Test Prep Test Prep Certifications BUSINESS-ENVIRONMENT-AND-CONCEPTS Questions & Answers

• Question 261:

  In a competitive market an increase in the minimum wage will likely have the following effects:

  A. The general (or aggregate) demand for labor will increase; however, the quantity demanded will remain unchanged.

  B. The general (or aggregate) supply of labor will increase; however, the quantity supplied will remain unchanged.

  C. The general (or aggregate) demand for labor will remain unchanged; however, the quantity demanded will decrease.

  D. The general (or aggregate) supply of labor will remain unchanged; however, the quantity supplied will decrease.

  Correct Answer: C

  Choice "c" is correct. The general (or aggregate) demand for labor will remain unchanged; however, the

  quantity demanded will decrease.

  Choice "a" is incorrect, per for choice "c" above.

  Choices "b" and "d" are incorrect. The general (or aggregate) supply of labor will remain unchanged;

  however, the quantity supplied will increase.

• Question 262:

  An increase in the minimum wage:

  I. Will move employers down the labor demand curve, causing the quantity of labor demanded to fall.

  II.

  Is likely to increase the supply of labor, as more people will be willing to work for the higher wage.

  A.

  Only I.

  B.

  Only II.

  C.

  Both I and II.

  D.

  Neither I nor II.

  Correct Answer: D

  Choice "d" is correct; neither statement I nor statement II are correct. Statement I is incorrect, as an increase in the minimum wage will move employers up, not down, the labor demand curve, causing the quantity of labor demanded to fall. Statement II is incorrect, as an increase in the minimum wage leads to a decrease in the quantity demanded of labor and an increase in the quantity supplied of labor. It does not increase the supply of labor, only the quantity supplied of labor. Choices "a", "b", and "c" are incorrect, per the above.

• Question 263:

  An oligopolist faces a "kinked" demand curve. This terminology indicates that:

  A. When an oligopolist lowers its price, the other firms in the oligopoly will match the price reduction, but if the oligopolist raises its price, the other firms will ignore the price change.

  B. An oligopolist faces a non-linear demand for its product, and price changes will have little effect on demand for that product.

  C. An oligopolist can sell its product at any price, but after the "saturation point," another oligopolist will lower its price and, therefore, shift the demand curve to the left.

  D. An oligopolist is similar to a monopolist, and as the quantity demanded for its product increases, the demand curve for that firm shifts to the right.

  Correct Answer: A

  Choice "a" is correct. In an oligopoly, each firm faces a "kinked" demand curve. Others will match price

  cuts, but ignore price increases. The "kink" is at the prevailing price. Best real world examples of oligopoly

  are the airline and auto industries.

  Choice "b" is incorrect. An oligopolist's demand curve is linear but "kinked." Above the "kink," demand is

  highly elastic. Below, very inelastic.

  Choice "c" is incorrect. An oligopolist cannot sell at any price. There is no "saturation point."

  Choice "d" is incorrect. A change in quantity demanded indicates a movement along the demand curve,

  not a shift in the curve.

• Question 264:

  Patents are granted in order to encourage firms to invest in the research and development of new products. Patents are an example of:

  A. Market concentration.

  B. Entry barriers.

  C. Exclusionary practices.

  D. Collusion.

  Correct Answer: B

  Choice "b" is correct. Patents are an example of entry barriers. Patents prevent other rival firms (without patents) from entering the market and consequently, are a form of entry barriers. Patents can be "processrelated" or "product-related." Choices "a", "c", and "d" are incorrect, per above Explanation.

• Question 265:

  Compared to firms in a perfectly competitive market, a monopolist tends to:

  A. Produce substantially less but charge a higher price.

  B. Produce substantially more and charge a higher price.

  C. Produce the same output and charge a higher price.

  D. Produce substantially less and charge a lower price.

  Correct Answer: A

  Choice "a" is correct. Compared to firms in a perfectly competitive market, a monopolist tends to produce

  substantially less but charge a higher price.

  Choices "b", "c", and "d" are incorrect, per above Explanation.

• Question 266:

  What is the effect when a foreign competitor's currency becomes weaker compared to the U.S. dollar?

  A. The foreign company will have an advantage in the U.S. market.

  B. The foreign company will be disadvantaged in the U.S. market.

  C. The fluctuation in the foreign currency's exchange rate has no effect on the U.S. company's sales or cost of goods sold.

  D. It is better for the U.S. company when the value of the U.S. dollar strengthens.

  Correct Answer: A

  Choice "a" is correct. As a foreign competitor's currency becomes weaker compared to the U.S. dollar, the product becomes less expensive in U.S. dollars. The less expensive product will have the advantage in the

  U.S.

  market. Choice "b" is incorrect. As a foreign competitor's currency becomes weaker compared to the

  U.S.

  dollar, the product becomes less expensive in U.S. dollars. The less expensive product will have the advantage in the U.S. market, not a disadvantage. Choice "c" is incorrect. Foreign currency exchange rates impact both sales and possibly cost of goods sold of a competing domestic company. Sales within U.S. markets will deteriorate as the currency of foreign competitors deteriorates and makes the domestic company's goods more expensive. As a foreign competitor's currency appreciates, sales within U.S. markets by a domestic company should also increase as goods manufactured in the U.S. become less expensive. Cost of goods sold may fluctuate if foreign suppliers are used. Choice "d" is incorrect. It is better for a U.S. company when the value of the U.S. dollar weakens, not strengthens. A weak U.S. dollar makes domestic goods relatively less expensive that imported goods.

• Question 267:

  An American importer expects to pay a British supplier 500,000 British pounds in three months. Which of the following hedges is best for the importer to fix the price in dollars?

  A. Buying British pound call options.

  B. Buying British pound put options.

  C. Selling British pound put options.

  D. Selling British pound call options.

  Correct Answer: A

  Choice "a" is correct. To fix a price in dollars to buy British pounds, British pound call options should be purchased. Call options would allow, but not require, the purchaser of the call to acquire the currency (British pounds) for a specified price at or before a specified time in the future. If the price goes down, the purchaser (the importer) would exercise the options; if not, the purchaser (importer) would buy the British pounds in the market and let the options expire. British pound futures could also be used, but that was not one of the choices listed. Choice "b" is incorrect. Buying British pound put options would allow, but not require, the purchaser of the put to sell the currency for a specified price at a specified time in the future. Since the importer needs British pounds, buying put options would not work. The importer needs to end up with British pounds. Choice "c" is incorrect. Selling British pound put options would not work. The importer needs to end up with British pounds. Selling put options could work, but the option would be exercised, or not, by the purchaser and not by the importer. If the options were not exercised, the importer could end up with nothing (other than the option premium). Choice "d" is incorrect. Selling British pound call options would not work. The importer needs to end up with British pounds; if call options are sold, the other party can exercise the options or let them expire, and if the options were exercised, the importer would have to supply the British pounds. This answer is backwards.

• Question 268:

  Hedgehog International has numerous foreign exchange transactions. Management has elected to hedge transactions as a means of mitigating transaction exposure to exchange rate risk. What is the most effective means that Hedgehog International can use to avoid overhedging?

  A. Hedgehog should acquire parallel loans to provide a means for liquidating unneeded hedge securities.

  B. Hedgehog should acquire the maximum amount required to hedge known and projected transactions.

  C. Hedgehog should acquire the minimum amount required to hedge known transactions.

  D. Hedgehog should enter into a cross hedging agreement.

  Correct Answer: C

  Choice "c" is correct. Hedgehog should only acquire the minimum amount of hedge contracts needed to offset the effect of known transactions. Choice "a" is incorrect. Parallel loans represent a swap contract for hedging long-term transaction exposure and are not specifically designed to mitigate the risk of overhedging. Choice "b" is incorrect. Acquisition of the maximum number of hedge contracts for known and projected transactions exposes the organization to greater risk of overhedging since projected transactions might not materialize. Choice "d" is incorrect. Cross hedging involves techniques related to currencies that do have hedge instruments available to mitigate risk and are not specifically designed to avoid overhedging.

• Question 269:

  Hedgehog International has a receivable valued at 500,000 local currency units from its foreign customer due in 90 days. The current spot rate of the local currency unit is $.60. Hedgehog purchases a put option to sell the local currency unit in 90 days for $.61 for a premium of $.005. The exchange rate for the local currency increases to $.63 in 90 days. What will Hedgehog do on the receivable's settlement date?

  A. Hedgehog will exercise its option and sell the proceeds of its accounts receivable collection under the provisions of the option contract at a gain.

  B. Hedgehog will not exercise the option and sell local currency units collected from its receivable at the spot rate.

  C. Hedgehog will be indifferent as to whether it exercises the option or not.

  D. Hedgehog will sell the option at the settlement date and combine its proceeds along with local currency units purchased at the spot rate to maximize its revenue.

  Correct Answer: B

  Choice "b" is correct. Hedgehog will not exercise its option and will, instead convert the local currency units collected from the receivables to its domestic currency by selling that currency at the spot rate at the time of collection. The exercise of the option represents a less profitable alternative than sale of the accounts receivable proceeds at the spot rate at the time the receivables are collected. The exercise of the option in comparison to allowing the option to expire is computed as follows:

  

  The premium is a sunk cost and is irrelevant to the Explanation. Note that the premium is a factor in

  determining the net gain (loss) but not in deciding whether to exercise option.

  Choices "a", "c", and "d" are incorrect, per computation above.

• Question 270:

  Hedgehog International owes 500,000 local currency units to its foreign supplier in 90 days. The current spot rate of the local currency unit is $.60. Hedgehog purchases a call option to buy the local currency unit in 90 days for $.61 for a premium of $.005. The exchange rate for the local currency increases to $.63 in 90 days. What will Hedgehog do on the payables' settlement date?

  A. Hedgehog will exercise its option and settle the payables with proceeds from the option contract at a gain.

  B. Hedgehog will not exercise the option and settle the payables after purchase of the local currency unit at the spot rate.

  C. Hedgehog will be indifferent as to whether it exercises the option or not.

  D. Hedgehog will sell the option at the settlement date and use its proceeds along with local currency units purchased at the spot rate to satisfy the amount payable.

  Correct Answer: A

  Choice "a" is correct. Hedgehog will exercise its option and liquidate the payables associated with the proceeds. The exercise of the option represents a less costly alternative than acquisition of proceeds at the spot rate at the time the payables are due. The net impact of exercise of the option is computed as follows:

  

  The premium is a sunk cost and is irrelevant to the decision. Note that the premium is a factor in

  determining the net gain (loss) but not in deciding whether to exercise the option.

  Choices "b", "c", and "d" are incorrect, per computation above.