Economics, Strategy, and Globalization Questions and Answers

Economics, Strategy, and Globalization Questions and Answers Absolute Advantage - CORRECT ANSWER-An advantage a country has over other countries in the production of a good or service Comparative Advantage - CORRECT ANSWER-An advantage a country has in producing a good or service because it has no alternative users of its resources that would involve a higher return Consumption Function - CORRECT ANSWER-Depicts the relationship between changes in personal disposable income and consumption Dumping - CORRECT ANSWER-A form of predatory pricing in which a manufacturer in one country exports a product at a price that is lower than the priced charged in its home country Economic Profit - CORRECT ANSWER-The amount of profit in excess of normal profit Demand Curve Shift - CORRECT ANSWER-when demand variables other than price change. For example, if the price of substitute products for Product X increase in price, the demand for Product X would shift upward and to the right. Direct Relationship - CORRECT ANSWER-As goods that may be purchased instead go up in price the demand for the product goes up. As an example, if the price of pork increases the demand for beef may increase If the price of the good is expected to increase in the future, there will be an increase in demand As consumer income (wealth) goes up the demand for many products (normal goods) goes up. However, there are certain goods that are inferior (e.g., bread, potatoes, etc.) and the demand for such goods actually goes up as consumer income (wealth) goes down As the size of the market increases, the demand for the product will increase. Inverse Relationship - CORRECT ANSWER-As the prices of complement goods go up, the demand for the product goes down. As an example, if the price of hamburger increases the demand for hamburger buns decreases If a group of consumers boycott a product, demand will be decreased. Indeterminate Relationship - CORRECT ANSWER-The effect depends on whether the shift is towards or away from the product. Externalities - CORRECT ANSWER-term used to describe damage to common areas that is caused by the production of certain goods i.e. pollution from a factory Perfect (pure) competition - CORRECT ANSWER-(a) It is composed of a large number of sellers, each of which is too small to affect the price of the product or service (b) The firms sell a virtually identical product (c) Firms can enter or leave the market easily (i.e., no barriers to entry) i.e. markets for crops *demand curve is perfectly elastic(horizontal), firm is a price taker *firm will produce/sell products until MC MR *key is to be lowest cost producer Pure Monopoly - CORRECT ANSWER-is a market in which there is a single seller of a product or service for which there are no close substitutes. (a) Increasing returns to scale (b) Control over the supply of raw materials (c) Patents (e.g., a drug manufacturer) (d) Government franchise (e.g., a public utility) -demand curve is negatively sloping -produce and sell as long as MR AVC Natural Monopolies - CORRECT ANSWER-exist when economic or technical conditions permit only one efficient supplier Monopolistic Competition - CORRECT ANSWER-many firms selling a differentiated product or service. The differentiation may be real or only created by advertising, and there is relatively easy entry to the market but not as easy as in a perfectly competitive market. This type of market is prevalent in retailing, including the markets for groceries, detergents, and breakfast cereals -sell until MR AVC Oligopoly - CORRECT ANSWER-characterized by significant barriers to entry. As a result there are few (generally large) sellers of a product. Because there are few sellers the actions of one affect the others. As a result, game theory is often used to analyze the behavior of the firms. An example of an oligopoly is the automobile industry. Other examples are found in the production of steel, aluminum, cigarettes, personal computers, and many electrical appliances -engage in nonprice competition through differentiation -will match price decreases not price increases **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. - CORRECT ANSWER-answer is (c) because without additional information about the extent of the change, the effect on price is not determinable **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. - CORRECT ANSWER-A 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. - CORRECT ANSWER-A **6. Which one of the following has an inverse relationship a. Aggregate income. b. Price levels. c. Interest rates. d. Flow of funds. - CORRECT ANSWER-The correct answer is (c) because as interest rates increase the demand for money decreases **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. - CORRECT ANSWER-A Which of the following market features is likely to cause a surplus of a particular product? a. A monopoly. b. A price floor. c. A price ceiling. d. A perfect market. - CORRECT ANSWER-Answer (b) is correct because a price floor, if it is above the equilibrium price, will cause excess production and a surplus **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. - CORRECT ANSWER-D **10. Demand for a product tends to be price inelastic if a. The product is considered a luxury item. b. Few good complements for the product are available. c. The population in the market area is large. d. People spend a large share of their income on the product. - CORRECT ANSWER-D 11. Which of the following has the highest price elasticity coefficient? a. Milk. b. Macaroni and cheese. c. Bread. d. Ski boats. - CORRECT ANSWER-D **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. - CORRECT ANSWER-A *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 - CORRECT ANSWER-B **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. - CORRECT ANSWER-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 **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 - CORRECT ANSWER-D *16. Which of the following will cause a shift in the supply curve of a product? a. Changes in the price of the produ