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

• Question 341:

  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 large capital outlay necessary for the equipment is an example of a(n):

  A. Entry barrier.

  B. Minimum efficiency scale.

  C. Created barrier.

  D. External cost.

  Correct Answer: A

  Choice "a" is correct. Large capital (money) requirements are the basic example of barriers to entry. A

  barrier to entry effectively prevents firms from entering the market to compete against existing firms.

  Choice "b" is incorrect. Minimum efficient scale is the output level at which long run average costs are

  minimized. Here, Parker has not even been able to enter the industry.

  Choice "c" is incorrect. A created barrier is made by firms already in the industry. Here, Parker's barrier

  was not created.

  Choice "d" is incorrect. An external cost is a cost that the company does not account for, but passes on to

  the detriment of society.

• Question 342:

  Which one of the following statements concerning pure monopolies is correct?

  A. The demand curve of a monopolist is perfectly elastic.

  B. The price at which a monopolist maximizes its profit is where price equals both marginal cost and marginal revenue.

  C. A monopolist's marginal revenue curve lies below its demand curve.

  D. The supply curve of a monopolist is perfectly inelastic.

  Correct Answer: C

  Choice "c" is correct. A monopolist's marginal revenue curve lies below its demand curve.

  Choice "a" is incorrect. The demand curve of a monopolist is not perfectly elastic.

  Choice "b" is incorrect. A monopolist sets its price higher than marginal revenue.

  Choice "d" is incorrect. A monopolist can change the quantity supplied or fix the price but cannot do both

  simultaneously. In any case, its supply curve is not perfectly inelastic.

• Question 343:

  A natural monopoly exists because:

  A. The firm owns natural resources.

  B. Economic and technical conditions permit only one efficient supplier.

  C. The government is the only supplier.

  D. Other firms are unable to enter the industry.

  Correct Answer: B

  Choice "b" is correct. A natural monopoly exists when economic and technical conditions permit only one

  efficient supplier.

  Choice "a" is incorrect. Owning natural resources, even if they are unique, would not create a monopoly.

  Substitutes for the resource may be available.

  Choice "c" is incorrect. Government control may create a monopoly, but not a natural monopoly. This is a

  regulated monopoly.

  Choice "d" is incorrect. Barriers to entry help create a monopoly, but the product must be unique.

• Question 344:

  In order to sell at the rate of output in markets controlled by monopolists, price is set where:

  A. Price equals marginal cost.

  B. Marginal revenue equals marginal cost.

  C. Marginal revenue equals average total cost.

  D. Price equals average total cost.

  Correct Answer: B

  Choice "b" is correct. In order to sell at the rate of output in markets controlled by monopolists, the price is

  set where marginal revenue equals marginal cost. No matter which model is representative of the industry

  in which the firm operates, the firm will maximize profits by producing at MR = MC. The monopolist's price

  will be higher than MR.

  Choice "a" is incorrect. Price exceeds both MR and MC.

  Choices "c" and "d" are incorrect, which are far-out distractors.

• Question 345:

  Which one of the following is not a key assumption of perfect competition?

  A. Customers are indifferent about which firm they buy from.

  B. The level of a firm's output is small relative to the industry's total output.

  C. Each firm can price its product above the industry price.

  D. There is freedom of entry into and exit out of the industry.

  Correct Answer: C

  Choice "c" is correct. A key assumption of perfect competition is that the firm is a "price taker," that is, it cannot fix the price. Accordingly, it is not true that each firm can price its product above the industry price. Key assumptions of perfect competition include:

  A. Customers are indifferent about which firm they buy from.

  B. The level of a firm's output is small relative to the industry's total output.

  D. There is freedom of entry into and exit out of the industry.

• Question 346:

  When markets are perfectly competitive, consumers:

  A. Have goods and services produced at the lowest cost in the long run.

  B. Must choose the brands they buy solely on the basis of informational advertising.

  C. Do not receive any consumer surplus unless producers choose to overproduce.

  D. Must search for the lowest price for the products they buy.

  Correct Answer: A

  Choice "a" is correct. 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.

  Choice "b" is incorrect. Brand differentiation is present in monopolistic competition, not perfect competition.

  Choice "c" is incorrect. This is a far-out distractor.

  Choice "d" is incorrect. Also far out. Individual consumers are also price takers at the market equilibrium

  price.

• Question 347:

  The following table contains Emerald Corp.'s quarterly revenues, in thousands, for the past three years. During that time, there were no major changes to Emerald's selling strategies and total capital investment.

  

  Which of the following statements best describes the likely cause of the fluctuations in Emerald's revenues and the best response to those fluctuations?

  A. The fluctuations are from changes in the economy, and Emerald should examine its cost structure for potential changes.

  B. The fluctuations are from changes in the economy, and Emerald should manage its inventories and cash flow to match the cycle.

  C. The fluctuations are from the seasonal demand for Emerald's products, and Emerald should examine its cost structure for potential changes.

  D. The fluctuations are from the seasonal demand for Emerald's products, and Emerald should manage its inventories and cash flow to match the cycle.

  Correct Answer: D

  Choice "d" is correct. Relatively stable demand over a three year period in each of the first three quarters of the year followed by an increase of between 40 and 50 percent in the final quarter of the year over average sales in the first three quarters in each of the three years presented is indicative of seasonal fluctuations in demand for Emerald's product that would require appropriate inventory management. Choice "a" is incorrect. The consistent volume levels and fluctuation percentages displayed for the activity in each quarter for each year are indicative of changes in seasonal demand rather than changes in the economy generally. Choice "b" is incorrect. The consistent volume levels and fluctuation percentages displayed for the activity in each quarter for each year are indicative of changes in seasonal demand rather than changes in the economy generally. Choice "c" is incorrect. Relatively stable demand over a three year period in each of the first three quarters of the year followed by an increase of between 40 and 50 percent in the final quarter of the year over average sales in the first three quarters in each of the three years presented is indicative of seasonal fluctuations in demand for Emerald's product. The company should be more attentive to the timing of inventory purchases to meet demand, however, rather than the company's overall cost structure.

• Question 348:

  Which of the following is correct regarding the consumer price index (CPI) for measuring the estimated decrease in a company's buying power?

  A. The CPI is measured only once every 10 years.

  B. The products a company buys should differ from what a consumer buys.

  C. The CPI measures what consumers will pay for items.

  D. The CPI is skewed by foreign currency translations.

  Correct Answer: B

  Choice "b" is correct. The consumer price index measures the costs of a market basket of specific goods commonly purchased by consumers. It measures consumer buying power and is not distorted by items generally bought by industry. Choice "a" is incorrect. The Consumer Price Index (CPI) represents monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. Choice "c" is incorrect. The Consumer Price Index measures what has been paid for items, not what consumers will pay for items.

  Choice "d" is incorrect. The Consumer Price Index measures what has been paid by consumers in over eighty urban areas in the United States. The amounts paid are denominated in US dollars and would not be skewed by foreign currency translations.

• Question 349:

  Gross domestic product includes which of the following measures?

  A. The size of a population that must share a given output within one year.

  B. The negative externalities of the production process of a nation within one year.

  C. The total monetary value of all final goods and services produced within a nation in one year.

  D. The total monetary value of goods and services including barter transactions within a nation in one year.

  Correct Answer: C

  Choice "c" is correct. Gross domestic product (GDP) is the total dollar (monetary) value of all new final products and services produced with the economy in a given time period. The emphasis is on the final goods and services. Choice "a" is incorrect. The size of a population that must share a given output within one year is not a part of the GDP calculation. Choice "b" is incorrect. The negative (or positive) externalities of the production process of a nation within one year are not a part of the GDP calculation. In economics, externalities are the effects that the acts of consumers or producers have on each other. Externalities range from technological changes to changes in the range of options available to consumers. Externalities may also be regarded as the unanticipated side effects of courses of action. Choice "d" is incorrect. The total monetary value of goods and services, including barter transactions, is not a part of the GDP calculation. GDP includes only monetary value, not barter value.

• Question 350:

  All of the following are components of the formula used to calculate gross domestic product, except:

  A. Household income.

  B. Foreign net export spending.

  C. Government spending.

  D. Gross investment.

  Correct Answer: A

  Choice "a" is correct. Gross domestic product (GDP) is calculated in two different ways. The first, which is the expenditure approach and can be used to answer this question, is the mnemonic GICE, or government purchases plus private domestic investment plus personal consumption expenditures plus net exports. Household income is the only one of the answers that is not included in this mnemonic. Choice "b" is incorrect. Foreign net export spending is included in the mnemonic (E) for GDP; although, it is called simply net exports in the mnemonic and not foreign net export spending. Choice "c" is incorrect. Government spending is included in the mnemonic (G) for GDP. Choice "d" is incorrect. Gross investment is included in the mnemonic (I) for GDP, although it is called private domestic investment in the mnemonic.