Economics for Business Practice Questions
Course Introduction
Economics for Business introduces students to the fundamental concepts of microeconomics and macroeconomics with a focus on their practical application in the business world. The course explores how markets operate, the role of supply and demand, pricing strategies, market structures, and the impact of government interventions. Students will also analyze broader economic factors such as GDP, inflation, unemployment, and fiscal and monetary policy, examining how these influence business decisions and strategies. Through real-world case studies and problem-solving exercises, learners will develop the analytical skills necessary to make informed managerial and strategic decisions in dynamic economic environments.
Recommended Textbook Modern Principles Microeconomics 3rd Edition by Tyler Cowen
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Chapter 1: The Big Ideas
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Sample Questions
Q1) One of the limitations of economics is that the principles only apply to the American economic system and not foreign economies.
A)True
B)False
Answer: False
Q2) Institutions that support economic growth are the ones that:
A) encourage consumption and discourage savings.
B) give the government more control over what is produced and how it is produced.
C) require companies to act in the social interest.
D) provide incentives for entrepreneurs to take risks and innovate.
Answer: D
Q3) When people spend more money without an increase in the supply of goods, prices:
A) must rise.
B) must fall.
C) may rise or fall.
D) must stay the same.
Answer: A
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Chapter 2: The Power of Trade and Comparative
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Sample Questions
Q1) A country has a comparative advantage in a good if:
A) it can produce more of that good than any other country.
B) it does not have an absolute advantage in that good.
C) it has the lowest opportunity cost of producing that good.
D) no other country is willing to buy that good from it.
Answer: C
Q2) A country has a comparative advantage in producing a good when it produces that good:
A) at a lower opportunity cost than another country.
B) at a higher opportunity cost than another country.
C) in greater quantity than another country.
D) with fewer inputs than another country.
Answer: A
Q3) If Joyce can gather 15 logs a day or catch 10 fish a day and Percy can gather five logs a day or catch five fish a day, then Percy has a comparative advantage in gathering fish.
A)True
B)False
Answer: True
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Chapter 3: Supply and Demand
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Sample Questions
Q1) The demand curve for oil slopes downward because:
A) oil will only be used in its higher-valued uses when the price of oil is lower.
B) oil will only be used in its higher-valued uses when the price of oil is higher.
C) oil has many substitutes so that no buyer is willing to pay when the price of oil rises.
D) oil has no substitutes so that buyers do not react to any change in the price of oil.
Answer: B
Q2) A reduction in the expected future supply of a good will increase the demand for substitute goods today.
A)True
B)False
Answer: False
Q3) If the price of corn rises, all else the same, we expect the supply of soybeans to increase.
A)True
B)False
Answer: False
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Chapter 4: Equilibrium
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Sample Questions
Q1) In a free market, the market moves to an equilibrium because buyers compete against sellers to get the lowest possible prices.
A)True
B)False
Q2) Which of the following would cause the current supply of iPods to increase?
A) an economic boom, which increases the amount that people are willing to spend on personal electronics
B) a decrease in the price of songs on iTunes
C) producers expecting that the future price of iPods will decrease
D) an increase in the wages offered to technicians building iPods
Q3) (Figure: Chocolate) If the price in the diagram is $5, what will happen?
A) The price will increase because of a shortage.
B) The price will decrease because of a shortage.
C) The price will increase because of a surplus.
D) The price will decrease because of a surplus.
Q4) The equilibrium price is unstable because sellers have an incentive to lower their price to sell more goods.
A)True
B)False
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Chapter 5: Elasticity and Its Applications
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Sample Questions
Q1) In regards to the criminalization of drugs, Nobel prize-winning economist Gary Becker suggested:
A) raising the capital gains tax to help provide more government resources for the war on drugs.
B) that the government should make drugs legal and then place a tax on drugs to control their usage.
C) subsidizing the consumption of illegal drugs in an effort to avoid deadweight losses.
D) All of the answers are correct.
Q2) Economic theory suggests that gun buyback programs:
A) are effective in reducing the number of guns on city streets.
B) do not reduce the number of guns on city streets.
C) are most effective if the supply curve of guns is perfectly elastic.
D) reduce the demand for new and better-functioning guns.
Q3) The fundamental determinant of the elasticity of demand for a good is:
A) the opportunity cost of producing the good.
B) the value that consumers place on one more unit of the good.
C) how easy it is to substitute the good for another.
D) the number of consumers in the market.
Q4) Summarize the factors that cause goods to have a more inelastic supply.
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Chapter 6: Taxes and Subsidies
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Sample Questions
Q1) Taxes drive a wedge between what buyers pay and sellers receive in a market.
A)True
B)False
Q2) If a tax is imposed on a market with inelastic demand and elastic supply:
A) buyers will bear most of the burden of the tax.
B) sellers will bear most of the burden of the tax.
C) the burden of the tax will be shared equally between buyers and sellers.
D) neither the buyer nor the seller will bear the burden of the tax.
Q3) The economist Henry George argued that the best tax that a government can impose is a tax on land. What was the basis of his argument?
A) The supply of land is highly elastic, so taxes on land will raise lots of revenue with little deadweight loss.
B) The demand for land is highly elastic, so taxes on land won't raise much revenue and will have lots of deadweight loss.
C) The supply of land is highly inelastic, so taxes on land will raise lots of revenue with little deadweight loss.
D) The demand for land is highly inelastic, to taxes on land will raise lots of revenue with little deadweight loss.
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Chapter 7: The Price System
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Sample Questions
Q1) As the price of oil increases, Brazilians will shift sugar cane from sugar production to ethanol production, thereby holding down fuel costs and reducing the price of sugar.
A)True
B)False
Q2) The Iowa Electronic Markets:
A) predicted that Obama would lose the election for president in 2008.
B) have an excellent track record in predicting political events.
C) create biased predictions because they do not use price signals.
D) are where farmers buy and sell futures contracts.
Q3) The Strike King Lure Co. ordered $100,000 worth of stainless steel to use in the production of fishing lures. The $100,000 expenditure represents the:
A) value of the stainless steel in its lowest-valued use.
B) profits gained from selling fishing lures.
C) value of the stainless steel in its next highest-valued use.
D) revenues of producing fishing lures minus the costs.
Q4) Explain why price controls may actually end up making consumers worse off in areas that have experienced natural disasters such as hurricanes.
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Chapter 8: Price Ceilings and Floors
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Sample Questions
Q1) (Figure: Price Ceilings and Consumer Valuation) Refer to the figure. Suppose a price ceiling of $3 goes into effect. If the goods sold are allocated only to the highest-value users, the total consumer surplus in the market would be:
A) $180.
B) $30.
C) $120.
D) $150.
Q2) Price floors encourage firms to provide ________ quality.
A) too little
B) too much
C) the right amount of
D) no
Q3) A price ceiling creates a ________ when it is set ________.
A) surplus; below the equilibrium price
B) surplus; above the equilibrium price
C) shortage; below the equilibrium price
D) shortage; above the equilibrium price
Q4) Using a supply and demand diagram as a reference, discuss the way a price ceiling causes a reduction in gains from trade.
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Chapter 9: International Trade
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Sample Questions
Q1) Economists consider tariffs to be:
A) necessary.
B) beneficial to domestic consumers.
C) harmful to domestic producers.
D) obstacles that reduce gains from trade.
Q2) According to the supply and demand framework in the text, an increase in import trade tends to ______ domestic production of a good.
A) increase
B) decrease
C) hold constant
D) have an indeterminate effect on
Q3) In a demand and supply diagram, the effects of a tariff and a quota on the supply and demand curves are identical.
A)True
B)False
Q4) What are the gains and losses of a trade restriction versus free trade? Explain carefully.
Q5) Briefly discuss any benefits of "protectionism".
Q6) What are the three major benefits of trade? Explain briefly.
Page 11
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Chapter 10: Externalities- When the Price Is Not Right
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Sample Questions
Q1) In a market with external costs, suppose the efficient level of output is 1,000 units. Which statement is TRUE?
A) To achieve the efficient level of output, the government should set a subsidy equal to the external cost.
B) To achieve the efficient level of output, the government could set a tax equal to the external cost or issue enough tradable allowances to restrict the output to the efficient level.
C) With external costs, the government can use only taxes to achieve the efficient level of output.
D) With external costs, the government can use only tradable allowances to achieve the efficient level of output.
Q2) When external benefits are significant:
A) market output is too low.
B) market output is too high.
C) market output is at the efficient level.
D) social surplus is maximized.
Q3) External costs cause deadweight losses, whereas external benefits do not.
A)True
B)False
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Chapter 11: Costs and Profit Maximization Under Competition
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Sample Questions
Q1) To maximize profit, a firm in a competitive industry increases output until price is greater than the average cost.
A)True
B)False
Q2) A perfectly competitive industry exists under which of the following conditions?
I. The product sold is similar across firms.
II. There are many sellers, each small relative to the total market.
III. There are many sellers, each with total assets less than $2 million.
IV. The threat of competition exists from potential sellers that have not yet entered the market.
A) I and II only
B) I, II, and III only
C) I, III, and IV only
D) I, II, and IV only
Q3) Profit is defined as:
A) net revenue minus depreciation.
B) average revenue minus average total cost.
C) marginal revenue minus marginal cost.
D) total revenue minus total cost.
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Chapter 12: Competition and the Invisible Hand
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Sample Questions
Q1) A free market can allocate production across two farms to minimize total costs even when an ideal central planner could not.
A)True
B)False
Q2) Consider two farms. Farm 1 produces unlimited bushels for a cost of $5 each. Farm 2 produces unlimited bushels for a cost of $7 each. How should production be allocated between these two farms?
A) Produce 7 bushels on Farm 1 for every 5 bushels on Farm 2.
B) Produce 5 bushels on Farm 1 for every 7 bushels on Farm 2.
C) Produce all bushels on Farm 1.
D) Produce all bushels on Farm 2.
Q3) In a competitive industry:
A) all firms will earn above-normal profits if demand is high.
B) the opportunity cost of production is zero.
C) profits are only attainable in the long run to those firms able to innovate at the lowest cost.
D) resources move across firms in such a way that the total value of production is maximized.
Q4) Explain how market entry affects the profit level of a competitive firm.
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Chapter 13: Monopoly
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Sample Questions
Q1) Which of the following statements is TRUE?
I. The deadweight loss from a monopoly refers to the loss in consumer surplus that is captured by the monopolist as profit.
II. According to theory, if the government sets a natural monopolist's price equal to marginal cost, the socially optimum quantity of output will result.
III. Deregulation of cable television caused higher prices and fewer programming choices for customers.
A) I only
B) II only
C) I and III only
D) I, II, and III
Q2) Deregulation of cable TV rates led to:
A) lower prices and better service.
B) higher prices, more stations, and better quality programming.
C) lower prices, fewer stations, and lower quality programming.
D) the proliferation of amateur programming.
Q3) Deadweight loss is present in both competitive and monopoly markets.
A)True
B)False
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Chapter 14: Price Discrimination
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Sample Questions
Q1) Merit scholarships not only allow universities to attract the most talented students, but to also practice price discrimination since meritorious students:
A) have many substitutes for attendance at any particular college.
B) can easily arbitrage their education.
C) do not have to submit their parents' tax returns to the financial aid office.
D) have highly inelastic demand for going to college.
Q2) A perfectly price-discriminating monopolist produces until:
A) P = MC.
B) MR = MC.
C) P = MR.
D) MR = AC.
Q3) Perfect price discrimination causes the demand curve to become the marginal revenue curve.
A)True
B)False
Q4) Arbitrage is the act of buying at a low price and selling at a high price, which makes the practice of price discrimination even more profitable.
A)True
B)False
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Chapter 15: Oligopoly and Game Theory
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Sample Questions
Q1) In some cases cartels are successful because:
A) the cartel produces a manufactured good with many substitutes.
B) the marginal costs of production are high.
C) the barriers to entry in the market are low.
D) the cartel controls access to a key input.
Q2) Government policy toward cartels and oligopolies typically leads to all of the following, EXCEPT:
A) higher prices.
B) more innovation.
C) lower quality.
D) lower output.
Q3) The milk cartel in the United States:
A) ended when the government prosecuted the owners of four major milk producers who conspired to raise prices.
B) is made legal and enforced by the government, and any firm that breaks the cartel is fined.
C) frequently breaks down because of firm cheating.
D) was put out of business because of new entrants.
Q4) Do oligopolies price at competitive prices, monopoly prices, or at a different price? Explain.
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Chapter 16: Competing for Monopoly
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Sample Questions
Q1) Competition in the case of network goods is:
A) "for the market."
B) "in the market."
C) "of the market."
D) "by the market."
Q2) Which statement about network goods is TRUE?
A) They are goods that are usually sold by large firms with a great deal of market power
B) They are goods that tend to have a large number of users or consumers.
C) They are goods whose value to one consumer increases the greater the total number of consumers.
D) All of the answers are correct.
Q3) A Nash equilibrium in game theory is defined as a situation in which:
A) no player has an incentive to change his or her strategy even when other players change.
B) no player has an incentive to change his or her strategy unilaterally.
C) any player has an incentive to change his or her strategy until he or she reaches the optimum.
D) any player has an incentive to change his or her strategy even when other players remain unchanged.
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Chapter 17: Monopolistic Competition and Advertising
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Sample Questions
Q1) Advertising does not promote messages of quality.
A)True
B)False
Q2) Why do supermarkets send out newspaper supplements?
Q3) Monopolistic competitive products are usually _____ advertised.
A) never
B) rarely C) occasionally
D) highly
Q4) When does a monopolistic competitive industry not experience entrants into the market?
Q5) In No Logo, Naomi Klein criticizes companies that prioritize the brand name over quality of their product. What function of advertising is Klein concerned about?
A) informative
B) signaling
C) persuasion
D) informative, signaling, and part of the product
Q6) What is an advantage of monopolistic competitive firms not producing at the minimum of the AC?
Page 19
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Chapter 18: Labor Markets
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Sample Questions
Q1) An individual's labor supply curve might not be purely upward sloping.
A)True
B)False
Q2) The marginal product of labor increases as a firm hires more workers.
A)True
B)False
Q3) Which of the following statements is(are) TRUE?
I. The demand for labor is downward sloping.
II. The marginal product of labor declines as a firm hires more labor.
III. The marginal product of labor is the demand curve for labor.
A) I only
B) I and II only
C) III only
D) I, II, and III
Q4) Similar jobs will often have different compensation packages, all things considered.
A)True
B)False
Q5) Explain how the impact of discrimination driven by customers may be different from that driven by employers.
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Chapter
19: Public Goods and the Tragedy of the Commons
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Sample Questions
Q1) A good is excludable if:
A) the government can regulate the availability of the good.
B) it is a normal good.
C) several people can enjoy the good simultaneously.
D) people can be prevented from using it.
Q2) If a consumer could pay $100 for a new pair of jeans or $100 toward asteroid deflection, what would that consumer likely choose?
I. purchase the jeans
II. purchase asteroid deflection
III. purchase both the jeans and asteroid deflection
A) I only
B) II only
C) III only
D) I and II only
Q3) To provide the necessary funding for an asteroid defense shield, the A) government will have to tax the public.
B) government can rely on voluntary contributions.
C) market can use debt financing.
D) market can create forced riders.
Q4) Does equal sharing in farm output lead to free riders? Explain.
Page 21
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Chapter 20: Political Economy and Public Choice
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Sample Questions
Q1) The greater the share of the population that is brought into power, the:
A) less likely that policies will offer something for everyone in the society.
B) more likely that policies will offer something for everyone in the society.
C) less likely that policies will be efficient.
D) more likely that policies will impede economic growth.
Q2) If the costs of informing oneself are greater than the benefits, then ignorance is
A) rational.
B) irrational.
C) not beneficial.
D) not costly.
Q3) If a policy transfers $100 to a special interest group at a cost of $4,000 to society, the group would lobby:
A) for the policy no matter how large the special interest group is.
B) for the policy if the group made up more than 5% of the population.
C) for the policy if the group made up less than 1% of the population.
D) against the policy if the group made up less than 2% of the population.
Q4) Larger groups tend to favor more inefficient policies.
A)True
B)False
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Chapter 21: Economics, Ethics, and Public Policy
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Sample Questions
Q1) Utilitarians advocate redistributing income from rich people to poor people only up to the point that:
A) the income distribution is equal.
B) the marginal cost is greater than the redistribution.
C) the marginal change in utility created from the redistribution is no longer positive.
D) the basic subsistence needs of all the poor have been met.
Q2) Income inequality is not a problem if it results from voluntary transactions in the marketplace, according to Nozick's entitlement theory.
A)True
B)False
Q3) Which of the following hold to a meddlesome preference?
A) people who are against interracial dating
B) people who are against sodomy
C) people who are against certain religious practices
D) All of the answers are correct.
Q4) Politicians that oppose same sex marriage are conveying a meddlesome preference.
A)True
B)False
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Chapter 22: Managing Incentives
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Sample Questions
Q1) Which famous economist discovered widespread cheating by teachers?
A) Gary Becker
B) Paul Krugman
C) Steven Levitt
D) Emily Oster
Q2) When Safelite Glass Corporation switched to a piece rate system of compensation in 1994, productivity:
A) decreased by 44%.
B) decreased by 22%.
C) increased by 22%.
D) increased by 44%.
Q3) Tournaments work best when it is hard to determine worker effort and there are random external forces that affect worker performance.
A)True
B)False
Q4) Piece rate pay works better when:
A) output is harder to measure.
B) output is easier to measure.
C) quality matters a great deal.
D) monitoring is expensive.
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Chapter 23: Stock Markets and Personal Finance
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Sample Questions
Q1) It is possible for active investing to consistently beat average market returns.
A)True
B)False
Q2) The Dow is a better indicator of the market as a whole than the S&P 500.
A)True
B)False
Q3) John Stossel picked Wall Street stocks at random, and his portfolio outperformed what proportion of expert stockbrokers and fund managers?
A) 50%
B) 60%
C) 80%
D) 90%
Q4) Which of the following investment instruments would a risk-averse individual choose?
A) stocks that are negatively correlated with the rest of one's portfolio
B) agricultural stocks in a foreign agricultural economy
C) oil stocks
D) technology stocks
Q5) Briefly list several important lessons for investing wisely that economics offers.
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Chapter 24: Price Discrimination
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Sample Questions
Q1) Signaling creates benefits by:
A) increasing information but also creates inefficiencies.
B) increasing information without creating inefficiencies.
C) decreasing moral hazard.
D) reducing inefficiencies.
Q2) List and describe features the health insurance market has developed to reduce adverse selection.
Q3) Designing a contract that aligns the interests of the buyer with the interests of the seller would reduce:
A) a mutually beneficial trade.
B) moral hazard.
C) adverse selection.
D) the principal-agent problem.
Q4) When a mechanic recommends an unnecessary repair, this is an example of:
A) adverse selection.
B) the principal-agent problem.
C) mutually beneficial trades.
D) moral hazard.
Q5) What signal does an engagement ring send? Why does it have to be expensive?
Q6) Explain the health insurance death spiral.
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Chapter 25: Consumer Choice
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Sample Questions
Q1) If the price of good X is $10 and price of good Y is $15, the slope of the budget constraint is -1.5.
A)True
B)False
Q2) If the marginal utility per dollar for hamburgers is higher than the marginal utility per dollar for tacos, then in order to maximize utility the consumer should only consume hamburgers.
A)True
B)False
Q3) A worker might respond to a lower wage by working less.
A)True
B)False
Q4) If the price of apples rises, oranges become relatively less expensive. The increase in the orange consumption resulting from this price change is an example of the income effect.
A)True
B)False
Q5) Indifference curves can never cross.
A)True
B)False
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