Economics for Business Exam Solutions
Course Introduction
Economics for Business provides an introduction to key economic concepts and analytical tools essential for understanding todays business environment. This course examines how microeconomic and macroeconomic factors such as supply and demand, market structures, pricing strategies, and government policies impact business decisions. Students will analyze real-world case studies to explore how economic principles influence firm behavior, market outcomes, and organizational strategy in both local and global contexts, equipping them with the knowledge to make informed business decisions.
Recommended Textbook
Essentials of Economics 3rd Edition by Glenn Hubbard
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Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) Economists reason that the optimal decision is to continue any activity up to the point where the
A) marginal benefit is zero.
B) marginal benefit is greater than the marginal cost.
C) marginal cost is zero.
D) marginal benefit equals the marginal cost.
Answer: D
Q2) The prevalence of Alzheimer's dementia is very high among residents living in nursing homes.A student concludes that it is likely that living in a nursing home causes Alzheimer's dementia.What is the flaw in the student's reasoning?
A) The student has failed to take into account other causes of Alzheimer's disease.
B) The student is drawing a false conclusion; he is confusing cause and effect.
C) The student is using an inadequate sample size.
D) The student is drawing a false conclusion by making the mistake of omitting critical variables such as the age and gender of the residents.
Answer: B
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Sample Questions
Q1) 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.
Q2) Refer to Table 2-4.What is Haley's opportunity cost of making a bracelet?
A) 3/4 of a bracelet
B) 3 bracelets
C) 1 1/3 necklaces
D) 2 necklaces
Answer: C
Q3) The basis for trade is comparative advantage,not absolute advantage.
A)True
B)False
Answer: True
Q4) What is meant by the term 'opportunity cost'?
Answer: Opportunity cost is the highest-valued alternative that must be given up to engage in an activity.
Q5) What is economic growth?
Answer: Economic growth refers to the ability of the economy to increase the production of 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) An increase in the quantity of a product supplied is caused by an increase in the price of the product.
A)True
B)False
Answer: True
Q2) In June,buyers of titanium expect that the price of titanium will fall in July.What happens in the titanium market in June,holding everything else constant?
A) The demand curve shifts to the right.
B) The quantity demanded increases.
C) The quantity demanded decreases
D) The demand curve shifts to the left.
Answer: D
Q3) Refer to Figure 3-1.A decrease in taste or preference for the product would be represented by a movement from
A) A to B.
B) B to A.
C) D<sub>1</sub> to D<sub>2</sub>.
D) D<sub>2</sub> to D<sub>1</sub>.
Answer: D
Page 5
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Chapter 4: Market Efficiency and Market Failure
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Sample
Questions
Q1) Barbara,the consummate hostess,proudly announced as she served dessert,'A port is often the perfect end to a meal,sipped with a piece of my scrumptious chocolate cake.'
Evidently,Barbara views
A) port and chocolate cake as luxury items.
B) port and chocolate cake as necessities.
C) port and chocolate cake as complementary goods.
D) port and chocolate cake as substitutes to other desserts.
Q2) Consider the following pairs of items:
a.shampoo and conditioner
b.iPhones and earbuds
c.a laptop computer and a desktop computer
d.beef and pork
e.air-travel and weed killer
Which of the pairs listed will have cross-price elasticity of zero?
A) a and b only
B) c only, since most people cannot do without computers
C) e only
D) None of the pairs listed
Q3) What does price elasticity of demand measure? When is demand elastic? Inelastic? Unit elastic?
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Chapter 5: The Economics of Healthcare
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Sample Questions
Q1) Frieda is at her local florist to buy a dozen roses.She is willing to pay $75 for the roses,and buys them for $75.Frieda's consumer surplus from the purchase is
A) $150.
B) $75.
C) $37.50.
D) $0.
Q2) The total amount of consumer surplus in a market is equal to the area below the demand curve.
A)True
B)False
Q3) Refer to Figure 5-2.What area represents producer surplus at a price of P<sub>2</sub>?
A) A + B
B) B + D
C) A + B + C
D) A + B + C + D + E
Q4) If the market price is at equilibrium,the producer surplus is minimised.
A)True
B)False
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Chapter 6: Firms,the Stock Market,and Corporate Governance
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Sample Questions
Q1) If the 15th unit of output has a marginal cost of $29.50 and the average cost of producing 14 units of output is $30.23,what will happen to the average cost of production if the 15th unit is produced?
A) Average cost increases as more is produced.
B) Average cost will fall.
C) Average cost could increase or decrease depending on what happens to variable cost.
D) Average cost could increase or decrease depending on what happens to fixed cost.
Q2) Red Stone Creamery currently hires 5 workers.When it added a 6th worker,its output actually fell.Which of the following statements is true?
A) The marginal product of the sixth worker must be negative.
B) The average product of the sixth worker is negative.
C) The sixth worker is not as skilled as the fifth worker.
D) The total product becomes negative.
Q3) State the law of diminishing marginal returns.
Q4) If a firm experiences diminishing returns,its marginal product must be negative.
A)True
B)False
Page 8
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Chapter 7: Consumer Choice and Elasticity
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Sample Questions
Q1) In the short run,a firm might choose to produce rather than shut down even if its market price is less than its average total cost of production.
A)True
B)False
Q2) Refer to Figure 7-7.At price P<sub>2</sub>,the firm would
A) lose an amount equal to its fixed cost.
B) lose an amount more than fixed cost.
C) lose an amount less than fixed cost.
D) break even.
Q3) Refer to Figure 7-7.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) For a given quantity,the total profit of a perfectly competitive firm is equal to the vertical distance between the firm's total revenue curve and its total cost curve.
A)True
B)False
Q5) What is meant by the term 'long-run competitive equilibrium'?
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Chapter 8: Technology, production, and Costs
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Sample Questions
Q1) There are several types of barriers to entry that can create a monopoly.Which of the following barriers is the result of government action?
A) Network externalities
B) Public franchise
C) Economies of scale
D) Control of a key resource
Q2) When a proposed merger between two companies is reviewed by the government,the relevant market is defined by
A) whether or not there are close substitutes for the products of the two firms.
B) how elastic the demand is for each firm's product.
C) counting the number of firms that produce the same product.
D) how much advertising is done in the industry.
Q3) Which of the following is a necessary condition for successful price discrimination?
A) The seller must possess market power.
B) The buyer must possess market power.
C) Transaction costs must be zero.
D) Buyers must have identical inelastic demands.
Q4) What is a public franchise? Are all public franchises natural monopolies?
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Chapter 9: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) For a monopolistically competitive firm,price equals average revenue.
A)True
B)False
Q2) Collusion makes firms better off because if they act as a single entity (a cartel),they can reduce output and increase their prices and profits.But some cartels have failed and others are unstable.Which of the following is a reason why cartels often break down?
A) Most cartels do not have a dominant strategy.
B) When a cartel is profitable, the amount of competition it faces increases.
C) Members of a cartel may resent having to share their profits equally.
D) Each member of a cartel has an incentive to 'cheat' on the collusive agreement by producing more than its share when everyone else sticks with the collusive agreement.
Q3) The barrier to entry that allowed Alcoa to make persistent economic profits was ownership of an essential input.
A)True
B)False
Q4) In a Nash equilibrium,all players select non-dominant strategies.
A)True
B)False
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Chapter 10: Monopoly and Antitrust
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Sample Questions
Q1) A monopsony restricts the quantity of a factor demanded to force down the price of the factor and increase profits.
A)True
B)False
Q2) The present value of $300 received 5 years in the future would be calculated as which of the following when the interest rate is 5 per cent?
A) 300/(1.5)5
B) 300/(1.05)5
C) 300 × 1.5 × 5
D) 5.05/300
Q3) Let MP = marginal product,P = output price,and W = wage,then the equation that represents a situation where a competitive firm should lay off some workers to maximise profits is
A) P × MP = W.
B) P × MP > W.
C) P × MP < W.
D) MP × W = P.
Q4) What is a compensating differential?
Q5) What is personnel economics?
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Chapter 11: Monopolistic Competition and Oligopoly
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Q1) For the Coase theorem to work,there must be clear assignment of property rights.
A)True
B)False
Q2) All of the following are examples of public goods except
A) broadcast television with commercials.
B) clean water systems.
C) stock of knowledge in the public domain.
D) crime prevention.
Q3) Assume that air pollution from a copper smelter imposes external costs on people who live near the smelter.If the victims of the pollution could not legally enforce the right of their property not to be damaged,the amount of pollution reduction
A) would be significantly less than if the owners of the smelter were legally liable for damages.
B) would be less than the amount at which the marginal benefit of pollution reduction equalled the marginal cost.
C) would be the same as it would be if the owners of the smelter were legally liable.
D) would be too small; the government would have to intervene to bring about an efficient outcome.
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Chapter 12: GDP: Measuring Total Production and Income
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Q1) Gross national income (GNI)is defined as the value of final goods and services produced
A) within Australia.
B) outside of Australia.
C) by residents of Australia even if the production takes place outside of Australia.
D) within Australia, by Australian residents.
Q2) According to new growth theory,the accumulation of ________ capital is subject to diminishing returns at the ________ level,but not at the level of the economy as a whole.
A) physical; firm
B) technological; personal
C) knowledge; firm
D) physical; production
Q3) Economic growth depends more on technological change than on increases in capital per hour worked.
A)True
B)False
Q4) Do countries produce more or less pollution as GDP grows?
Q5) What is the gross domestic product of a country?
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Chapter 13: Unemployment and Inflation
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Sample Questions
Q1) The unemployment rate is calculated by
A) dividing the number of unemployed people by the sum of the number of working people plus the number of unemployed people, and multiplying by 100.
B) dividing the number of unemployed people by the number of working individuals, and multiplying by 100.
C) dividing the number of unemployed people by the number in the working-age population, and multiplying by 100.
D) dividing the number of unemployed people by the number of people in the labour force, and dividing by 100.
Q2) The natural rate of unemployment
A) always fluctuates with the rate of inflation.
B) is equal to cyclical unemployment.
C) is a constant figure of about 4 per cent.
D) occurs at a full-employment equilibrium.
Q3) Cost-push inflation is characterised by
A) very high levels of aggregate demand pushing prices higher.
B) the short-run aggregate supply curve shifting to the right.
C) rising prices and rising unemployment.
D) an increase in the level of nominal wages.
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Chapter 14: Economic Growth, the Financial System and Business Cycles
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Q1) How does an increase in the price level in Australia relative to the price level of other countries affect the aggregate demand curve,ceteris paribus?
A) This will move the economy up along a stationary aggregate demand curve.
B) This will move the economy down along a stationary aggregate demand curve.
C) This will shift the aggregate demand curve to the left.
D) This will shift the aggregate demand curve to the right.
Q2) A decrease in the price level will
A) shift the aggregate demand curve to the left.
B) shift the aggregate demand curve to the right.
C) move the economy up along a stationary aggregate demand curve.
D) move the economy down along a stationary aggregate demand curve.
Q3) The automatic mechanism ________ the price level in the case of ________ and ________ the price level in the case of ________.
A) raises; recession; lowers; expansion
B) raises; expansion; raises; recession
C) lowers; expansion; lowers; recession
D) lowers; recession; raises; expansion
Q4) Explain the three reasons the aggregate demand curve slopes downward.
Q5) Outline the phases of the business cycle.
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Chapter 15: Aggregate Demand and Aggregate Supply Analysis
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Sample Questions
Q1) ________ are financial securities that represent partial ownership of a firm.
A) Shares
B) Bonds
C) Treasury bills
D) Certificates of deposit
Q2) If banks increase their reserve ratios,the deposit multiplier increases.
A)True
B)False
Q3) In March 2014,the level of credit in Australia was approximately
A) $2237.9 billion.
B) $49.8 billion.
C) $141.8 billion.
D) $445.1 billion.
Q4) Broad money is usually less than M3 in Australia.
A)True
B)False
Q5) How do financial intermediaries affect risk in the financial market?
Q7) Why is gold not a good medium of exchange? Page 17
Q6) What is the main monetary policy tool used by the Reserve Bank of Australia (RBA)and why?
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Page 18
Chapter 16: Money, banks, and the Federal Reserve System
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Sample Questions
Q1) Refer to Figure 16.3.An increase in the supply of loanable funds could result in which of the following combinations of the real interest rate and quantity of loanable funds at a new equilibrium?
A) The real interest rate is 5 per cent, and the quantity of loanable funds is $150 million.
B) The real interest rate is 5 per cent, and the quantity of loanable funds is $90 million.
C) The real interest rate is 3 per cent, and the quantity of loanable funds is $150 million.
D) The real interest rate is 3 per cent, and the quantity of loanable funds is $90 million.
Q2) A government budget deficit will shift the ________ curve for loanable funds to the ________ and the equilibrium real interest rate will ________.
A) supply; right; fall
B) supply; left; rise
C) demand; right; rise
D) demand; left; fall
Q3) Explain how the Reserve Bank of Australia maintains its targeted cash rate on a daily basis.
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Chapter 17: Monetary Policy
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Sample Questions
Q1) Following a decrease in government spending,as the price level falls we would expect the level of interest rates to ________ and investment to ________.
A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase
Q2) The Phillips curve shows the short-run relationship between
A) real GDP and the inflation rate.
B) real wages and real GDP.
C) real wages and the inflation rate.
D) the unemployment rate and the inflation rate.
Q3) During economic contractions,government expenditure automatically
A) falls because of programs such as unemployment benefits.
B) rises because of programs such as unemployment benefits.
C) falls because of the progressive income tax system.
D) rises because of the progressive income tax system.
Q4) What is the formula for the multiplier? Explain why this formula is considered to be too simple.
Q5) What is fiscal policy,and who is responsible for fiscal policy?
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Chapter 18: Fiscal Policy
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Q1) Free trade ________ living standards by ________ economic efficiency. A) raises; increasing B) lowers; decreasing C) raises; equalising D) lowers; eliminating
Q2) One reason for the success that firms have in getting the government to erect barriers to foreign competition is that jobs lost to foreign competition are easy to identify but jobs created by foreign trade are often hard to identify.Which of the following is a second reason?
A) The costs that tariffs and quotas impose on consumers are large in total but relatively small per person.
B) People who benefit from foreign trade tend not to vote in elections; people who are harmed by foreign trade are much more likely to vote.
C) Firms that benefit from trade barriers have more money to lobby government officials to support the barriers than do firms that are harmed by trade barriers.
D) The benefits from free trade are less than the costs.
Q3) What does it mean for a country to have an absolute advantage in producing a product?
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Chapter 19: Comparative Advantage, international Trade, and Exchange Rates
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Q1) Ceteris paribus,an appreciation of the dollar will increase net exports in Australia.
A)True
B)False
Q2) What factors occur in the real world that prevent purchasing power parity from occurring fully in the long run?
Q3) If a current account deficit increases,and investment levels remain the same,national saving must increase.
A)True
B)False
Q4) When can foreign debt become a problem for a country?
Q5) Which of the following is an item in Australia's financial account?
A) Net secondary income
B) Net primary income
C) Net exports of goods and services
D) The change in private Australian assets abroad
Q6) Experiences of other countries show support for the twin deficits hypothesis.
A)True
B)False
22
Q7) What is the difference between net exports and the current account balance?
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