Ivy Software MBA PrepWorks Fundamentals of Economics
Exam 2026/2027 UPDATED QUESTIONS WITH ANSWERS
GRADED A+
• When country A has a lower opportunity cost of producing sugar relative to country B,
then country A is said to have -✓✓ Comparative Advantage
• A graph that shows the combinations of two goods that the economy can produce
given the available scarce resources and available technology is called a -✓✓
Production Possibilities Frontier
• Assume a production possibilities frontier for pickup trucks and big Mac hamburgers.
The economy is producing 20 big Mac hamburgers and 65 pickup trucks (point 20, 65).
What is the opportunity cost of producing an additional 20 Big Mac hamburgers (point
40, 60)? -✓✓ Five Pickup Trucks
• The opportunity cost of an item is -✓✓ whatever must be given up to obtain the item.
• Consider market for pork, suppose that price of beef, a substitute for pork, increases.
Because of the change in price of beef, the equilibrium price of pork...? -✓✓ Increases
• Consider the market for pork, suppose that the price of beef, a substitute for pork,
increases. Because of this change in the price of beef, the equilibrium quantity of pork
will...? -✓✓ Increase because increase in price of beef causes demand curve for pork to
shift North East. B/c of this shift, the equilibrium quantity of pork will increase.
• Consider the market for pork. Suppose that the price of hog feed, an input to the
production of pork, increases. Because of that change in the price of hog feed, the
equilibrium quantity of pork ...? -✓✓ Decreases because the increase in price of hog
feed causes the supply curve for pork to shift NW. B/c of this shift, the quantity of pork
decreases.
• Consider the market for pork. Suppose that disposable income increases and pork is
an inferior good. Because of that change in income, the equilibrium price of pork...? -✓✓
Decreases because the increase in disposable income causes the demand curve for
pork to shift south west, because pork is an inferior good. because of this shift, the
equilibrium price of pork decreases.
• Consider the market for pork. Suppose that 1) disposable income increases and pork
is a normal good, And 2) the price of hog feed decreases. Because of these changes,
the equilibrium price of pork is... -✓✓ Indeterminate because the increase in disposable
income causes the demand curve for pork to shift north east because pork is a normal
good. The decrease in price of hog feed causes the supply curve to shift to the south
,east. The net effect of these shifts leaves us unable to say waht will happen to the
equilibrium price of pork.
• Consider the market for pork. Suppose that disposable income increases and pork is a
normal good and the price of hog feed decreases. The equilibrium quantity of pork...? -
✓✓ Increases.
• Suppose the price elasticity for demand for retail phone service in the US is 0.95. If the
# of retail substitutes for retail telephone service increases, will the price elasticity of
demand become more elastic or more inelastic? -✓✓ Elastic. When the number of
substitute products increases, the price elasticity of demand will become more elastic.
consumers become more sensitive to price when they have more options to chose
among.
• True or False: the law of demand states that if the price of a good increases, CP, then
the quantity demanded of that good will increase. -✓✓ False. quantity demanded of that
good will decrease.
• Suppose the cross-price elasticity of demand for home heating oil with respect to the
price of natural gas is +0.6. This number tells us that home heating oil and natural gas
are substitute or compliment goods? -✓✓ Substitute goods. When the cross price
elasticity is positive then they are substitutes.
• Consider the market for mustard which is a complement to hot dogs. Suppose the
price of hot dogs increase. What happens to the equilibrium price and equilibrium
quantity of the mustard market? -✓✓ Equilibrium price decreases and equilibrium
quantity decreases. The price of hot dogs is an independent variable in the demand
function for mustard. This is because hot dogs and mustard are complementary goods.
Therefore, if the price of hot dogs increases, then the demand curve for mustard shifts
to the south-west. People demand less mustard at every price when hot dogs are more
expensive. In the mustard market, the equilibrium price decreases and equilibrium
quantity decreases.
• profit maximizing rule -✓✓ a business maximizes profits when it produces where the
marginal revenue from selling another unit equals the marginal cost of producing
another unit.
Marginal Revenue=Marginal Cost
• Marginal cost -✓✓ is equal to the change in the total cost that arises from an extra unit
of production. It is calculated by taking the change in total cost and dividing it by the
change in the quantity produced
=change in TC/change in Q
, • Marginal revenue -✓✓ is the change in total revenue generated from an additional unit
sold. It is calculated by taking the change in total revenue divided by the change in
quantity sold
• Short Run -✓✓ a time horizon where some fixed costs exist.
is a time horizon within which a business is unable to adjust at least one input because
there is a fixed cost of some kind.
we think in terms of the short run not the long run
• Long Run -✓✓ a situation where the fixed costs (the inputs) become variable. a time
horizon long enough for the seller to adjust all inputs. If you observe a business with no
fixed costs, then it is in a long run state.
\when prices remain low for a very long period of time, then the business moves into a
long run decision mode. In the long run there are no fixed costs.
• fixed costs -✓✓ costs that do not vary with changes in the quantity produced. what
expenses must be paid even if production equals zero?
• variable costs -✓✓ costs that do vary with changes in the quantity produced
• total cost -✓✓ equals the sum of the fixed costs and variable costs
TC=VC+FC
• average fixed cost -✓✓ equals fixed cost divided by quantity produced
AFC= TC/Q
• average variable cost -✓✓ equals variable cost divided by the quantity produced
• average total cost -✓✓ equals the total cost divided by the quantity produced, or it is
the sum of average fixed cost plus average variable cost
• sunk cost -✓✓ a cost that has already been committed and cannot be recovered
• joint costs -✓✓ costs that do not change with changes in the scope of production.
economies of scope arise when there are joint costs. (ie: comcast purchasing NBC
universal).
• perfect competition -✓✓ occurs in an industry in which
- there are many buyers and many sellers
- an industry in which the good is homogeneous
- and an industry in which all who want to enter the industry are free to do so and any
business may exit at a time of their choosing
Exam 2026/2027 UPDATED QUESTIONS WITH ANSWERS
GRADED A+
• When country A has a lower opportunity cost of producing sugar relative to country B,
then country A is said to have -✓✓ Comparative Advantage
• A graph that shows the combinations of two goods that the economy can produce
given the available scarce resources and available technology is called a -✓✓
Production Possibilities Frontier
• Assume a production possibilities frontier for pickup trucks and big Mac hamburgers.
The economy is producing 20 big Mac hamburgers and 65 pickup trucks (point 20, 65).
What is the opportunity cost of producing an additional 20 Big Mac hamburgers (point
40, 60)? -✓✓ Five Pickup Trucks
• The opportunity cost of an item is -✓✓ whatever must be given up to obtain the item.
• Consider market for pork, suppose that price of beef, a substitute for pork, increases.
Because of the change in price of beef, the equilibrium price of pork...? -✓✓ Increases
• Consider the market for pork, suppose that the price of beef, a substitute for pork,
increases. Because of this change in the price of beef, the equilibrium quantity of pork
will...? -✓✓ Increase because increase in price of beef causes demand curve for pork to
shift North East. B/c of this shift, the equilibrium quantity of pork will increase.
• Consider the market for pork. Suppose that the price of hog feed, an input to the
production of pork, increases. Because of that change in the price of hog feed, the
equilibrium quantity of pork ...? -✓✓ Decreases because the increase in price of hog
feed causes the supply curve for pork to shift NW. B/c of this shift, the quantity of pork
decreases.
• Consider the market for pork. Suppose that disposable income increases and pork is
an inferior good. Because of that change in income, the equilibrium price of pork...? -✓✓
Decreases because the increase in disposable income causes the demand curve for
pork to shift south west, because pork is an inferior good. because of this shift, the
equilibrium price of pork decreases.
• Consider the market for pork. Suppose that 1) disposable income increases and pork
is a normal good, And 2) the price of hog feed decreases. Because of these changes,
the equilibrium price of pork is... -✓✓ Indeterminate because the increase in disposable
income causes the demand curve for pork to shift north east because pork is a normal
good. The decrease in price of hog feed causes the supply curve to shift to the south
,east. The net effect of these shifts leaves us unable to say waht will happen to the
equilibrium price of pork.
• Consider the market for pork. Suppose that disposable income increases and pork is a
normal good and the price of hog feed decreases. The equilibrium quantity of pork...? -
✓✓ Increases.
• Suppose the price elasticity for demand for retail phone service in the US is 0.95. If the
# of retail substitutes for retail telephone service increases, will the price elasticity of
demand become more elastic or more inelastic? -✓✓ Elastic. When the number of
substitute products increases, the price elasticity of demand will become more elastic.
consumers become more sensitive to price when they have more options to chose
among.
• True or False: the law of demand states that if the price of a good increases, CP, then
the quantity demanded of that good will increase. -✓✓ False. quantity demanded of that
good will decrease.
• Suppose the cross-price elasticity of demand for home heating oil with respect to the
price of natural gas is +0.6. This number tells us that home heating oil and natural gas
are substitute or compliment goods? -✓✓ Substitute goods. When the cross price
elasticity is positive then they are substitutes.
• Consider the market for mustard which is a complement to hot dogs. Suppose the
price of hot dogs increase. What happens to the equilibrium price and equilibrium
quantity of the mustard market? -✓✓ Equilibrium price decreases and equilibrium
quantity decreases. The price of hot dogs is an independent variable in the demand
function for mustard. This is because hot dogs and mustard are complementary goods.
Therefore, if the price of hot dogs increases, then the demand curve for mustard shifts
to the south-west. People demand less mustard at every price when hot dogs are more
expensive. In the mustard market, the equilibrium price decreases and equilibrium
quantity decreases.
• profit maximizing rule -✓✓ a business maximizes profits when it produces where the
marginal revenue from selling another unit equals the marginal cost of producing
another unit.
Marginal Revenue=Marginal Cost
• Marginal cost -✓✓ is equal to the change in the total cost that arises from an extra unit
of production. It is calculated by taking the change in total cost and dividing it by the
change in the quantity produced
=change in TC/change in Q
, • Marginal revenue -✓✓ is the change in total revenue generated from an additional unit
sold. It is calculated by taking the change in total revenue divided by the change in
quantity sold
• Short Run -✓✓ a time horizon where some fixed costs exist.
is a time horizon within which a business is unable to adjust at least one input because
there is a fixed cost of some kind.
we think in terms of the short run not the long run
• Long Run -✓✓ a situation where the fixed costs (the inputs) become variable. a time
horizon long enough for the seller to adjust all inputs. If you observe a business with no
fixed costs, then it is in a long run state.
\when prices remain low for a very long period of time, then the business moves into a
long run decision mode. In the long run there are no fixed costs.
• fixed costs -✓✓ costs that do not vary with changes in the quantity produced. what
expenses must be paid even if production equals zero?
• variable costs -✓✓ costs that do vary with changes in the quantity produced
• total cost -✓✓ equals the sum of the fixed costs and variable costs
TC=VC+FC
• average fixed cost -✓✓ equals fixed cost divided by quantity produced
AFC= TC/Q
• average variable cost -✓✓ equals variable cost divided by the quantity produced
• average total cost -✓✓ equals the total cost divided by the quantity produced, or it is
the sum of average fixed cost plus average variable cost
• sunk cost -✓✓ a cost that has already been committed and cannot be recovered
• joint costs -✓✓ costs that do not change with changes in the scope of production.
economies of scope arise when there are joint costs. (ie: comcast purchasing NBC
universal).
• perfect competition -✓✓ occurs in an industry in which
- there are many buyers and many sellers
- an industry in which the good is homogeneous
- and an industry in which all who want to enter the industry are free to do so and any
business may exit at a time of their choosing
