Business Economics

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MODULE I : INTRODUCTION TO BUSINESS ECONOMICS

Case Study

Suppose that Russ has budgeted $20 a month to buy candy bars, music downloads, or some combination of each. If Russ buys only candy bars he can obtain 40 bars a month; if he buys only downloads, he can buy 20 a month.

Question 1: If an economy moves from producing 10 units of A and 4 units of B to producing 7 As and 5Bs, the opportunity cost of the 5th B is:

a. 7As

b. 10As

c. 3As

d. 1A

Question 2: In a free market the combination of products produced will be determined by:

a. Market forces of supply and demand

b. The government

c. The law

d. The public sector

Question 3: The basic economic problems will not be solved by:

a. Market forces

b. Government intervention

c. A mixture of government intervention and the free market

d. The creation of unlimited resources

Question 4: The sacrifice involved when you choose a particular course of action is called the:

a. Alternative

b. Opportunity cost

c. Consumer cost

d. Producer cost

Question 5: What is the opportunity cost of a candy bar?

a. 0.6

b. 0.2

c. 0.5

d. 0.6

Question 6: What is the opportunity cost of a music download?

a. 3

b. 2

c. 4

d. 5

Question 7: What is the price of a candy bar?

a. 20 cents

b. 50 cents

c. 40 cents

d. 10 cents

Question 8: What is the price of a music download?

a. $1

b. $3

c. $4

d. $5

Question 9: Which of the following is a normative statement in economics?

a. More spending by the government will reduce poverty

b. Higher taxes will lead to less desire to work

c. The UK economy is growing fast relative to other European Union members

d. The government should concentrate on reducing unemployment

Question 10: Which one of the following is not one of the basic economic questions?

a. What to produce

b. Who to produce for

c. How to produce

d. How to minimize economic growth

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MODULE II : DEMAND, SUPPLY AND EQUILIBRIUM

Case Study

Suppose that the government of Zanzi decides that there is a need to reduce cigarette smoking in their country. The cigarette market in Zanzi can currently be described by the following demand and supply equations:

Demand for cigarettes: Q = 1125 – 12.5P

Supply of cigarettes: Q = 1100P – 1100

The government proposes implementing a quantity control of 500 units: this quantity control would limit the number of cigarettes that could be sold in Zanzi to exactly 500 units. The government has asked you to evaluate this program by answering the following series of questions.

Question 1: Before implementing the quantity control, what is the equilibrium price of cigarettes in Zanzi?

a. $4

b. $2

c. $3

d. $7

Question 2: Before implementing the quantity control, what is the equilibrium quantity of cigarettes in Zanzi?

a. 700 cigarettes

b. 900 cigarettes

c. 1100 cigarettes

d. 800 cigarettes

Question 3: Before implementing the quantity control, what is the value of consumer surplus in the market for cigarettes in Zanzi?

a. $48,400

b. $48,200

c. $43,400

d. $38,400

Question 4: Before implementing the quantity control, what is the value of producer surplus in the market for cigarettes in Zanzi?

a. $220

b. $550

c. $5

d. $320

Question 5: Suppose the government implements the quantity control. What is the deadweight loss due to this program?

a. $13, 656

b. $14,565

c. $12,343

d. $12,345

Question 6: Suppose the government implements the quantity control. What is the value of consumer surplus with this program?

a. $6,000

b. $4,000

c. $10,000

d. $15,000

Question 7: Suppose the government implements the quantity control. What is the value of producer surplus with this program?

a. $113

b. $112

c. $123

d. $235

Question 8: Suppose the government implements the quantity control. What price must consumers pay in order to only demand 500 cigarettes in Zanzi?

a. $40

b. $30

c. $30

d. $50

Question 9: Suppose the government implements the quantity control. What price must producers receive in order to only supply 500 cigarettes in Zanzi? (Round your answer to the nearest cent.)

a. $1

b. $1

c. $2

d. $2

Question 10: Suppose the government implements the quantity control. What price will the government sell the right to sell a unit of cigarettes for in Zanzi if the government sets the quantity control at 500 cigarettes?

a. $49

b. $49

c. $55

d. $47

10 on 10

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MODULE III: PRODUCTION ANALYSIS

Case Study

Consider the Beiswanger Company, a small firm engaged in engineerng analysis. Beiswanger’s president has estimated that the firm’s output per month (Q) is related in the following way to the number of engineers € and technicians used (T): Q = 20E – E^2 + 12T – 0.5T^2 . The monthly wage of an engineer is $4,000, and the monthly wage of a technician is $2,000. President allots $28,000 per month for the combined wages of engineers and technicians.

Question 1: By re-stating the firm’s supply decision, we have the following:

a. if at the best production level ‘q*’ greater than the average variable cost, then the firm should choose to produce ‘q*’

b. if at the best production level ‘q*’ greater than the average fixed cost, then the firm should choose to produce ‘q*’

c. if at the best production level ‘q*’ less than the average variable cost, then the firm should choose to produce ‘q*’

d. if at the best production level ‘q*’ greater than the marginal cost, then the firm should choose to produce ‘q*’

Question 2: Diminishing marginal returns occurs when

a. when the opportunity cost the extra output increases

b. when the opportunity cost the extra output decreases

c. output remains constant as more of variable factor is added to a fixed factor, output initially increases, then peaks before finally declining

d. output declines as more of variable factor is added to a fixed factor, output initially increases, then peaks before finally declining

Question 3: If the president is to maximize output, he must choose a bundle of engineers and technicians such that

a. MP^e / P^e = MP^t / P^t

b. MP^e / P^t = MP^t / P^e

c. MP^t / P^e = MP^e / P^t

d. None of the above

Question 4: The firm should consider temporary shut down when:

Select one:

a. if at output ‘q*’, price is greater than average variable cost

b. if at output ‘q*’, price is equals average variable cost

c. if at output ‘q*’, price is less than average variable cost

d. if at output ‘q*’, price is greater than marginal cost

Question 5: Total costs are:

a. total fixed cost plus average variable costs

b. total fixed costs plus total variable costs

c. total average fixed costs plus total average variable costs

d. total costs plus opportunity costs

Question 6: What amount of engineers should be hired?

a. 2

b. 4

c. 6

d. 8

Question 7: What amount of technicians should be hired?

a. 4

b. 2

c. 6

d. 8

Question 8: What will be the calculated MP^e?

a. 10 – 2E

b. 20 – 2E

c. 30 – 3E

d. 16 – 3e

Question 9: What will be the calculated MP^t?

a. 12 – T

b. 13 – T

c. 22 – T

d. 15 – T

Question 10: What will be the value of T?

a. E – 2 (wrong answer)

b. E + 2

c. E – 6

d. E – 4

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MODULE IV : MARKET STRUCTURES

Case Study

Assume that two identical firms in a purely oligopolistic industry selling a homogenous product agree to share the maket equally. The total market demand function for the commodity is Qd = 240 – 10P. The cost schedules of the firms are given in the following table:

q1 40 50 60 80 q2 50 70 100

SMC1 (Rs.) 8 10 12 16 SMC1 (Rs.) 4 6 9

SAC1 (Rs.) 13 12.3 12 13 SAC1 (Rs.) 7 6 7

Question 1: Profits for this firm will be:

a. Rs. 420

b. Rs. 130 (wrong)

c. Rs. 350

d. Rs. 450

Question 2: When q1 = 40, What will be MR1?

a. 2

b. 8

c. 5

d. 4

Question 3: When q1 = 40, what will be the profit maximising output for the first firm?

a. 30

b. 60

c. 40

d. 20

Question 4: When q1 = 50, what will be MR1?

a. 7

b. 2

c. 4

d. 3

Question 5: When q1 = 60, what will be MR1?

a. 0

b. 2

c. 4

d. 6

Question 6: When q1 = 80, what will be MR1?

a. 7

b. -4

c. 5

d. -8

Question 7: When q2 = 100, then MR2 will be

a. 16

b. 32

c. -32

d. -16

Question 8: When q2 = 50, price at this level of output will be

a. 12

b. 14

c. 24

d. 32

Question 9: When q2 = 50, then MR2 will be

a. 2

b. 4

c. 5

d. 6

Question 10: When q2 = 70, then MR2 will be

a. 4

b. -9

c. -4

d. -5

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MODULE V : BUSINESS CYCLES

Case Study

The president of the Martin Company is considering two alternative investments, X and Y. If each investment is carried out, there are four possible outcomes. The present value of net profit and profitability of each outcome follow:

Investment X Investment Y

Outcome Net Present Value Probability Outcome Net Present value Probability

1 $ 20 million 0.2 A $ 12 million 0.1

2 8 million 0.3 B 9 million 0.3

3 10 million 0.4 C 6 million 0.1

4 3 million 0.1 D 11 million 0.5

Question 1: Risk management is responsibility of the

a. Customer

b. Investor

c. Developer

d. Project team

Question 2. The president of the Martin Company has the utility function U = 10 + 5P – 0.01 P^2. Which investment should she choose?

a. Investment x

b. nor investment X neither investment Y

c. Investment Y

d. None of the above

Question 3. What is the coefficient of variation of investment X?

Select one:

a. 37%

b. 23%

c. 47%

d. 65%

Question 4. What is the coefficient of variation of investment Y?

a. 37%

b. 23%

c. 47%

d. 18%

Question 5. What is the expected present value of investment X?

a. $ 6 million

b. $ 10.7 million

c. $ 4 million

d. $ 11.09 million

Question 6. What is the expected present value of investment Y?

a. $11 million

b. $ 9 million

c. $ 5 million

d. $ 7 million

Question 7. What is the standard deviation of investment X?

a. $ 5.06 million

b. $ 6 million

c. $ 5 million

d. $ 4 million

Question 8. What is the standard deviation of investment Y?

a. $ 5.06 million

b. $ 1.95 million

c. $ 5 million

d. $ 4 million

Question 9. Which investment is risker?

a. Investment X

b. Investment Y

c. Investment X and Y both

d. None of the above

Question 10. Which of the following technique will ensure that impact of risk will be less?

a. Risk avoidance technique

b. Risk Mitigation technique

c. Risk contingency technique

d. All of the above

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ASSIGNMENT 2

Case Study

The market for study desks is characterized by perfect competition. Firms and consumers are price takers and in the long run there is free entry and exit of firms in this industry. All firms are identical in terms of their technological capabilities. Thus the cost function as given below for a representative firm can be assumed to be the cost function faced by each firm in the industry. The total cost and marginal cost functions for the representative firm are given by the following equations:

TC = 2qs^2+ 5qs + 50

MC = 4qs + 5

Suppose that the market demand is given by:

PD = 1025 – 2QD

Note: Q represents market values and q represents firm values. The two are different.

Question 1: At the new long-run equilibrium, how many firms will be in the industry?

a. 32

b. 45

c. 150

d. 230

Question 2. At the new long-run equilibrium, what will be the output of each representative firm in the industry?

a. 4

b. 5

c. 3

d. 2

Question 3. Determine the equation for average total cost for the firm

a. 2qs + 2 + 50/qs

b. 2qs + 5 + 50/qs

c. 3qs + 5 + 50/qs

d. None of the above

Question 4. Determine the market quantity Q from the market demand curve, given that we know the above calculated market price.

a. 23

b. 504

c. 34

d. 89

Question 5. In the long-run given this technological advance, how many firms will there be in the industry?

a. 34

b. 84

c. 32

d. 56

Question 6. Now suppose that the number of students increases such that the market demand curve for study desks shifts out and is given by, PD = 1525 – 2QD . What will be the new long-run equilibrium price in this industry?

a. 25

b. 34

c. 23

d. 45

Question 7. Now, consider another scenario where technology advancement changes the cost functions of each representative firm. The market demand is still the original one (before the increase in the number of students). The new cost functions are: TC = qs^2+5qs + 36 MC = 2qs + 5 What will be the new equilibrium price?

a. 17

b. 4

c. 2

d. 6

Question 8. What is the long-run equilibrium price in this market?

a. 12

b. 14

c. 25

d. None of the above

Question 9. What is the long-run output of each representative firm in this industry?

a. 5

b. 3

c. 6

d. 7

Question 10. When this industry is in long-run equilibrium, how many firms are in the industry?

a. 3

b. 80

c. 40

d. 100

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