Business Economics Questions and Answers

Answer: C

The product with highly inelastic demand is Salt.

Salt is a necessity with no close substitute, and it takes a tiny share of household income. Even a large rise in its price hardly changes how much people buy, so its demand is highly inelastic.

Jewellery, television sets and sports cars are luxuries or durables whose purchase can be postponed or given up, so their demand is relatively elastic.

Answer: C

The one that is not a method is the Psychological method.

Price elasticity of demand is measured by the ratio or percentage method (percentage change in quantity divided by percentage change in price), the total outlay or expenditure method (how total spending changes with price), the point or geometrical method (on a demand curve) and the arc method.

There is no 'psychological method' of measuring elasticity, so it is the odd one out.

Answer: B

Isoquants are usually convex to the origin.

An isoquant shows combinations of two inputs giving the same output. Because of the diminishing marginal rate of technical substitution, ever larger amounts of one input are needed to replace each further unit of the other, which makes the curve bow inwards, convex to the origin.

A concave isoquant would imply an increasing rate of substitution. 'Parallel' and 'perpendicular to the origin' are not meaningful descriptions of a curve's shape.

Answer: B

The marginal cost curve cuts the average cost curve from below.

When marginal cost is below average cost, each extra unit pulls the average down; when it is above, it pulls the average up. So MC rises through AC at AC's lowest point, cutting it from below.

Option A reverses the curves, option C is wrong because the two curves differ except at that one point, and option D is wrong because after the intersection MC exceeds AC, not the other way round.

Answer: D

The statement that is not true is Total cost = Total fixed cost + Average variable cost.

Total cost is the sum of two totals:

\[ TC = TFC + TVC \]

Adding an average (per-unit) cost to a total mixes different units, so option D is wrong. The other statements are true: opportunity cost is the value of the next best alternative forgone (A), in the short run at least one factor is fixed (B), and variable costs such as direct material and direct labour make up prime cost (C).

Answer: B

The extra cost of one more unit is Marginal cost.

Marginal cost is the change in total cost from producing one additional unit:

\[ MC_{n} = TC_{n} - TC_{n-1} \]

Average cost is total cost divided by output, implicit cost is the imputed cost of the owner's own resources, and accounting cost is the explicit cost recorded in the books; none of them is the cost of an extra unit.

Answer: A

A lump-sum tax causes an upward shift of the AFC and ATC curves.

A lump-sum tax is a fixed amount that does not vary with output, so it adds to fixed cost. At every level of output, average fixed cost rises by the tax divided by output, and average total cost rises by the same amount, so both curves shift up.

Average variable cost and marginal cost are not affected. A downward shift would need a subsidy, and leftward or rightward shifts are not how cost curves respond to a change in cost at every output.

Answer: A

The firm's demand curve is a horizontal straight line.

A perfectly competitive firm is a price taker: it is one of very many sellers of an identical product, so it can sell any quantity at the market price but nothing above it. Its demand curve is therefore perfectly elastic, a horizontal line at the market price, which is also its average and marginal revenue.

A vertical line would be perfectly inelastic demand, and a downward sloping curve is the market demand curve or that of a monopolist; an upward sloping demand curve does not apply here.

Answer: A

An inward shift of the production possibility curve indicates Economic recession in the key's reading.

The PPC shows the maximum combinations of goods an economy can produce with its resources and technology. When the curve shifts inward, the economy's capacity to produce has shrunk, for example after a loss of resources, a war, a natural disaster or a deep downturn that destroys productive capacity, which is the contraction the key calls recession.

Economic growth is the opposite case: more resources or better technology shift the curve outward. Stagnation means the curve stays where it is, and hyperinflation is a rise in the price level, which is not what the PPC measures.

Answer: A

The keyed answer is that business economics is essentially Applied microeconomics only.

Business (managerial) economics applies economic theory to decisions inside a firm: demand analysis and forecasting, production and cost, pricing, and capital budgeting. These are the subjects of microeconomics, the study of individual units, which is why texts such as Joel Dean's describe it as applied microeconomics.

Macroeconomic conditions such as inflation, interest rates and the business cycle form the environment in which the firm decides, so they are drawn on, but the core of the subject is micro. That is why the key rejects 'applied macroeconomics only', and does not treat the subject as an equal mix of the two or as neither.