Business Economics Questions and Answers

Answer: B

In perfect competition the demand curve facing a firm is horizontal. The firm is a price taker: it can sell any quantity at the market price, but at any higher price it would sell nothing, so the curve is perfectly elastic at the market price, and average revenue equals marginal revenue.

A vertical curve would mean perfectly inelastic demand. A positively sloped curve is not a demand curve at all. The negatively sloped demand curve belongs to firms with market power, such as a monopolist or a monopolistic competitor, and it is the industry demand curve in perfect competition that slopes downward.

Answer: B

The demand curve normally slopes downward from left to right, so (B) is correct. Under the law of demand, other things being equal, a fall in price raises the quantity demanded, because of the substitution effect and the income effect, and a rise in price lowers it, so price and quantity move in opposite directions. An upward slope (option A) is found only in the exceptional cases of Giffen goods and goods of conspicuous consumption. A horizontal curve (option C) describes perfectly elastic demand, and a vertical curve (option D) describes perfectly inelastic demand, but neither is the normal case.

Answer: B

Perfect competition is marked by no restrictions on the movement of goods and none on the factors of production, so (B), only (ii) and (iii), is correct. Buyers and sellers are free to enter and leave the market, goods move freely so that one price rules, and labour and capital are mobile. Statement (i), that there are restrictions on buyers and sellers, is the opposite of perfect competition because it describes a market in which entry is controlled. Options (A), (C) and (D) all include (i), so each contains a statement that is false.

Answer: C

Both statements are correct, so (C) is the answer. The assertion is the equi-marginal principle of consumer equilibrium: total utility is greatest when the ratio of the marginal utility of each good to its price is equal across goods, since the last unit of money spent gives the same satisfaction everywhere. The reason says that deviating from this situation reduces the maximum utility, which is also true; a consumer who shifts spending away from the equal-ratio point would gain less satisfaction. Options (A), (B) and (D) each call at least one of these two accepted statements wrong.

Answer: C

The correct order of evolution is Cournot's duopoly model (1838), Sweezy's kinked demand curve model (1939), the game theory model of von Neumann and Morgenstern (1944) and Baumol's sales maximisation model (1959). So (iii), (i), (ii), (iv), option (C), is correct. Option (A) puts Baumol first and Sweezy last, which reverses the history. Option (B) puts game theory first. Option (D) puts Sweezy before Cournot. The question uses the printed spellings Cournal, Newman and Baumal for these authors.

Answer: B

Both statements are correct. Business economics is a tool centred discipline that helps decision making in business, because it applies economic theory such as demand analysis, cost analysis and pricing to managerial problems. The reason is correct too, since it gives an analytical understanding of economic activities. Options A, C and D reject one or both statements, so they are wrong, and option B is the keyed answer.

Answer: D

Demand has all of the elements listed: quantity, price and time. Demand is the quantity of a good that a consumer is willing and able to buy at a given price during a given period of time. Without a price the quantity has no meaning, because the quantity demanded changes as the price changes, and without a period of time, such as a day or a year, the quantity cannot be measured. Since options A, B and C are each an element, the keyed answer is all the above, option D.

Answer: B

A perfectly competitive firm attains equilibrium when marginal revenue equals marginal cost, MR = MC, option B. At that output the firm earns the greatest profit, because producing one more unit would add more to cost than to revenue, and one unit less would give up a profit. The firm also needs marginal cost to cut the marginal revenue curve from below. AC = AR, MC = AC and TC = TR are conditions that show normal profit or the minimum of average cost, but they are not the general rule for equilibrium, so options A, C and D are wrong.

Answer: C

Business economics deals with the tools of economics used for decision making in business. It applies economic theory and the methods of analysis, such as demand estimation and cost analysis, to the problems that a firm faces.

Studying economic relationships and optimum allocation of scarce resources describe economics in general, and the aggregate level is the field of macroeconomics. The third option states the particular role of business economics.

Economics for business is applied economics, concerned with the firm's choice among alternatives.

Answer: D

The correct match is (a)-(ii), (b)-(i), (c)-(iv), (d)-(iii). A zero cross elasticity means two commodities are independent, the shut-down point is where price equals average variable cost, the Slutsky theorem splits the price effect and shows the substitution effect, and the production possibility curve is also called the transformation line.

The other codes give the transformation line to the shut-down point or the substitution effect to independent goods, so they are wrong on at least two pairs.

Slutsky split the effect of a price change into a substitution effect and an income effect.