Economics Questions – Business 225
6) Which of the following statements best characterizes the disagreements be-
tween Paul Samuelson and Jagdish Bhagwati in their debate about outsourc-
ing?
a. Their disagreements are grounded in normative economic analysis. They dis-
agree over how to interpret the relevant economic statistics.
b. Their disagreements are grounded in positive economic analysis. They dis-
agree about the relevant economic statistics used in the model.
c. Their disagreements are grounded in normative economic analysis. They dis-
agree over the types of jobs lost to outsourcing.
d. Their disagreements are grounded in positive economic analysis. They dis-
agree about the model and the assumptions used in the model.
22) Although it is a popular product, Apple makes little profit from each song
downloaded through iTunes. Why does Apple charge only $0.99 to download
a song?
a. Although Apple makes a small amount of profit per song, total profit is large
because the quantity sold is large.
b. The low price makes it more likely that consumers will buy iPods, which are
relatively expensive.
c. Apple plans to increase the price of downloading songs after it sells a large
enough number of iPods.
d. Apple cannot raise the price above $0.99 per song because consumers can
download songs at even lower prices from Apple’s competitors.
44) You have a bond that pays $60 per year in coupon payments. Which of the
following would result in an increase in the price of your bond?
a. The price of a share of stock in the company falls.
b. The likelihood that the firm issuing your bond will default on debt increases.
c. Coupon payments on newly-issued bonds fall to $50 per year.
d. Coupon payments on newly-issued bonds rise to $80 per year.
45) In June 2007 General Motors (GM) posted a price-earnings ratio of 9.84. If
the price of the stock at that time was $36 per share, which of the following
must have been true?
a. GM’s earnings per share was 3.66.
b. GM’s coupon payment was $35 per year.
c. GM’s dividend yield for the year was 26%.
d. GM’s revenues that month were $366 million.
46) In 2007, the dividend yield on General Motors (GM) stock fell from 8.6% to
4.4%. Which of the following would have generated that result?
a. The price-earnings ratio rose.
b. GM issued bonds with a coupon rate equal to 8%.
c. GM announced a decrease in the dividend it would pay per share.
d. The closing price of GM stock fell.
63) When a firm’s long-run average cost curve is horizontal for a range of output,
then in that range production displays
a. constant average fixed costs.
b. increasing returns to scale.
c. constant returns to scale.
d. decreasing returns to scale.
67) A perfectly competitive market is in long-run equilibrium. At present there are
100 identical firms each producing 5,000 units of output. The prevailing
market price is $20. Assume that each firm faces increasing marginal cost.
Now suppose there is a sudden increase in demand for the industry’s product
which causes the price of the good to rise to $24. Which of the following
describes the effect of this increase in demand on a typical firm in the indus-
try?
a. In the short run the typical firm increases its output and makes an above
normal profit.
b. In the short run the typical firm’s output remains the same but because of the
higher price its profit increases.
c. In the short run the typical firm increases its output but its total cost also
rises. Hence, the effect on the firm’s profit cannot be determined without
more information.
d. In the short run the typical firm increases its output but its total cost also
rises, resulting in no change in profit.
69) According to Craig Johnson, president of retail consulting group Customer
Growth Partners “Wal-Mart’s foray into organics should help to bring down
prices for consumers.” Which of the following statements supports Mr.
Johnson’s argument?
a. Wal-Mart has a reputation for deliberately lowering prices to force its
competitors out of the market.
b. Wal-Mart is large enough that it can successfully pressure the U.S.
Department of Agriculture to force organic food farmers to lower their prices.
c. By expanding the organic market, Wal-Mart would bring in economies of scale
that would, when added to a competitive market, drive down prices.
d. Wal-Mart’s core customer base is the low-income consumer. Therefore, to
compete for this customer group organic food farmers will be compelled to
lower prices.
71) Microsoft thought that the initial Xbox was sufficiently different from PS2
that it could charge a significantly higher price for the Xbox than Sony could
charge for PS2. Which of the following statements is implied by Microsoft’s
product positioning?
a. Microsoft recognized that the PS2 was a substitute for the Xbox but believed
that the Microsoft name would be sufficient to draw customers away from the
PS2 and that customers would be willing to pay a premium for Microsoft’s
product.
b. Microsoft believed that the PS2 would soon be phased out by Sony’s PS3;
therefore, it could charge a high price for the Xbox because it had no close
substitutes.
c. Microsoft believed that the PS2 was a distant substitute for the Xbox and
therefore the demand curve for Xbox would be elastic. Charging a higher price
would enable it to increase its profits.
d. Microsoft believed that it had differentiated the Xbox sufficiently to insulate
it from competition. Consequently, it would be able to charge a higher price
and increase its profits.
76) A major difference between monopolistic competition and perfect competi-
tion is that
a. there are barriers to entry in monopolistic competition. There are no barriers
to entry in perfectly competitive markets.
b. monopolistically competitive firms sell differentiated products. Perfectly
competitive firms sell identical products.
c. government regulation restricts the ability of monopolistically competitive
firms to change their prices. Perfectly competitive firms face no price regula-
tion.
d. the market demand curve in a monopolistically competitive market slopes
downward. The market demand curve in a perfectly competitive market is
horizontal.
79) At the peak of its success in the mid-1980s to the early 1990s, Apple Com-
puter had a 15 percent share of the personal computer market. In 2007
Apple’s share of the growing personal computer market was estimated at 6
percent. Which of the following best accounts for this decline in market
share?
a. The entry of rivals eliminated Apple’s product differentiation.
b. Apple was not able to keep up with technological advancements in the per-
sonal computer market.
c. The entry of rivals revealed that Apple was producing sub-standard comput-
ers.
d. Rivals engaged in predatory pricing but Apple was not willing to engage in a
price war.
98) Why does the short-run aggregate supply curve shift to the left in the long
run, following an increase in aggregate demand?
a. Workers and firms adjust their expectations of wages and prices upward and
they push for higher wages and prices.
b. Workers and firms adjust their expectations of wages and prices upward and
they accept lower wages and prices.
c. Workers and firms adjust their expectations of wages and prices downward
and they accept lower wages and prices.
d. Workers and firms adjust their expectations of wages and prices downward
and they push for higher wages and prices.
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