Economic Environment of Business
Final Exam
Course Introduction
The Economic Environment of Business examines the external factors and forces that influence business operations and strategic decision-making. The course covers fundamental economic concepts such as supply and demand, market structures, fiscal and monetary policy, inflation, unemployment, and international trade. Students will learn how macroeconomic and microeconomic environments shape business opportunities and challenges, and how government regulations, global economic trends, and market dynamics impact organizational behavior and competitiveness. By understanding these factors, students will be able to analyze the economic landscape, anticipate changes, and make informed business decisions in a dynamic global economy.
Recommended Textbook
Managerial Economics Theory Applications and Cases 8th Edition by W. Bruce Allen
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Page 2
Chapter 1: Introduction
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Q1) The price of computers has fallen,while the quantity purchased has remained constant.This implies that the demand for computers has:
A) decreased, while the supply of computers has increased. B) increased.
C) decreased, while the supply of computers has decreased. D) increased, while the supply of computers has increased. E) become more volatile.
Answer: A
Q2) Managers may choose to pursue goals other than maximization of a firm's value.This is referred to as the problem.
A) slacker-shirking
B) neuropathy
C) generation X
D) principal-agent
E) none of the above
Answer: D
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Chapter 2: Demand Theory
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Q1) The price elasticity of market demand primarily depends on the:
A) number of firms in an industry.
B) cost of producing an industry's output.
C) availability of substitutes.
D) substitutability of inputs in producing a product.
E) supply curves of inputs.
Answer: C
Q2) The cross-price elasticity of demand is defined as the:
A) percentage change in the quantity demanded of a good divided by the percentage change in the good's price.
B) percentage change in the quantity demanded of a good divided by the percentage change in a different good's price.
C) percentage change in a good's price divided by the percentage change in a different good's price.
D) change in the quantity demanded of a good divided by the change in its price.
E) change in the quantity demanded of a good divided by the change in income.
Answer: B
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Chapter 3: Consumer Behavior and Rational Choice
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Q1) The marginal rate of substitution of X for Y is defined as:
A) P<sub>X</sub>/P<sub>Y </sub>.
B) P<sub>X </sub>P<sub>Y </sub>.
C) MU<sub>X</sub> MU<sub>Y </sub>.
D) MU<sub>X</sub>/MU<sub>Y </sub>.
E) MU<sub>X</sub>/P<sub>X </sub>.
Answer: D
Q2) Suppose Al is currently consuming four movies and four concerts per month.If his utility function is given by U = 15M<sup>0.5</sup>C,where M represents the number of movies consumed and C represents the number of concerts attended,what is the marginal utility of the next concert Al will attend?
A) 15.
B) 30.
C) 60.
D) 120.
E) 960.
Answer: B
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Page 5
Chapter 4: Estimating Demand Functions
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Q1) The root-mean-squared error (RMSE)is:
A) the proportion of the variation in the dependent variable that is explained by the regression.
B) the coefficient estimate divided by the standard error of the estimate.
C) an increasing function of the number of independent variables.
D) the square root of the coefficient of determination.
E) useful for constructing confidence intervals for estimates of the dependent variable.
Q2) When the coefficient of determination is near 1 but the t-statistics are all insignificant,the regression likely suffers from:
A) nonconstant variance of the error terms.
B) multicollinearity.
C) serial correlation.
D) randomness.
E) nonidentifiability.
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6
Chapter 5: Production Theory
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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) When average product is at a maximum,marginal product is:
A) zero.
B) increasing.
C) equal to average product.
D) greater than average product.
E) less than average product.
Q3) Hedge Fun is a landscaping firm that specializes in topiary.Last year,the firm had 60 employees and served 120 customers.This year,it had 70 employees and served 140 customers.What is the marginal product of labor?
A) 2.
B) 3.
C) 4.
D) 5.
E) None of the above.
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Chapter 6: The Analysis of Costs
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Q1) The opportunity cost of a firm's inputs:
A) depends on who supplies them to the firm.
B) includes implicit costs but does not include explicit costs.
C) includes explicit costs but does not include implicit costs.
D) should not concern anyone but economists.
E) is the value of the inputs in their most highly valued alternative use.
Q2) Whenever average variable cost is declining with increases in output:
A) marginal cost is always declining as average total cost declines.
B) average total cost at first decreases and then increases with output.
C) marginal cost is always declining as average total cost increases.
D) marginal cost at first decreases and then increases with output.
E) marginal cost at first increases and then decreases with output.
Q3) If there is only one variable input,average variable cost can be defined as the:
A) output's price divided by the input's average product.
B) output's price divided by the input's marginal product.
C) price of the variable input divided by its average product.
D) price of the variable input divided by its marginal product.
E) price of the variable input multiplied by its marginal product.
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Chapter 7: Perfect Competition
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Q1) If a representative firm with long-run total cost given by TC = 2,000 + 20q + 5q<sup>2</sup> operates in a competitive industry where the market demand is given by Q<sub>D</sub> = 10,000 - 40P,in the long-run equilibrium there will be:
A) 60 firms.
B) 98 firms.
C) 106 firms.
D) 110 firms.
E) 120 firms.
Q2) In the model of perfect competition,there:
A) are many firms producing differentiated products.
B) are a few firms producing undifferentiated products.
C) are a few firms producing differentiated products.
D) are many firms producing undifferentiated products.
E) is one firm producing a highly differentiated product.
Q3) 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.
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Chapter 8: Monopoly and Monopolistic Competition
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Q1) If a monopolist faces a constant-elasticity demand curve given by Q = 400P <sup>-</sup><sup>2</sup> and has total costs given by TC = 0.625Q<sup>2</sup>,its profit-maximizing level of output is:
A) 0.
B) 2.
C) 4.
D) 6.
E) 8.
Q2) If the demand curve is horizontal,the price elasticity used to calculate the profit-maximizing price is:
A) -10.
B) -5.
C) -0.
D) -1.
E) infinity.
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10
Chapter 9: Managerial Use of Price Discrimination
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Q1) If a firm supplies separable markets with price elasticities \(\eta\)<sub>1</sub> and \(\eta\)<sub>2</sub>,it should set prices P<sub>1</sub> and P<sub>2</sub> so that:
A) P<sub>1</sub>\(\eta\)<sub>1</sub> = P<sub>2</sub>\(\eta\)<sub>2</sub>.
B) P<sub>1</sub> /\(\eta\)<sub>1</sub> = P<sub>2</sub> /\(\eta\)<sub>2</sub>.
C) P<sub>1</sub>(1 + 1/\(\eta\)<sub>1</sub>) = P<sub>2</sub> (1 + 1/\(\eta\)<sub>2</sub>).
D) P<sub>1</sub>/(1 - 1 /\(\eta\)<sub>1</sub>) = P<sub>2</sub> / (11/\(\eta\)<sub>2</sub>).
E) P<sub>1</sub> = 1 - 1/\(\eta\)<sub>1</sub> and P<sub>2</sub> = 11/\(\eta\)<sub>2</sub>.
Q2) The demand for health club services is Q = 350 - 2P and the marginal cost of providing these services is MC = 110 + 2Q.If a two-part tariff pricing system is used,what is the optimal price and quantity combination?
A) P = 52 and Q = 240.
B) P = 199 and Q = 52.
C) P = 26 and Q = 162.
D) P = 162 and Q = 26.
E) None of the above.
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Chapter 10: Bundling and Intrafirm Pricing
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Q1) If a firm has a marketing division and a production division with increasing costs,and a competitive external market for the production division's output exists,then the marketing division should always buy:
A) from the production division at production's price.
B) all it wants at the external market price from the production division.
C) only externally.
D) all the production division can produce at the external price.
E) what it wants at the external market price, first from whatever the production division wishes to sell and then, if necessary, externally.
Q2) If a firm uses optimal transfer pricing between production division A and marketing division B,and a competitive external market for the output of division A exists,then production division A will surely:
A) make positive economic profits.
B) make normal economic profits.
C) sell at marginal costs.
D) sell at the external price.
E) sell at less than the external price.
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Chapter 11: Oligopoly
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Q1) The OPEC oil cartel lost its market power and world oil prices fell in the 1980s because:
A) OPEC expanded its membership to include all international producers of oil.
B) world consumers boycotted OPEC oil.
C) a limit pricing strategy was pursued by some members of the cartel.
D) members began to cheat on cartel agreements.
E) the United States refused to buy oil from OPEC.
Q2) While a cartel is holding together,its individual members' demand curves are likely to be:
A) significantly elastic.
B) significantly inelastic.
C) close to unitary in elasticity.
D) kinked.
E) upward-sloping.
Q3) The price leadership strategy is most appropriate when a market is:
A) perfectly competitive.
B) monopolistic.
C) monopolistic competitive.
D) oligopolistic.
E) all of the above.
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Page 13
Chapter 12: Game Theory
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Q1) 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.
Q2) A Nash equilibrium occurs when:
A) each player has a dominant strategy.
B) each player receives the same final payoff.
C) each player believes it is doing the best it can given the behavior of rivals.
D) there is no dominant strategy for any player.
E) payoffs are independent of the actions taken by rivals.
Q3) 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.
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Chapter 13: Auctions
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Q1) Second-price,sealed-bid auctions have rules that are incentive-compatible because:
A) they encourage buyers and sellers to maximize profits.
B) they encourage buyers and sellers to collude to fix the results of the auction.
C) they encourage individuals to reveal their true preferences.
D) individual bidders are encouraged to work with rivals to submit bids that maximize joint profits.
E) each buyer is encouraged to submit the same bid.
Q2) Repurchase tender offers require sellers to:
A) submit a sealed bid indicating the minimum amount that they would accept for their shares.
B) submit a schedule indicating their willingness to supply different numbers of shares at different prices.
C) accept or reject the tender offer price specified by the corporation.
D) contractually limit their opportunity to sell shares on the open market.
E) purchase warrants that specify the future price of shares.
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15
Chapter 14: Risk Analysis
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Q1) If \(\sigma\) is the standard deviation of a project with expected returns $100 and \(\sigma\)<sup>2</sup> = 4,the coefficient of variation is:
A) 1/25.
B) 1/50.
C) $200.
D) $400.
E) $5,000.
Q2) Betty Gamble is willing to pay exactly,but not more than,$20 to get a deal where she has a 1/3 chance of winning $30 and a 1/6 chance of winning $6 and will win $20 otherwise.Betty is:
A) risk-averse and profit maximizing.
B) risk-averse, not profit maximizing.
C) risk loving and profit maximizing.
D) risk loving, not profit maximizing.
E) risk-neutral.
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Chapter 15: Principalagent Issues and Managerial Compensation
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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) Creditors and shareholders may have an incentive incompatibility because:
A) shareholders can declare bankruptcy and hence have limited liability.
B) creditors must bear less risk than shareholders.
C) creditors can call debt if better opportunities arise.
D) shareholders choose projects with less risk than creditors would like.
E) none of the above; creditors and shareholders are both interested in maximizing the profits of the enterprise.
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Chapter 16: Adverse Selection
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Q1) Good drivers have a 20% chance,and bad drivers have a 50% chance,of getting into an accident.A car is worth $900,and an accident would reduce its value to $400.Both types of drivers have utility U = (car value)<sup>0.5</sup>.What is a bad driver's expected utility without insurance?
A) 20.
B) 25.
C) 28.
D) 30.
E) None of the above.
Q2) Requiring applicants for life insurance to undergo a physical examination is an effective way to:
A) reduce moral hazard.
B) increase information asymmetry.
C) reduce adverse selection.
D) increase sales.
E) none of the above.
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Chapter 17: Government and Business
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Q1) Teal Taxi Company has a regulated taxi monopoly in Colortown.It faces a demand for rides given by P = 3 - 0.02Q. It has total costs (exclusive of the required rate of return on its invested capital)of TC = -110 + 0.1Q + 0.01Q<sup>2</sup>.If the commission that regulates Teal Taxi determines that $100 is sufficient to compensate equity holders for their invested capital,what are the regulated price and output?
A) P = 0, Q = 150.
B) P = .5, Q = 125.
C) P = 1, Q = 100.
D) P = 1.5, Q = 75.
E) P = 2, Q = 50.
Q2) The antitrust law that made giving discounts to large buyers on the basis of volume purchases illegal was the:
A) Sherman Act.
B) Clayton Act.
C) Federal Trade Commission Act.
D) Robinson-Patman Act.
E) Celler-Kefauver Act.
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Page 19
Chapter 18: Optimization Techniques
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Q1) 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.
Q2) The chain rule of differentiation is:
A) Y = U(W(X)) \(\rarr\)dY/dX = dY/dX dW/dX.
B) Y = U(W(X))\(\rarr\) dY/dX = dU/dW dW/dX.
C) Y = U(W(X))\(\rarr\) dY/dX = dU/dX dW/dX.
D) Y = U(W(X)) \(\rarr\) dY/dX = dW/dU dU/dX.
E) Y = U(W(X)) \(\rarr\) dY/dX = dU/dU dU/dX.
Q3) A function of one argument is minimized when the first derivative is:
A) zero and the second derivative is positive.
B) positive and the second derivative is negative.
C) zero and the second derivative is negative.
D) negative and the second derivative is positive.
E) zero and the second derivative is zero.
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Chapter 19: Appendix Problems
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Q1) If the annual interest rate is i,the present value of a payment of $X to be received n years from now forever is:
A) $X/(1 + i).
B) $X/i.
C) $X/(1 + i )<sup>n</sup>.
D) $X/i <sup>n</sup>.
E) none of the above.
Q2) You buy your child a $100 savings bond that matures in 10 years and pays an annual interest rate of 10%.At maturity the bond will be worth:
A) $228.17.
B) $200.
C) $259.37.
D) $271.17.
E) $217.71.
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