Economics for Business Test Preparation
Course Introduction
Economics for Business provides students with a comprehensive understanding of how fundamental economic principles apply to real-world business decisions. The course covers key topics such as supply and demand, market structures, pricing strategies, consumer behavior, production and cost analysis, and the impact of government policies on business operations. Through case studies and practical examples, students learn to analyze market trends, assess competitive environments, and make informed managerial decisions. The course also addresses the global context of business economics, fostering the ability to think critically about how economic forces shape business practices and organizational strategies.
Recommended Textbook Microeconomics 5th Edition by
David Besanko
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17 Chapters
1033 Verified Questions
1033 Flashcards
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Page 2
Chapter 1: Analyzing Economic Problems
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48 Flashcards
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Sample Questions
Q1) Identify the truthfulness of the following statements: I. Equilibrium analysis helps economists determine the market-clearing price.
II) Comparative statics help economists analyze how a change in an exogenous variable affects the level of a related endogenous variable in an economic model.
A) Both I and II are false.
B) Both I and II are true.
C) I is true; II is false.
D) I is false; II is true.
Answer: B
Q2) The definition of an exogenous variable is
A) a variable whose value is determined within the model under study.
B) a variable whose value is determined outside the model under study.
C) a variable whose value is determined through constrained optimization.
D) a variable whose value is determined through comparative statics.
Answer: B
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3
Chapter 2: Demand and Supply Analysis
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Sample Questions
Q1) An income elasticity of demand for milk of 0.1 could mean that
A) as income rises by 10 percent, quantity demanded rises by 1 percent.
B) as income rises by 100 percent, quantity demanded rises by 1 percent.
C) as income rises by 20 percent, quantity demanded rises by 10 percent.
D) as income rises by 50 percent, quantity demanded rises by 25 percent.
Answer: A
Q2) The following equations represent demand curves for a commodity, q: (i) q = 100 - p; (ii) q = 10 + p; (iii) q = 50. For each of these demands, calculate the choke price, the slope, and the price elasticities of demand in the neighborhood of q = 100 and q = 50.
Answer: the choke price for demand (i) is 100 since 0 = 100 - 100. For demands (ii) and (iii), there is no price at which quantity demanded is zero. The slope of demand (i) is -1 (the coefficient of price). The slope of demand (ii) is 1, and the slope of demand (iii) is zero. (Notice that, when we graph demand, we usually put price on the vertical axis, so that the slope in the graph would be the coefficient of output.) The elasticities are the following at 100: (i ) \(\varepsilon\)<sub>Q,P </sub>= (\(\Delta\)Q/\(\Delta\)P)(P/Q) = (-1/1)(0/100) = 0,
Q3) What is the elasticity of the following demand curve? QP<sup>2</sup> = 100 Answer: \(\varepsilon\)<sub>Q,P</sub> = -2.
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Chapter 3: Consumer Preferences and the Concept of Utility
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Sample Questions
Q1) If I prefer steak to burritos, burritos to pasta and pasta to steak:
A) My preferences are irrational.
B) My preferences violate the transitivity assumption.
C) My preferences violate the "more is better assumption.
D) I must have been exhibiting diminishing marginal utility.
Answer: B
Q2) If two goods are perfect complements, then
A) the marginal rate of substitution is constant.
B) the indifference curves are straight lines.
C) the indifference curves are "L-shaped."
D) both a) and b) are true.
Answer: C
Q3) Suppose the marginal rate of substitution of x for y is constant for all levels of x and y . Goods x and y are
A) perfect substitutes.
B) perfect complements.
C) normal goods.
D) inferior goods.
Answer: A
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Chapter 4: Consumer Choice
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Sample Questions
Q1) Suppose that a consumer considers coffee and tea to be perfect substitutes, but he requires two cups of tea to give up one cup of coffee. This consumer's budget constraint can be written as 3C + T = 10. What should the consumer buy?
A) 2 cups of tea and no coffee.
B) 10 cups of tea and no coffee
C) 3 cups of coffee and no tea.
D) 4 cups of coffee and no tea.
Q2) Suppose a consumer buys two goods, \(x\) and \(y\) and has income of $30. Initially P<sub>x</sub> = 3 and P<sub>y</sub> = 3 and the consumer chooses basket \(A\) with x = 7 and y = 3. The prices change to P<sub>x</sub> = 4 and P<sub>y</sub> = 2 and the consumer chooses basket \(B\) with x = 5 and y = 5.
A) These choices are consistent with utility maximization.
B) These choices are not consistent with utility maximization.
C) With this information it is not possible to determine if these choices are consistent with utility maximization.
D) Basket B must be preferred to basket A.
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Chapter 5: The Theory of Demand
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Sample Questions
Q1) Suppose when the consumer's income rises by 100%, the consumer's consumption of good \(x\) falls by 1%. We can infer that good \(x\) is a(n)
A) normal good.
B) inferior good.
C) Giffen good.
D) marginal good.
Q2) Compensating variation is
A) the change in income necessary to hold the consumer at the final level of utility as price changes.
B) always the area under the demand curve and above the price paid.
C) the change in income necessary to restore the consumer to the initial level of utility.
D) the difference in the consumer's income between the purchase of the original basket and the new basket at the old prices.
Q3) A curve that represents the consumer's "willingness to pay" is the consumer's
A) Exchange curve
B) Demand curve
C) Supply curve
D) None of the above
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Chapter 6: Inputs and Production Functions
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Sample Questions
Q1) The slope of the isoquant can be expressed as
A) the ratio of the input prices.
B) the ratio of the inputs.
C) the ratio of the marginal productivities of the inputs.
D) the sum of the marginal productivities of the inputs.
Q2) For the production function \(Q = a K + b L\) , where the variables are graphed as usual, the equation for a typical isoquant is
A) \(K = \frac { Q - b L } { a }\)
B) \(L = \frac { Q - a K } { b }\)
C) \(K = \frac { Q ^ { 2 } } { L }\)
D) \(K = a Q - b L\)
Q3) Marginal productivity is maximized with the ___________ worker.
A) second
B) third
C) fourth
D) sixth
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8
Chapter 7: Costs and Cost Minimization
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Sample Questions
Q1) A firm uses labor and capital, \( (L, K) \) , to produce an output. The hourly cost of labor is $10, and the hourly cost of capital is $50. Which of the following combinations of labor and capital hours of use represent points on the firm's $100,000 isocost line?
A) (10000, 2000)
B) (2000, 10000)
C) (1000, 1800)
D) (1000, 1000)
Q2) A firm's production process uses labor, L, and capital, K, to produce an output, Q according to the function Q = 25KL. Let labor be fixed at level \(L = \bar { L }\) . What is the cost minimizing level of capital that the firm must use to produce a target level of output, \(Q = \bar { Q }\) ?
A) \(K = \frac { \bar { L } } { 25 Q }\)
B) \(K = 25 \bar { L } Q\)
C) \(K = \frac { \bar { Q } } { 25 \bar { L } }\)
D) \(K = \frac { Q ^ { 2 } } { 2500 \bar { L } }\)
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9
Chapter 8: Cost Curves
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Sample Questions
Q1) Suppose a firm's production function can be specified as Q = 10KL. This firm's cost function exhibits
A) economies of scale
B) diseconomies of scale
C) neither diseconomies nor economies of scale.
D) economies of scale for output levels less than some level, Q<sub>1</sub>= 1/4, and diseconomies of scale thereafter.
Q2) The output elasticity of total cost is equal to
A) the slope of the isocost line.
B) the ratio of marginal cost to average cost.
C) the ratio of average cost to marginal cost.
D) the ratio of average cost to total cost.
Q3) Suppose that a firm's long-run total cost curve can be expressed as \(T C ( Q ) = 100 Q\) . This firm's long-run marginal cost curve can be expressed as
A) \(M C = 100\) .
B) \(M C = 100 Q\) .
C) \(M C = 100 Q ^ { 2 }\) .
D) \(M C = 10\) .
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Chapter 9: Perfectly Competitive Markets
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Sample Questions
Q1) In the long run, free entry drives the market price to the minimum level of ________, and each firm supplies a quantity equal to its ____________.
A) long-run average cost; price.
B) marginal cost; minimum efficient scale.
C) long-run average cost; minimum efficient scale.
D) marginal cost; price.
Q2) The short-run market supply curve is derived by ________ supplied of the individual firm supply curves.
A) vertically summing the prices and quantities
B) horizontally summing the prices and quantities
C) vertically summing the quantities
D) horizontally summing the quantities
Q3) In a perfectly competitive, increasing-cost industry in the long run, economic profit for the industry __________ and economic rent __________.
A) can be positive; can be positive.
B) can be positive; equals zero.
C) equals zero; can be positive.
D) equals zero; equals zero.
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Chapter 10: Competitive Markets: Applications
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Sample Questions
Q1) Acreage limitations are used by the government because
A) they induce less deadweight loss than cash transfers to farmers.
B) they raise the market price of an agricultural product without the surpluses associated with price supports.
C) the government wishes to lower agricultural prices.
D) they are an effective way to feed poor people.
Q2) In a perfectly competitive market, a production quota
A) sets a limit on the level of imports of a good.
B) has the effect of keeping the market price below the equilibrium level.
C) will create excess supply in the market.
D) creates no deadweight loss.
Q3) An analysis that determines the equilibrium prices and quantities in more than one market simultaneously is called
A) partial equilibrium analysis
B) general equilibrium analysis
C) externality analysis
D) market equilibrium analysis
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Chapter 11: Monopoly and Monopsony
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Sample Questions
Q1) Suppose a monopolist faces a demand curve Q = aP<sup>-b</sup> and that the monopolist has a constant marginal cost of C. The monopolist's profit-maximizing price is
A) \(P = C ( 1 - 1 / b )\)
B) \(P = C ( 1 / b )\)
C) \(P = C \left( \frac { 1 } { 1 - 1 / b } \right)\)
D) P = C(-1/b)
Q2) A monopolist faces a demand curve \(Q = 50 P ^ { - 4 }\) and that the monopolist has a constant marginal cost of 75. The monopolist's profit-maximizing price is
A) 25
B) 50
C) 75
D) 100
Q3) A monopolist maximizes total revenue where marginal revenue
A) equals marginal cost.
B) is maximized.
C) equals zero. D) is negative.
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Chapter 12: Capturing Surplus
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Sample Questions
Q1) Let the inverse demand curve for a monopolist's product be P = 100 - 2Q and the marginal cost of production be constant at MC = 10. Which of the following is the optimal two-block tariff for the firm?
A) P<sub>1</sub> = $70; Q<sub>1</sub> = 15; P<sub>2</sub> = $40; Q<sub>2</sub> = 30
B) P<sub>1</sub> = $60; Q<sub>1</sub> = 20; P<sub>2</sub> = $30; Q<sub>2</sub> = 15
C) P<sub>1</sub> = $80; Q<sub>1</sub> = 10; P<sub>2</sub> = $40; Q<sub>2</sub> = 15
D) P<sub>1</sub> = $55; Q<sub>1</sub> = 22.5; P<sub>2</sub> = $55; Q<sub>2</sub> = 22.5
Q2) During the winter months, the price of natural gas is high. During the summer months, the price of natural gas is low. This could be an example of A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) bundling.
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14
Chapter 13: Market Structure and Competition
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Sample Questions
Q1) In equilibrium, how many units will the dominant firm supply?
A) 45 units
B) 60 units
C) 90 units
D) 135 units
Q2) Which of the following is an example of horizontally differentiated products?
A) Product A, which everyone agrees is superior to Product B.
B) Product C, which everyone agrees is worse than Product D.
C) Product E, which some believe is better than Product F (while others believe Product F is better than Product E).
D) Product G, which everyone agrees is the same quality as product H.
Q3) When one firm possesses a large share of the market but competes against numerous small firms each offering identical products, such markets are called
A) Oligopoly markets
B) Dominant firm markets
C) Differentiated markets
D) Homogenous product markets
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Chapter 14: Game Theory and Strategic Behavior
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Sample Questions
Q1) In a sequential game
A) A player always obtains a higher payoff by maintaining the maximum flexibility in his or her actions.
B) The first mover always obtains a higher payoff than a second mover.
C) A player can sometimes obtain a higher payoff by making a move that restricts the flexibility he or she will have later in the game.
D) strategic moves include those that are easy to reverse.
Q2) In Game 5 above, in the Nash equilibrium in mixed strategies
A) player A chooses A1 with a 2/9 probability.
B) player A chooses A1 with a 3/9 probability.
C) player A chooses A1 with a 4/9 probability.
D) player A chooses A1 with a 5/9 probability.
Q3) In Game 1 above,
A) Player A has a dominant strategy.
B) Player B has a dominant strategy.
C) Both players have dominant strategies.
D) Neither player has a dominant strategy.
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Chapter 15: Risk and Information
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Sample Questions
Q1) Would you expect an insurance company in the "real world" to sell an insurance policy for exactly the "fairly-priced" level as defined in the text?
A) Yes, because the fairly-priced insurance policy includes some profit for the insurance company.
B) Yes, because insurance companies are required to sell their policy at the fairly-priced level by law.
C) Probably not, because the expected value of profits for the insurance company would be zero.
D) Probably not, because insurance companies are not in a competitive industry and are able to earn monopoly profits.
Q2) Suppose you purchase a collectible baseball card from an acquaintance for $50. You think it could be worth $1,000 with a 10% probability and $0 with a 90% probability. What is your expected value for the baseball card?
A) $150
B) $100
C) $1000
D) $50
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Chapter 16: General Equilibrium Theory
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Sample Questions
Q1) Gains from free trade are realized when countries specialize in the production of goods
A) for which they have a comparative advantage.
B) which they can produce for low costs.
C) for which they have an international reputation for excellence. D) which they can produce for a profit.
Q2) If we consider two spices, cumin and paprika, to be substitutes, a drop in the supply of paprika, will probably cause an increase in the price of A) both
B) neither
C) cumin
D) paprika
Q3) When a fixed stock of inputs cannot be reallocated among firms in an economy without reducing the output of at least one of the goods that is produced in the economy, the allocation satisfies.
A) exchange efficiency.
B) input efficiency.
C) substitution efficiency.
D) Walras' Law.
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Page 18
Chapter 17: Externalities and Public Goods
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Sample Questions
Q1) Which of the following is not an example of a free rider problem?
A) Sally listens to public radio but never contributes to her local station.
B) Fred benefits when the National Guard arrives to help create a flood wall around his town, but he is so poor that he pays no taxes.
C) Joe works with two other students on a group project for his intermediate microeconomics class. The grade is based on a group paper, but Joe goes to a movie instead of working on the paper because he knows that the other group members will write it without him.
D) John goes into his local corner shop and walks out with an apple without paying for it.
Q2) Suppose that the government could accurately measure the marginal cost of an externality such as water pollution. In order to reduce production from a plant that emits water pollution, the government places an optimal emissions fee on the plant. The final amount of production equates demand with the marginal social cost to society. The deadweight loss associated with this fee is
A) equal to the amount of the tax.
B) equal to the quantity reduction as a result of the tax.
C) measured as \( 1 / 2(\triangle Q \Delta P) \) .
D) zero.
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