UNIT 5 - BEC
Patents are granted in order to encourage firms to invest in the research and development of new products. Patents are an example of:
Barriers to entry Patents are an example of barriers to entry. Patents prevent other rival firms (without patents) from entering the market and consequently, are a form of barriers to entry. Patents can be "process-related" or "product-related."
A hospital is comparing last year's emergecy rescue services expenditures to those from 10 years ago. Last year's expenditures were 100,500. Ten years ago, the expenditures were 72,800. The CPI for last year is 168.5 as compared to 121.3 ten years ago. After adjusting for inflation, what percentage change occurred in expenditures for emergency rescue services?
0.6% decrease The consumer price index (CPI) is a measure of the overall cost of a fixed basket of goods and services purchased by an average household. The inflation rate is calculated as the percentage change in the CPI from one period to the next. By extension, nominal costs can be deflated to price level adjusted amounts by dividing a base year price index by the current year price index. The current fact pattern anticipates the following computation: Base year - emergency rescue service 72,800 Current year costs times the ratio of base to current year indices: $100,500 × (121.3 / 168.5) = 72,348 Difference (decrease) (452) The percentage change in the expenses is simply the change divided by the base year computed as follows: (452) / 72,800 = .6% decrease.
Assume the following data for U.S. economy in a recent year: Personal consumption expenditures 5,015 billion Exports 106 billion Government purchases of goods/services 1,040 billion M1 262 billion Imports 183 billion Gross private domestic investment 975 billion Open market purchases by Federal Reserve 5 billion What is the US GDP for the year?
6,953 billion GDP = G + I + C + E (Exports - Imports) 1,040 billion 975 billion 5,015 billion 106 billion - 183 billion 6,953 billion
What factor, impacting aggregate demand and supply curves respectively, will definitively lead to inflation?
A depreciating local currency and an increase in wages Inflation occurs when prices rise, and in order for prices to definitively rise, the aggregate demand curve must shift to the right and the aggregate supply curve must shift to the left. A depreciating local currency will shift the aggregate demand curve to the right because net exports will increase. An increase in a factor of production (like wages) will cause the aggregate supply curve to shift to the left.
What is most likely a result of imposing tariffs to increase domestic employment?
A long-run reallocation of workers from export industries to protected domestic industries A tariff is a tax imposed on imported goods and services. One of the desired effects of implementing a tariff is that if imported goods and services become more expensive, companies and individuals will be more likely to produce domestically—thereby increasing domestic employment. Taxes will have a negative effect on international business, thereby increasing domestic business. Workers will be needed to meet the demand domestically.
Structural unemployment
A mismatch between worker skills and available employment is an example of structural unemployment.
Economic activity is characterized by fluctuations known as business cycles. What properly describes the corresponding phase of the business cycle?
A trough is the lowest point of economic activity. During a trough, firm profits are likely to be at their lowest level. Firms often try to reduce the size of their workforce and reduce other costs.
Suppose the equilibrium wage for low skilled workers in California is 6 dollars an hour. If the government increases the wage to 7 dollars an hour, what would be the effect on the market for low skilled labor?
An excess supply of labor would result A minimum wage that is set above the equilibrium wage will result in an excess supply (or surplus) of labor.
What is true assuming that demand for a product is price elastic?
An increase in price will result in a decline in total revenue. If demand is price elastic, an increase in price will result in a decline in total revenue (negative relationship).
Michael Porter identified five forces that affect profitability. What are these forces?
Bargaining power of customers Existence of a substitute product Barriers to market entry Market competitiveness Bargaining power of suppliers
What pricing policy results in establishment of a price to external customers higher than the competitive price for a given indusry?
Collusive pricing Collusive pricing anticipates that competitors will collude or conspire to maintain prices and mutual profitability. Collusive pricing undermines competitive pricing and maintains prices to external customers at levels higher than they would be in a competitive market place.
Under the expenditure approach, GDP can be calculated as the sum of:
Consumption, investment, government purchases, and net exports
What would cause the aggregate demand curve to shift to the right?
Depreciated domestic currencies A shift to the right in the aggregate demand curve indicates an increase in demand at every price level. A decrease in domestic currency rates, as compared with foreign currency rates, tends to make domestic goods more affordable for consumers both inside and outside of the country. Foreign goods, on the other hand, become more expensive. This results in demand for domestic goods increasing, thus increasing the overall aggregate demand curve.
As a measure of national income, the relationship between personal income and disposable income is best described as:
Disposable income is less than personal income as adjusted for personal taxes Disposable income is computed as personal income (the income received by households and noncorporate businesses) net of personal taxes. Disposable income is the amount left over from personal income that is available either to spend or save.
Dual pricing
Dual pricing involves appropriately assigning different prices to the same product in different market settings. Dual pricing is a sophisticated extension of competitive pricing. The prices are simply established at the levels appropriate for each market and would not result in higher prices than would be experienced in competitive markets.
Dumping
Dumping occurs when the price charged to foreign customers on exported goods is less than either the price charged in the domestic market or less than the production cost.
A massive earthquake and tsunami seriously damaged the productive capabilities of auto manufactures in Japan. As a result, workers at U.S. parts manufacturing firms dedicated to supplying the Japanese manufacturers are furloughed bc the parts produced in the U.S. plants are temporarily unneeded. The negative impact of the Japanese earthquake and tsunami on these U.S. parts manufacturers is best described as:
Global sourcing complications Global sourcing is the use of a worldwide supply chain. The reduced production in U.S. factories, as a result of a natural disaster in Japan, is an example of the complications that come from global sourcing.
Deflation will be most beneficial for individuals who:
Hold monetary assets Monetary assets are fixed in dollar amounts, regardless of what happens with price level changes. Holding a monetary asset (like accounts receivable) when prices are dropping will be beneficial, as the asset's value will increase when price levels drop.
What is true regarding supply and demand?
If demand increases and supply decreases, equilibrium price will increase. If quantity demanded for a product goes up, this drives price up. Additionally, if supply decreases, this will also drive prices up. Therefore, it is a certainty that price will be driven up, given an increase in demand and a decrease in supply.
An increase in the market supply of beef would result in a:
Increase in the quantity of beef demanded A shift outward (increase) in supply, increases quantity demanded at equilibrium, accompanied by a decline in price. Thus, an increase in the market supply of beef would result in an increase in the quantity of beef demanded.
When applying value chain analysis, a firm asks its accounting department to perform an analysis of the sources of profits and costs of activities that exist within the firm. The firm is performing which form of value chain analysis?
Internal costs analysis Internal costs analysis includes analyzing the internal value-creating ability of a firm, so the sources of profit and costs of the internal activities of the firm must be analyzed.
What is strategic planning?
It establishes the general direction of the organization. Strategic planning is the creation of an overall strategic plan for an organization to achieve its overall "business objectives." The strategic plan will establish the general direction of the organization.
A country's currency conversion value has recently changed from 1.5 to the U.S. dollar to 1.7 to eh U.S. dollar. What is true about the country?
Its exports are less expensive for he United States The foreign country's exports will be less expensive for the United States since it will require fewer U.S. dollars to buy the foreign goods. If the conversion factor is 1.5 FCU to the USD, it takes $.666 to purchase one currency unit. When the conversion factor changes to 1.7 FCU to the USD, it takes $.588 to purchase one currency unit. Therefore, with the higher exchange rate the country's exports will be less expensive for the United States.
What correctly lists the three ways to increase the money supply?
Lower the required reserve ratio, decrease the discount rate, buy bonds on the open market.
A firm is in heavy competition with a rival firm, and its rivals are consistently able to effectively respond to changes in consumer preferences by making strategic moves in an effort to win over the buyers and gain competitive advantage. What force affects the competitive environment and profitability of a firm does this best demonstrate?
Market competitiveness Market competitiveness is often the most significant of the five forces facing a firm. Firms need to be able to anticipate the strategic moves of rival firms. If a firm is in competition with other firms who are able to respond to changes in various components affecting business, the firm faces a strong competitive force of intensity of competition (market competitiveness).
Predatory pricing
Predatory pricing strategies typically result in lower prices to external customers than competitive pricing. Predatory pricing (below market or even below cost) is undertaken by larger organizations that can absorb losses and deliberately do so in an attempt to drive smaller, less capitalized, competitors from the market place.
If elasticity of demand for a normal good is established to be1.5, then a 10% reduction in its price would cause:
Quantity demanded to rise by 15% The elasticity of demand is calculated as: % change in demand % change in price If the elasticity of demand is 1.5 (assumed to be the absolute value, as the elasticity of demand for a normal good is always negative), then a 10% price reduction would cause an increase in the quantity demanded by 15% (a ratio of 15 to 10 or 1.5).
An increase in the personal income tax will tend to cause:
Real GDP to fall and unemployment to rise An increase in the personal income tax will cause a decrease in aggregate demand (i.e., causes the aggregate demand curve to shift left). As a result, an increase in taxes causes real GDP to fall and unemployment to rise.
Cyclical unemployment
Recessions are low points in economic cycles that create cyclical unemployment.
What Federal Reserve policy would increase money supply?
Reduce the discount rate A lower discount rate would reduce short-term interest rates, which would encourage more (short-term) borrowing at the lower interest rate (lower cost means more demand). More borrowing means more lending and more money in the economy.
When the overall price level is rising, nominal interest rates tend to be:
Rising The relationship between nominal interest rates and inflation can be seen by rearranging the equation for real interest rates as follows: Nominal Interest Rate = Real Interest Rate + Inflation Thus, if real interest rates do not change, a 1% increase in the inflation rate will lead to a 1% increase in nominal interest rates.
Suppose a stock market boom causes a large increase in wealth. If the Federal Reserve wanted to counteract the effect of the stock market boom on the economy it could:
Sell government securities or increase the discount rate A large increase in wealth would shift the aggregate demand curve to the right. As a result, real GDP and the price level would rise. The Federal Reserve might intervene in such a case to offset the inflationary effects of the shift right in aggregate demand. To do so, the Fed would have to decrease the money supply. It could decrease the money supply by selling government securities or increasing the discount rate.
During a tactical planning meeting, company management discussed the performance of each of its business segments. Management concluded that its recreational vehicles segment was underperforming and lacked the core competencies to align with the company's three other business segments. What strategy should the company pursue if management concluded that the divestiture of the recreational vehicles segment would improve its stock price?
Sell off Company management concluded that the recreational vehicles segment was underperforming and lacking core competencies to align with its other business segments. Given that management further determined that the company's stock price would actually improve with the segment's divestiture, the best course of action is an outright sell-off of the recreational vehicles segment.
If, in a competitive market, a price ceiling is impose establishing a maximum price below the market equilibrium price, this price ceiling would result in:
Shortages because the quantity demanded would exceed the quantity supplied Setting a ceiling price below the price dictated by the market (as established by the equilibrium price) would create excess demand and a shortage.
Two junior financial analysts meet for lunch to discuss their recent assignment pertaining to analyzing potential business segment divestitures. The following statements are made: Statement 1: The types of divestitures can result in either a full or partial divestiture of a business segment. Statement 2: A straight sell-off of a business segment results in obtaining cash without any future interest in that segment. Statement 3: completing an equity carve-out requires an IPO with the parent company maintaining a minority interest stake. Statement 4: A spin-off typically involves creating a new company where existing shareholders receive stock in the new company in exchange for their shares of the company. What statement is false?
Statement 3 Although it is accurate that an equity carve-out involves an IPO, it is a false statement that the parent receives a minority interest share as part of the equity carve-out. Instead, the parent receives a controlling interest in that operating subsidiary.
The invisible hand
The "invisible hand" in economics relates to individuals acting in their own best interests and the unintended benefit to society which results.
What is true regarding an economy at the peak of the business cycle?
The economy will be at the natural rate of unemployment At the natural rate of unemployment, there is frictional, structural, and seasonal unemployment; cyclical unemployment is at 0 percent, which implies that the economy is operating at its highest potential level.
What is correct if there is an increase in the resources available within an economy?
The economy will be capable of producing more goods and services.
What is true regarding the existence of substitute products?
The impact of substitutes will have more of an effect on the competitive environment of a firm if the substitutes are readily available for customers to obtain.
What characteristic would indicate that an item sold would have a high price elasticity of demand?
The item has many similar substitutes If an item has many similar substitutes, its price elasticity of demand will be high. Customers can always switch to a substitute, so a change in price may affect demand substantially.
Frictional unemployment refers to unemployment resulting from:
The time needed to match qualified job seekers with available jobs. Frictional unemployment is the unemployment that arises from workers routinely changing jobs or from workers being temporarily laid off. It results from the time needed to match qualified job seekers with available jobs.
What is a common component between the expenditures approach and the incomes approach to measuring gross domestic product (GDP)?
There are no common items in the two formulas for calculating Gross Domestic Product (GDP). The expenditures approach is based on expenditures while the incomes approach includes only income items.
In a competitive market, an increase in the minimum wage will likely have what effect?
Total employment will likely decrease in affected industries and generate unemployment. Employers will demand a smaller number of workers while a larger number of workers will be attracted by the higher wage.
Transfer pricing
Transfer pricing is the charge made between affiliates for products or services. Transfer prices may be at any level including cost and market and do not relate to the establishment of prices to external customers.
An oligopolist faces a "kinked" demand curve. This terminology indicates that:
When an oligopolist lowers its price, the other foirms in the oligopoly will match the price reduction, but if the oligopolist raises its price, the other firms will ignore the price change.
The concept of global economic balance of power anticipates:
a distribution of power and influence that ensures that no one nation or group of nations will dominate or interfere with the activities of others.
All of the following actions are valid tools that the Federal Reserve Bank uses to control the supply of money, except: a) printing money when the money supply appears low b) changing the reserve ratio c) raising or lowering the discount rate d) selling government securities
a) printing money when the money supply appears low The Treasury prints money.
If an economy is currently experiencing both full employment and price stability, a major tax reduction will probably cause:
an acceleration in the inflation rate, unless government expenditures are also reduced. A tax cut shifts the aggregate demand curve to the right causing the price level and therefore the inflation rate to rise.
If a product's demand is elastic and there is a decrease in price, the effect will be:
an increase in total revenue If demand is relatively elastic, then the reduction in price will, by definition, produce a proportionately greater increase in quantity demanded. Hence, total revenue will increase.
Which of the following is not likely to cause rightward shift in the aggregate demand curve? a) an increase in the general level of confidence about the economic outlook b) an increase in the level of real interest rates c) an increase in wealth d) an increase in government spending
b) an increase in the level of real interest rates An increase in real interest rates increases the cost of capital, which shifts the aggregate demand curve to the left.
Economic indicators are often used to try to predict or explain economic activity. Which of the following is not an example of a leading economic indicator? a) building permits for residential properties b) manufacturing and trade sales c) price changes of materials d) orders for goods
b) manufacturing and trade sales Manufacturing and trade sales tend to be coincident indicators, as the increases or decreases tend to occur at the same time as the increases or decreases in overall economic activity.
Increased demand for product A increases the demand for resources used to produce product A. What is the best explanation for the increase in the demand for resources?
the theory of derived demand is working Derived demand relates to the demand for factors of production. Demand for these factors is directly correlated to the demand for the goods/services the factors are used to produce. If the demand for resources used to produce Product A increases due to an increase in demand for Product A, then this illustrates the theory of derived demand.
Which of the following is incorrect with regard to government intervention in market operations? a) government intervention may create a price different from the market price, thus causing either a surplus or shortage b) price floors are minimum prices established by law, such as minimum wages and agricultural price supports c) a price ceiling is a price that is established above the equilibrium price, which causes a surplus to develop d) rationing limits the availability of certain goods to a specified level, which lowers demand and prices for a given supply
c) a price ceiling is a price that is established above the equilibrium price, which causes a surplus to develop A price ceiling is a price that is established below the equilibrium price, which causes a shortage to develop. This answer in choice defines a price floor.
Which of the following statements is correct regarding developed versus emerging nations and their trade positions? a) the US, as a developed nation, will typically have a trade surplus due to more imports and exports b)India, as a developed nation, will typically have a trade deficit due to more imports and exports c) Russia, as an emerging nation, will typically have a trade deficit due to more exports than imports d) Brazil, as an emerging nation, will typically have a trade surplus due to more exports than imports
d) Brazil, as an emerging nation, will typically have a trade surplus due to more exports than imports Brazil is an emerging nation. Most (not all) emerging nations have trade surpluses, which occur when exports exceed imports.
Which of the following events will most likely lead to both inflation and a recession? a) an appreciation in the local currency b) a decrease in real wages c) a decrease in real interest rates d) an increase in the cost of raw materials
d) an increase in the cost of raw materials An increase in the cost of raw materials will cause the aggregate supply curve to shift to the left, which will serve to both increase prices (inflation) and reduce output (recession). An appreciation in the local currency will cause aggregate demand to shift to the left, which will reduce output and prices. A decrease in real wages will shift the aggregate supply curve to the right, which will reduce prices and increase economic output. A decrease in real interest rates will increase aggregate demand, which will increase prices but will also increase output.
Which of the following changes will cause the demand curve for jet fuel to shift to the left? a) the price of jet fuel increases b) the average domestic air fare decreases c) the supply of jet fuel decreases d) the average domestic air fair increases
d) the average domestic air fair increases Air fares and jet fuel are complementary goods. Any increase in average domestic air fares will decrease demand for jet fuel at all price levels because the demand for jet fuel is directly affected by the demand for airline tickets, thereby causing the demand curve for jet fuel to shift to the left.
A natural monopoly exists because:
economic and tecnhical conditions permit only one efficient supplier Government control may create a monopoly, but not a natural monopoly. This is a regulated monopoly.
Economic fluctuations (or business cycles) are best described as:
fluctuations in the level of economic activity, relative to a LT growth trend.
When markets are perfectly competitive, consumers:
have good sand services produced at the lowest cost in the long run Since price is barely sufficient to give a firm a normal profit and stay in business, the consumer obtains the product at as low a price as is economically feasible. In addition, every firm is forced to produce at the most efficient output rate.
A market with many independent firms, low barriers to entry, and the product differentiation is best classified as:
monopolistic competition A market with many independent firms, low barriers to entry, and product differentiation is best classified as monopolistic competition. There are few barriers to entry and firms exert some influence over price in such a market. Best examples are brand name consumer products.
A basic determinant of the elasticity of demand for a normal good is the:
number of substitutes available for the product The change in demand for a product, based upon a given change in that product's price, is dependent on whether or not other (presumably cheaper) goods can be substituted for the product.
In the pharmaceutical industry where a diabetic must have insulin no matter what the cost, the diabetic's demand is considered to be:
perfectly inelastic When a good is demanded, no matter the price, demand is described as perfectly inelastic. The demand "curve" is a vertical line at the quantity demand with price making no difference.
What is true with respect to price elasticity of demand?
product demand is more elastic when more substitutes are available.
An industry that is oligopolistic would be best characterized by:
significant barriers to entry Oligopoly market conditions are characterized by: Few firms in the market Significant barriers to entry Differentiated products Fixed (or semi fixed) prices Kinked demand curves
Given that cyclical unemployment in the local economy is a negative one percent, what is most accurate?
the economy's potential level of output is less than real GDP When real GDP exceeds the economy's potential level of output, cyclical unemployment will be a negative number as it is here.
What condition is the primary cause of fluctuations in business activity resulting in the alternating rise and fall of economic growth?
the level of total spending Business cycles represent the rise and fall of economic activity, and these cycles result from shifts in aggregate demand and short-run aggregate supply. Changes in government spending cause shifts in aggregate demand, which in turn lead to business cycles.