Economic Analysis for Business
Exam Answer Key
Course Introduction
Economic Analysis for Business provides students with the essential tools and frameworks needed to apply economic principles to real-world business problems. The course explores concepts such as demand and supply, market structure, pricing strategies, cost analysis, and the impact of government policy on business activities. By integrating theoretical foundations with practical case studies, students learn how economic reasoning informs managerial decision-making, resource allocation, and strategic planning within diverse business environments. The course also emphasizes the interpretation of market signals and macroeconomic trends to better anticipate changes in the business landscape and make informed organizational decisions.
Recommended Textbook
Managerial Economics 3rd Edition by Froeb
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Page 2
Chapter 2: The One Lessor of Business
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Sample Questions
Q1) Taxes cause:
A)Market distortions
B)Reduce incentives to work
C)Decrease wealth creating transactions
D)All of the above
Answer: D
Q2) Price floors are primarily targeted to help
A)No one
B)Consumers
C)Producers
D)Government
Answer: C
Q3) Total surplus or gains created from trade equal
A)Seller surplus
B)Buyer surplus
C)The summation of seller and buyer surplus
D)Profits earned by a firm
Answer: C
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Chapter 3: Benefits, Costs, and Decisions
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Sample Questions
Q1) A business incurs the following costs per unit: Labor - $125/unit;Materials $45/unit and rent - $25000/month.If the firm produces 1,000,000 units a month,the total costs equal
A)$125,250,000
B)$170,250,000
C)$125,050,000
D)$170,050,000
Answer: B
Q2) Opportunity costs arise due to
A)Resource scarcity
B)Interest rates
C)Limited wants
D)Preferences
Answer: A
Q3) Variable costs are
A)costs that vary with output
B)equal marginal costs
C)not considered in decision-making
D)equal to total costs
Answer: A
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Chapter 4: Extent How Muchdecisions
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Sample Questions
Q1) How many units should the firm produce? In other words,at what level of output does marginal cost equal marginal revenue?
A)1
B)2
C)3
D)4
Q2) What is the difference between the average cost per unit for 5 units and the marginal cost of the 5th unit?
A)196
B)86
C)40.
D)110.
Q3) Total costs increase from $1500 to $1800 when a firm increases output from 40 to 50 units.Which of the following are true?
A)AVC rise by $300
B)AVC rise by $1800
C)AVC rise by $1500
D)AVC rise by $0
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5
Chapter 5: Investment Decisions: Look Ahead and Reason
Back
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Sample Questions
Q1) If the company plans to produce 5000 units of output,is acquiring the competitor's technology a good idea?
A)Yes,because the competitor has a low-marginal-cost technology
B)Yes,because the competitor has a high-marginal-cost technology
C)Yes,because the company plans to produce less than the break-even quantity
D)Both b and c
Q2) What is the total cost at the break-even quantity calculated above?
A)$750
B)$1000
C)$1500
D)$2000
Q3) At what quantity is Jim's Production indifferent between two technologies?
A)5000
B)7500
C)10000
D)12500
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Chapter 6: Simple Pricing
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Sample Questions
Q1) For substitutes,cross price elasticity of demand is:
A)Negative
B)Positive
C)between zero and one only
D)zero.
Q2) Given the information above,the demand is
A)unitary.
B)indeterminate.
C)elastic.
D)inelastic.
Q3) As the price of video games is raised from $40 to $45,their quantity demanded fell from 1.5 million copies to 1.2 million copies.The elasticity of demand of video games is:
A)0)25
B)1)89
C)1)66
D)2)08
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Chapter 7: Economies of Scale and Scope
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Sample Questions
Q1) Diminishing marginal returns occur because
A)All inputs are variable in the short-run
B)All inputs are variable in the long-run
C)Some inputs are fixed and some inputs are variable in the short-run
D)None of the above
Q2) Decreasing returns to scale and diminishing returns differ in that
A)Diminishing returns is a long-run concept while decreasing returns to scale is a short-run concept.
B)Diminishing returns is a short-run concept while decreasing returns to scale is a long-run concept.
C)Diminishing returns is a both short and long-run concept while decreasing returns to scale is a short-run concept.
D)Diminishing returns is a long-run concept while decreasing returns to scale is a short and long-run concept.
Q3) In any production process the marginal product of labor equals
A)Change in total output divided by change in labor input
B)Total output divided by total input
C)Total output
D)None of the above
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Page 8
Chapter 8: Understanding Markets and Industry Changes
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Sample Questions
Q1) Based on the answer above,the price for bus rides _____________ and the quantity demanded for bus rides ____________.
A)Increase;increase
B)Increase;decrease
C)Decrease;increase.
D)Decrease,decrease
Q2) As the income for bus consumers increased,the wages of bus drivers increased simultaneously.How does this affect the market for bus rides (inferior good)?
A)The demand curve will shift to the left;the supply curve will shift to the left
B)The demand curve will shift to the left;the supply curve will shift to the right
C)The demand curve will shift to the right;the supply curve will shift to the left
D)The demand curve will shift to the right;the supply curve will shift to the right
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9
Chapter 9: Market Structure and Long-Run Equilibrium
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Sample Questions
Q1) A monopolist's profit maximizing price is $15.At MC=MR,the output is 100 units and the MC is $10.At this level of production,average total costs are $12.Monopolist's profits are
A)$300
B)$1500
C)$500
D)None of the above
Q2) In the above scenario,the quantity of gas sold will
A)increase.
B)decrease.
C)remains the same.
D)may increase or decrease.
Q3) Which of the products below is towards the spectrum of perfectly competitive industry?
A)Nike shoes
B)Eggs
C)Purdue Chicken
D)Restaurants
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10
Chapter 10: Strategy: the Quest to Keep Profit From Eroding
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Sample Questions
Q1) For a firm to reduce competitive intensity,it should
A)Enact barrier to entry
B)Lobby to the government
C)Acquire patents
D)All the above
Q2) To stay one step ahead of the forces of competition,a firm can adopt one of these strategies except
A)Cost reduction
B)Product differentiation
C)Advertising
D)Reduction in the intensity of competition
Q3) _____________ is defined as firm's ability to earn above-average profit
A)Resource heterogeneity
B)Superior performance
C)Competitive advantage
D)Sustainable advantage
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11
Chapter
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Sample Questions
Q1) If US consumers want to buy Chinese goods,they will
A)buy Yuans to sell US Dollars
B)Sell Yuans to buy US Dollars
C)Demand Yuan
D)Both a and c
Q2) Holding other things constant,a decrease in the inflation rate in the US compared to the Canadian economy may cause the demand for dollar to _____________ and the supply for dollar to __________.
A)Increase;decrease
B)Increase,increase
C)Decrease;Increase
D)Decrease;Decrease
Q3) Holding other things constant,an appreciation of the US Dollar to the Chinese Yuan might cause the demand for Yuan to _____________ and the supply for Yuan to __________.
A)Increase;decrease
B)Increase,increase
C)Decrease;Increase
D)Decrease;Decrease
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Chapter 12: More Realistic and Complex Pricing
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Sample Questions
Q1) Cannibalization is:
A)Reducing the sales of own firm
B)Improving quality over a rival's product
C)Reducing costs
D)Increasing one's output to reduce sales of another firm
Q2) Firm's should lower the price of their goods
A)If the demand for the product is elastic
B)If it acquires a firm selling a complement good
C)If it acquires a firm selling a substitute good
D)Both a and b
Q3) Acquiring a firm that sells a substitute good will
A)Make the demand curve more inelastic
B)Make the demand curve more elastic
C)Make MR>MC
D)Will have no effect on the demand curve
Q4) All of the following are true,except
A)Some consumers may infer high prices of a good to signal high quality
B)Low prices can also signal high quality
C)Promotional campaigns do not affect consumer's perception on quality
D)It makes more sense to raise price when advertising makes demand less elastic
Page 13
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Chapter 13: Direct Price Discrimination Indirect Price
Discrimination
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Sample Questions
Q1) Arbitrage
A)Is the act of to buying low in one market and selling high in another market
B)Can force a seller to go back to uniform pricing
C)Can defeat direct price discrimination
D)All of the above
Q2) Chinese restaurants that charge one price per customer for their buffet is an example of
A)Individual pricing
B)Pure bundling
C)Mixed Bundling
D)None of the above
Q3) What is a better pricing strategy for the monopolist? At this price,what are the total profits to the monopolist?
A)Bundle the goods at $2,800;Profits=$5,600
B)Bundle the goods at $4,000;Profits=$8,000
C)Charge $2,800 for good 1 and charge $1,700 for good 2;Profits=$4,500
D)Charging the lowest price for each good individually is the best pricing strategy;profits = $7,000
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Chapter 15: Strategic Games
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Sample Questions
Q1) According to Prisoners'' Dilemma
A)Both parties do not confess
B)It is difficult to maintain cooperation among prisoners
C)Both a and b
D)None of the above
Q2) Which of the following is a violation of the antitrust laws?
A)A firm discussing/fixing price with its competitors
B)Making arrangements to stay out each other's markets
C)Merging with the competitor to eliminate competition
D)All of the above are violations
Q3) First-mover advantage is a characteristic of
A)A simultaneous-move game
B)A dominant strategy
C)A sequential-move game
D)A Nash equilibrium
Q4) Suppose the game is infinitely repeated.What strategies will each firm utilize?
A)Firm A will charge a lower price and firm B will charge a lower price
B)Firm A will charge a higher price and firm B will charge a lower price
C)Firm A will charge a lower price and firm B will charge a higher price
D)Firm A will charge a higher price and firm B will charge a higher price
Page 15
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Chapter 16: Bargaining
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Sample Questions
Q1) In the sequential labor negotiation game:
A)The ability to commit to a strategy gives you an advantage
B)The ability to commit to a strategy gives your opponent an advantage
C)The ability to commit to a strategy is irrelevant
D)Players should simply state their desire to commit to a strategy to obtain an advantage
Q2) To improve your own bargaining position
A)have low valued outside options
B)increase the value of outside options
C)do not alter the value of your outside options
D)increase the value of your opponent's outside options
Q3) Which of the following will improve your salary bargaining position
A)The product your team produces has become more costly to produce
B)New firms have entered with competing products for the one your team produces
C)Your competitors have developed new products that contain more of the features that your team produces
D)There are fewer close substitutes for the product your team supports
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16
Chapter 17: Making Decisions With Uncertainty
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Sample Questions
Q1) Half of all potential customers would pay $10 for your product but half would only pay $8 but you cannot tell them apart.Your marginal costs are $4.If you set the price at $10,the expected profit is:
A)$3
B)$4
C)$5
D)$6
Q2) The key distinction between risk and uncertainty is A)risk cannot be quantified,priced or traded
B)uncertainty refers to not knowing possible outcomes or their probabilities
C)uncertainty is modeled by listing the possible outcomes and assigning probabilities to the outcomes
D)risk has to do with not knowing the probability distribution of a random variable
Q3) Heads and tails are equally likely but you win a dollar on heads and lose a dollar on tails
A)the expected value is $0.50
B)the expected value is -$0.50
C)the expected value is $1.00
D)the expected value is $0.00
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Page 17
Chapter 18: Auctions
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Sample Questions
Q1) If the bidders at an oral auction have true values of $78,$72,$66,and $65,the item will sell for
A)$78
B)just under $78
C)$72
D)just over $72
Q2) Bid-rigging is more likely when
A)auctions are larger
B)auctions are infrequent
C)auctions generate different sets of potential bidders
D)the auctioneer is paid a fixed fee rather than on commission
Q3) The winners curse is more often associated with;
A)oral auctions
B)second-price auctions
C)first-price sealed bid auctions
D)common value auctions
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Chapter 19: The Problem of Adverse Selection
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Sample Questions
Q1) An individual who is a risk lover
A)values a lottery at more than its expected value
B)values a lottery at exactly its expected value
C)values a lottery at less than its expected value
D)tends to play lots of lotteries
Q2) Which is NOT an example of signaling high quality in a social setting
A)wearing everyday clothes to a job interview
B)leaving a big tip for the waiter after a dinner date
C)offering an expensive engagement ring to your bride
D)Visiting the beauty salon before a big date
Q3) Which firm is not dealing with adverse selection
A)a manufacturer requires a 90 day probationary period for new employees
B)a temporary clerical agency hires without verifying typing skills
C)a manufacturer requires suppliers to be ISO 9000 certified
D)Smokers get the worse life insurance rates as non-smokers
Q4) Adverse selection is
A)when people act differently because they are insured
B)when more risk averse people want to be insured more
C)when people at greater risk want to be insured more
D)when your guess at a test question is wrong
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Chapter 20: The Problem of Moral Hazard
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Q1) An example of moral hazard is
A)people drive as carefully in icy conditions with antilock brakes as without
B)people drive as safely with more airbags as without
C)football players avoid 'spearing' with their heads even with safer helmets
D)people fail to read the medicine warnings more often when self-medicating versus with a doctor's prescription
Q2) An example of moral hazard is
A)workers working diligently even though the boss is not looking
B)health care insured forgoing their diet and exercise
C)drivers of safer cars turning their phones off before driving
D)borrowers investing their loan proceeds exactly as the bank requires
Q3) Progressive Insurance's 'Tripsense' monitors driving patterns of the people who purchase the related insurance policy.This lowers insurance costs because
A)only less reckless drivers will accept the device
B)only more reckless drivers will accept the device
C)drivers will believe they can now drive more recklessly
D)it does not affect care in driving
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Chapter 21: Getting Employees to Work in the Firms Best
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Sample Questions
Q1) An incentive compensation scheme includes
A)a performance evaluation system
B)a disciplinary action committee
C)a reward system
D)a and c.
Q2) When a manager's bonuses are tied to multiple unrelated performance measures
A)we typically see the manager miss all goals by about the same amount
B)we typically see the manager greatly exceeding some goals while missing others altogether
C)we typically see the manager just meeting some goals while missing others by a wide margin
D)we typically see the manager indifferent to the goals
Q3) The three central questions for efficient organizational design include all EXCEPT
A)does the decision maker have the relevant information?
B)is the decision maker in a supervisory role?
C)who is making the decision?
D)does the decision maker have an incentive to make a good decision?
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Page 21
Chapter 22: Getting Divisions to Work in the Firms Best
Interest
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Sample Questions
Q1) Transfer prices
A)are an accounting devise to allocate the costs and revenues of intermediate products across divisions
B)increase the 'profits' of the profit center producing the intermediate product when they rise
C)decrease the 'profits' of the profit center using the intermediate product when they rise
D)all of the above
Q2) The features of the M-Form of firm organization are
A)divisions have difficulty responding to market changes
B)it is difficult to maintain customer relationships
C)there is less coordination across the firm's divisions
D)evaluating employees is easier because managers typically are similarly trained
Q3) Ways to "game" the budgeting process include
A)delaying sales if just short of a target
B)accelerating expenses if just short of a target
C)delaying sales once a target is met
D)delaying expenses costs once a target is met
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Chapter 23: Managing Vertical Relationships
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Sample Questions
Q1) The conditions for unaligned retailer and manufacturer incentives include
A) customers are familiar with the product before they shop for it
B) retailers have no opportunity to educate consumers
C) manufacturers have little scope for educating consumers
D) demand for the product is decreased with some consumer education
Q2) The various ways that vertical relationships can evade regulation include
A) tying the sale of a regulated good to a customer's choice of an unregulated good
B) unbundling regulated and unregulated goods
C) excluding sellers of competing unregulated goods
D) insuring tax rates are uniform across jurisdictions
Q3) Mechanisms that manufacturers can use to deal with misaligned retailer incentives include
A) setting a maximum retail price
B) allowing many retailers to sell the product in each market
C) preventing retailers from compensating sales staff for demonstrating the product
D) providing manufacturer staff to demonstrate the product in stores
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