Questions and Answers of Business Economics And Finance

4. If a group of sellers could form a cartel, what quantity and price would they try to set?London, told a group of UK competition authority officials in 2001 that ‘every system of competition law
3. Does a monopolistic competitor produce too much or too little output compared to the most efficient level? What practical considerations make it difficult for policy makers to solve this problem?
2. Draw a diagram depicting a firm in a monopolistically competitive market that is making profits in the short run.a. Now show what happens to this firm as new firms enter the industry.b. Now draw
1. Describe the three attributes of monopolistic competition.How is monopolistic competition like monopoly? How is it like perfect competition?
10. Many schemes for price discriminating involve some cost. For example, discount coupons take up time and resources from both the buyer and the seller. This question considers the implications of
9. The Best Computer Company just developed a new computer chip, on which it immediately acquires a patent.a. Draw a diagram that shows the consumer surplus, producer surplus and total surplus in the
8. Pablo, Dirk and Franz run the only bar in town. Pablo wants to sell as many drinks as possible without losing money. Dirk wants the bar to bring in as much revenue as possible.Franz wants to make
7. The Placebo Drug Company holds a patent on one of its discoveries.a. Assuming that the production of the drug involves rising marginal cost, draw a diagram to illustrate Placebo’s
6. A company is considering building a bridge across a river.The bridge would cost €2 million to build and nothing to maintain. The following table shows the company’s anticipated demand over the
5. The Wise Economists, a top rock band, have just finished recording their latest music CD. Their record company’s marketing department determines that the demand for the CD is as follows:The
4. Suppose the Eau de Jeunesse Water Company has a monopoly on bottled water sales in France. If the price of tap water increases, what is the change in Eau de Jeunesse’s profit-maximizing levels
3. Consider the delivery of mail. In general, what is the shape of the average total cost curve? How might the shape differ between isolated rural areas and densely populated urban areas? How might
2. Suppose that a natural monopolist was required by law to charge average total cost. On a diagram, label the price charged and the deadweight loss to society relative to marginal-cost pricing.
1. A publisher faces the following demand schedule for the next novel of one of its popular authors:The author is paid €2 million to write the book, and the marginal cost of publishing the book is
10. Give two examples of price discrimination. In each case, explain why the monopolist chooses to follow this business strategy.
9. Describe the two problems that arise when regulators tell a natural monopoly that it must set a price equal to marginal cost.
8. What gives the government the power to regulate mergers between firms? From the standpoint of the welfare of society, give a good reason and a bad reason that two firms might want to merge.
7. In your diagram from the previous question, show the level of output that maximizes total surplus. Show the deadweight loss from the monopoly. Explain your answer.
6. Draw the demand, marginal revenue and marginal cost curves for a monopolist. Show the profit-maximizing level of output. Show the profit-maximizing price.
5. Why is a monopolist’s marginal revenue less than the price of its good? Can marginal revenue ever be negative?Explain.
4. Define natural monopoly. What does the size of a market have to do with whether an industry is a natural monopoly?
3. Give an example of a government-created monopoly. Is creating this monopoly necessarily bad public policy? Explain.
2. Do firms which operate in a market where there is a dominant firm not face competition? Explain.
1. Explain the difference between a perfectly competitive market and an imperfectly competitive market.
10. What other factors does a firm have to have in place in order to adopt a premium pricing strategy?
9. The tactic of using loss leaders is sometimes referred to as the ‘razor strategy’ because firms who sell razors do so below cost but then charge high prices for replacement blades. What sort
8. Explain why predatory pricing is illegal in many countries. Do you agree that it should be illegal or is this pricing strategy just an inevitable consequence of competition? Explain your reasoning.
7. Two firms operate in different markets and introduce a new product into their respective markets. One uses a price penetration strategy and the other a market skimming strategy.At the end of the
6. A firm producing fancy dress costumes estimates the fixed costs per costume at €20 and the variable costs at €5.a. Using this information, calculate the price if:i. The desired profit margin
5. Choose a product with which you are familiar. Explain how the firm producing that product tries to differentiate it from rivals.
4. Using an appropriate example, explain how value chain analysis can be a source of cost leadership and competitive advantage.
3. Consider the models of emergent strategy and logical incrementalism. To what extent would you agree with the view that they are effectively describing the same thing –the reality of decision
2. ‘The thicker the strategic plan the less relevant it will be’.(Quote adapted from Davies, B. and Ellison, L. 1999. Strategic Direction and Development of the School. London:Routledge.) To what
1. A chemical firm believes it has a core competency in identifying and exploiting particular chemical processes in intermediate products (i.e. chemical products which will be used to help make other
10. Explain the difference between market skimming and price penetration strategies.
9. Outline two advantages and two disadvantages to a firm of using cost-based pricing policies.
8. Explain the relevance of the concept of the margin in pricing decisions.
7. Outline three challenges facing a business in implementing strategy.
6. Why might niche market strategies be beneficial to small and medium-sized firms?
5. How can value chain analysis help a firm establish an appropriate pricing policy?
4. Give a bullet point list to outline the main features of the:a. Resource-based modelb. Emergent strategyc. Logical incrementalism
3. Outline two frameworks which a business might use in strategic analysis.
2. Explain how the idea of ‘strategic intent’ helps a firm provide a framework for strategic decision making.
1. Give a definition of the term ‘strategy’.
10. The liquorice industry is competitive. Each firm produces 2 million liquorice bootlaces per year. The bootlaces have an average total cost of €0.20 each, and they sell for €0.30.a. What is
9. Assume that the gold-mining industry is competitive.a. Illustrate a long-run equilibrium using diagrams for the gold market and for a representative gold mine.b. Suppose that an increase in
8. Suppose that the European Union textile industry is competitive, and there is no international trade in textiles. In long-run equilibrium, the price per unit of cloth is €30.a. Describe the
7. Many small boats are made of fibreglass, which is derived from crude oil. Suppose that the price of oil rises.a. Using diagrams, show what happens to the cost curves of an individual boat-making
6. Suppose the book printing industry is competitive and begins in long-run equilibrium.a. Draw a diagram describing the typical firm in the industry.b. Hi-Tech Printing Company invents a new process
5. ‘High prices traditionally cause expansion in an industry, eventually bringing an end to high prices and manufacturers’prosperity.’ Explain, using appropriate diagrams.
4. PC Camera GmBH faces costs of production as follows:a. Calculate the company’s average fixed costs, average variable costs, average total costs and marginal costs at each level of production.b.
3. You go out to the best restaurant in town and order a lobster dinner for €40. After eating half of the lobster, you realize that you are quite full. Your date wants you to finish your dinner,
2. Your flatmate’s long hours in the chemistry lab finally paid off – she discovered a secret formula that lets people do an hour’s worth of studying in 5 minutes. So far, she’s sold 200
1. What are the characteristics of a competitive market?Which of the following drinks do you think is best described by these characteristics? Why aren’t the others?a. tap waterb. bottled waterc.
10. Are market supply curves typically more elastic in the short run or in the long run? Explain.
9. If a firm is making abnormal profit in the short run, what will happen to these profits in the long run assuming the conditions for a highly competitive market exist?
8. Explain why a firm will continue in production even if it makes zero profit.
7. Does a firm’s price equal the minimum of average total cost in the short run, in the long run, or both? Explain.
6. Does a firm’s price equal marginal cost in the short run, in the long run, or both? Explain.
5. Under what conditions will a firm enter a market? Explain.
4. Under what conditions will a firm exit a market? Explain.
3. Under what conditions will a firm shut down temporarily?Explain.
2. Draw the cost curves for a typical firm. For a given price, explain how the firm chooses the level of output that maximizes profit.
1. What is meant by a competitive firm?
10. Given the equation K = 2000 – 250L, calculate the combination of capital and labour between L = 1 and L = 10 which would produce an output with a total cost of €400. Draw the resulting
9. Consider the following table of long-run total cost for three different firms:Does each of these firms experience economies of scale or diseconomies of scale? Quantity 1 2 3 4 5 6 7 Firm A 60 70
8. Healthy Harry’s Juice Bar has the following cost schedules:a. Calculate average variable cost, average total cost and marginal cost for each quantity.b. Graph all three curves. What is the
7. You are thinking about setting up a lemonade bar. The bar itself costs €200 a week to rent. The ingredients for each cup of lemonade cost €0.50.a. What is your fixed cost of doing business?
6. Consider the following cost information for a pizzeria:a. What is the pizzeria’s fixed cost?b. Construct a table in which you calculate the marginal cost per dozen pizzas using the information
5. Suppose that you and your roommate have started a bagel delivery service on campus. List some of your fixed costs and describe why they are fixed. List some of your variable costs and describe why
4. Clean Sweep is a company that makes brooms and then sells them door-to-door. Here is the relationship between the number of workers and Clean Sweep’s output in a given day:a. Fill in the column
3. A commercial fisherman notices the following relationship between hours spent fishing and the quantity of fish caught:a. What is the marginal product of each hour spent fishing?b. Use these data
2. Patrice is thinking about opening a café. He estimates that it would cost €500 000 per year to rent the premises, buy the equipment to make hot drinks and snacks and to buy in the ingredients.
1. This chapter discusses many types of costs: opportunity cost, total cost, fixed cost, variable cost, average total cost and marginal cost. Fill in the type of cost that best completes each phrase
10. Using the isocost, isoquant model, explain why firms might make a decision to cut the labour force and invest in capital equipment instead.
9. Define an isoquant, an isocost line and the least-cost input combination.
8. Define economies of scale and explain why they might arise. Define diseconomies of scale and explain why they might arise.
7. How and why does a firm’s average total cost curve differ in the short run and in the long run?
6. Draw the marginal cost and average total cost curves for a typical firm. Explain why the curves have the shapes that they do and why they cross where they do.
5. Define total cost, average total cost and marginal cost. How are they related?
4. Draw a production function that exhibits diminishing marginal product of labour. Draw the associated total cost curve. (In both cases, be sure to label the axes.) Explain the shapes of the two
3. What is marginal product, and what does it mean if it is diminishing?
2. Give an example of an opportunity cost that an accountant might not count as a cost. Why would the accountant ignore this cost?
1. What is the relationship between a firm’s total revenue, profit and total cost?
10. A firm is operating in a market in which the good it sells is in the maturity stage of its life cycle. How does knowledge of this shape its decisions about what its goals for that product might
9. How might an energy firm such as BP or Shell claim that they can maximize shareholder value but at the same time emphasize their environmental and social credentials?
8. Which of the following do you think is the most important element of shareholder value: the dividend to shareholders, the firm’s share price or free cash flow? Explain your answer.
7. Workers in a firm have petitioned the management for a 5 per cent pay increase. How might the firm’s management approach negotiations on the pay claim. (Hint – the management may be interested
6. If a firm faces a downward sloping demand curve, why doesn’t total revenue continue rising as a firm sells more of its output?
5. The firm in Question 4 above is operating at its break-even output. A discussion is being held about making a decision to change price with the aim of increasing profit. It is operating at 98 per
4. A firm has the following information available to its managers:Fixed costs are €1500, price = €8 and the variable costs are€0.50 per unit. What is the break-even output for this firm?
3. A firm faces the following cost and revenue schedules:Calculate the profit, marginal revenue, marginal cost and state what the profit maximizing output will be for the firm. Output (Q) 012345698
2. A firm faces the following cost and demand equations:P ¼ 100 – Q TC ¼ 10 – 5Q2 Find the profit maximizing output.
1. Why can it be difficult to distinguish between aims and objectives and strategies and tactics?
10. What is a social enterprise?
9. Explain how an objective to base decisions on strong ethical principles can lead to stakeholder conflict.
8. Using examples, explain the difference between social and environmental objectives.
7. Why might a firm have a goal of increasing market share?
6. How can increases in factor productivity help a firm to achieve cost minimization?
5. What is the meaning of the term ‘productivity’?

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