Economic Concepts

Question 1

A direct effect of imposing a tariff on imported products?

Answer 1

Domestic consumption will be lower since a tariff increases the purchase price of imported goods

Question 2

Dumping occurs when….

Answer 2

An item is sold for less than it’s cost to produce in order to enter or win a market

Question 3

If a beta value equals 1, then….

Answer 3

The expected return is equal to the market return

Question 4

A consequence of a tariff or quota on imported goods causes….

Answer 4

Higher prices for the imported good

Question 5

Import quotas….

Answer 5

Will improve balance of payments in the short run

Question 6

When the quantity of demand for apples falls by 6% due to the price increasing by 10%, what is the price elasticity of demand for the apples?

Answer 6

0.60
Price elasticity of demand is calculated by dividing the percentage change in quantity to the percentage change in price.

Question 7

Nominal wages are?

Answer 7

The amounts paid to laborers

Question 8

A preventative measure for deflation is?

Answer 8

Increasing the money supply

Question 9

The coefficient of correlation of a stock portfolio with the least unsystematic risk is?

Answer 9

-1.0
Coefficient correlation measures the degree to which two variables are related. -1.0 means two variables always move in the opposite direction making them a perfect negative correlation

Question 10

The appropriate governmental action to raise the equilibrium output during a recession is?

Answer 10

To raise government spending

Question 11

Which of the following investments has the optimal risk-return tradeoff?

Answer 11

U.S. Treasury Bills
Coefficient of correlation = standard deviation / expected rate of return
3% / 4% = .75, which is the lowest ratio out of the 4 options and has the optimal risk-return tradeoff

Question 12

Domestic content rules….

Answer 12

Are imposed by capital-intensive countries. Domestic content rules require a portion of any imported product be constructed from parts manufactured in the imported country

Question 13

The weakest linear association between two variables of a coefficient correlation is?

Answer 13

-0.11
The coefficient correlation closes to zero indicates the weakest linear association

Question 14

What is the prime rate?

Answer 14

The rate charges on business loans to those with high credit scores.
The best rate charged to the biggest and most financially strong business customers

Question 15

The regression analysis results for ABC Co. is shown as y=90x+45. The standard error is 30 and the coefficient of determination is 0.81. The budget calls for production of 100 units. What is ABC’s estimate of total costs?

Answer 15

$9,045
The simple linear equation given in the problem can be used to figure this out. The standard error and coefficient of determination are irrelevant.
y=[90(100)+45]
=[9000+45]
=9,045

Question 16

The CPA reviewed the minutes of a board of director’s meeting of LQR Corp., an audit client. An order for widget handles was outsourced to SDT Corp. because LQR could not fill the order. By having SDT produce the order, LQR was able to realize $100,000 in sales profits that otherwise would have been lost. The outsourcing added a cost of $10,000, but LQR was ahead by $90,000 when the order was completed. Which of the following statements is correct regarding LQR’s action?

A. Accounting profit is total revenue minus explicit costs and implicit costs.
B. Implicit costs are not opportunity costs because they are internal costs.
C. The use of resource markets outside of LQR involves opportunity cost.
D. Explicit costs are opportunity costs from purchasing widget handles from a resource market.

Answer 16

C. The use of resource markets outside of LQR involves opportunity cost.

Opportunity cost is the maximum benefit forgone by using a scarce resource for a given purpose. It is the benefit, for example, the contribution to income, provided by the best alternative use of that resource. Thus, outsourcing involves opportunity cost. The outsourcer uses resources for purposes other than filling the order and therefore forgoes the benefits it would have received.

Question 17

An industry that is oligopolistic would be best characterized by

A. Horizontal or flat demand curves for the output of individual firms.
B. The absence of the profit-maximizing goal.
C. Significant barriers to entry.
D. One firm selling a product with no close substitutes.

Answer 17

C. Significant barriers to entry.

An oligopolistic industry is characterized by only a few firms. Usually there are significant barriers to entry, such as high capital requirements, which discourage new firms from entering the industry. The automobile industry is an example.

Question 18

What coefficient of correlation results from the following data?

A. +1
B. –1
C. Cannot be determined from the data given.
D. 0

Answer 18

B. –1

The coefficient of correlation (in standard notation, r) measures the strength of the linear relationship. The magnitude of r is independent of the scales of measurement of X and Y. Its range is –1.0 to 1.0. A value of –1.0 indicates a perfectly inverse linear relationship between X and Y. A value of zero indicates no linear relationship between X and Y. A value of +1.0 indicates a perfectly direct relationship between X and Y. As X increases by 1, Y consistently decreases by 2. Hence, a perfectly inverse relationship exists, and r must be equal to –1.0.

Question 19

Cook Co.’s total costs of operating five sales offices last year were $500,000, of which $70,000 represented fixed costs. Cook has determined that total costs are significantly influenced by the number of sales offices operated. Last year’s costs and number of sales offices can be used as the bases for predicting annual costs. What would be the budgeted cost for the coming year if Cook were to operate seven sales offices?

A. $586,000
B. $602,000
C. $672,000
D. $700,000

Answer 19

C. $672,000

Using the formula y = a + bx, y is the total budgeted cost, a is the fixed costs, b is the variable cost per unit, and x is the number of budgeted sales offices. The fixed costs are $70,000, the variable cost per unit is $86,000 [($500,000 – $70,000) ÷ 5], and the number of budgeted sales offices is 7. Thus, the budgeted cost for the coming year assuming seven sales offices is $672,000 [$70,000 + (7 × $86,000)].

Question 20

The graph is relating price to quantity, with quantity on the x-axis and price on the y-axis, and depicts the supply schedule for a good. An upward-sloping curve, represented by a solid line, is shifted to the right. The upward sloping curve that has shifted to the right is represented by a striped line.

The graph above depicts a relationship between the price and the quantity of a good. The movement depicted by the arrow could be caused by

A. A decrease in the cost of inputs to the production process.
B. An increase in the price of the product.
C. An increase in the demand for the product.
D. An increase in the cost of inputs to the production process.

Answer 20

A. A decrease in the cost of inputs to the production process.

An upward-sloping curve relating price to quantity depicts a supply schedule. A decrease in the cost of inputs to the production process allows suppliers to offer more product at every price level. This is depicted by a rightward shift of the supply curve.

Question 21

Which of the following is correct regarding the consumer price index (CPI) for measuring the estimated decrease in a company’s buying power?

A. The CPI is measured only once every 10 years.
B. The products a company buys should differ from what a consumer buys.
C. The CPI is skewed by foreign currency translations.
D. The CPI measures what consumers will pay for items.

Answer 21

B. The products a company buys should differ from what a consumer buys.

For a company to maintain its margins in times of rising prices, it must purchase lower-priced, if not lower-quality, products. The consumer may continue to buy the higher-priced products that (s)he is used to purchasing.

Question 22

Given a legal price floor of $3.00, what will be the result given the supply and demand curves below?

This graph represents a supply and demand curve for a particular product. The quantity demanded/supplied is measured along the x-axis while the price is measured along the y-axis. At a price of $3, the quantity demanded is 10; at a price of $2, the quantity demanded is 20; and at a price of $1, the quantity demanded is 30. The quantity supplied at a price of $1 is 30, the quantity supplied at a price of $2 is 20, and the quantity supplied at a price of $3 is 30 units. Accordingly, the equilibrium quantity and price are 20 units and $2 respectively.

A. A shortage of 10 units.
B. A surplus of 10 units.
C. A surplus of 20 units.
D. A shortage of 20 units.

Answer 22

C. A surplus of 20 units.

At a price of $3, the quantity demanded will be 10, while the quantity supplied will be 30. Thus, the surplus will be 20 units.

Question 23

The return to the home country of income earned by a domestic firm in a foreign country is

A. Repatriation.
B. Reinvestment.
C. Bankruptcy.
D. Expropriation.

Answer 23

A. Repatriation.

Many firms have business operations abroad. Repatriation is conversion of funds held in a foreign country into another currency and remittance of these funds to another nation. A firm often must obtain permission from the currency exchange authorities to repatriate earnings and investments. Regulations in many nations encourage a reinvestment of earnings in the country.

Question 24

Which of the following is the most likely result of imposing tariffs to increase domestic employment?

A. A long-run reallocation of workers from export industries to protected domestic industries.
B. A decrease in consumer prices in the domestic market.
C. A short-run increase in domestic employment in import industries from export industries.
D. A decrease in the tariff rates of foreign nations.

Answer 24

A. A long-run reallocation of workers from export industries to protected domestic industries.

Tariffs will increase domestic employment because imports will become more expensive, forcing companies to produce domestically. Thus, in the long-run, workers from export industries will shift to protected domestic industries due to the increased demand for domestic employment.

Question 25

If the return on the market portfolio is 10% and the risk-free rate is 5%, what is the effect on a company’s required rate of return on its stock of an increase in the beta coefficient from 1.2 to 1.5?

A. No change.
B. 1.5% decrease.
C. 3% increase.
D. 1.5% increase.

Answer 25

D. 1.5% increase.

The required rate of return on equity capital can be estimated with the capital asset pricing model (CAPM). CAPM consists of adding the risk-free rate (i.e., the return on government securities, denoted RF) to the product of the beta coefficient (a measure of the issuer’s risk) and the difference between the market return and the risk-free rate (denoted RM – RF, referred to as the risk premium). Below is the basic equilibrium equation for the CAPM:

Required rate of return = RF + β(RM – RF)

In this situation, the risk premium is 5% (10% – 5%). Thus, the required rate of return when the beta coefficient is 1.2 is 11% [5% + (1.2 × 5%)], and the required rate when the beta coefficient is 1.5 is 12.5% [5% + (1.5 × 5%)]. This is an increase of 1.5% (12.5% – 11%).

Question 26

If the Federal Reserve Banks sell $20 million in government securities to commercial banks and the required reserve ratio is 25%, the effect will be

A. To reduce the potential money supply by $20 million.
B. To reduce the actual supply of money by $20 million.
C. To reduce the potential money supply by $80 million.
D. To reduce the actual supply of money by $5 million.

Answer 26

C. To reduce the potential money supply by $80 million.

Because of the money multiplier, selling $20 million of reserves will diminish the money supply by more than the amount of the securities sold. The multiplier is calculated by dividing 1 by the reserve requirement. Thus, with a 25% reserve requirement, the multiplier is 4 (1 ÷ .25). Multiplying 4 by $20 million results in a potential reduction in the money supply of $80 million.

Question 27

A direct effect of imposing a protective tariff on an item for which there are both foreign and domestic producers is that domestic producers will sell <List> of the item while domestic consumers consume <List> of the item.</List></List>

Answer 27

Question 28

At what point in the industry life cycle should a firm in a monopolistic competitive market consider acquiring other firms?

A. At no point in the monopolistic competition industry life cycle should the firm be looking to make an acquisition.
B. New entrants flood the market due to profitability in the industry.
C. Higher costs eliminate economic profits that attracted the new entrants.
D. Firms begin to differentiate their products further, increasing their average total costs.

Answer 28

A. At no point in the monopolistic competition industry life cycle should the firm be looking to make an acquisition.

The theories of Monopolistic Competition are that (1) each firm produces one specific variety, or brand, of the industry’s differentiated product, (2) the industry contains so many firms that each one ignores the possible reactions of its competitors when it makes price and output decisions, and (3) there is freedom of entry and exit in the industry. If a firm was looking to make an acquisition, they would no longer be producing one specific variety of product and would no longer be operating in a monopolistically competitive environment.

Question 29

The demand and supply curves for a product are given by the equations below (P = price; Q = quantity):

Answer 29