan?
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Chapter 14: Perfectly Competitive Markets: Short-Run Analysis
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Q1) The profit-maximizing quantity for a competitive firm to set in the short run is that quantity at which the price received equals the marginal cost of production, provided that this price is greater than the average variable cost of production.
A)True
B)False
Q2) A government subsidy of wages will shift the demand curve for labor to the A) left
B) right
C) The direction of the shift depends on the size of the subsidy
Q3) Provided that the market price is greater than AVC, the profit-maximizing quantity for a competitive firm to set in the short run is that quantity at which the price received __________________ the marginal cost of production.
A) is equal to B) is greater than C) is less than
Q4) Perfectly competitive firms must take the market price as A) given
B) being randomly determined
C) whatever the firms want it to be
16
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Chapter 15: Competitive Markets in the Long Run
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Q1) At the long-run equilibrium of a perfectly competitive industry, price is set so that it is greater than marginal cost.
A)True
B)False
Q2) The average cost of the firm when economic rent is included as a cost is called
A) rent-exclusive average cost
B) rent-controlled fixed cost
C) rent-inclusive average cost
Q3) In a perfectly competitive industry over the long run, competition ensures that goods sold to consumers will be produced at _____________________ cost.
A) the lowest possible
B) zero
C) the highest possible
Q4) In a long-run equilibrium in a perfectly competitive industry, no firm will want to A) exit the industry because it is earning an amount at least equal to its opportunity cost B) enter the industry because it will not be able to make extra-normal profits
C) Both answers are correct
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Chapter 16: Market Institutions and Auctions
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Q1) A common value auction is an auction in which one objectively true value for a good exists, but information about that value is distributed across the population.
A)True
B)False
Q2) The resulting price of a Dutch auction will be _______________ the resulting price of a first-price sealed-bid auction.
A) equal to B) greater than C) less than
Q3) In a private value auction, one player's private value is known to A) only that player
B) all the bidders
C) only the seller
Q4) A sealed-bid auction is an auction in which bidders enter their bids privately and the loser is that bidder whose bid is highest.
A)True
B)False
Q5) Are the buyers or the sellers the active agents in a one-sided oral auction?
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Chapter 17: The Age of Entrepreneurship: Monopoly
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Q1) If a monopolist must charge one price to all consumers, then the price that maximizes the sum of the consumer surplus and the producer surplus must be the price at which the demand curve intersects the
A) average cost curve
B) marginal revenue curve
C) marginal cost curve
Q2) Price discrimination depends on the nonexistence of A) arbitrage opportunities
B) consumer surplus
C) extra-normal profits
Q3) The practice of charging different prices to different consumers is known as price discrimination.
A)True
B)False
Q4) The difference between what the consumers would have been willing to pay for a good and the amount the good is actually sold for is known as surplus goods.
A)True
B)False
Q5) Does a monopolist always earn extra-normal profits?
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Chapter 18: Natural Monopoly and the Economics of Regulation
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Q1) Explain why the inertia shopping rule provides a defensive pricing strategy.
Q2) What does it mean to say that it is a sufficient, but not a necessary condition for a natural monopoly, for average costs to decrease at all level of output?
Q3) To set a price that is equal to the marginal cost is
A) sustainable-cost pricing
B) marginal-cost pricing
C) average-cost pricing
Q4) A market outcome that is optimal given existing constraints in the market but worse than the outcome that would result if those constraints were removed is the third-best result.
A)True
B)False
Q5) Regulation in which a regulatory commission must allow any firm under its jurisdiction to earn a rate of return for the firm's investors that is sufficient to warrant their keeping their capital investment in the firm is called
A) overregulation
B) rate-of-return regulation
C) insider trading
20
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Chapter 19: The World of Oligopoly: Preliminaries to
Successful Entry
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Q1) A duopoly in which the two firms collude on a price to set is called a A) collusive duopoly
B) Bertrand model
C) competitive duopoly
Q2) Which of the following does not derive from an assumption that opponents will not respond to any action that a firm takes?
A) kinked-demand curve model
B) Bertrand model
C) Cournot model
Q3) A duopoly game in which firms alternate in setting quantities is known as a first-mover quantity-setting duopoly game.
A)True
B)False
Q4) The advantage the leader has in the Stackelberg model, which allows the leader to produce a higher level of output than in the Cournot equilibrium, thus receiving greater profits, is known as the
A) first-mover advantage
B) Stackelberg follower dominance
C) unstable equilibrium
21
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Chapter 20: Market Entry and the Emergence of Perfect Competition
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Q1) If you are a monopolist who sets the monopoly price, a potential entrant
A) may or not earn extra-normal profit
B) is guaranteed to earn an extra-normal profit
C) is guaranteed not to earn an extra-normal profit
Q2) In the Dixit-Spence model, we assume that the marginal cost of producing gadgets depends on the
A) amount of production capacity a firm has
B) long-run fixed cost of the firm
C) relative position of the average total cost curve of the firm
Q3) Impeded entry occurs when the incumbent firm is able to deter entry by simply pursuing a policy that is best for itself as a monopolist.
A)True
B)False
Q4) A disadvantage of overinvestment is that the incumbent firm builds capacity it never uses, which is
A) somewhat wasteful of resources
B) an efficient use of resources
C) socially optimal
Q5) List the characteristics of a perfectly competitive market.
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Chapter 21: The Problem of Exchange
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Q1) An allocation is a specification of the ___________ of each good to be ___________ by each agent in the economy.
A) price, consumed
B) quantity, produced
C) quantity, consumed
Q2) Imagine you have an identical twin. You and your sibling are negotiating a trade with a pair of identical twins who are not related to you. The other twins are trying to force you into a trade that would leave you indifferent to your no-trade allocation. You and you sibling
A) have to accept the trade because there is nothing you can do
B) can try to play one of the other twins off against the other to achieve a better allocation
C) should accept the offer because the other twins could force you into an even worse trade
Q3) To block is to prevent a trade from occurring by forming a coalition and offering each person in the coalition less than they receive from the current proposed trade.
A)True
B)False
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Chapter 22: General Equilibrium and the Origins of the Free
Market and Interventionist
Ideologies
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Q1) The slope of an isoquant represents the marginal rate of
A) technical substitution
B) substitution
C) revenue to cost
Q2) Interventionists ask whether it might not be better to sacrifice some _____________ for more _____________.
A) equity, efficiency
B) efficiency, equity
C) efficiency, extra-normal profits
Q3) Free-market advocates argue that government interference with the competitive process may ___________ the efficiency of that process.
A) reduce
B) increase
C) have no effect on
Q4) The allocations on the contract curve are Pareto
A) indifferent
B) efficient
C) interventions
Page 24
Q5) List the three beliefs on which the free-market argument rests.
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Chapter 23: Moral Hazard and Adverse Selection:
Informational Market Failures
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Q1) You are approved for an insurance policy that protects your truck. The next day you become a reckless driver. This is an example of
A) illogical behavior
B) social welfare
C) moral hazard
Q2) A restaurant pays each waiter a salary and allows no tipping. The opportunity wage of good waiters (wg) is greater than the opportunity wage of bad waiters (wb). If the restaurant sets its salary equal to or greater than wg, it will attract
A) both good and bad waiters
B) only good waiters
C) only bad waiters
Q3) An insurance lacks the information needed to distinguish between safe and risky people and therefore charges everyone the same average premium. As a result, the ________ people will not buy insurance, and the industry will be selling only to ________ people.
A) risk-neutral, safe
B) safe, risky
C) risky, safe
Q4) Explain why insurance markets fail.
Page 25
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Chapter 24: Externalities: the Free Market Interventionist
Battle Continues
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Q1) In the presence of externalities, the private competitive market will achieve the socially optimal solution on its own.
A)True
B)False
Q2) The goal a standards and charges system is to reduce the externality to the A) level acceptable to the government
B) socially optimal level
C) level where private marginal cost equals price
Q3) The agents in a market distorted by an externality should be able to agree on a mutually beneficial way to _________ the gains that could be achieved by altering the market outcome to the Pareto-optimal level.
A) ignore
B) split
C) reduce
Q4) Why do you think that the Coase theorem depends on costless negotiation?
Q5) What are the three conditions for a Pareto-optimal outcome in a perfectly competitive two-product economy? Which are is not satisfied when an externality is present?
26
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Chapter 25: Public Goods, the Consequences of Strategic
Voting Behavior, and the Role of Government
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Q1) As a general rule, society should provide a public good until that point at which the marginal benefit to society of having one more unit produced is __________________ the marginal cost of the good A) less than B) equal to C) greater than
Q2) A professor is trying to decide which tutorial Web site to post for an economics course. Exhibit 25-1 is a demand-revealing mechanism representing students' truthful answers about their preferences for three different sites. Which site has the highest total willingness to pay?
A) A
B) B
C) C
Q3) The voting paradox holds that, even if all the people in a society have transitive preferences, the preferences of society taken as a whole A) need not be transitive B) must be transitive C) will never be transitive
Q4) What is so bad about rent seeking behavior?
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Chapter 26: Input Markets and the Origins of Class Conflict
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Q1) A firm with 3 workers produces 8 units of output. When the firm hires 1 additional worker, output increases to 12 units of output. MPP is equal to
A) 4 units
B) 12 units
C) 1 unit
Q2) The return on a factor above the amount necessary to entice that factor into the production process is called rent.
A)True
B)False
Q3) The total wage a monopsonist pays for labor is known as
A) marginal expenditure
B) total expenditure
C) average expenditure
Q4) The change in a firm's total wage bill that results from its hiring of one additional unit of labor is called
A) marginal expenditure
B) total expenditure
C) average expenditure
Q5) Why is the price of land entirely determined by the demand curve?
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