Economics, Strategy, and Globalization

Question 1

1. If both the supply and the demand for a good increase,
   the market price will
   a. Rise only in the case of an inelastic supply function.
   b. Fall only in the case of an inelastic supply function.
   c. Not be predictable with only these facts.
   d. Rise only in the case of an inelastic demand function.

Answer 1

1. (c) The requirement is to predict the market price
   based on an increase in both supply and demand. The correct
   answer is (c) because without additional information about the
   extent of the change, the effect on price is not determinable.
   Answers (a), (b), and (d) are incorrect because the price
   elasticity of the demand or supply function does not provide
   enough information to determine the effect.

Question 2

2. A supply curve illustrates the relationship between
   a. Price and quantity supplied.
   b. Price and consumer tastes.
   c. Price and quantity demanded.
   d. Supply and demand.

Answer 2

2. (a) The requirement is to describe the relationship
   shown by a supply curve. A supply curve illustrates the
   quantity supplied at varying prices at a point in time.
   Therefore, the correct answer is (a). Answers (b) and (c)
   are incorrect because they deal with demand. Answer (d) is
   incorrect because it deals with demand-supply equilibrium

Question 3

3. As a business owner you have determined that the demand
   for your product is inelastic. Based upon this assessment you
   understand that
   a. Increasing the price of your product will increase total
   revenue.
   b. Decreasing the price of your product will increase
   total revenue.
   c. Increasing the price of your product will have no
   effect on total revenue.
   d. Increasing the price of your product will increase
   competition.

Answer 3

3. (a) The requirement is to apply the concept of priceelasticity
   of demand. If demand is inelastic an increase in price
   will increase total revenue. Answer (a) is correct because it
   accurately states this rule. Answer (b) is incorrect because if
   demand is inelastic the quantity demanded will not be affected
   signifi cantly by a change in price. Answer (c) is incorrect
   because if the quantity demanded is not signifi cantly affected
   by an increase in price, total revenue will increase. Answer (d)
   is incorrect because an increase in price may, or may not,
   increase competition.

Question 4

Assume that demand for a particular product changed as
shown below from D1 to D2.
Quantity
S
D D2 1
Price
4. Which of the following could cause the change shown in
the graph?
a. A decrease in the price of the product.
b. An increase in supply of the product.
c. A change in consumer tastes.
d. A decrease in the price of a substitute for the product.

Answer 4

4. (c) The requirement is to identify the reason for the shift
   in demand. The correct answer is (c) because a shift in demand
   could result from a change in consumer tastes. Answer (a)
   is incorrect because this would result in movement along
   the existing demand curve. Answer (b) is incorrect because a change in supply would not affect the demand function.
   Answer (d) is incorrect because a decrease in price of a
   substitute would result in a shift of the curve to the left.

Question 5

5. What will be the result on the equilibrium price for the
product?
a. Increase.
b. Decrease.
c. Remain the same.
d. Cannot be determined.

Answer 5

5. (a) The requirement is to determine the effect of the
   shift in the demand function on the price of the product. The
   correct answer is (a) because the shift (increase) in demand
   will increase the price of the product. Answer (b) is incorrect
   because a shift of the demand curve to the left would have
   to occur to decrease price. Answers (c) and (d) are incorrect
   because the effect on price will not be to remain the same and
   it can be determined.

Question 6

6. Which one of the following has an inverse relationship
with the demand for money?
a. Aggregate income.
b. Price levels.
c. Interest rates.
d. Flow of funds.

Answer 6

6. (c) The requirement is to identify the item that has an
   inverse relationship with the demand for money. The correct
   answer is (c) because as interest rates increase the demand
   for money decreases. Answers (a), (b), and (d) are incorrect
   because they do not have an inverse relationship with the
   demand for money.

Question 7

7. An improvement in technology that in turn leads to
   improved worker productivity would most likely result in
   a. A shift to the right in the supply curve and a lowering
   of the price of the output.
   b. A shift to the left in the supply curve and a lowering
   of the price of the output.
   c. An increase in the price of the output if demand is
   unchanged.
   d. Wage increases.

Answer 7

7. (a) The requirement is to describe the effect of an
   improvement in technology that leads to increased worker
   productivity. If the cost of producing a good declines, more
   will be supplied at a given price. Therefore, the supply curve
   will shift to the right and answer (a) is correct. Answer (b) is
   incorrect because a shift to the left would result in decreased
   supplies. Answer (c) is incorrect because price would not
   increase, and answer (d) is incorrect because wages would not
   necessarily increase.

Question 8

8. Which of the following market features is likely to cause a
surplus of a particular product?
a. A monopoly.
b. A price fl oor.
c. A price ceiling.
d. A perfect market

Answer 8

8. (b) The requirement is to identify the market feature that
   is likely to cause a surplus of a particular product. Answer (b)
   is correct because a price fl oor, if it is above the equilibrium
   price, will cause excess production and a surplus. Answer (a)
   is incorrect because a monopoly market is likely to be
   characterized by underproduction of the product. Answer (c) is
   incorrect because a price ceiling, if it is below the equilibrium
   price, will cause underproduction and shortages. Answer (d)
   is incorrect because in a perfect market with no intervention
   demand and supply will be equal.

Question 9

9. A decrease in the price of a complementary good will
   a. Shift the demand curve of the joint commodity to the
   left.
   b. Increase the price paid for a substitute good.
   c. Shift the supply curve of the joint commodity to the
   left.
   d. Shift the demand curve of the joint commodity to the
   right.

Answer 9

9. (d) The requirement is to describe the effect on demand
   for a good if a complementary good decreases in price. If
   the price of a complementary good decreases, demand for
   the joint commodity will increase. This is due to the fact that
   the total cost of using the two products decreases. If demand
   for a product increases the demand curve will shift to the
   right. Therefore, answer (d) is correct. Answer (a) is incorrect
   because a shift in the demand curve to the left depicts a
   decrease in demand. Answers (b) and (c) deal with supply and
   are not relevant.

Question 10

10. Demand for a product tends to be price inelastic if
    a. The product is considered a luxury item.
    b. People spend a large percentage of their income on
    the product.
    c. The population in the market area is large.
    d. Few good substitutes for the product are available.

Answer 10

10. (d) The requirement is to identify a characteristic of a
    product with price inelastic demand. The correct answer is (d)
    because price inelasticity means that the quantity demanded
    does not change much with price changes. This would be a
    characteristic of a good with few substitutes. Answers (a),
    (b), and (c) are characteristics of goods that have price elastic
    demand.

Question 11

11. Which of the following has the highest price elasticity
coeffi cient?
a. Milk.
b. Macaroni and cheese.
c. Bread.
d. Ski boats.

Answer 11

11. (d) The requirement is to apply the concept of price
    elasticity of demand. If substitutes for a good are readily
    available then the demand for the good is more elastic Answer (d) is correct because there are many substitutes for
    luxury goods. Answers (a), (b), and (c) are all considered to be
    necessities and demand for them is less elastic.

Question 12

12. The local video store’s business increased by 12% after
    the movie theater raised its prices from $6.50 to $7.00. Thus,
    relative to movie theater admissions, videos are
    a. Substitute goods.
    b. Superior goods.
    c. Complementary goods.
    d. Public goods.

Answer 12

12. (a) The requirement is to identify the relationship
    between two products for which one has increased demand
    when the other’s price increases. Answer (a) is correct.
    Substitute goods are selected by a consumer based on price.
    When the price of one goes up, demand for the other increases.
    Answer (b) is incorrect because superior goods are those
    whose demand is directly infl uenced by income. Answer (c)
    is incorrect because complementary goods are used together
    and when the price of one goes up, demand for the other goes
    down. Answer (d) is incorrect because a public good is one for
    which it is diffi cult to restrict use, such as a national park.

Question 13

13. An individual receives an income of $3,000 per month,
    and spends $2,500. An increase in income of $500 per month
    occurs, and the individual spends $2,800. The individual’s
    marginal propensity to save is
    a. 0.2
    b. 0.4
    c. 0.6
    d. 0.8

Answer 13

13. (b) The requirement is to calculate the marginal
    propensity to save. Answer (b) is correct because the marginal
    propensity to save is the change in savings divided by the
    change in income [($700 – $500)/($3,500 – $3,000) = .4].
    Answer (a) is incorrect because the average propensity to save
    would be calculated by dividing the new savings by the new
    income ($700/$3,500 = .2). Answer (c) is incorrect because
    the marginal propensity to consume is the change in spending
    divided by the change in income [($2,800 – $2,500)/($3,500
    – $3,000) = .6]. Answer (d) is incorrect because the average
    propensity to consume would be calculated by dividing the
    new consumption by the new income ($2,800/$3,500 = .8).

Question 14

14. In any competitive market, an equal increase in both
    demand and supply can be expected to always
    a. Increase both price and market-clearing quantity.
    b. Decrease both price and market-clearing quantity.
    c. Increase market-clearing quantity.
    d. Increase price.

Answer 14

14. (c) The requirement is to describe market conditions in
    a competitive market when both demand and supply increase.
    In a competitive market, the market will always clear at the
    equilibrium price. If there is an equal increase in both demand
    and supply, the equilibrium price may increase, decrease,
    or remain the same. However, there will be more units sold
    and, therefore, answer (c) is correct. Answers (a), (b), and (d)
    are incorrect because the equilibrium price may increase,
    decrease, or remain the same.

Question 15

15. Given the following data, what is the marginal
propensity to consume?
Level of
Disposable income          Consumption
$40,000 $38,000
48,000 44,000
a. 1.33
b. 1.16
c. 0.95
d. 0.75

Answer 15

15. (d) The requirement is to calculate the marginal
    propensity to consume. Answer (d) is correct because the
    marginal propensity to consume is calculated by dividing the
    change in consumption by the change in disposable income.
    Therefore, the marginal propensity to consume would be .75
    [($44,000 – $38,000)/($48,000 – $40,000)].

Question 16

16. Which of the following will cause a shift in the supply
    curve of a product?
    a. Changes in the price of the product.
    b. Changes in production taxes.
    c. Changes in consumer tastes.
    d. Changes in the number of buyers in the market.

Answer 16

16. (b) The requirement is to determine the item that
    will cause a shift in the supply curve. A shift in the supply
    curve may result from (1) changes in production technology,
    (2) changes or expected changes in resource prices,
    (3) changes in the prices of other goods, (4) changes in taxes
    or subsidies, (5) changes in the number of sellers in the
    market, and (6) expectations about the future price of the
    product. Answer (b) is correct because it identifi es changes in
    production taxes, which will alter the supply curve. Answer (a)
    is incorrect because a change in the price of the product
    involves movement along the existing supply curve, not a shift
    in the supply curve. Answers (c) and (d) are incorrect because
    they identify changes that result in a shift in the demand curve.

Question 17

17. When the federal government imposes health and safety
    regulations on certain products, one of the most likely results is
    a. Greater consumption of the product.
    b. Lower prices for the product.
    c. Greater tax revenues for the federal government.
    d. Higher prices for the product.

Answer 17

17. (d) The requirement is to identify the effects of
    government regulation on a product. Government regulation
    increases the cost of the product and therefore will most likely result in higher prices. Thus answer (d) is correct. Answer (a)
    is incorrect because the regulation has no relationship to
    consumption. Answer (b) is incorrect because an increase in
    cost is not likely to result in a decrease in price. Answer (c)
    is incorrect because tax revenue will likely decline due to the
    added production costs and reduced sales.

Question 18

18. In which of the following situations would there be
    inelastic demand?
    a. A 5% price increase results in 3% decrease in the
    quantity demanded.
    b. A 4% price increase results in a 6% decrease in the
    quantity demanded.
    c. A 4% price increase results in a 4% decrease in the
    quantity demanded.
    d. A 3% price decrease results in a 5% increase in the
    quantity demanded.

Answer 18

18. (a) The requirement is to identify which of the situations
    indicate inelastic demand. Elasticity of demand is measured
    by the percentage change in the quantity demanded divided
    by the percentage change in price. If the quotient is greater
    than one, demand for product is price elastic, and if it less than
    one, demand for the product is price inelastic. A quotient of
    exactly one indicates unitary elasticity. Answer (a) is correct
    because the price elasticity quotient is equal to 0.6 (3%/5%).
    Answer (b) is incorrect because the quotient is 1.5 (6%/4%).
    Answer (c) is incorrect because the quotient is 1 (4%/4%).
    Answer (d) is incorrect because the quotient is equal to 1.67
    (5%/3%).

Question 19

19. In a competitive market for labor in which demand is
    stable, if workers try to increase their wage
    a. Employment must fall.
    b. Government must set a maximum wage below the
    equilibrium wage.
    c. Firms in the industry must become smaller.
    d. Product supply must decrease.

Answer 19

19. (a) The requirement is to describe the effect of an
    increase in wages on demand for labor. Answer (a) is correct
    because, like any other good or service, if price is increased
    for labor, the demand will fall and employment will fall.
    Answer (b) is incorrect because setting a maximum wage will
    not allow workers to increase wages. Answer (c) is incorrect
    because fi rms may or may not change in size. Answer (d) is
    incorrect because supply will only decrease if the price of the
    product decreases.

Question 20

20. A polluting manufacturing fi rm tends, from the societal
viewpoint, to
a. Price its products too low.
b. Produce too little output.
c. Report too little profi tability.
d. Employ too little equity fi nancing.

Answer 20

20. (a) The requirement is to identify the market effects of a
    polluting manufacturer’s actions. Answer (a) is correct because
    a polluting fi rm calculates its profi ts without considering the
    costs of environmental damage and, as a result, prices its
    products too low. Answer (b) is incorrect because the polluting
    manufacturer is producing too much, not too little output.
    Answer (c) is incorrect because the manufacturer reports
    too much, not too little profi tability. Answer (d) is incorrect
    because there is no direct relationship between the use of
    equity versus debt fi nancing and the externalities involved in
    the production activities of the fi rm.

Question 21

21. If the federal government regulates a product or service
    in a competitive market by setting a maximum price below the
    equilibrium price, what is the long-run effect?
    a. A surplus.
    b. A shortage.
    c. A decrease in demand.
    d. No effect on the market.

Answer 21

21. (b) The requirement is to describe the effects of a
    government-mandated maximum price. If the government
    mandates a maximum price below the equilibrium price, the
    product will be selling at an artifi cially low price resulting
    in shortages. Thus the correct answer is (b). Answer (a) is
    incorrect because price fl oors result in surpluses. Answer (c) is
    incorrect because price ceilings would probably result in more
    demand. Answer (d) is incorrect because the market would be
    affected.

Question 22

22. A valid reason for the government to intervene in the
    wholesale electrical power market would include which one of
    the following?
    a. A price increase that is more than expected.
    b. Electricity is an essential resource and the wholesale
    market is not competitive.
    c. The electricity distribution companies are losing
    money.
    d. Foreign power generators have contracts with the local
    government at very high prices

Answer 22

22. (b) The requirement is to identify a valid reason for
    government intervention in a wholesale market. Answer (b) is
    correct because a valid reason for government intervention is
    the lack of a competitive market. Answers (a), (c), and (d) are
    incorrect because they provide no indication that the market is
    not competitive.

Question 23

23. If the income elasticity of demand coeffi cient for a
    particular product is 3.00, the good is likely
    a. A luxury good.
    b. A complementary good.
    c. An inferior good.
    d. A necessity.

Answer 23

23. (a) The requirement is to identify the type of good
    that is likely to have an income elasticity coeffi cient of 3.00.
    Answer (a) is correct because an income elasticity coeffi cient
    of 3.00 indicates that demand for the good is very sensitive to income levels. This is a characteristic of a luxury good.
    Answer (b) is incorrect because while the good may be
    complementary, it would have to be complementary to a
    luxury good. Answer (c) is incorrect because an inferior good’s
    coeffi cient will be negative. Answer (d) is incorrect because
    demand for a necessity is not sensitive to income levels.

Question 24

24. Long Lake Golf Course has raised greens fees for a
nine-hole game due to an increase in demand.
Previous
rate
           New
           rate
                    Average
                   games
                   played at
                  previous
                  rate
                                 Average
                                games
                                played at
                                new rate
Regular
weekday
               $10 $11 80 70
Senior
citizen
              6 8 150 82
Weekend 15 20 221 223 
Which one of the following is correct?
a. The regular weekday and weekend demand is
inelastic.
b. The regular weekday and weekend demand is elastic.
c. The senior citizen demand is elastic, and weekend
demand is inelastic.
d. The regular weekday demand is inelastic, and
weekend demand is elastic.

Answer 24

24. (c) The requirement is to calculate the price elasticity of
    demand for golf. The price elasticity of demand is calculated
    as the percentage change in quantity divided by the percentage
    change in price. If the result is greater than one, demand is
    elastic; if it is less than one, it is inelastic; and if it is equal
    to one, it is unitary elastic. The regular weekday demand is
    elastic as calculated below.
    (80 – 70) ÷ [(80 + 70) ÷ 2]
    = 1.4
    ($11 – $10) ÷ [($11 + $10) ÷ 2]
    The weekend demand is inelastic as calculated below.
    (223 – 221) ÷ [(223 + 221) ÷ 2]
    = .03
    ($20 – $15) ÷ [($20 + $15) ÷ 2]
    The senior citizen demand is elastic as calculated below.
    (150 – 82) ÷ [(150 + 82) ÷ 2]
    = 2.05
    ($8 – $6) ÷ [($8 + $6) ÷ 2]
    The only statement that correctly defi nes these relationships is
    answer (c).

Question 25

25. Which one of the following would cause the demand
    curve for a commodity to shift to the left?
    a. A rise in the price of a substitute product.
    b. A rise in average household income.
    c. A rise in the price of a complementary commodity.
    d. A rise in the population.

Answer 25

25. (c) The requirement is to identify the factor that would
    cause the demand curve for a product to shift to the left.
    Answer (c) is correct because a shift in the demand curve to
    the left would be indicative of a decrease in demand for the
    product, and an increase in the price of a complementary
    commodity would cause such a shift. Answers (a), (b), and (d)
    are incorrect because they would all potentially cause an
    increase in demand, causing the demand curve to shift to the
    right.

Question 26

26. Price ceilings
    a. Are illustrated by government price support programs
    in agriculture.
    b. Create prices greater than equilibrium prices.
    c. Create prices below equilibrium prices.
    d. Result in persistent surpluses.

Answer 26

26. (c) The requirement is to describe the effect of price
    ceilings. Price ceilings cause the price of a product to be
    artifi cially low resulting in decreased supply. The price is
    below the equilibrium price as indicated by answer (c).
    Answer (a) is incorrect because government price support is an
    example of a price fl oor. Answer (b) is incorrect because price
    ceilings create prices less than equilibrium prices. Answer (d)
    is incorrect because price ceilings create shortages, not
    surpluses.

Question 27

27. X and Y are substitute products. If the price of product Y
    increases, the immediate impact on product X is
    a. Price will increase.
    b. Quantity demanded will increase.
    c. Quantity supplied will increase.
    d. Price, quantity demanded, and supply will increase.

Answer 27

27. (b) The requirement is to determine the immediate effect
    upon one product of an increase in the price of a substitute
    good. The demand and price of substitute products are directly
    related. If the price of a good increases, the demand for its
    substitute will also increase. Answer (b) is correct because it
    depicts this relationship. Answer (a) is incorrect because the
    price of a product will not increase due to an increase in a
    substitute product’s price. Answer (c) is incorrect because the
    quantity supplied will not be impacted by an increase in price of a substitute product. Answer (d) is incorrect because even
    though the quantity demanded will increase with an increase in
    price of a substitute product, the price and supply will not be
    directly affected.

Question 28

28. Wilson Corporation has a major competitor that produces
    a product that is a close substitute for Wilson’s good. If the
    coeffi cient of cross-elasticity of demand for Wilson’s product
    with respect to the competitor’s product is 2.00 and the
    competitor decreases its price by 5%, what is the expected
    effect on demand for Wilson’s product?
    a. A 5% increase in demand.
    b. A 5% decrease in demand.
    c. A 10% increase in demand.
    d. A 10% decrease in demand.

Answer 28

28. (d) The requirement is to calculate the effect a decrease
    in the price of a substitute good has on demand for a good.
    Answer (d) is correct because if the coeffi cient of crosselasticity
    is 2.00, a 5% decrease in price will result in a 10%
    (5% × 2.00) decrease in the demand for Wilson’s product.
    Answers (a), (b), and (c) are incorrect because they misstate
    the relationship.

Question 29

29. As the price for a particular product changes, the
quantity of the product demanded changes according to the
following schedule:
Total quantity demanded Price per unit
100 $50
150 45
200 40
225 35
230 30
232 25
Using the arc method, the price elasticity of demand for this
product when the price decreases from $50 to $45 is
a. 0.20
b. 10.00
c. 0.10
d. 3.80

Answer 29

29. (d) The requirement is to calculate the price elasticity
    of demand for a product. Price elasticity using the arc method
    is calculated by dividing the percentage change in quantity
    demanded by the percentage change in price, using the average
    changes. In this case, price elasticity is calculated below.
    (150 – 100) ÷ [(150 + 100) ÷ 2]
    = 3.8
    ($50 – $45) ÷ [($50 + $45) ÷ 2]
    Therefore answer (d) is correct.

Question 30

30. As the price for a particular product changes, the
quantity of the product demanded changes according to the
following schedule:
Total quantity demanded Price per unit
100 $50
150 45
200 40
225 35
230 30
232 25
Using the arc method, the price elasticity of demand for this
product when the price decreases from $40 to $35 is
a. 0.20
b. 0.88
c. 10.00
d. 5.00

Answer 30

30. (b) The requirement is to calculate the price elasticity
    of demand. Answer (b) is correct because the formula for
    price elasticity is equal to the percentage change in quantity
    demanded divided by the percentage change in price. In this
    case, the percentage change in price is 0.88 as calculated
    below.
    (225 – 200) ÷ [(225 + 200) ÷ 2]
    = .088
    ($40 – $35) ÷ [($40 + $35) ÷ 2

Question 31

31. If a group of consumers decide to boycott a particular
    product, the expected result would be
    a. An increase in the product price to make up lost
    revenue.
    b. A decrease in the demand for the product.
    c. An increase in product supply because of increased
    availability.
    d. That demand for the product would become
    completely inelastic.

Answer 31

31. (b) The requirement is to identify the effect of a boycott
    on demand for a good. Answer (b) is correct because a boycott
    means less people are purchasing the good. Therefore, demand
    is decreased. Answer (a) would not occur because, if anything,
    a decrease in demand would lead to a decrease in price.
    Answer (c) is incorrect because demand does not affect supply.
    Answer (d) is incorrect because the elasticity of demand for a
    good is determined by its nature.

Question 32

32. Which of the following is not likely to affect the supply
of a particular good?
a. Changes in government subsidies.
b. Changes in technology.
c. Changes in consumer income.
d. Changes in production costs.

Answer 32

32. (c) The requirement is to identify the factor that is not
    likely to affect the supply of a good. Answer (c) is correct
    because changes in consumer income could affect the demand
    for the good, but not its supply. Answer (a) is incorrect
    because government subsidies reduce the cost of producing
    a good, and therefore, affect supply. Answer (b) is incorrect
    because changes in technology can alter production costs,
    and therefore, affect supply. Answer (d) is incorrect because
    changes in production costs affect the supply of a good.

Question 33

**33. If a product’s demand is elastic and there is a decrease in
price, the effect will be
a. A decrease in total revenue.
b. No change in total revenue.
c. A decrease in total revenue and the demand curve
shifts to the left.
d. An increase in total revenue

Answer 33

33. (d) The requirement is to identify the effect on total
    revenue of a decrease in price of a price-elastic product.
    Answer (d) is correct because if a product’s demand is
    price-elastic, a decrease in price will lead to an even larger
    percentage increase in quantity demanded. Therefore, total
    revenue will increase. Answers (a), (b), and (c) are incorrect
    because they do not describe the appropriate effect.