Economics for Business Exam Preparation Guide
Course Introduction
Economics for Business introduces students to fundamental economic principles and their application in the business environment. The course covers both microeconomic and macroeconomic concepts, including supply and demand analysis, market structures, pricing strategies, consumer behavior, production costs, and the impact of government policies on business operations. Through real-world case studies and current events, students learn how economic decision-making influences business strategy, resource allocation, and organizational performance in a global context. This course equips future managers and entrepreneurs with the analytical tools required to understand market dynamics and make informed business decisions.
Recommended Textbook
Microeconomics 5th Edition by Glenn Hubbard
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Page 2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) What is opportunity cost?
Answer: Opportunity cost refers to the highest-valued alternative that must be given up to engage in an activity.For example,the opportunity cost of taking this economics class is what you are giving up to take the class,which may be taking another class such as accounting or psychology,working extra hours at your job,or extra sleep (whichever is your highest-valued alternative).
Q2) In economics,choices must be made because we live in a world of
A) unemployment.
B) scarcity.
C) greed.
D) unlimited resources.
Answer: B
Q3) When production reflects consumer preferences,________ occurs.
A) allocative efficiency
B) productive efficiency
C) equity
D) efficient central planning
Answer: A
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3
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Sample Questions
Q1) The points outside the production possibilities frontier are A) efficient.
B) attainable.
C) inefficient.
D) unattainable.
Answer: D
Q2) In economics,the term "free market" refers to a market where products are traded but not sold.
A)True
B)False
Answer: False
Q3) What is meant by the term "free market"?
Answer: A free market is a market with few government restrictions on how a good or service can be produced or sold or on how factors of production can be employed.
Q4) What is the difference between product markets and factor markets?
Answer: Product markets are markets for goods and services.Factor markets are markets for the factors of production,which are the inputs used to make goods and services.
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) For each of the following pairs of products state which are complements,which are substitutes,and which are unrelated.
a.Digital camera and memory stick
b.7Up and Mountain Dew
c.Swimsuits and flip-flops
d.Tylenol and cat food
e.Photocopier and paper
Answer: a.Complements
b.Substitutes
c.Complements
d.Unrelated
e.Complements
Q2) If a decrease in income leads to in a decrease in the demand for mac and cheese,then mac and cheese is
A) a normal good.
B) a neutral good.
C) a complement.
D) a necessity.
Answer: A
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Chapter 4: Economic Efficiency, government Price Setting, and Taxes
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Sample Questions
Q1) Refer to Figure 4-3.What is the value of producer surplus at the equilibrium price of $15?
A) $80
B) $160
C) $240
D) $400
Q2) Refer to Figure 4-8.As a result of the tax,is there a loss in consumer surplus?
A) Yes, because consumers paying a price above the economically efficient price.
B) No, because the producer pays the tax.
C) No, because the market reaches a new equilibrium
D) No, because consumers are charged a lower price to cover their tax burden.
Q3) What is economic surplus? When is economic surplus at a maximum?
Q4) Which term refers to a legally established minimum price that firms may charge?
A) a price ceiling
B) a subsidy
C) a price floor
D) a tariff
Q5) A price ceiling is a legally determined maximum price that sellers may charge.
A)True
B)False
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Chapter 5: Externalities, environmental Policy, and Public Goods
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Sample Questions
Q1) What is a "social cost" of production?
A) the cost of the natural resources used up in production
B) the total costs of producing a product, both implicit and explicit costs
C) the sum of all costs to individuals in society, regardless of whether the costs are borne by those who produce the products or consume the product
D) the cost of the environmental damage created by production
Q2) A market supply curve reflects the
A) external costs of producing a good or service.
B) external benefits of producing a good or service.
C) social costs of producing a good or service.
D) private costs of producing a good or service.
Q3) Refer to Figure 5-1.Suppose the current market equilibrium output of Q<sub>1</sub> is not the economically efficient output because of an externality.The economically efficient output is Q<sub>2</sub>.In that case,the diagram shows
A) the effect of a positive externality in the production of a good.
B) the effect of a negative externality in the production of a good.
C) the effect of an external cost imposed on a producer.
D) the effect of an external benefit such as a subsidy granted to consumers of a good.
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Chapter 6: Elasticity: The Responsiveness of Demand and Supply
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Q1) According to a study of the price elasticities of products sold in supermarkets,the price elasticity of demand for toothpaste is estimated at -0.45.Which of the following could explain why the price elasticity of demand for toothpaste is so low?
A) The toothpaste industry is highly competitive.
B) Toothpaste is relatively inexpensive.
C) Toothpaste is heavily endorsed by dentists.
D) There are few close substitutes for toothpaste.
Q2) Which of the following statements about the price elasticity of demand is correct?
A) The elasticity of demand for a good in general is equal to the elasticity of demand for a specific brand of the good.
B) The absolute value of the elasticity of demand ranges from zero to one.
C) Demand is more elastic in the long run than it is in the short run.
D) Demand is more elastic the smaller the percentage of the consumer's budget the item takes up.
Q3) What does price elasticity of demand measure? When is demand elastic? Inelastic?
Unit elastic?
Q4) Explain the relationship between price elasticity of demand and total revenue.
Q5) Briefly explain the economic concept of elasticity.
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Chapter 7: The Economics of Health Care
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Sample Questions
Q1) Suppose you see a 2006 Scion xB Sport Wagon advertised in the local newspaper for $8,500.If you knew the car was reliable,you would be willing to pay $10,000 for it.If you knew the car was unreliable,you would only be willing to pay $5,500 for it.Under what circumstances should you buy the car?
Q2) In addition to covering the costs of unpredictable events,health insurance typically covers many planned expenses,such as routine checkups,annual physicals,and the cost of vaccinations.because of this,health insurance
A) discourages overuse of health care services.
B) encourages overuse of health care services.
C) generates an efficient quantity of health care services.
D) is not accepted by most doctors and hospitals.
Q3) What is an externality? Explain how someone receiving a meningitis vaccination is an example of an externality in the market for health care.
Q4) Refer to Figure 7-1.At the market equilibrium
A) the marginal benefit is equal to the marginal cost.
B) the marginal benefit is greater than the marginal cost.
C) the marginal benefit is less than the marginal cost.
D) the marginal benefit is zero.
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Page 9
Chapter 8: Firms, the Stock Market, and Corporate Governance
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Sample Questions
Q1) What is the primary difference between a sole proprietorship and a partnership?
A) Proprietorships have unlimited liability while partnerships have limited liability.
B) Partnerships can issue stocks and bonds while proprietorships cannot.
C) Partnerships have more owners than do proprietorships.
D) There is no real difference between the two types of firms.
Q2) The minimum amount that investors must earn on the funds they invest in a firm,expressed as a percentage of the amount invested,is referred to as
A) the explicit costs of production.
B) net worth.
C) net income.
D) a normal rate of return.
Q3) Steve Ballmer is the Chief Executive Officer of Microsoft as well as a member of Microsoft's board of directors.Ballmer is therefore classified as an
A) inside director.
B) outside director.
C) independent director.
D) unbiased director.
Q4) What type of business has the potential for double taxation of profits and why?
Page 10
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Chapter 9: Comparative Advantage and the Gains From International Trade
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Sample Questions
Q1) In 2012,the largest exporter in the world was
A) Japan.
B) Germany.
C) China.
D) the United States.
Q2) Which of the following statements is used to justify protectionism?
A) Free trade leads to higher prices for imported goods.
B) Free trade increases employment by protecting domestic firms.
C) A country should not rely on other countries for goods that are critical to its national defense.
D) Trade restrictions are not necessary to protect new firms since they can gain experience and become more productive without protection.
Q3) Free trade refers to trade between countries without government restrictions.
A)True
B)False
Q4) Refer to Figure 9-1.Under autarky,the producer surplus is
A) $40
B) $105
C) $195
D) $285
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Chapter 10: Consumer Choice and Behavioral Economics
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Sample Questions
Q1) Refer to Figure 10-7.Suppose the price of Pilates sessions rise to $30 while income and the price of Yoga sessions remain unchanged.The income effect of this price change is represented by the movement from A) A to B.
B) B to C.
C) D to B
D) D to C.
Q2) The substitution effect of a decrease in the price of movie tickets results in A) an increase in the quantity demanded of movie tickets. B) a decrease in the quantity demanded of movie tickets.
C) an increase in the demand for movie tickets.
D) a decrease in the demand for movie tickets.
Q3) Refer to the Article Summary.Economists refer to an increase in sales due to celebrity endorsements as being the result of A) network externalities.
B) the endowment effect.
C) social influence.
D) the ultimatum game.
Q4) What is a Giffen good?
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Chapter 11: Technology, production, and Costs
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Sample Questions
Q1) The processes a firm uses to turn inputs into outputs of goods and services is called A) technology.
B) technological change.
C) marginal analysis.
D) positive economic analysis.
Q2) The River Rouge plant was built by the Ford Motor Company in the 1920s to produce the company's Model A car.Which of the following is evidence that the River Rouge plant suffered from diseconomies of scale?
A) Despite an expensive advertising campaign the Model A did not earn the company a profit.
B) Model A cars made at the River Rouge plant failed to earn Ford a profit. Ford eventually constructed smaller plants to make the Model A at a lower average cost.
C) Model A cars made at the River Rouge plant failed to earn a profit. Ford reduced the average cost of the Model A by cutting its employees' wages.
D) Model A cars made at the River Rouge plant failed to earn a profit because the price of steel used to manufacture the Model A rose when workers in the steel industry went on strike.
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Page 13
Chapter 12: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) Refer to Figure 12-5.The firm's manager suggests that the firm's goal should be to maximize average profit.If the firm does this,what is the amount of profit that it will earn?
A) $6,600
B) $6,750
C) $12,150
D) $36,000
Q2) What is meant by productive efficiency? How does a perfectly competitive firm achieve productive efficiency?
Q3) Refer to Figure 12-9.At price P<sub>4</sub>,the firm would
A) lose an amount equal to its fixed cost.
B) make a profit.
C) lose an amount less than fixed cost.
D) make a normal profit.
Q4) Refer to Figure 12-6.To maximize his profit,Jason should produce the rate of output indicated by point
A) a.
B) b.
C) e.
D) d.
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Chapter 13: Monopolistic Competition: the Competitive
Model in a More Realistic Setting
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Sample Questions
Q1) Recent research has shown that the first firm to enter a market often does not have a long-term advantage over later entrants into the market.An example that has been used to illustrate this is
A) McDonald's entry into the high-end coffee market.
B) Xerox, which became a generic term for making photocopies.
C) Abercrombie and Fitch, which was the first clothing company to market to young men.
D) the introduction of the first ballpoint pen in 1945.
Q2) In theory,in the long run,monopolistically competitive firms earns zero profits.However,in reality there are some ways by which a firm can avoid losing profits.Which of the following is one such way?
A) gradually increase the mark up on the goods produced
B) lower the price of its products to expand its market share
C) identify new markets and develop products precisely for those markets
D) find a market niche and keep it as narrow as possible so as to prevent other producers from entering this market segment
Q3) Discuss the role of product differentiation and advertising in monopolistic competition.
Q4) What is the difference between zero accounting profit and zero economic profit?
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Chapter 14: Oligopoly: Firms in Less Competitive Markets
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Sample Questions
Q1) In a decision tree,the difference between a decision node and a terminal node is that
A) at a decision node all participants are free to make individual decisions but at a terminal node they must agree on a collective decision.
B) at a decision node all participants make the same decision, while at a terminal node different players may make different decisions.
C) at a decision node, a decision must be made while a terminal node shows the payoff.
D) at a decision node a decision must be made, while at a terminal node the final decision must be made.
Q2) Refer to Table 14-8.If the firms cooperate,what prices will they select?
A) Both firms will select a low price.
B) Brawny Juice will select a high price, Power Fuel a low price.
C) Both firms will select a high price.
D) Brawny Juice will select a low price, Power Fuel a high price.
Q3) An oligopolistic industry is characterized by a few large firms acting independently. A)True B)False
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Chapter 15: Monopoly and Antitrust Policy
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Sample Questions
Q1) A market economy benefits from market power
A) if the majority of the population are entrepreneurs.
B) if firms with market power do research and development with the profits earned.
C) if market power gets so bad the government creates public enterprises.
D) under no circumstances.
Q2) Refer to figure 15-16.In the absence of any government regulation,the profit-maximizing owners of this firm will produce ________ units and charge a price of ________.
A) Q<sub>0</sub> units; P<sub>0</sub>
B) Q<sub>1</sub> units; P<sub>1</sub>
C) Q<sub>1</sub> units; P<sub>4</sub>
D) Q<sub>3 </sub>units; P<sub>3</sub>
Q3) Natural monopolies in the United States are generally regulated by
A) the Federal Trade Commission.
B) the Department of Justice.
C) local or state regulatory commissions.
D) the Department of Commerce.
Q4) Provide two examples of a government barrier to entry.
Q5) What happens to a monopoly's revenue when it sells more units of its product?
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Chapter 16: Pricing Strategy
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Sample Questions
Q1) The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services are called
A) exchange costs.
B) implicit costs.
C) transactions costs.
D) selling costs.
Q2) The term "early adopters" refers to
A) firms that are the first to implement a new technology that is used to produce new goods or services.
B) book clubs that are first to recommend best-selling books to their members.
C) consumers who respond quickly to fads, seasonal changes, etc.
D) consumers who are willing to pay high prices to be among the first to own new products.
Q3) The airline industry routinely engages in price discrimination across time.
A)True
B)False
Q4) In an optimal two-part tariff pricing schedule,consumer surplus is zero.
A)True
B)False
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Chapter 17: The Markets for Labor and Other Factors of Production
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Sample Questions
Q1) The demand for labor is a derived demand.Explain what is meant by the term "derived demand."
Q2) Despite evidence that companies will find it more profitable to use a commission system of compensation rather than a salary system,many companies continue to pay their workers salaries.Which of the following is one reason why firms choose a salary system?
A) Most business owners and managers are not trained economists; therefore, they are unaware of the research that shows a commission system is more profitable than a salary system.
B) Firms often use salary systems to overcome their principal-agent problems.
C) Firms that have salary systems do not have to use compensating differentials to attract employees to do hazardous jobs.
D) Many workers dislike risk and prefer to be paid a salary rather than to be paid by commission.
Q3) The labor supply for an industry would decrease if A) the wage rate falls.
B) the percentage of the population from age 16 to 65 decreases.
C) the government welcomes foreign workers into the country.
D) a greater percentage of women want to work outside the home.
Page 19
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Chapter 18: Public Choice,taxes,and the Distribution of Income
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Sample Questions
Q1) The public choice model raises questions about the government's ability to regulate economic activity efficiently.Which of the following statements represents the views of most economists with regard to the role of government?
A) Congress should abolish the Food and Drug Administration, the Environmental Protection Agency and other agencies and commissions because the costs of their actions exceed the benefits they provide to the public.
B) Government should do more to regulate markets. The public choice model has shown that rent seeking and rational ignorance affect more markets than are currently subject to regulation.
C) U.S. citizens can afford more government regulation if the cost of this regulation is borne mostly by taxpayers with the highest incomes.
D) Agencies such as the Food and Drug Administration and the Environmental Protection Agency can serve a useful purpose, but we need to take the costs of regulation into account along with the benefits.
Q2) Is a typical person likely to gather more information when buying a new computer or when voting for a member of the U.S.Senate? Why?
Q3) What is the difference between the poverty line and the poverty rate?
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