Economics for Business Exam

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Questions and Answers

If there is a shortage in the market, what accurately describes the situation and solution?

The price is below the equilibrium, leading to demand exceeding supply, so the price must fall.
The price is below the equilibrium, leading to demand exceeding supply, so the price must rise. (correct)
The price is above the equilibrium, leading to demand exceeding supply, so the price must rise.
The price is above the equilibrium, leading to demand exceeding supply, so the price must fall.

Which statement is true for an inferior, but non-Giffen good?

Following a rise in the price of the good, there will be a decrease in the quantity demanded due to the substitution effect; an increase in the quantity demanded due to the income effect; the income effect will outweigh the substitution effect.
Following a rise in the price of the good, there will be a decrease in the quantity demanded due to the substitution effect; an increase in the quantity demanded due to the income effect; the substitution effect will outweigh the income effect. (correct)
Following a rise in the price of the good, there will be a decrease in the quantity demanded due to both the substitution and income effect and the two effects will therefore reinforce each other.
Following a rise in the price of the good, there will be an increase in the quantity demanded due to the substitution effect; a decrease in the quantity demanded due to the income effect; the substitution effect will outweigh the income effect.

In the market for chocolate, currently in equilibrium and assumed to be a normal good, which situation would cause the biggest impact on the market price?

A tax is imposed on chocolate at the same time as consumer incomes fall. The price elasticity of demand for chocolate is $PED = -0.4$, while the price elasticity of supply of chocolate is $PES = +3$.
A tax is imposed on chocolate at the same time as consumer incomes fall. The price elasticity of demand for chocolate is $PED = -0.4$, while the price elasticity of supply of chocolate is $PES = +0.3$. (correct)
A tax is imposed on chocolate at the same time as consumer incomes rise. The price elasticity of demand for chocolate is $PED = -0.4$, while the price elasticity of supply of chocolate is $PES = +0.3$.
A tax is imposed on chocolate at the same time as consumer incomes rise. The price elasticity of demand for chocolate is $PED = -0.4$, while the price elasticity of supply of chocolate is $PES = +3$.

Given the demand function for good B: $Q_B = 40 – 6P_B + 0.9Y – 2P_A + 1.4P_C + 13Q_{UB}$, where $Q_B$ is demand for good B, $P_B$ is its price, $Y$ is consumer income, $P_A$ and $P_C$ are prices of other goods, and $Q_{UB}$ is the quality of good B. Assume $P_B = 3$, $Y = 1000$, $P_A = 5$, $P_C = 5$, $Q_{UB} = 6$. Which correctly provides the demand elasticities and explanations?

$YED = 0.9$; $CED_{BC} = 0.094$; $QuE_B = 13$. Good B is a normal good; goods B and C are substitutes; there is a positive impact on demand for good B from quality improvements. (B) Signup and view all the answers

Consider a data set showing changes in output following changes in inputs. Which of the following statements accurately describes what this data shows?

The firm experiences first increasing returns to scale and then runs into decreasing returns to scale. (B) Signup and view all the answers

Suppose a firm is currently producing at a point on its LRAC curve that is above the minimum. This indicates that:

The firm is experiencing problems of control and coordination. (B) Signup and view all the answers

Consider a firm with a total cost function that increases linearly with output and consequently the firm experiences constant marginal cost. Assuming that total cost is denoted $TC$ and that $a, b$ are constants, which could be the firm's total cost function?

$TC = a + bQ$ (D) Signup and view all the answers

Which of the following statements is true regarding a firm's production possibility frontier?

If a firm's production possibility frontier is concave, then it must face increasing opportunity costs and decreasing returns. (C) Signup and view all the answers

Consider a perfectly competitive firm in long-run equilibrium. If market demand falls, this will cause:

The market price to fall, which will lead to firms making losses in the short run. Firms will exit the industry, which will push up the price until the remaining firms make normal profits. (B) Signup and view all the answers

Which is NOT an outcome in the long run for a monopolist?

The firm will produce at both an allocatively and a productively efficient point. (B) Signup and view all the answers

Warwick Inc. operates in a monopolistically competitive market. How would a firm in this market structure transition from the short run to the long run?

The supernormal profits earned by Warwick Inc. in the short run will attract new firms into the market. This will shift Warwick Inc.'s demand curve to the left and it will continue to shift left until Average Revenue equals Average Cost and only normal profits are made. (B) Signup and view all the answers

A firm can make supernormal profits in the short run, but only normal profits in the long run. In which market structures could this occur?

Perfect Competition, monopolistic competition and potentially oligopoly, depending on how firms are competing with each other. (C) Signup and view all the answers

Suppose exports fall and savings rise. Which of the following would describe the changes according to the Keynesian model of using income and expenditure, in determining the equilibrium national output?

Injections function shifts down, withdrawals function shifts to the right, and the new equilibrium output is lower. (B) Signup and view all the answers

Which component of the circular flow of income is not normally assumed to be exogenous?

Consumption of domestically produced goods. (D) Signup and view all the answers

An increase in the price of imported oil, ceteris paribus, would lead to:

A cost-push inflation and a leftward shift of the aggregate supply. (D) Signup and view all the answers

Consider a business cycle diagram. Which statement is incorrect?

There may be inefficiency in using economic resources, so the actual output is always lower than the trend output. (D) Signup and view all the answers

Which of the following best describes the accelerator effect?

A rise in the national output increases national income, which in turn may increase consumption and encourage firms to invest more, resulting in a further increase in the aggregate demand and the national output. (B) Signup and view all the answers

Which will cause a depreciation in the exchange rate for the UK pound sterling against the US dollar, ceteris paribus?

The inflation rate in the UK is higher relative to the US inflation rate. (C) Signup and view all the answers

Consider the diagram where Y is national output; J and W are injections and withdrawals, respectively; $C_d$ is domestic consumption; and E is the expenditure function. Which statement is correct in equilibrium?

Withdrawals can be calculated as the vertical distance 'gp'. (B) Signup and view all the answers

According to the IS-LM model, what would happen if government spending increased and the money supply also increased through quantitative easing?

There would be a rise in equilibrium national output and an unknown effect on the interest rate. (B) Signup and view all the answers

Flashcards

Market Shortage

A situation where the price is below the equilibrium, leading to demand exceeding supply. Price must rise to equilibrium.

Inferior, Non-Giffen Good

Following a price rise, the quantity demanded decreases because of the substitution effect, increases because of the income effect, but overall decreases.