Ivy Software MBA Prepworks Fundamentals
of Economics UPDATED ACTUAL
Questions and CORRECT Answers
The main concept demonstrated in the production possibilities frontier is - CORRECT
ANSWER - Opportunity cost
When country A has a lower opportunity cost of producing sugar relative to country B, then
country A is said to have - CORRECT ANSWER - 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 - CORRECT ANSWER -
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)? - CORRECT
ANSWER - Five Pickup Trucks
The opportunity cost of an item is - CORRECT ANSWER - 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...? - CORRECT ANSWER -
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...? - CORRECT
ANSWER - 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
...? - CORRECT ANSWER - 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...? - CORRECT
ANSWER - 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... - CORRECT ANSWER - 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...? - CORRECT
ANSWER - 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? - CORRECT ANSWER - 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. - CORRECT ANSWER - 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? - CORRECT ANSWER - 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? - CORRECT ANSWER - 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 - CORRECT ANSWER - 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 - CORRECT ANSWER - 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 - CORRECT ANSWER - 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 - CORRECT ANSWER - 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 - CORRECT ANSWER - 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 - CORRECT ANSWER - costs that do not vary with changes in the quantity
produced. what expenses must be paid even if production equals zero?
variable costs - CORRECT ANSWER - costs that do vary with changes in the quantity
produced
total cost - CORRECT ANSWER - equals the sum of the fixed costs and variable costs
TC=VC+FC
average fixed cost - CORRECT ANSWER - equals fixed cost divided by quantity
produced
AFC= TC/Q
average variable cost - CORRECT ANSWER - equals variable cost divided by the
quantity produced
average total cost - CORRECT ANSWER - equals the total cost divided by the quantity
produced, or it is the sum of average fixed cost plus average variable cost
sunk cost - CORRECT ANSWER - a cost that has already been committed and cannot be
recovered
joint costs - CORRECT ANSWER - 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 - CORRECT ANSWER - occurs in an industry in which
of Economics UPDATED ACTUAL
Questions and CORRECT Answers
The main concept demonstrated in the production possibilities frontier is - CORRECT
ANSWER - Opportunity cost
When country A has a lower opportunity cost of producing sugar relative to country B, then
country A is said to have - CORRECT ANSWER - 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 - CORRECT ANSWER -
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)? - CORRECT
ANSWER - Five Pickup Trucks
The opportunity cost of an item is - CORRECT ANSWER - 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...? - CORRECT ANSWER -
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...? - CORRECT
ANSWER - 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
...? - CORRECT ANSWER - 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...? - CORRECT
ANSWER - 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... - CORRECT ANSWER - 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...? - CORRECT
ANSWER - 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? - CORRECT ANSWER - 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. - CORRECT ANSWER - 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? - CORRECT ANSWER - 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? - CORRECT ANSWER - 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 - CORRECT ANSWER - 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 - CORRECT ANSWER - 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 - CORRECT ANSWER - 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 - CORRECT ANSWER - 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 - CORRECT ANSWER - 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 - CORRECT ANSWER - costs that do not vary with changes in the quantity
produced. what expenses must be paid even if production equals zero?
variable costs - CORRECT ANSWER - costs that do vary with changes in the quantity
produced
total cost - CORRECT ANSWER - equals the sum of the fixed costs and variable costs
TC=VC+FC
average fixed cost - CORRECT ANSWER - equals fixed cost divided by quantity
produced
AFC= TC/Q
average variable cost - CORRECT ANSWER - equals variable cost divided by the
quantity produced
average total cost - CORRECT ANSWER - equals the total cost divided by the quantity
produced, or it is the sum of average fixed cost plus average variable cost
sunk cost - CORRECT ANSWER - a cost that has already been committed and cannot be
recovered
joint costs - CORRECT ANSWER - 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 - CORRECT ANSWER - occurs in an industry in which
