Questions and Answers of Business Economics And Finance

4. What is meant by the terms ‘break-even point’ and ‘margin of safety’?
3. Explain why, at the point of maximum TR, the price elasticity of demand for a good is –1.
2. Explain why a business can maximize profit where MC =MR.
1. Using an example, explain the difference between aims and objectives.
10. Describe three adverts that you have seen on TV. In what ways, if any, were each of these adverts socially useful? In what ways were they socially wasteful? Did the adverts affect the likelihood
9. The government is considering two ways to help the needy:giving them cash, or giving them free meals at soup kitchens.Give an argument for giving cash. Give an argument, based on asymmetric
8. For each of the following pairs of firms, explain which firm would be more likely to engage in advertising:a. A family-owned farm or a family-owned restaurant.b. A manufacturer of forklift trucks
7. Some AIDS activists believe that health insurance companies should not be allowed to ask applicants if they are infected with the HIV virus that causes AIDS. Would this rule help or hurt those who
6. Each of the following situations involves moral hazard. In each case, identify the principal and the agent, and explain why there is asymmetric information. How does the action described reduce
5. Look at the following two statements:a. Which would you prefer – a 50 per cent chance of winning€150 or a 50 per cent chance of winning €100?b. Would you prefer a decision that guarantees a
4. Choose three products you purchased recently. Think about the reasons that you made the particular purchase decision in each case in relation to the various heuristics.
3. Economist George Stigler once wrote that, according to consumer theory, ‘if consumers do not buy less of a commodity when their incomes rise, they will surely buy less when the price of the
2. Surette buys only orange juice and yoghurt.a. In 2014, Surette earns €100, orange juice is priced at €2 a carton and yoghurt is priced at €4 a tub. Draw Surette’s budget constraint.b. Now
1. Jacqueline divides her income between coffee and croissants(both of which are normal goods). An early frost in Brazil causes a large increase in the price of coffee in France.a. Show how this
10. Define signalling and screening, and give an example of each.
9. What is adverse selection? Give an example of a market in which adverse selection might be a problem.
8. What is moral hazard? List three things an employer might do to reduce the severity of this problem.
7. Explain two benefits that might arise from the existence of brand names.
6. How might advertising with no apparent informational content in fact convey information to consumers?
5. Explain and give an example of the following heuristics:a. Representative heuristicsb. Availability heuristicsc. Simulation heuristicsd. Adjustment heuristics
4. The price of cheese rises from €6 to €10 a kilo, while the price of wine remains at €3 a glass. For a consumer with a constant income of €3000, show what happens to consumption of wine and
3. Show a consumer’s budget constraint and indifference curves for bread and cheese. Show the optimal consumption choice. If the price of bread is €3 a loaf and the price of cheese is €6 a
2. A consumer has income of €3000. Bread is priced at €3 a loaf and cheese is priced at €6 a kilo.a. Draw the consumer’s budget constraint. What is the slope of this budget constraint?b. Draw
1. A consumer goes into a coffee shop and has four cups of coffee. Explain what we might observe about the total utility and marginal utility of the individual. How does your explanation illustrate
10. (This problem is challenging) There are three industrial firms in Eurovia.The government wants to reduce pollution to 120 units, it gives each firm 40 tradable pollution permits.a. Who sells
9. Some people object to market-based policies to reduce pollution, claiming that they place a monetary value on cleaning our air and water. Economists reply that society implicitly places a monetary
8. ‘A fine is a tax for doing something wrong. A tax is a fine for doing something right.’ Discuss.
7. The Pristine River (or the ‘Blue Pristine’, as it is affectionately known) has two polluting firms on its banks. European Industrial and Creative Chemicals each dump 100 tonnes of effluent
6. Many observers believe that the levels of pollution in our economy are too high.a. If society wishes to reduce overall pollution by a certain amount, why is it efficient to have different amounts
5. Assume that it is rumoured that the Swiss government subsidizes cattle farming, and that the subsidy is larger in areas with more tourist attractions. Can you think of a reason why this policy
4. The government decides to reduce air pollution by reducing the use of petrol. It imposes €0.50 tax for each litre of petrol sold.a. Should it impose this tax on petrol companies or motorists?
3. The cost of producing DVD players has fallen over the past few years. Let’s consider some implications of this fact.a. Use a supply-and-demand diagram to show the effect of falling production
2. Consider the market for fire extinguishers.a. Why might fire extinguishers exhibit positive externalities?b. Draw a graph of the market for fire extinguishers, labelling the demand curve, the
1. Do you agree with the following statements? Why or why not?a. ‘The benefits of Pigovian taxes as a way to reduce pollution have to be weighed against the deadweight losses that these taxes
10. What are Pigovian taxes? Why do economists prefer them over regulations as a way to protect the environment from pollution?
9. How does a subsidy on a good affect the price paid by buyers, the price received by sellers and the quantity bought and sold?
8. How does a tax imposed on a good with a high price elasticity of demand affect the market equilibrium? Who bears most of the burden of the tax in this instance?
7. List some of the ways that the problems caused by externalities can be solved without government intervention.
6. In what way does the patent system help society solve an externality problem?
5. In a supply-and-demand diagram, show producer and consumer surplus in the market equilibrium.
4. Use a supply-and-demand diagram to explain the effect of a negative externality in production.
3. Give an example of a negative externality and an example of a positive externality.
2. Using an appropriate example, explain the difference between a private cost and a social cost and a private benefit and a social benefit.
1. Identify, using examples, three sources of market failure.
10. Explain why the following might be true: a drought around the world raises the total revenue that farmers receive from the sale of grain, but a drought only in France reduces the total revenue
9. Suppose that there is severe flooding in a region in which there is a high concentration of wheat farmers.a. Farmers whose crops were destroyed by the floods were much worse off, but farmers whose
8. Pharmaceutical drugs have an inelastic demand, and computers have an elastic demand. Suppose that technological advance doubles the supply of both products (that is, the quantity supplied at each
7. Consider public policy aimed at smoking.a. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a packet of cigarettes is currently priced at €6 and the
6. Two drivers – Jan and Lou – each drive up to a petrol station.Before looking at the price, each places an order. Jan says, ‘I’d like 30 litres of petrol.’ Lou says, ‘I’d like
5. Suppose that your demand schedule for DVDs is as follows:a. Use the midpoint method to calculate your price elasticity of demand as the price of DVDs increases from €8 to €10 if (i) your
4. Suppose that business travellers and holidaymakers have the following demand for airline tickets from Birmingham to Naples:a. As the price of tickets rises from €200 to €250, what is the price
3. For each of the following pairs of goods, which good would you expect to have a more price elastic demand and why?a. Required textbooks or mystery novels.b. Beethoven recordings or classical music
2. Because better weather makes farmland more productive, farmland in regions with good weather conditions is more expensive than farmland in regions with bad weather conditions.Over time, however,
1. Seafront properties along the promenade at Brighton on the south coast of England have an inelastic supply, and cars have an elastic supply. Suppose that a rise in population doubles the demand
10. In the 2000s, house prices in many parts of the world rose significantly. Outline some of the factors that will affect the elasticity of supply and demand for houses in the short run and the long
9. What do we call a good whose income elasticity is less than 0?
8. If demand is elastic, how will an increase in price change total revenue? Explain.
7. On a supply and demand diagram, show equilibrium price, equilibrium quantity and the total revenue received by producers.
6. If the elasticity is greater than 1, is demand elastic or inelastic? If the elasticity equals 0, is demand perfectly elastic or perfectly inelastic?
5. List and explain some of the determinants of the price elasticity of demand. Think of some examples to use to illustrate the factors you cover.
4. Define the price elasticity of demand and the income elasticity of demand.
3. What are the main factors that affect the price elasticity of supply? Think of some examples to use to illustrate the factors you cover.
2. Is the price elasticity of supply usually larger in the short run or in the long run? Why?
1. How is the price elasticity of supply calculated? Explain what this measures.
10. What do we mean by a perfectly competitive market? Do you think that the example of rape seed used in this chapter fits this description? Is there another type of market that better characterizes
9. Market research has revealed the following information about the market for chocolate bars: the demand schedule can be represented by the equation QD = 1600 – 300P, where QD is the quantity
8. Suppose that the price of tickets to see your local football team play at home is determined by market forces.Currently, the demand and supply schedules are as follows:a. Draw the demand and
7. The market for pizza has the following demand and supply schedules:Graph the demand and supply curves. What is the equilibrium price and quantity in this market? If the actual price in this market
6. Suppose that in the year 2008 the number of births is temporarily high. How might this baby boom affect the price of baby-sitting services in 2013 and 2023? (Hint: 5-year-olds need babysitters,
5. Using supply and demand diagrams, show the effect of the following events on the market for sweatshirts.a. A drought in Egypt damages the cotton crop.b. The price of leather jackets falls.c. All
4. During the 1990s, technological advances reduced the cost of computer chips. How do you think this affected the market for computers? For computer software? For typewriters?
3. Consider the market for large family saloon cars. For each of the events listed here, identify which of the determinants of supply or demand are affected. Also indicate whether supply or demand is
2. ‘An increase in the demand for mozzarella cheese raises the quantity of mozzarella demanded, but not the quantity supplied.’ Is this statement true or false? Explain.
1. Explain each of the following statements using supply and demand diagrams.a. When there is a drought in southern Europe, the price of olive oil rises in supermarkets throughout Europe.b. When the
10. Describe the role of prices in market economies.
9. Cheese and wine are complements because they are often enjoyed together. When the price of wine rises, what happens to the supply, demand, quantity supplied, quantity demanded and the price in the
8. Define the equilibrium of a market. Describe the forces that move a market toward its equilibrium.
7. Carlos prefers asparagus to spinach. His income declines and as a result he buys more spinach. Is spinach an inferior or a normal good to Carlos? Explain your answer.
6. Does a change in consumers’ tastes lead to a movement along the demand curve or a shift in the demand curve?Does a change in price lead to a movement along the demand curve or a shift in the
5. What are the demand schedule and the demand curve, and how are they related? Why does the demand curve slope downward?
4. What determines the quantity of a good that buyers demand?
3. Does a change in producers’ technology lead to a movement along the supply curve or a shift in the supply curve?Does a change in price lead to a movement along the supply curve or a shift in the
2. What are the supply schedule and the supply curve, and how are they related? Why does the supply curve slope upward?
1. What determines the quantity of a good that sellers supply?
10. Do you think that it is ever possible for a business to satisfy the conflicting demands of all stakeholders? Justify your reasoning.
9. A pharmaceutical business reads a research report published by a leading university that suggests consumers are 20 per cent less likely to use over-the-counter medicines if these have not been
8. Should businesses be allowed to regulate their own activities or should governments legislate to force them to meet their social and environmental responsibilities? Explain your reasoning and use
7. A business making high-quality ball-point pens faces a number of challenges in the next year. It is concerned that a slowdown in the European economy along with a shift to the use of laptops and
6. The price of a high-quality diamond ring used for weddings is €250. The price of a tonne of steel is €25. Does this mean that the transformation process in making a diamond ring is ten times
5. What do you think is the main reason for the relatively high rate of business failures five years after start-up? Justify your answer.
4. What do you think separates those entrepreneurs that are deemed massively successful because they are worth millions and those who just about manage to survive running their own business?
3. Industries that use large amounts of capital in relation to other factors of production are said to be capital intensive.Is it necessarily the case that capital intensive businesses are more
2. To what extent is it the case that value added is always higher in a B2C business than a B2B business because businesses are more aware of value for money than are consumers?
1. Is there such a thing as a ‘science of decision making’?Explain your answer in relation to business decision making.
10. Describe how a plan by a business to increase the price of its goods might cause a conflict between the interests of managers, shareholders, employees and customers.
9. Explain how an investment decision might affect shareholder value in a positive way both in the short run and in the long run.
8. Explain how a concern over the effect on the environment of business activity can lead to not only environmental change but also technological, social and legal changes which could affect a
7. Explain the possible differences between the microeconomic and macroeconomic environment effects on a business producing costume jewellery.
6. In a country with a democratic political system, why might a business be concerned about a change in government?
5. Describe the value added at each stage of production of a loaf of bread up to the point it is purchased by the consumer.

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