Economics for Business Exam Solutions
Course Introduction
Economics for Business explores fundamental economic principles and their practical application in business decision-making. The course covers key topics such as supply and demand, market structures, pricing strategies, consumer behavior, and the impact of macroeconomic factors on businesses. Students will learn how to interpret economic data, understand the effects of government policies, and analyze economic trends to make informed managerial choices in both domestic and international contexts. Emphasis is placed on real-world scenarios, enabling students to connect economic theory with everyday business operations and strategic planning.
Recommended Textbook
Principles of Economics 7th Edition by Robert H. Frank
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28 Chapters
4171 Verified Questions
4171 Flashcards
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Page 2
Chapter 1: Thinking Like an Economist
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142 Verified Questions
142 Flashcards
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Sample Questions
Q1) Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. Larry's opportunity cost of attending State NoName U is:
A)$60,000
B)$30,000
C)$20,000
D)$15,000
Answer: C
Q2) Which of the following would not be studied in microeconomics?
A)How individual firms decide how much to produce.
B)Whether to study or watch TV tonight.
C)How an early freeze in California will affect the price of fruit.
D)Whether the federal budget should be balanced.
Answer: D
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Page 3
Chapter 2: Comparative Advantage
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163 Flashcards
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Sample Questions
Q1) When a nation reduces the barriers to international trade:
A)each individual citizen becomes better off.
B)each individual citizen becomes worse off.
C)the total value of all goods and services produced by the nation falls.
D)the total value of all goods and serviced produced by the nation rises.
Answer: D
Q2) The production possibilities curve shows:
A)the minimum amount of one good that can be produced for every possible production level of the other good.
B)how increasing the resources used to produce one good increases the production of the other good.
C)the maximum amount of one good that can be produced for every possible production level of the other good.
D)how increasing the production of one good allows production of the other good to also rise.
Answer: C
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4
Chapter 3: Supply and Demand
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Sample Questions
Q1) If the supply curve and the demand curve both shift to the left, then the new equilibrium:
A)quantity will be higher, but the direction of the price change is uncertain.
B)price will be lower, but the direction of the change in quantity is uncertain.
C)price will be higher, but the direction of the change in quantity is uncertain.
D)quantity will be lower, but the direction of the price change is uncertain.
Answer: D
Q2) For two goods, X and Y, to be classified as substitutes, it must be the case that:
A)X and Y are identical.
B)consumers tend to purchase both items together.
C)when the price of X rises, the demand for Y decreases.
D)when the price of X rises, the demand for Y increases.
Answer: D
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5
Chapter 4: Elasticity
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Sample
Questions
Q1) In 1985 a desert community stopped pumping water from a 1000 foot well because it had run dry. In 2005 the price of water doubled. The community then drilled the well deeper and started pumping again. In this community,
A)the supply of water is perfectly inelastic because it is a finite resource.
B)water production is characterized by increasing opportunity costs.
C)markets cannot reach equilibrium because there is a persistent shortage of water.
D)higher water prices can reduce quantity demanded but cannot increase quantity supplied.
Q2) Demand tends to be ________ in the short run than in the long run.
A)more elastic
B)less elastic
C)more variable
D)less important
Q3) The demand for a good is elastic if the price elasticity of demand is:
A)equal to one.
B)greater than one.
C)less than one.
D)equal to zero.
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6
Chapter 5: Demand
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Sample Questions
Q1) Suppose that Fiona spends all of her income on 10 units of good X and 14 units of good Y. Fiona's marginal utility from the 10 unit of good X is 24 utils, and her marginal utility from the 14 unit of good Y is 20 utils. If the price of good X is $8 per unit and the price of good Y is $5 per unit, then to comply with the rational spending rule, Fiona should:
A)purchase more than 10 units of good X and less than 14 units of Y.
B)purchase less than 10 units of good X and more than 14 units of good Y.
C)purchase more than 10 units of good X and more than 14 units of good Y.
D)continue to purchase 10 units of good X and 14 units of good Y.
Q2) Suppose that Cathy spends all of her income on 20 units of good X and 25 units of good Y. Cathy's marginal utility from the 20 unit of good X is 9 utils, and her marginal utility from the 25 unit of good Y is 19 utils. If the price of good X is $0.50 per unit and the price of good Y is $1.00 per unit, then to comply with the rational spending rule, Cathy should:
A)purchase more than 20 units of good X and less than 25 units of Y.
B)purchase less than 20 units of good X and more than 25 units of good Y.
C)purchase more than 20 units of good X and more than 25 units of good Y.
D)continue to purchase 20 units of good X and 25 units of good Y.
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Page 7
Chapter 6: Perfectly Competitive Supply
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Sample Questions
Q1) Suppose Ben owns a small company that makes kites. The market for kites is perfectly competitive, and kites sell for $25 each. Ben's total production costs vary depending on the number of kites he makes each day, as shown in the accompanying table.
\[\begin{array} { | c | c | }
\hline \text { Number d kites Per Day } & \text { Tutal Cast Per Day (\$) } \\
\hline 0 & 100 \\
\hline 1 & 110 \\
\hline 2 & 126 \\
\hline 3 & 148 \\
\hline 4 & 172 \\
\hline 5 & 200 \\
\hline 6 & 235 \\
\hline
\end{array}\]
When Ben makes 2 kites per day, what is his average variable cost?
A)$13
B)$26
C)$50
D)$63
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Chapter 7: Efficiency, Exchange, and the Invisible Hand in Action
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Sample Questions
Q1) Suppose farmers in a given market can either grow soy beans or corn on their land. In addition, suppose an increase in the demand for corn causes the price of corn to increase. As a result of the increase in the price of corn, farmers who were already growing corn will earn an:
A)economic loss in the short run.
B)economic profit in the long run.
C)economic profit in the short run.
D)economic loss in the long run.
Q2) Adam Smith coined the term "invisible hand" to describe the process by which the actions of independent, self-interested buyers and sellers will:
A)always lead an economy to ruin.
B)often lead to the most efficient allocation of resources.
C)always lead to the most efficient allocation of resources.
D)often lead to increasing inequality.
Q3) The main problem with price subsidies is that they:
A)do not help the poor afford essential goods and services.
B)are not effective at lowering prices.
C)lead to a decrease in demand.
D)lower total economic surplus.
Page 9
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Chapter 8: Monopoly, Oligopoly, and Monopolistic Competition
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Sample Questions
Q1) Suppose the accompanying table describes the relationship between price and quantity demanded for a monopolist.
\[\begin{array} { | c | c | }
\hline \text { Quntity } & \text { Price } \\
\hline 1 & \$ 10 \\
\hline 2 & \$ 9 \\
\hline 3 & \$ 8 \\
\hline 4 & \$ 7 \\
\hline 5 & \$ 6 \\
\hline 6 & \$ 5 \\
\hline 7 & \$ 4 \\
\hline 8 & \$ 3 \\
\hline
\end{array}\] If the marginal cost of producing each unit of output is $5, then the socially optimal level of output is ________.
A)3 units
B)6 units
C)7 units
D)4 units
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Chapter 9: Games and Strategic Behavior
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150 Flashcards
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Sample Questions
Q1) A credible threat is:
A)possible to carry out.
B)legally enforceable.
C)in the threatener's interest to carry out.
D)not in the threatener's interest to carry out.
Q2) Cartel agreements are difficult to sustain because:
A)it's a dominant strategy for each cartel member to cheat on the cartel agreement.
B)the collective payoff to all the cartel members is lower when they all abide by the cartel agreement.
C)cartel members do not face the economic incentives inherent in a prisoner's dilemma.
D)it's usually easy to discover if one of the members has cheated.
Q3) A commitment problem exists when people cannot achieve their goals because:
A)they cannot make credible threats or promises.
B)they cannot play their dominant strategy.
C)the payoff matrix is unknown.
D)they do not have the first-mover advantage in a sequential move game.
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Chapter 10: An Introduction to Behavioral Economics
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111 Flashcards
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Sample Questions
Q1) Impulse control problems can arise when people:
A)discount the future too little.
B)discount the future too heavily.
C)place too much weight on future costs and benefits.
D)place too little weight on current costs and benefits.
Q2) The present aim standard of rationality:
A)assumes that people's goals are themselves a choice variable and that people's choices about which goals to pursue are made efficiently.
B)takes people's goals as given and assumes that people are efficient at pursuing whatever goals they happen to hold at the moment of action.
C)assumes that people act in their own self-interest because cooperating with others is irrational.
D)argues that people are only able behave rationally if they are aware of how their actions affect others.
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Chapter 11: Externalities, Property Rights, and the Environment
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184 Flashcards
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Sample Questions
Q1) Which of the following is NOT an example of an activity with external benefits?
A)Eating a sandwich in the dining hall
B)Planting flowers in your front yard
C)Installing smoke alarms in your house
D)Having your car's faulty exhaust system repaired
Q2) Your economics professor has announced that he or she will assign final grades as follows: the top 20 percent of students will get an A, the bottom 20 percent of students will get an F, and everyone else will get a C. You would expect that, as the semester progresses, students who really care about getting an A will:
A)study less and less to maintain low standards.
B)try to forget about the grading scheme.
C)engage in a positional arms race, studying more and more.
D)maintain a stable agreement to not study for exams.
Q3) If either the production or consumption of a good generates an external cost, then the market equilibrium quantity will be:
A)socially optimal.
B)less than the socially optimal quantity.
C)greater than the socially optimal quantity.
D)equal to zero.
Page 13
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Chapter 12: The Economics of Information
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127 Flashcards
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Sample Questions
Q1) Mel is thinking of going on a cruise. Mel values a cruise in nice weather at $2,000 and values a cruise in bad weather at $50. The probability of nice weather is 60 percent and the probability of bad weather is 40 percent. Trip insurance is sometimes available. If purchased, it allows travelers to delay the cruise until the weather is nice. Suppose that the price of the cruise is $1,200. If Mel is risk-neutral, then Mel should:
A)not buy trip insurance.
B)only buy trip insurance if it costs less than $780.
C)only buy trip insurance if it costs less than $20.
D)only buy trip insurance if it costs less than $50.
Q2) The marginal cost curve for information is upward sloping because:
A)most information is provided by sources that have a vested interest in offering false information.
B)consumers tend to start with the least expensive sources of information and then progress to more expensive sources.
C)there is only so much to learn about a product.
D)most information is misleading.
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Page 14
Chapter 13: Labor Markets, Poverty, and Income Distribution
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138 Flashcards
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Sample Questions
Q1) Matt is offered a job driving the campus shuttle bus from 4 p.m. to 6 p.m. each Monday. His reservation wage for this job is $7 per hour. Now suppose the director offers Matt $50 per hour, but also announces that the earnings from the job will be divided equally among Matt and the 99 other students who live in Matt's dorm. Will Matt accept this job?
A)Yes, accepting the job means a positive surplus for Matt.
B)No, accepting the job means a negative surplus for Matt.
C)Yes, although accepting the job means a negative surplus for Matt, still it's better than having no job.
D)No, although accepting the job means a positive surplus for Matt, still it's not the best option for him.
Q2) A firm is unlikely to hire a worker if:
A)the additional revenue generated by hiring the worker is less than his or her wage.
B)the additional output a firms gets by hiring the worker is greater than his or her wage.
C)there are diminishing marginal returns to labor.
D)the minimum wage set by law is less than the equilibrium wage in the market.
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15
Chapter 14: Public Goods and Tax Policy
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Sample Questions
Q1) When private firms reduce investment because of the increase in interest rates brought about by government borrowing it is termed:
A)logrolling.
B)crowding out.
C)monetary policy.
D)rent seeking.
Q2) A pure public good is one that is:
A)highly nonrival and highly nonexcludable.
B)neither nonrival nor nonexcludable.
C)nonexcludable but rival.
D)nonrival but excludable.
Q3) National defense is an example of a good that is:
A)neither nonrival nor nonexcludable.
B)largely nonrival and nonexcludable.
C)only nonexcludable.
D)only nonrival
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Chapter 15: International Trade and Trade Policy
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Sample Questions
Q1) In general, a nation can enjoy a higher standard of living by ________ than by being self sufficient.
A)increasing its versatility
B)avoiding trade with other nations
C)specialization and trading
D)taxing imported goods
Q2) Sheila and Jim live in an island where they are the only two workers. Sheila can either catch 10 fish or gather 40 pounds of berries each day, and Jim can either catch 8 fish or gather 24 pounds of berries each day. Both of them work 200 days per year. At current world prices 1 fish trades for 3.5 pounds of berries. In a closed economy, who has the comparative advantage in catching fish?
A)Sheila and Jim
B)Jim
C)Sheila
D)Neither of them
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Chapter 16: Macroeconomics: The Birds Eye View of the Economy
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Sample Questions
Q1) "Any tax cut to increase demand for output should favor lower-income people" is a ________ statement about ________ policy.
A)positive; fiscal
B)normative; fiscal
C)positive; monetary
D)normative; monetary
Q2) "Social Security should be privatized to get the government out of the retirement-financing business," is an example of a ________ statement about ________ policy.
A)positive; fiscal
B)normative; structural C)positive; structural
D)normative; monetary
Q3) A broad government initiative to reduce a country's reliance on agriculture and promote high-technology industries is an example of ________ policy.
A)aggregation
B)fiscal
C)monetary
D)structural
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Chapter 17: Measuring Economic Activity: GDP and Unemployment
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Sample Questions
Q1) Intermediate goods and services are ________ production and ________ counted in GDP.
A)the end products of; are
B)the end products of; are not
C)used up in the process of; are
D)used up in the process of; are not
Q2) Which of the following would increase the consumption component of U.S. GDP?
A)You purchase a bottle of California wine.
B)A person in Paris purchases a bottle of California wine.
C)A restaurant in Denver purchases a bottle of California wine to include on its wine list.
D)The U.S. government buys a bottle of California wine to serve at a state dinner in the White House.
Q3) People who say that they would like to have a job, but have not made an effort to find a job in the past four weeks, are called ________ workers.
A)unemployed
B)involuntary part-time
C)discouraged
D)chronically unemployed
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Chapter 18: Measuring the Price Level and Inflation
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Sample Questions
Q1) The consumer price index measures the cost of:
A)a fixed basket of goods and services.
B)a changing basket of goods and services.
C)all goods and services purchased by consumers.
D)goods and services required to live above the poverty level.
Q2) To prevent people paying a higher percentage of their income in taxes even when their real incomes have not changed, Congress:
A)implemented a flat tax.
B)reduced the capital gains tax.
C)indexed the income tax brackets to the CPI.
D)deflated the income tax brackets to the CPI.
Q3) Assume one investor bought a 10-year inflation-protected bond with a fixed annual real rate of 1.5 percent and another investor bought a 10-year bond without inflation protection with a nominal annual return of 4.2 percent. If inflation over the 10-year period averaged 3 percent, which investor earned a higher real return?
A)The investor who purchased the inflation protected bond.
B)The investor who purchased the bond without inflation protection.
C)Both investors earned the same real return.
D)Neither investor earned a positive real return.
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Page 20
Chapter 19: Economic Growth, Productivity, and Living Standards
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Sample Questions
Q1) If 50 percent of the population in a country is employed and average labor productivity equals $30,000, then real GDP per person equals:
A)$15,000.
B)$30,000.
C)$50,000.
D)$60,000.
Q2) If you left $2,500 on deposit with a bank promising to pay you a 6 percent compound annual rate of interest, then after 50 years your deposit would be worth approximately:
A)$2,800
B)$18,420
C)$46,050
D)$250,750
Q3) Government support of basic research by funding scientists through the National Science Foundation is an example of a government policy to promote economic growth by:
A)increasing human capital.
B)increasing physical capital.
C)improving technology.
D)increasing the availability of natural resources.
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Chapter 20: The Labor Market: Workers, Wages, and Unemployment
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Sample Questions
Q1) Compared to the United States, over the last three decades unemployment in Western Europe is ________ and the rate of job creation is ________.
A)higher; slower
B)higher; faster
C)lower; slower
D)lower; faster
Q2) Holding other factors constant, technological progress ________ the real wage and ________ employment.
A)increases; increases
B)increases; decreases
C)increases; does not change
D)decreases; increases
Q3) Frictional unemployment may be economically beneficial if:
A)its psychological costs are borne only by the unemployed worker.
B)losses in economic output are small.
C)it leads to a better match between worker and job.
D)the social costs are limited to smaller tax revenues collected.
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Page 22
Chapter 21: Saving and Capital Formation
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Sample Questions
Q1) Public saving is positive when:
A)there is a government budget surplus.
B)after-tax income of households and businesses is less than consumption expenditures.
C)the government's budget is balanced.
D)after-tax income of households and businesses is greater than consumption expenditures.
Q2) Which of the following is an asset of a family?
A)Student loan
B)Mortgage
C)Unpaid credit card balance
D)Checking account balance
Q3) Steve uses $300 from his paycheck to pay off his credit card balance. Based on this information:
A)Steve's saving has increased by $300.
B)Steve's saving has decreased by $300.
C)Steve's wealth is unchanged.
D)Steve has a capital loss of $300.
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Chapter 22: Money Prices and the Federal Reserve
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Sample Questions
Q1) The M2 measure of money consists of the sum of:
A)savings deposits, small time deposits, and money market mutual funds.
B)currency, checking and savings deposits, and small time deposits.
C)currency, checking and savings deposits.
D)M1, savings deposits, small time deposits, and money market mutual funds.
Q2) When an individual deposits currency into a checking account:
A)bank reserves increase, which allows banks to lend more and increases the money supply.
B)bank reserves decrease, which reduces the amount banks can lend and reduces the growth of the money supply.
C)bank reserves are unchanged.
D)bank liabilities increase, which reduces the amount banks can lend and reduces the growth of the money supply.
Q3) When money is used as a means to hold wealth, it serves as a:
A)double coincidence of wants.
B)store of value.
C)medium of exchange.
D)unit of account.
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Chapter 23: Financial Markets and International Capital Flows
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Sample Questions
Q1) Each of the following is an example of a financial intermediary EXCEPT a:
A)commercial bank.
B)credit union.
C)bond market.
D)savings and loan association.
Q2) In an open economy, an increase in the government's budget deficit will ________ the domestic real interest rate and ________ the level of capital investment in the country, holding other factors constant.
A)increase; increase
B)increase; decrease
C)decrease; decrease D)decrease; increase
Q3) Purchases of foreign assets by domestic firms or households is called a:
A)trade surplus.
B)trade deficit.
C)capital outflow.
D)capital inflow.
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Page 25
Chapter 24: Short-Term Economic Fluctuations: An Introduction
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Sample Questions
Q1) In Okunland, a country whose economy operates according to Okun's law, real GDP equals $7,520 billion, potential GDP equals $8,000 billion, and the actual unemployment rate is 8 percent. What is the natural rate of unemployment in Okunland?
A)2 percent
B)5 percent
C)6 percent
D)11 percent
Q2) Industrial production, total sales, nonfarm employment, and after-tax household income are examples of ________ indicators of economic activity.
A)coincident
B)preceding
C)lagged
D)real
Q3) If real GDP is less than potential GDP, then:
A)the actual unemployment rate is greater than the natural rate of unemployment.
B)the actual unemployment rate equals zero.
C)the output gap is positive.
D)the actual unemployment rate is less than the natural rate of unemployment.
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Chapter 25: Spending and Output in the Short Run
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Sample Questions
Q1) In Econland autonomous consumption equals 700, the marginal propensity to consume equals 0.80, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. Autonomous expenditure equals:
A)990.
B)940.
C)900.
D)890.
Q2) In the Keynesian cross diagram, the vertical intercept of the expenditure line equals ________ and the slope of the expenditure line equals ________.
A)induced expenditures; autonomous expenditures
B)autonomous expenditures; induced expenditures
C)planned spending; unplanned spending
D)autonomous expenditures; the mpc
Q3) The slope of the consumption function:
A)is vertical.
B)is horizontal.
C)equals 1.
D)equals the marginal propensity to consume.
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Chapter 26: Stabilizing the Economy: The Role of
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Sample Questions
Q1) One problem with using monetary policy to address "bubbles" in asset markets is that:
A)the Federal Reserve is better than financial-market professionals at identifying bubbles.
B)monetary policy is not a very good tool for addressing the problem of inappropriately high asset prices.
C)reducing the real interest rate to deal with the bubble could lead to inflation.
D)the Federal Reserve is not interested in stabilizing output.
Q2) If the Federal Reserve sets a target nominal interest rate, it can:
A)independently set a target money supply.
B)only set a money supply target that is consistent with the nominal interest rate target.
C)achieve this target with any arbitrary supply of money.
D)shift the money demand curve to the right.
Q3) The Federal Reserve can decrease the money supply by:
A)increasing reserve requirements.
B)decreasing the discount rate.
C)introducing deposit insurance.
D)conducting open market purchases.
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Chapter 27: Aggregate Demand, Aggregate Supply, and Inflation
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Sample Questions
Q1) For a given level of inflation, if there is a greater willingness by foreigners to purchase domestic goods, then the ________ shifts ________.
A)aggregate demand curve; right
B)short-run aggregate supply line; downward
C)aggregate demand curve; left
D)short-run aggregate supply line; upward
Q2) Starting from potential output, if firms become less optimistic about the future and decide to decrease their investment in new capital, then this will generate a(n)________ gap and inflation will ________.
A)recessionary; increase
B)recessionary; decrease
C)expansionary; decrease
D)expansionary; increase
Q3) The aggregate demand curve shifts when there are changes in:
A)inflation inertia and aggregate supply shocks.
B)exogenous spending and the Fed's reaction function.
C)exogenous spending and inflation inertia.
D)potential output and exogenous spending.
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Chapter 28: Exchange Rates and the Open Economy
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Sample Questions
Q1) Suppose the government of New Country fixes the exchange rate of its currency, the Newo, in terms of the U.S. dollar. Initially the exchange rate is set at $0.50 per Newo. In a crisis, the government changes the exchange rate to $0.25 per Newo. This is an example of a(n):
A)appreciation.
B)depreciation.
C)devaluation.
D)revaluation.
Q2) The U.S. dollar exchange rate, e, expressed as Japanese yen per U.S. dollar, will depreciate when:
A)real GDP in Japan decreases.
B)real GDP in Japan increases.
C)the U.S. Federal Reserve tightens monetary policy.
D)U.S. consumers decrease their preference for Japanese cars.
Q3) The purchasing power parity theory is a reasonably good explanation for nominal exchange rate determination:
A)in the short run.
B)in the long run.
C)when there are significant volumes of non-traded goods and services.
D)when there are fixed exchange rates.
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