The economic environment of business and finance

Chapter-11

01. Mr. Rahim manufactures pieces of classic furniture. Mr. Rahim predicts that “if
people’s incomes rise next year, then the demand for my furniture will increase”.

Requirement

The accuracy of Mr. Rahim’s prediction depends on whether the pieces of furniture he
produces:

A. are normal goods

B. have few substitutes
C. have many complements
D. have few complements

02. Potatoes are a Giffen good. An increase in the price of potatoes will cause:

A. an increase in demand for potatoes

B. a decrease in demand for substitutes for potatoes
C. a decrease in demand for potatoes
D. an increase in demand for substitutes for potatoes

03. Y is a complement of X in consumption. An increase in the price of Y will:

A. increase the demand for Y and decrease the demand for X

B. decrease the demand for Y and increase the demand for Y
C. increase the demand for both Y and X
D. decrease the demand for both Y and X

04. A brand of cheese is an inferior good. A consultant has made two statements about
the cheese.

Statement (1): Demand for the cheese will rise as incomes rise.
Statement (2): Demand for the cheese only exists because of the effects of advertising.

Requirement

Identify whether each statement is true or false.

A. Statement (1) true; Statement (2) false

B. Statement (1) false; Statement (2) false
C. Statement (1) true; Statement (2) true
D. Statement (1) false; Statement (2) true
05. The market for a product is a natural monopoly. Production of the product must be
associated with:

A. high marginal costs

B. low marginal costs
C. economies of scope acting as a barrier to entry
D. low fixed costs

06. The cross elasticity of demand between the Terra product and the Nova product is
zero. The two products are:

A. complements
B. substitutes
C. Veblen goods
D. Unrelated

07. An analyst with ABC PLC has drawn a supply curve for one of the company’s major
products, the Soap. The curve is a vertical straight line. This indicates that supply of the
Soap is:

A. perfectly inelastic
B. of unitary elasticity
C. perfectly elastic
D. one

08. There has been a significant rise in factor costs for the Tempo product during recent
months. It can be expected that there will be:

A. a contraction in demand and supply

B. an expansion in demand and supply
C. a contraction in demand and an expansion in supply
D. an expansion in demand and a contraction in supply

09. In the market for the Optical product competitors do not compete through price.
Instead they spend substantial sums of money on raising consumer awareness
through advertising. There is some differentiation between products, often achieved
through branding. There are many buyers and sellers in the market for the product.

Requirement
The market for the Optical product is characterized as:

A. monopolistic competition
B. oligopoly
C. perfect competition
D. monopoly
10. Which three of the following are associated with conditions of perfect competition?
A. Suppliers are price-makers
B. Suppliers earn ‘normal’ profits
C. Consumers lack influence over market price
D. Differentiated products
E. A single selling price

11. ABC PLC has been able to achieve significant external economies of scale. This
indicates that the market for the company’s only product has been:
A. static, so forcing the company to achieve economies of scale in production
B. growing, so enabling the economies of scale to be achieved
C. contracting, so enabling the company to cut costs in distribution
D. volatile, meaning that internal economies of scale were unattainable

12. If the price of a particular product is Tk.9.00 per unit, on average 150 units of the
product are sold per month. At a price of Tk.10.00 per unit, on average 110 units per
month are sold. The price elasticity of demand for the product is:
A. –0.42
B. –2.40
C. –0.27
D. –0.11

13. The minimum price for a good is set by the government above the current free
market equilibrium price.
Requirement

What will be the effect (if any) on demand for and supply of the good in the short term?

A. Demand for the good will fall; supply of the good will rise
B. Demand for the good will rise; supply of the good will fall
C. Both demand for and supply of the good will rise
D. There will be no effect on either demand for or supply of the good

14. Bench Ltd produces chairs. An economist predicts that, if average incomes rise next
year, demand for the chairs will increase in direct proportion to the rise in incomes
(assuming all other factors remain unchanged).
Requirement
The accuracy of the economist’s prediction depends on whether the chairs:
A. are normal goods
B. have many complementary goods
C. have few complementary goods
D. have few substitutes
15. The basic economic problem facing all national economies is:

A. maximizing economic growth

B. unemployment
C. inflation
D. allocating scarce resources
16. Which of the following is regarded by economists as a factor of production?

A. Demand
B. Enterprise
C. Supply
D. Innovation

17. Which of the following is a source of economies of scale?

A. The introduction of a new product

B. Bulk buying
C. The use of skills in production
D. Cost savings resulting from new production techniques

18. The marginal propensity to consume measures:

A. the relationship between changes in consumption and changes in consumer utility

B. the proportion of household incomes spent on consumer goods
C. the proportion of total national income spent on consumer goods
D. the relationship between changes in income and changes in consumption

19. Which of the following is the correct sequence in a business cycle?

A. Boom, Recession, Depression, Recovery

B. Recession, Recovery, Boom, Depression
C. Boom, Recovery, Recession, Depression
D. Recovery, Recession, Depression, Boom

20. The recession phase of the business cycle will normally be accompanied by all of the
following except:

A. a rise in the rate of inflation

B. a fall in the level of national output
C. an improvement in the trade balance
D. a rise in the level of unemployment
21. The government may seek to reduce the rate of demand-pull inflation by any of the
following means except:

A. reducing interest rates

B. increasing VAT
C. applying more stringent controls over bank lending
D. reducing public expenditure

22. Which of the following would lead to demand pull inflation?

A. Rising import prices

B. Increase in wages
C. Increases in indirect taxation
D. High consumer expenditure such that aggregate demand exceeds aggregate supply

23. Which of the following are effects of reduced interest rates?

1) Consumer spending will increase

2) Business investment will be encouraged
3) Saving will increase

A. 1 only
B. 1 and 2 only
C. 2 and 3 only
D. 1, 2 and 3

24. Which of the following is a fiscal policy measure by government?

A. To raise short-term interest rates in the money markets

B. To support the exchange rate for the country’s currency
C. To control growth in the money supply
D. To alter rates of taxation

25. If the government wishes to increase consumer spending, it should increase the rate
of:

A. income tax
B. corporation tax
C. import duties
D. social security payments
26. Pinewood Ltd produces two complementary products, the Buggle and the Chine.

Requirement

Which of the following describes the cross elasticity of demand between the two
products?

A. Negative
B. Indeterminate
C. Zero
D. Positive

27. Which of the following is not a component of the business environment?

A. Economic environment
B. Political environment
C. Technological environment
D. Internal environment

28. Which of the following is not a micro environmental factor?

A. Customers
B. Suppliers
C. Government
D. Technological trends

29. Which of the following is not a macro environmental factor?

A. Economic conditions
B. Political stability
C. Technological changes
D. Management style

30. Which of the following is not a policy that can be used to reduce unemployment?

A. Fiscal policy
B. Monetary policy
C. Supply-side policy
D. Wage and price controls
E. Privatization
31. What are the benefits of the market mechanism?

A. The market mechanism is efficient in allocating resources.

B. The market mechanism encourages innovation.
C. The market mechanism is responsive to changes in consumer demand.
D. All of the above
32. Equilibrium price is the price at which:

A. Quantity demanded is equal to quantity supplied.

B. Buyers are willing to pay the most for a good or service.
C. Sellers are willing to sell a good or service for the least amount.
D. All of the above

33. If the price of a good is below the equilibrium price, then:

A. There will be a surplus of the good.

B. There will be a shortage of the good.
C. The price will go up.
D. Both (a) and (c)

34. If the price of a good is above the equilibrium price, then:

A. There will be a surplus of the good.

B. There will be a shortage of the good.
C. The price will go down.
D. Both (b) and (c)

35. In a perfectly competitive market, firms are price takers. What does this mean?

A. Firms can set the price of their product.

B. Firms must accept the market price for their product.
C. Firms can charge different prices for different customers.
D. All of the above are incorrect.

36. Which of the following is an example of a perfectly competitive market?

A. The market for wheat.

B. The market for cars.
C. The market for smartphones.
D. All of the above