Business Economics Questions and Answers

Answer: B

The statement that is not a property is indifference curve is concave to origin.

Indifference curves are convex to the origin, because the marginal rate of substitution diminishes: the more of X a consumer has, the less Y he will give up for one more unit of X.

The other statements are standard properties. Indifference curves slope downward, since more of one good must be offset by less of the other; two curves cannot intersect, since that would make one bundle give two different levels of satisfaction; and a higher curve represents a higher level of satisfaction.

Answer: C

An increase in the capacity cannot take place in the short run.

The short run is defined as the period in which at least one factor, usually plant and machinery, is fixed. Output can be changed only by varying the variable factors within the existing plant. Expanding capacity needs a new plant or new machines, which is possible only in the long run, when all factors are variable.

Changing the number of workers, cutting output and routine maintenance of the plant are all things a firm can do with its existing capacity, so they are short-run decisions.

Answer: A

Increasing returns to scale means a more than proportionate increase in output.

Returns to scale compare the change in output with an equal proportional change in all inputs. If doubling every input more than doubles output, returns are increasing, usually owing to specialisation and indivisibilities.

A proportionate increase is constant returns to scale and a less than proportionate increase is decreasing returns to scale. 'Multiproportionate increase' is not a term used in production theory.

Answer: B

This is the least cost input combination.

The isoquant's slope is the marginal rate of technical substitution between labour and capital, and the isocost line's slope is the ratio of their prices. Where the two slopes are equal, the isocost line is tangent to the isoquant, and the firm produces the given output at the lowest possible cost. This is the producer's equilibrium, also called the least cost combination of factors.

'Balanced cost input' and 'maximum cost input' are not terms in production theory, and cost of production is the total outlay, not the combination itself.

Answer: B

The point where total cost equals total revenue is the break-even point.

At break-even the firm makes neither profit nor loss. Below it, revenue does not cover fixed and variable costs together; above it, every unit sold adds its contribution to profit.

The shut-down point is different: it is where price just covers average variable cost, below which a firm should stop production in the short run even though it still bears its fixed costs. 'Expansion point' and 'focal point' are not cost-volume-profit terms.

Answer: A

Advertising expenses are least under monopoly.

A monopolist is the only seller of a product with no close substitutes, so there is no rival to win customers from. It may advertise to inform buyers or expand the market, but competitive advertising is largely unnecessary.

The other structures advertise heavily. Under monopolistic competition firms sell differentiated products and spend on selling to set their brand apart. In oligopoly, and in duopoly, which is its two-firm case, a few interdependent rivals compete through advertising rather than price.

Answer: D

The statement that is not correct is that consumer surplus is the extra price paid by the consumer.

Consumer surplus is the difference between what a consumer is willing to pay for a good and what he actually pays. It is a gain the consumer keeps, the benefit received beyond the price paid, not an amount he pays out.

The first two statements give the standard Marshallian definition, and the third describes the surplus loosely as value the consumer receives. Only the last reverses its meaning by turning a benefit into an extra payment.

Answer: A

Business economics is micro in character because it studies the problems of an individual business unit.

Microeconomics studies individual economic units, a consumer, a firm or an industry. Business economics applies economic theory to the decisions of a single firm, such as demand forecasting, pricing, cost and production decisions, so it is microeconomic in nature.

Studying national income is macroeconomics, and 'related to resources' or 'studies the market' do not explain why the subject is micro.

Answer: B

The main objective of a business firm is to undertake a profit making process.

In economic theory, the traditional objective of the firm is profit maximisation, and profit is what keeps a business in existence and funds its growth.

Production is the means by which a firm earns profit, not the end. Social activities are a responsibility a firm may accept, and 'national activities' are not a business objective.

Answer: A

Rolex and Bollix are substitute goods.

Cross price elasticity measures the response of demand for one good to a change in the price of another. A positive value, here 10, means that when the price of one rises, demand for the other rises too, which is the mark of substitutes.

Complements have negative cross elasticity, independent goods have zero, and inferior goods are defined by income elasticity, not cross elasticity.