Business Economics
Practice Exam
Course Introduction
Business Economics explores the application of economic theories and principles to real-world business decision-making. The course covers key topics such as demand analysis, production and cost functions, market structures, pricing strategies, and the impact of government regulation on businesses. Students will learn how economic concepts influence managerial choices, resource allocation, and strategic planning, providing them with analytical tools to assess the economic environment in which businesses operate. Emphasis is placed on understanding both microeconomic and macroeconomic factors that affect business performance and competitiveness in a dynamic market economy.
Recommended Textbook Microeconomics 7th Edition by R. Glenn Hubbard
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Page 2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) Which of the following is a microeconomic question?
A)How much will be saved and how much will be produced in the entire economy?
B)What will the level of economic growth be in the entire economy?
C)What factors determine the price of carrots?
D)What determines the average price level and inflation?
Answer: C
Q2) The Coffee Nook, a small cafe near campus, sells cappuccinos for $2.50 and Russian tea cakes for $1.00 each.What is the opportunity cost of buying a Russian tea cake?
A)2 1/2 cappuccinos
B)2/5 of a cappuccino
C)$2.50
D)$1.00
Answer: B
Q3) Positive analysis is concerned with "what ought to be," while normative analysis is concerned with "what is."
A)True
B)False
Answer: False
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Chapter 2: Trade-Offs, Comparative Advantage, and the Market System
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Sample Questions
Q1) The concept of opportunity cost is that
A)in a market economy, taking advantage of profitable opportunities involves some money cost.
B)the economic cost of using a factor of production is the alternative use of that factor that is given up.
C)taking advantage of investment opportunities involves costs.
D)the cost of production varies depending on the opportunity for technological application.
Answer: B
Q2) "An Inquiry into the Nature and Causes of the Wealth of Nations" published in 1776 was written by
A)John Maynard Keynes.
B)Karl Marx.
C)Alfred Marshall.
D)Adam Smith.
Answer: D
Q3) What is economic growth?
Answer: Economic growth refers to the ability of the economy to increase the production of goods and services.
Page 4
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) Which of the following statements is true?
A)An increase in demand causes a change in equilibrium price; the change in price does not cause a further change in demand or supply.
B)A decrease in supply causes equilibrium price to rise; the increase in price then results in a decrease in demand.
C)If both demand and supply increase there must be an increase in equilibrium price; equilibrium quantity may either increase or decrease.
D)If demand decreases and supply increases one cannot determine if equilibrium price will increase or decrease without knowing which change is greater.
Answer: A
Q2) Scarcity is defined as the situation that exists when the quantity demanded for a good is greater than the quantity supplied.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Economic Efficiency, Government Price Setting, and Taxes
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Sample Questions
Q1) Refer to Figure 4-1.What is the total amount that Arnold is willing to pay for 4 burritos?
A)$1.00
B)$4.00
C)$7.00
D)$10.00
Q2) Refer to Table 4-7.The equations above describe the demand and supply for Bubba's Fried Jellybeans.The equilibrium price and quantity for Bubba's Fried Jellybeans are $40 and 5 thousand units.What is the value of economic surplus in this market?
A)$5 thousand
B)$12.5 thousand
C)$25 thousand
D)$37.5 thousand
Q3) Refer to Table 4-4.If a minimum wage of $12.50 an hour is mandated, what is the quantity of labor demanded?
A)80,000
B)550,000
C)630,000
D)1,180,000
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Chapter 5: Externalities, Environmental Policy, and Public Goods
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Q1) It is difficult for a private market to provide the economically efficient quantity of a public good because
A)by law governments cannot use cost-benefit analysis to determine this quantity.
B)public goods produce positive and negative externalities.
C)individual preferences are not revealed in the market for the good.
D)it is too expensive to produce the necessary amount of the good.
Q2) If electric utilities continually reduce their emissions of sulfur dioxide,
A)the utilities will eventually be forced to go out of business.
B)the marginal benefit of additional emissions will rise.
C)the marginal cost of further emissions will rise.
D)the total benefit of sulfur dioxide emissions will fall.
Q3) Define the tragedy of the commons.Give three examples of common resources.Briefly explain why common property resources are subject to overuse.
Q4) A quasi-public good is similar to a public good in that one person's consumption of the quasi-public good does not reduce the amount available for everyone else.
A)True
B)False
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Chapter 6: Elasticity: the Responsiveness of Demand and Supply
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Q1) If a 5 percent increase in income leads to a 10 percent decrease in quantity demanded for a product, this product is
A)an income elastic good.
B)an inferior good.
C)a necessity.
D)a luxury good.
Q2) If the demand for iPods is price elastic, then
A)the percentage change in quantity demanded is greater than the percentage change in price (in absolute value).
B)the percentage change in quantity demanded is less than the percentage change in price (in absolute value).
C)the percentage change in quantity demanded is equal to the percentage change in price.
D)quantity demanded is not responsive to changes in price.
Q3) Explain the economic concept of price elasticity of supply.How is price elasticity of supply calculated?
Q4) Explain why a local bottler of PepsiCo products would likely prefer a national soda tax to a local soda tax in its region.
Page 8
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Chapter 7: The Economics of Health Care
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Sample Questions
Q1) Consider a used car market in which half the cars are good and half are bad (lemons).Suppose the average price of a good car is $9,000 and the average price of a lemon is $3,000.If rational buyers are willing to pay $6,000 for a used car, then sellers will agree to sell mostly lemons at this price.What is the term used to describe this situation?
A)moral hazard
B)adverse selection
C)an efficient market
D)economic irrationality
Q2) Compared to other high-income countries, health care spending per person in the United States has been
A)growing at a faster rate.
B)declining at a faster rate.
C)growing at approximately the same rate.
D)declining at approximately the same rate.
Q3) In the United States, private health insurance companies
A)are all for-profit firms.
B)are all not-for-profit firms.
C)can be either for-profit or not-for-profit firms.
D)are all government-run firms.
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Page 9
Chapter 8: Firms, the Stock Market, and Corporate Governance
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Sample Questions
Q1) Net worth and stockholders' equity are both equal to the difference between assets and liabilities.
A)True
B)False
Q2) What is the difference between retained earnings and dividends?
Q3) Unlike firms that sell stock in financial markets, which are known as ________ firms, companies which do not sell stock in financial markets are known as ________ firms.
A)public; private
B)open; closed
C)corporate; proprietary
D)stock market; bond market
Q4) As a business type, corporations ________ in the United States.
A)earn the majority of revenues
B)are the most common
C)are the least common
D)are subject to the fewest taxes
Q5) How does a firm raise external funds through direct finance?
Q6) Define a sole proprietorship.
Q7) How can a sole proprietorship raise funds needed for firm expansion? Page 10
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Chapter 9: Comparative Advantage and the Gains From International Trade
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Sample Questions
Q1) Refer to Table 9-6.If the actual terms of trade are 1 hat for 1.8 clocks and 150 hats are traded, how many hats will Denmark gain compared to the "without trade" numbers?
A)-150
B)0
C)150
D)1,050
Q2) In 1995 ________, which was established in 1948, was replaced by ________.
A)the GATT; the WTO
B)the WTO; NAFTA
C)the Smoot-Hawley Tariff; the GATT
D)NAFTA; the Smoot-Hawley Tariff
Q3) Refer to Table 9-2.Select the statement that accurately interprets the data in the table.
A)Sarita has a greater opportunity cost than Gabriel for baking cakes.
B)Sarita's opportunity cost for baking cakes is less than Gabriel's.
C)Gabriel has a greater opportunity cost than Sarita for baking pies.
D)Gabriel's opportunity cost for baking cakes and baking pies are both greater than Sarita's.
Q4) What is autarky?
Page 12
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Chapter 10: Consumer Choice and Behavioral Economics
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Sample Questions
Q1) Refer to Table 10-1.If Keegan can drink all the bubble tea he wants for free, how many glasses will he consume?
A)4 glasses
B)5 glasses
C)6 glasses
D)He would consume an infinite amount of bubble tea if it is free.
Q2) An increase in income results in an outward shift of an indifference curve.
A)True
B)False
Q3) What must be true in terms of the income effect, the substitution effect, and the type of good for the good's demand curve to be upward sloping?
Q4) All of the following products are likely to have significant network externalities except A)cat food.
B)cell phones.
C)popular board games.
D)Twitter.
Q5) What is an indifference curve? Why can indifference curves never cross?
Q6) What is marginal utility and what is the law of diminishing marginal utility?
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Chapter 11: Technology, Production, and Costs
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Sample Questions
Q1) Refer to Figure 11-1.The marginal product of the 7th worker is
A)66.
B)9.43.
C)2.
D)-2.
Q2) Who was the economist who first analyzed the advantages of specialization and the division of labor?
A)David Ricardo
B)Arthur C. Pigou
C)Ronald Coase
D)Adam Smith
Q3) If production displays constant returns to scale, then all economies of scale have been exhausted.
A)True
B)False
Q4) Refer to Figure 11-5.The vertical difference between curves F and G measures
A)average fixed costs.
B)marginal costs.
C)fixed costs.
D)sunk costs.
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Chapter 12: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) In the long run, perfectly competitive firms earn zero economic profit.Why do firms enter an industry when they know that in the long-run they will not earn any profit?
Q2) Refer to Figure 12-11.Suppose the prevailing price is $20 and the firm is currently producing 1,350 units.In the long-run equilibrium, the firm represented in the diagram
A)will continue to produce the same quantity.
B)will reduce its output to 1,100 units.
C)will reduce its output to 750 units.
D)will cease to exist.
Q3) When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell
A)the output where marginal revenue equals marginal cost.
B)any positive output the entrepreneur decides upon because all of it can be sold.
C)nothing at all; the firm shuts down.
D)the output where average total cost equals price.
Q4) What assumptions are necessary for a market to be perfectly competitive? Explain why each of these assumptions is important.
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Page 15
Chapter 13: Monopolistic Competition: the Competitive
Model in a
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Sample Questions
Q1) If buyers of a monopolistically competitive product feel the products of different sellers have little differences between them, then the demand for each seller's product is relatively elastic.
A)True
B)False
Q2) All of the following characteristics are common to both monopolistic competition and perfect competition except
A)firms act to maximize profit.
B)entry barriers into the industries are low.
C)the market demand curves are downward-sloping.
D)firms take market prices as given.
Q3) A major difference between monopolistic competition and perfect competition is A)the number of sellers in the markets.
B)the degree by which the market demand curves slope downwards.
C)that products are not standardized in monopolistic competition unlike in perfect competition.
D)the barriers to entry in the two markets.
Q4) How would a marketing campaign directed at single women improve the chances of success at a place like a cigar bar?
Page 16
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Chapter 14: Oligopoly: Firms in Less Competitive Markets
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Sample Questions
Q1) Airlines often engage in last-minute price cutting to fill remaining empty seats on a flight because this practice will generally
A)prevent rival airlines from competing in that market.
B)increase marginal revenue more than marginal cost.
C)maximize marginal revenue.
D)discourage rivals from matching price cuts.
Q2) When top managers of all four major airlines publicly stated that they intended to undertake only modest increases in capacity by buying additional planes or flying additional routes, the Department of Justice
A)brought charges against the airlines for collusion.
B)stated that since this was an issue of capacity and not price, no collusion could have taken place.
C)forced the airlines to increase capacity and lower prices.
D)decided there was not enough evidence to charge the airlines with collusion.
Q3) Decision trees can only be used to analyze sequential games.
A)True
B)False
Q4) Firms in an oligopoly are said to be interdependent.What does this mean?
Q5) List the competitive forces in the five competitive forces model.
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Chapter 15: Monopoly and Antitrust Policy
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Sample Questions
Q1) The 10-year protection period from generic competition for drug manufacturers is a form of
A)copyright.
B)trademark.
C)hallmark.
D)patent.
Q2) Explain why market power leads to a deadweight loss.Is the total deadweight loss from market power in the United States large or small?
Q3) Refer to Figure 15-5.If the monopolist charges price P* for output Q*, in order to maximize profit or minimize loss in the short run, it should
A)continue to produce because the price is greater than average variable cost.
B)shut down because the price is greater than marginal cost.
C)shut down because the price is less than average total cost.
D)continue to produce because a monopolist always earns a profit.
Q4) Governments grant patents to
A)compensate firms for research and development costs.
B)encourage competition.
C)encourage low prices.
D)encourage firms to reveal secret production techniques.
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Chapter 16: Pricing Strategy
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Sample Questions
Q1) Which of the following is a reason why airline yield management is an effective method to increase revenue?
A)because airlines have invested heavily in developing computer models that identify optimal pricing strategies in the various market segments
B)because airlines have successfully induced customers to reveal their resources and preferences by offering them different versions of the product such as business class and coach plane tickets
C)because a ticket is a contract to transport a specific person, and is not transferable
D)because airlines have a monopoly in long-distance carriage
Q2) Consumers who will pay high prices to be among the first to own certain new products are called
A)savvy consumers.
B)naive consumers.
C)gullible.
D)early adopters.
Q3) Book publishers use price discrimination routinely, but the form of price discrimination they use is different from the form used by airlines and other industries.Explain.
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19
Chapter 17: The Markets for Labor and Other Factors of Production
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Sample Questions
Q1) Consider the market for blackjack dealers in Las Vegas.In each of the following cases, explain what happens to the equilibrium wage rate and the quantity of blackjack dealers hired.
a.Three new large resort casinos open in Las Vegas.
b.Fewer students are attending classes to learn to become blackjack dealers.
c.Traditionally, blackjack dealing is a field that attracts foreign workers.However, changes in immigration laws have made it more difficult for foreign workers to come to Las Vegas to obtain jobs.The demand for blackjack dealers, however, does not change.
d.Advances in technology have increased the popularity of electronic blackjack machines and decreased the popularity of live table games which require the use of a dealer.
Q2) The most important factor contributing to wage differences in the labor market is differences in the level of education and training among workers.
A)True
B)False
Q3) The marginal product of labor curve is the demand curve for labor.
A)True B)False
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Chapter 18: Public Choice, Taxes, and the Distribution of Income
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Sample Questions
Q1) If you pay a constant percentage of your taxable income in taxes, the tax is A)regressive.
B)proportional.
C)progressive.
D)random.
Q2) All of the following occur whenever a government taxes a product except A)the quantity consumed of that product falls.
B)the price of that product rises.
C)the marginal benefit of the last unit sold exceeds the marginal cost of producing it.
D)there will be no excess burden if the government's tax revenue is sufficiently large to offset the deadweight loss.
Q3) Refer to Figure 18-6.If area X = 2,060, area Y = 240, and area Z = 2,700, calculate the Gini coefficient for Islandia.
A)0.41
B)0.45
C)0.70
D)0.76
Q4) Describe the main factors economists believe cause inequality of income.
Page 21
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