Economics, Strategy, and Globalization Flashcards
1
Q
- 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.
A
- (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.
2
Q
- 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.
A
- (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
3
Q
- 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.
A
- (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.
4
Q
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.
A
- (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.
5
Q
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.
A
- (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.
6
Q
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.
A
- (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.
7
Q
- 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.
A
- (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.
8
Q
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
A
- (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.
9
Q
- 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.
A
- (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.
10
Q
- 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.
A
- (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.
11
Q
11. Which of the following has the highest price elasticity coeffi cient? a. Milk. b. Macaroni and cheese. c. Bread. d. Ski boats.
A
- (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.
12
Q
- 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.
A
- (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.
13
Q
- 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
A
- (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).
14
Q
- 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.
A
- (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.
15
Q
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
A
- (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)].
16
Q
- 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.
A
- (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.
17
Q
- 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.
A
- (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.
18
Q
- 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.
A
- (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%).
19
Q
- 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.
A
- (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.
20
Q
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.
A
- (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.
21
Q
- 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.
A
- (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.
22
Q
- 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
A
- (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.
23
Q
- 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.
A
- (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.
24
Q
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.
A
- (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).
25
Q
- 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.
A
- (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.
26
Q
- 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.
A
- (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.
27
Q
- 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.
A
- (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.
28
Q
- 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.
A
- (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.
29
Q
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
A
- (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.
30
Q
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
A
- (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
31
Q
- 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.
A
- (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.
32
Q
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.
A
- (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.
33
Q
**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
A
- (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.
