Economic Analysis for Business Decisions

1. The fundamental economic problem faced by all societies is:

a. unemployment
b. inequality
c. poverty
d. scarcity

2. "Capitalism" refers to:

a. the use of markets
b. government ownership of capital goods
c. private ownership of capital goods
d. private ownership of homes & cars

3. There are three fundamental questions every society must answer. Which of
the following is/are one of these questions?
a. What goods and services are to be produced?
b. How are the goods and services to be produced?
c. Who will get the goods and services that are produced?
d. All of the above

5. The bowed shape of the production possibilities curve illustrates:

a. the law of increasing marginal cost
b. that production is inefficient
c. that production is unattainable
d. the demand is relatively inelastic

6. You have taken this quiz and received a grade of 3 out of a possible 10 points
(F). You are allowed to take a second version of this quiz. If you score 7 or more,
you can raise your score to a 7 (C). You will need to study for the second version.
In making a rational decision as to whether or not to retake the test, you should
a. always retake the quiz
b. consider only the marginal benefits from of retaking the quiz (four extra points)
c. consider only the marginal opportunity costs from taking the quiz (the time spent
studying and taking the quiz)
d. consider both the marginal benefits and the marginal opportunity costs of
retaking the quiz

7. The law of demand states that:

a. as the quantity demanded rises, the price rises
b. as the price rises, the quantity demanded rises
c. as the price rises, the quantity demanded falls
d. as supply rises, the demand rises

8. The price elasticity of demand is the:

a. percentage change in quantity demanded divided by the percentage change in
price
b. percentage change in price divided by the percentage change in quantity demanded
c. dollar change in quantity demanded divided by the dollar change in price
d. percentage change in quantity demanded divided by the percentage change in
quantity supplied

9. Community Colleges desired to increase revenues. They decided to raise fees

paid by students with Bachelors degrees to $50 per unit because they believed
this would result in greater revenues. But in reality, total revenues fell. Therefore,
the demand for Community College courses by people with Bachelors degrees
must have actually been:
a. relatively inelastic
b. unit elastic
c. relatively elastic
d. perfectly elastic

10. The demand for a product would be more inelastic:

a. the greater is the time under consideration
b. the greater is the number of substitutes available to buyers
c. the less expensive is the product in relation to incomes
d. all of the above

11. In the case of agriculture,

a. the demand has shifted to the right more than the supply has shifted to the right
b. the demand has shifted to the right less than the supply has shifted to the right
c. the demand has shifted to the left more than the supply has shifted to the left
d. the demand has shifted to the left less than the supply has shifted to the left

12. The agricultural price support program is an example of

a. a price ceiling
b. a price floor
c. equilibrium pricing
d. None of above

13. If there is a price floor, there will be

a. shortages
b. surpluses
c. equilibrium
d. None of above

14. If there is a price ceiling, there will be

a. shortages
b. surpluses
c. equilibrium
d. None of above

15. If there is a price ceiling, which of the following is NOT likely to occur?
a. rationing by first-come, first-served
b. black markets
c. gray markets
d. sellers providing goods for free that were formerly not free

16. The goal of a pure market economy is to best meet the desires of
a. consumers
b. companies
c. workers
d. the government

17. In a pure market economy, which of the following is a function of the price?
I. provide information to sellers and buyers
II. provide incentives to sellers and buyers
a. I only
b. II only
c. both I and II
d. neither I nor II

18. In a market system, sellers act in ____________ interest , but this leads to
behaviors in ____________ interest.
a. self; self
b. self; society’s
c. society’s; society’s
d. society’s; self

19. The law of diminishing (marginal) returns states that as more of a variable
factor is added to a certain amount of a fixed factor, beyond some point:
a. Total physical product begins to fall
b. The marginal physical product rises
c. The marginal physical product falls
d. The average physical product falls
20. Why is the law of diminishing marginal returns true?
a. specialization and division of labor
b. spreading the average fixed cost
c. limited capital
d. all factors being variable in the long-run

21. Which of the following is a characteristic of pure monopoly?

a. one seller of the product
b. low barriers to entry
c. close substitute products
d. perfect information

22. In pure monopoly, what is the relation between the price and the marginal
revenue?
a. the price is greater than the marginal revenue
b. the price is less than the marginal revenue
c. there is no relation
d. they are equal

23. In order to maximize profits, a monopoly company will produce that quantity
at which the:
a. marginal revenue equals average total cost
b. price equals marginal revenue
c. marginal revenue equals marginal cost
d. total revenue equals total cost

24. Compared to the case of perfect competition, a monopolist is more likely to:
a. charge a higher price
b. produce a lower quantity of the product
c. make a greater amount of economic profit
d. all of the above

25. Which of the following is necessary for a natural monopoly?

a. economies of scale
b. a high proportion of the total cost is the cost of capital goods
c. the market is very small
d. all of the above

26. Which of the following best defines price discrimination?

a. charging different prices on the basis of race
b. charging different prices for goods with different costs of production
c. charging different prices based on cost-of-service differences
d. selling a certain product of given quality and cost per unit at different prices to
different buyers

27. In order to practice price discrimination, which of the following is needed?

a. some degree of monopoly power
b. an ability to separate the market
c. an ability to prevent reselling
d. all of the above

28. In price discrimination, which section of the market is charged the higher
price?
a. the section with the richest people
b. the section with the oldest people
c. the section with the most inelastic demand
d. the section with the most elastic demand

29. Which of the following concepts represents the extra revenue a firm receives
from the services of an additional unit of a factor of production?
a. total revenue
b. marginal physical product
c. marginal revenus product
d. marginal revenue

30. The demand for labor is the same as the

a. marginal revenue product
b. marginal physical product
c. marginal cost
d. wage

31. The demand for labor slopes down and to the right because of
a. the law of demand
b. the iron law of wages
c. the law of diminishing marginal returns
d. economies of scale

32. Skills that embodied in a person are called

a. Human capital
b. Embodied skills
c. Physical capital
d. Experience skills

33. “Treating an individual as typical of a group” is the definition of

a. pure discrimination
b. statistical discrimination
c. human capital
d. specific skills

34. If a 1% fall in the price of a product causes the quantity demanded of the
product to increase by 2%, demand is
  Inelastic.
 Unit-elastic.
 Elastic.
 Perfectly elastic.

35. Compared to the lower-right portion, the upper-left portion of most demand
curves tend to be

 More inelastic.
 More elastic.
 Unit-elastic.
 Perfectly inelastic.

36. If a business increased the price of its product from $7 to $8 when the
elasticity of demand was inelastic, then

 Total revenues decreased.

 Total revenues increased.
 Total revenues remained unchanged.
 Total revenues were perfectly inelastic.

37. You are the sales manager for a pizza company and have been informed that
the price elasticity of demand for your most popular pizza is greater than 1. To
increase total revenues, you should

 Increase the price of the pizza.

 Decrease the price of the pizza.
 Hold pizza prices constant.
 Decrease demand for your pizza.

38. Assume Amanda Herman finds that her total spending on compact discs
remains the same after the price of compact discs falls, other things equal. Which
of the following is true about Amanda’s demand for compact discs with this price
change?

 It is unit-price-elastic.
 It is perfectly price-elastic.
 It is perfectly price-inelastic.
 It increased in response to the price change.
39. Which is characteristic of a product whose demand is elastic?

 The price elasticity coefficient is less than 1.

 Total revenue decreases if price decreases.
 Buyers are relatively insensitive to price changes.
 The percentage change in quantity is greater than the percentage of
change in price.

40. The demand for Nike basketball shoes is more price-elastic than the demand
for basketball shoes as a whole. This is best explained by the fact that

 Nike basketball shoes are a luxury good, not a necessity.

 Nike basketballs shoes are the best made and are widely advertised.
 There are more complements for Nike basketball shoes than for basketball shoes
as a whole.
 There are more substitutes for Nike basketball shoes than for basketball
shoes as a whole.

41. Which is characteristic of a good whose demand is inelastic?

 There are a large number of good substitutes for the good for consumers.
 The buyer spends a small percentage of total income on the good.
 The good s regarded by consumers as a luxury.
 The period of time for which demand is given is relatively long.

42. From a time perspective, the demand for most products is

 Less elastic in the short run and unit-elastic in the long run.
 Less elastic in the long run and unit-elastic in the short run.
 More elastic in the short run than in the long run.
 More elastic in the long run than in the short run.

43. If a 5% fall in the price of a commodity causes quantity supplied to decrease

by 8% supply is

 Elastic.
 Inelastic.
 Unit-elastic.
 Perfectly inelastic.
44. If supply is inelastic and demand decreases, the total revenue of sellers will

 Increase.
 Decrease.
 Decrease only if demand is elastic.
 Increase only if demand is inelastic.

45. The chief determinant of the price elastic of supply of a product is

 The number of good substitutes the product has.

 The length of time sellers has to adjust to a change in price.
 Whether the product a luxury or necessity.
 Whether the product is a durable or a nondurable good.

46. A study shows that the coefficient of the cross elasticity of Coke and Sprite is
negative. This information indicates that Coke and Sprite are

 Normal goods.
 Complementary goods.
 Substitute goods.
 Independent goods.

47. If a 5% increase in the price of one good results in a decrease of 2% in the

quantity demanded of another good, then it can be concluded that the two goods
are

 Complements.
 Substitutes.
 Independent.
 Normal.

48. Most goods can be classified as normal goods rather than inferior goods. The
definition of a normal good means that

 The percentage change in consumer income is greater that the percentage

change in price of a normal good.
 The percentage change in quantity demanded of the normal good Is greater than
the percentage change in consumer income.
  As consumer income increases, consumer purchases of a normal
goodincrease.
 The income elasticity of demand is negative.

49. In below question chicken and waffles are considered complimentary goods
in the region of Rosco. There is an outbreak of the avian flu which kills a majority
of the chicken in the region of Rosco.

50. What will happen to supply and demand for chicken and waffles in Rosco?

 Supply of chicken will increase and quantity of waffles will increase

 Supply of chicken will increase and quantity of waffles will decrease
 Supply of chicken will decrease and quantity of waffles will increase
 Supply of chicken will decrease and quantity of waffles will decrease

51. What will happen to the price of chicken?

 Increase, because the demand for waffles will increase

 Decrease, because chicken are cheaper during influenzas
 Increase, because demand stayed the same while supply decreased
 No change

52. What will happen to the quantity supplied of waffles?

 Increase, because waffles are a substitute for chicken

 Decrease, because the supplied of chicken has decreased as well
 Increase, because more workers can make waffles now that supply of chicken is
decreased
 No change

In below question Baby Bottle Pops and Nerds Ropes are considered substitute
goods. Along with sugar and spice, Wonka candy producers accidentally include
chemical X as an ingredient in all their candy, depleting the supply of Nerds
Ropes.
53. What will happen to the demand for Baby Bottle Pops?

 Decrease, because people will buy less candy after hearing about Wonka
 Increase, because Nerds Ropes become more expensive with limited
supply
  Increase, because people will want to increase sugar consumption
 No Change

54. What will happen to the price of Nerds Ropes and quantity demanded of Baby
Bottle Pops?

 Price of Nerds Ropes will increase and quantity of Baby Bottle Pops will
increase
 Price of Nerds Ropes will increase and quantity of Baby Bottle Pops will
decrease
 Price of Nerds Ropes will decrease and quantity of Baby Bottle Pops will
increase
 Price of Nerds Ropes will decrease and quantity of Baby Bottle Pops will
decrease

55. The country Beta is experiencing an increase in unemployment. If steak is a

normal good:

 Demand for steak will increase

 Quantity demanded of steak will increase
 Demand for steak will decrease
 Quantity demanded of steak will decrease

56. Orange juice and mango juice are close substitutes. According to cross-
elasticity, if the price of mango juice increases by 12%, then the price/quantity
demanded of orange juice must also increase/decrease:

 Price, increase
 Price, decrease
 Quantity demanded, increase
 Quantity demanded, decrease

57. A private high school increases student tuition. This will increase total
revenue if the price elasticity of demand for private education is:

 Inelastic
 Unit-elastic
 Elastic
 Cross-elastic
Use the graph at right to answer questions 18-20.

58. At Y, what would cause the QS to shift from Q3 to Q4?

 Demand decreases, D1 to D
 Demand increases, D to D1
 Supply decreases, S to S1
 Supply increases, S1 to S

59. At X, what would cause price to decrease from P4 to P2?

 Supply increases, S1 to S
 Supply decreases, S to S1
 Demand increases, D to D1
 Demand decreases, D1 to D

60. What price and quantity demanded would result from a decrease in demand
from D1 to D when starting at X?

 P1, Q3
 P4, Q2
 P3, Q1
 P2, Q4

Use the following diagram to answer questions below 2.

61. Why is the supply curve upward sloping?

 As price increases, so do costs

 As price increases, consumers demand less
 As the price increases, suppliers can earn higher levels of profit or justify
higher marginal costs to produce more
 As the price increases, producers supply more of the good.

62. Which is an explanation for the downward slope of the demand curve?
  Substitution effect
 Elasticity
 Profit maximization
 Diminishing marginal utility

63. The set of six determinants of supply does not include:

 Changes in technology
 Changes in the size of the population
 Changes in resource costs
 Changes in the number of suppliers

64. Costs of production of jelly beans increase simultaneously with a decrease in

the price of M&Ms, a close substitute. This will cause:

 A decrease in the demand of jelly beans

 A decrease in the price of jelly beans
 An increase in the supply of M&Ms
 An increase in the demand of M&Ms

65. Income rises, and initially the demand for sweatshirts increases. As income
continues to rise, however, the demand for sweatshirts decreases. This tells us
that a sweatshirt is:

 A normal good at all income levels

 An inferior good at all income levels
 An inferior good at low income levels and a normal good at high income levels
 A normal good at low income levels and an inferior good at high income
levels

66. Which of the following is NOT a determinant of a product’s demand?

 Taxes and subsidies

 Changes in consumer preferences
 Expected future prices by consumers
 Changes in prices of substitute products

67. Average income of the American population decreases by 10%. The market
would see an increase in the demand for products sold at:
  Jewelry stores
 Boutiques
 Department stores
 Thrift stores

68. The price floor is set at $___ and the price ceiling is set at $___:

 10, 25
 80, 120
 25, 10
 60, 140

69. The quantity demanded when the government sets the price floor is:

 60
 80
 120
 140

70. When the price ceiling is enforced there is a shortage/surplus of 40/80:

 Shortage, 40
 Shortage, 80
 Surplus, 40
 Surplus, 80

71. Which of the following is NOT an inferior good?

 Fur coats
 Used cars
 Secondhand clothing
 Generic products

72. An increase in the demand for designer handbags would most likely result
from a(n):

 Increase in the costs of designer handbags

 Increase in the costs of production of designer handbags
 Increase in unemployment
  Increase in average income

73. The price of red wine increases by 7% and the quantity demanded decreases
by 13%. The elasticity coefficient of red wine is:

 Less than one, so it is elastic

 Less than one, so it is inelastic
 Greater than one, so it is elastic
 Greater than one, so it is inelastic

74. Which of the following would cause the entire market demand curve for
peanut butter to shift left?

 An increase in the costs of peanuts

 An increase in the price of peanut butter
 A decrease in the price of nutella, a close substitute
 An decrease in the price of jelly, a strong complement

75. Roy’s company produces both ping pong balls and tennis balls. The price of
ping pong balls decreases relative to the price of tennis balls. What will happen to
the supply of both types of balls?

 Supply of tennis balls increases, supply of ping pong balls increases

 Supply of tennis balls increases, supply of ping pong balls decreases
 Supply of tennis balls decreases, supply of ping pong balls decreases
 Supply of tennis balls decreases, supply of ping pong balls increases

76. Which of the following causes a good to be more elastic?

 Greater percentage of income

 Fewer substitutes
 Greater necessity
 Fewer suppliers of the good

77. The price of cashmere scarves increases by 4% but total revenue remains the
same. Price elasticity of cashmere scarves is:

 Inelastic
 Unit-elastic
  Elastic
 Equal to zero

78. The quantity demanded of shoelaces increases from 100 to 145 as price
decreases from $7 to $5. Comparison of total revenue before and after the price
change proves that:

 Elasticity of demand is equal to zero

 Elasticity of demand is equal to one
 Elasticity of demand is greater than one
 Elasticity of demand is less than one

79. Adam Smith's invisible hand principle stresses

 That compassion is a powerful motivator that encourages individuals to engage

in productive economic activity.
 The tendency of the competitive market process to direct self-interested
individuals into activities that enhance the economic welfare of society.
 The potential of government regulation as a means of bringing the self interest of
individuals into harmony with the economic welfare of society.
 The tendency of self-interested individuals to pursue activities that benefit
themselves, but harm the overall economic welfare of society.

80. In a free market economy, consumption and investment decisions

 Are controlled largely by the government.

 Shape the future course of the national economy.
 Are necessarily controlled by big businesses.
 Require protection from foreign forces if individuals desire wealth accumulation.

81. Most microeconomic models assume that decision makers wish to

 Make themselves as well off as possible.

 Act selfishly.
 Not cooperate with others.
 None of the above.

82. Which of the following is an example of a normative statement?

  A higher price for a good causes people to want to buy less of that good.
 A lower price for a good causes people to want to buy more of that good.
 To make the good available to more people, a lower price should be set.
 If you consume this good, you will be better off.

83. According to the Law of Demand, the demand curve for a good will

 Shift leftward when the price of the good increases.

 Shift rightward when the price of the good increases.
 Slope downward.
 Slope upward.

84. Holding all other factors constant, consumers demand more of a good the

 Higher its price.

 Lower its price.
 Steeper the downward slope of the demand curve.
 Steeper the upward slope of the demand curve.

85. As the price of good increases, the change in the quantity demanded can be
shown by

 Shifting the demand curve leftward.

 Shifting the demand curve rightward.
 Moving down along the same demand curve.
 Moving up along the same demand curve.

86. If the price of automobiles were to increase substantially, the demand curve
for gasoline would most likely

 Shift leftward.
 Shift rightward.
 Become flatter.
 Become steeper.

87. If the price of automobiles were to decrease substantially, the demand curve
for automobiles would most likely

 Shift rightward.
  Shift leftward.
 Remain unchanged.
 Become steeper.

88. If the price of automobiles were to decrease substantially, the demand curve
for public transportation would most likely

 Shift rightward.
 Shift leftward.
 Remain unchanged.
 Remain unchanged while quantity demanded would change.

89. An increase in the demand curve for orange juice would be illustrated as a

 Leftward shift of the demand curve.

 Rightward shift of the demand curve.
 Movement up along the demand curve.
 Movement down along the demand curve.

90. If government regulations prohibit the production of a particular good, the

demand curve for that good will most likely

 Shift leftward.
 Shift rightward.
 Remain unchanged.
 Disappear.

91. To determine the total demand for all consumers, sum the quantity each
consumer demands

 At a given price.
 At all prices and then sum this amount across all consumers.
 Both a and b will generate the same total demand.
 None of the above

92. Suppose the demand curve for a good shifts rightward, causing the
equilibrium price to increase. This increase in the price of the good results in
  A rightward shift of the supply curve.
 An increase in quantity supplied.
 A leftward shift of the supply curve.
 A leftward movement along the supply curve.

93. Equilibrium is defined as a situation in which

 Neither buyers nor sellers want to change their behavior.

 No government regulations exist.
 Demand curves are perfectly horizontal.
 Suppliers will supply any amount that buyers wish to buy.

94. If price is initially above the equilibrium level,

 The supply curve will shift rightward.

 The supply curve will shift leftward.
 Excess supply exists.
 All firms can sell as much as they want.

95. A competitive equilibrium is described by

 A price only.
 A quantity only.
 The excess supply minus the excess demand.
 A price and a quantity.

96. In the labor market, if the government imposes a minimum wage that is below
the equilibrium wage, then

 Workers who wish to work at the minimum wage will have a difficult time finding
jobs.
 Firms will hire fewer workers than without the minimum wage law.
 Some workers may lose their jobs as a result.
 Nothing will happen to the wage rate or employment.

97. The change in price that results from a leftward shift of the supply curve will
be greater if
  The demand curve is relatively steep than if the demand curve is relatively
flat.
 The demand curve is relatively flat than if the demand curve is relatively steep.
 The demand curve is horizontal than if the demand curve is vertical.
 The demand curve is horizontal than if the demand curve is downward sloping.

98. The change in price that results from a rightward shift in demand will be
greater if

 The supply curve is horizontal than if the supply curve is upward sloping.
 The supply curve is relatively steep than if the supply curve is relatively
flat.
 The supply curve is upward sloping than if the supply curve is vertical.
 The supply curve is horizontal than if the supply curve is vertical.

99. If the demand curve for a good is horizontal and the price is positive, then a
leftward shift of the supply curve results in

 A price of zero.
 An increase in price.
 A decrease in price.
 No change in price.

100. A vertical demand curve results in

 No change in quantity when the supply curve shifts.

 No change in price when the supply curve shifts.
 No change in the supply curve being possible.
 No change in quantity when the demand curve shifts.

101. A vertical demand curve for a particular good implies that consumers are

 Sensitive to changes in the price of that good.

 Not sensitive to changes in the price of that good.
 Irrational.
 Not interested in that good.

102. The percentage change in the quantity demanded in response to a

percentage change in the price is known as the
  Slope of the demand curve.
 Excess demand.
 Price elasticity of demand.
 All of the above.

103. If the price elasticity of demand for a good is less than one in absolute terms,
we say consumers of this good

 Are not very sensitive to price.

 Are not very sensitive to the quantity they demand.
 Are very sensitive to price.
 Are elastic.

104. The fundamental economic problem faced by all societies is:

 Unemployment
 Inequality
 Poverty
 Scarcity