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

• Question 331:

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

  A. Firms currently paying above the new minimum wage would generally raise their pay rates (although the new minimum wage creates a new floor for employee wage bargaining purposes).

  B. Firms paying at the current minimum wage rate would generally be unaffected if the marginal revenue produced by the lowest paid workers does not exceed the new higher cost of the worker. Many firms would thus be forced to work more efficiently.

  C. 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.

  D. If a marginally more expensive form of capital is available to substitute for labor (e.g., due to technological advances), firms will reduce their use of labor.

  Correct Answer: C

  Choice "c" is correct. With an increase in the minimum wage, 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. Choice "a" is incorrect. Firms currently paying above the new minimum wage would generally be unaffected, not raise their pay rates. Choice "b" is incorrect. Firms paying at the current minimum wage rate would attempt to reduce labor, not generally be unaffected. Choice "d" is incorrect. If a marginally cheaper, not more expensive.

• Question 332:

  In competitive markets, an increase in an effective minimum wage will:

  A. Have a neutral effect on the demand for labor.

  B. Decrease the supply of labor.

  C. Decrease unemployment.

  D. Increase unemployment.

  Correct Answer: D

  Choice "d" is correct. When the "minimum" wages are increased, employers may elect to hire fewer

  employees thereby increasing unemployment.

  Choice "a" is incorrect. An increase in the minimum wage will have an effect on the demand for labor.

  Choice "b" is incorrect. The supply of labor will likely go up as the wage being paid increases.

  Choice "c" is incorrect. As the minimum wage increases, unemployment will increase.

• Question 333:

  If a group of consumers decide to boycott a particular product, the expected result would be:

  A. An increase in the product price to make up lost revenue.

  B. A decrease in the demand for the product.

  C. An increase in product supply because of increased availability.

  D. That companies in the industry would experience higher economic profits.

  Correct Answer: B

  Choice "b" is correct. A consumer boycott will decrease demand for the product being boycotted.

  Choice "a" is incorrect. Increasing price will further reduce the quantity demanded. The effect on revenue is

  uncertain.

  Choice "c" is incorrect. Supply will be unaffected by a boycott.

  Choice "d" is incorrect. A boycott of a particular product will reduce the overall profits of the industry.

• Question 334:

  Any business firm that has the ability to control the price of the product it sells:

  A. Faces a downward-sloping demand curve.

  B. Does not have any entry or exit barriers in its industry.

  C. Has a supply curve that is horizontal.

  D. Has a demand curve that is horizontal.

  Correct Answer: A

  Choice "a" is correct. Any business firm that has the ability to control the price of the product it sells faces a

  downward-sloping demand curve for the firm. Only the firm in a competitive market is a price-taker facing a

  horizontal demand curve at the market equilibrium price.

  Choice "b" is incorrect. Firms in competitive industries have no entry or exit barriers and are price-takers.

  Choice "c" is incorrect, this is a far-out distractor.

  Choice "d" is incorrect. Only firms in perfectly competitive markets (price-takers) face horizontal demand

  curves.

• Question 335:

  Karen Parker wants to establish an environmental testing company that would specialize in evaluating the quality of water found in rivers and streams. However, Parker has discovered that she needs either certification or approval from five separate local and state government agencies before she can commence business. Also, the necessary equipment to begin would cost several million dollars. However, Parker believes that if she is able to obtain capital resources, she can gain market share from the two major competitors. The market structure Karen Parker is attempting to enter is best described as:

  A. Pure competition.

  B. A natural monopoly.

  C. An oligopoly.

  D. Monopolistic competition.

  Correct Answer: C

  Choice "c" is correct. Major competitors and substantial capital requirements (high barriers to entry) are

  oligopolistic market conditions.

  Choice "a" is incorrect. Pure competition has small barriers to entry and numerous suppliers.

  Choice "b" is incorrect. A natural monopoly suggests that economic conditions allow only one supplier for

  efficiency purposes.

  Choice "d" is incorrect. Monopolistic competition has easier barriers to entry and more firms competing to

  supply the market than oligopoly.

• Question 336:

  The kinked demand curve is associated with:

  A. The analysis of agricultural markets.

  B. The analysis of monopolistic competition.

  C. The analysis of pure competition.

  D. The analysis of oligopoly.

  Correct Answer: D

  Choice "d" is correct. The demand curve for any individual oligopolist is kinked sharply downward. This

  occurs because, in oligopoly market conditions, the other firms in the market will match any price reduction

  so they do not lose market share but will not match any price increase of an individual firm.

  Therefore, for the individual firm attempting to raise its prices beyond equilibrium, consumers will quickly

  buy from other firms in the market and demand will drop off sharply creating a kinked demand curve.

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

• Question 337:

  An industry that is oligopolistic would be best characterized by:

  A. One firm selling a product with no close substitutes.

  B. Significant barriers to entry.

  C. Horizontal or flat demand curves for the output of individual firms.

  D. The absence of significant economies of scale.

  Correct Answer: B

  Choice "b" is correct. 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

  Choice "a" is incorrect. This is an example of monopoly. Choice "c" is incorrect. Horizontal demand curves represent demand that is perfectly price elastic (buyers will only pay one price for any quantity of a product). This occurs in perfectly competitive markets. Choice "d" is incorrect. This is characteristic of perfect competition, as there are no barriers to entry ("size doesn't matter") in perfect competition.

• Question 338:

  Monopolistic competition is characterized by:

  A. A relatively large group of sellers who produce differentiated products.

  B. A relatively small group of sellers who produce differentiated products.

  C. One or two companies producing similar products.

  D. A relatively large group of sellers who produce a homogeneous product.

  Correct Answer: A

  Choice "a" is correct. Monopolistic competition is characterized by a relatively large number of sellers who

  produce differentiated products. There are few barriers to entry and firms exert some influence over the

  price and the market. Best examples are brand name consumer products.

  Choice "b" is incorrect. Relatively few sellers with differentiated products would indicate an oligopoly.

  Choice "c" is incorrect. One company would be a monopoly, two an oligopoly.

  Choice "d" is incorrect. A relatively large number of sellers and a standardized product indicates perfect

  competition.

• Question 339:

  In markets that are imperfectly competitive, such as monopoly and monopolistic competition, firms produce at an output where:

  A. Price equals marginal cost.

  B. Average costs are minimized.

  C. Price equals average cost.

  D. Marginal cost equals marginal revenue.

  Correct Answer: D

  Choice "d" is correct. Firms produce up to the point where marginal cost equals marginal revenue, whether the markets are perfectly competitive or imperfectly competitive. Choice "a" is incorrect. Very close, but it's actual marginal revenue, not price. It is assumed that revenue is not fixed on a unit basis. Choice "b" is incorrect. Beyond the point of average costs being minimized, marginal cost will rise. Still, it will make sense to increase production until marginal cost equals marginal revenue. Choice "c" is incorrect. Marginal revenue, not price, as revenue is assumed to vary on a per unit basis, and not average cost, since it will increase profits to expand production until marginal revenue equals marginal cost.

• Question 340:

  Entry into monopolistic competition is:

  A. Frequent, as no obstacles exist.

  B. Difficult, with significant obstacles.

  C. Rare, as significant capital is required.

  D. Relatively easy, with only a few obstacles.

  Correct Answer: D

  Choice "d" is correct. The characteristics of monopolistic competition include:

  ?Numerous firms with differentiated products.

  ?Ease of entry - few barriers.

  ?Firms exact some influence over price and market.

  ?Non-price competition is frequent and critical.

  Choice "a" is incorrect. Monopolistic competition has a few obstacles. A market with no obstacles is in

  perfect competition.

  Choice "b" is incorrect. Significant obstacles are characteristic of oligopoly.

  Choice "c" is incorrect. Significant capital requirements represent a significant barrier to entry, which is

  characteristic of oligopoly.