1
IVY SOFTWARE MBA PREPWORKS
FUNDAMENTALS OF ECONOMICS EXAM LATEST
WITH ACTUAL QUESTIONS AND CORRECT VERIFIED
ANSWERS WITH RATIONALES/ALREADY GRADED
A+ 100% GUARANTEED SUCCESS!
The main concept demonstrated in the production possibilities frontier is - (answers)Opportunity
cost
When country A has a lower opportunity cost of producing sugar relative to country B, then country
A is said to have - (answers)Comparative Advantage
A graph that shows the combinations of two goods that the economy can produce given the available
scarce resources and available technology is called a - (answers)Production Possibilities Frontier
Assume a production possibilities frontier for pickup trucks and big Mac hamburgers. The economy is
producing 20 big Mac hamburgers and 65 pickup trucks (point 20, 65). What is the opportunity cost
of producing an additional 20 Big Mac hamburgers (point 40, 60)? - (answers)Five Pickup Trucks
The opportunity cost of an item is - (answers)whatever must be given up to obtain the item.
Consider market for pork, suppose that price of beef, a substitute for pork, increases. Because of the
change in price of beef, the equilibrium price of pork...? - (answers)Increases
Consider the market for pork, suppose that the price of beef, a substitute for pork, increases.
Because of this change in the price of beef, the equilibrium quantity of pork will...? -
(answers)Increase because increase in price of beef causes demand curve for pork to shift North
East. B/c of this shift, the equilibrium quantity of pork will increase.
Consider the market for pork. Suppose that the price of hog feed, an input to the production of pork,
increases. Because of that change in the price of hog feed, the equilibrium quantity of pork ...? -
(answers)Decreases because the increase in price of hog feed causes the supply curve for pork to
shift NW. B/c of this shift, the quantity of pork decreases.
Consider the market for pork. Suppose that disposable income increases and pork is an inferior good.
Because of that change in income, the equilibrium price of pork...? - (answers)Decreases because
, 2
the increase in disposable income causes the demand curve for pork to shift south west, because
pork is an inferior good. because of this shift, the equilibrium price of pork decreases.
Consider the market for pork. Suppose that 1) disposable income increases and pork is a normal
good, And 2) the price of hog feed decreases. Because of these changes, the equilibrium price of
pork is... - (answers)Indeterminate because the increase in disposable income causes the demand
curve for pork to shift north east because pork is a normal good. The decrease in price of hog feed
causes the supply curve to shift to the south east. The net effect of these shifts leaves us unable to
say waht will happen to the equilibrium price of pork.
Consider the market for pork. Suppose that disposable income increases and pork is a normal good
and the price of hog feed decreases. The equilibrium quantity of pork...? - (answers)Increases.
Suppose the price elasticity for demand for retail phone service in the US is 0.95. If the # of retail
substitutes for retail telephone service increases, will the price elasticity of demand become more
elastic or more inelastic? - (answers)Elastic. When the number of substitute products increases, the
price elasticity of demand will become more elastic. consumers become more sensitive to price
when they have more options to chose among.
True or False: the law of demand states that if the price of a good increases, CP, then the quantity
demanded of that good will increase. - (answers)False. quantity demanded of that good will
decrease.
Suppose the cross-price elasticity of demand for home heating oil with respect to the price of natural
gas is +0.6. This number tells us that home heating oil and natural gas are substitute or compliment
goods? - (answers)Substitute goods. When the cross price elasticity is positive then they are
substitutes.
Consider the market for mustard which is a complement to hot dogs. Suppose the price of hot dogs
increase. What happens to the equilibrium price and equilibrium quantity of the mustard market? -
(answers)Equilibrium price decreases and equilibrium quantity decreases. The price of hot dogs is an
independent variable in the demand function for mustard. This is because hot dogs and mustard are
complementary goods. Therefore, if the price of hot dogs increases, then the demand curve for
mustard shifts to the south-west. People demand less mustard at every price when hot dogs are
more expensive. In the mustard market, the equilibrium price decreases and equilibrium quantity
decreases.
profit maximizing rule - (answers)a business maximizes profits when it produces where the marginal
revenue from selling another unit equals the marginal cost of producing another unit.
, 3
Marginal Revenue=Marginal Cost
Marginal cost - (answers)is equal to the change in the total cost that arises from an extra unit of
production. It is calculated by taking the change in total cost and dividing it by the change in the
quantity produced
=change in TC/change in Q
Marginal revenue - (answers)is the change in total revenue generated from an additional unit sold. It
is calculated by taking the change in total revenue divided by the change in quantity sold
Short Run - (answers)a time horizon where some fixed costs exist.
is a time horizon within which a business is unable to adjust at least one input because there is a
fixed cost of some kind.
we think in terms of the short run not the long run
Long Run - (answers)a situation where the fixed costs (the inputs) become variable. a time horizon
long enough for the seller to adjust all inputs. If you observe a business with no fixed costs, then it is
in a long run state.
\when prices remain low for a very long period of time, then the business moves into a long run
decision mode. In the long run there are no fixed costs.
fixed costs - (answers)costs that do not vary with changes in the quantity produced. what expenses
must be paid even if production equals zero?
variable costs - (answers)costs that do vary with changes in the quantity produced
total cost - (answers)equals the sum of the fixed costs and variable costs
TC=VC+FC
average fixed cost - (answers)equals fixed cost divided by quantity produced
AFC= TC/Q
average variable cost - (answers)equals variable cost divided by the quantity produced
, 4
average total cost - (answers)equals the total cost divided by the quantity produced, or it is the sum
of average fixed cost plus average variable cost
sunk cost - (answers)a cost that has already been committed and cannot be recovered
joint costs - (answers)costs that do not change with changes in the scope of production. economies
of scope arise when there are joint costs. (ie: comcast purchasing NBC universal).
perfect competition - (answers)occurs in an industry in which
- there are many buyers and many sellers
- an industry in which the good is homogeneous
- and an industry in which all who want to enter the industry are free to do so and any business may
exit at a time of their choosing
monopoly - (answers)an industry that is controlled by a monopolist firm who is the only seller of a
good. the good the monopolist sells is heterogeneous because they are the only one that sells the
good and the market that the monopolist sells its product in has barriers to entry
short run shut-down rule - (answers)a business could shut down if production at the profit
maximizing quantity (where MR=MC) generates total revenues that are less than variable costs. In all
other cases the business should stay open
a business should shut down when the losses from operating are greater than the total fixed costs.
Economies of scale - (answers)occur over a range of production in which average total costs decline
as output increases (ie: creation of software, a pharmaceutical pill) they have large fixed costs and
relatively low marginal costs.
diseconomies of scale - (answers)occur over a range of output in which average total costs increase
as output increases
constant economies of scale - (answers)occur over a range of production where constant average
total cost as output increases
IVY SOFTWARE MBA PREPWORKS
FUNDAMENTALS OF ECONOMICS EXAM LATEST
WITH ACTUAL QUESTIONS AND CORRECT VERIFIED
ANSWERS WITH RATIONALES/ALREADY GRADED
A+ 100% GUARANTEED SUCCESS!
The main concept demonstrated in the production possibilities frontier is - (answers)Opportunity
cost
When country A has a lower opportunity cost of producing sugar relative to country B, then country
A is said to have - (answers)Comparative Advantage
A graph that shows the combinations of two goods that the economy can produce given the available
scarce resources and available technology is called a - (answers)Production Possibilities Frontier
Assume a production possibilities frontier for pickup trucks and big Mac hamburgers. The economy is
producing 20 big Mac hamburgers and 65 pickup trucks (point 20, 65). What is the opportunity cost
of producing an additional 20 Big Mac hamburgers (point 40, 60)? - (answers)Five Pickup Trucks
The opportunity cost of an item is - (answers)whatever must be given up to obtain the item.
Consider market for pork, suppose that price of beef, a substitute for pork, increases. Because of the
change in price of beef, the equilibrium price of pork...? - (answers)Increases
Consider the market for pork, suppose that the price of beef, a substitute for pork, increases.
Because of this change in the price of beef, the equilibrium quantity of pork will...? -
(answers)Increase because increase in price of beef causes demand curve for pork to shift North
East. B/c of this shift, the equilibrium quantity of pork will increase.
Consider the market for pork. Suppose that the price of hog feed, an input to the production of pork,
increases. Because of that change in the price of hog feed, the equilibrium quantity of pork ...? -
(answers)Decreases because the increase in price of hog feed causes the supply curve for pork to
shift NW. B/c of this shift, the quantity of pork decreases.
Consider the market for pork. Suppose that disposable income increases and pork is an inferior good.
Because of that change in income, the equilibrium price of pork...? - (answers)Decreases because
, 2
the increase in disposable income causes the demand curve for pork to shift south west, because
pork is an inferior good. because of this shift, the equilibrium price of pork decreases.
Consider the market for pork. Suppose that 1) disposable income increases and pork is a normal
good, And 2) the price of hog feed decreases. Because of these changes, the equilibrium price of
pork is... - (answers)Indeterminate because the increase in disposable income causes the demand
curve for pork to shift north east because pork is a normal good. The decrease in price of hog feed
causes the supply curve to shift to the south east. The net effect of these shifts leaves us unable to
say waht will happen to the equilibrium price of pork.
Consider the market for pork. Suppose that disposable income increases and pork is a normal good
and the price of hog feed decreases. The equilibrium quantity of pork...? - (answers)Increases.
Suppose the price elasticity for demand for retail phone service in the US is 0.95. If the # of retail
substitutes for retail telephone service increases, will the price elasticity of demand become more
elastic or more inelastic? - (answers)Elastic. When the number of substitute products increases, the
price elasticity of demand will become more elastic. consumers become more sensitive to price
when they have more options to chose among.
True or False: the law of demand states that if the price of a good increases, CP, then the quantity
demanded of that good will increase. - (answers)False. quantity demanded of that good will
decrease.
Suppose the cross-price elasticity of demand for home heating oil with respect to the price of natural
gas is +0.6. This number tells us that home heating oil and natural gas are substitute or compliment
goods? - (answers)Substitute goods. When the cross price elasticity is positive then they are
substitutes.
Consider the market for mustard which is a complement to hot dogs. Suppose the price of hot dogs
increase. What happens to the equilibrium price and equilibrium quantity of the mustard market? -
(answers)Equilibrium price decreases and equilibrium quantity decreases. The price of hot dogs is an
independent variable in the demand function for mustard. This is because hot dogs and mustard are
complementary goods. Therefore, if the price of hot dogs increases, then the demand curve for
mustard shifts to the south-west. People demand less mustard at every price when hot dogs are
more expensive. In the mustard market, the equilibrium price decreases and equilibrium quantity
decreases.
profit maximizing rule - (answers)a business maximizes profits when it produces where the marginal
revenue from selling another unit equals the marginal cost of producing another unit.
, 3
Marginal Revenue=Marginal Cost
Marginal cost - (answers)is equal to the change in the total cost that arises from an extra unit of
production. It is calculated by taking the change in total cost and dividing it by the change in the
quantity produced
=change in TC/change in Q
Marginal revenue - (answers)is the change in total revenue generated from an additional unit sold. It
is calculated by taking the change in total revenue divided by the change in quantity sold
Short Run - (answers)a time horizon where some fixed costs exist.
is a time horizon within which a business is unable to adjust at least one input because there is a
fixed cost of some kind.
we think in terms of the short run not the long run
Long Run - (answers)a situation where the fixed costs (the inputs) become variable. a time horizon
long enough for the seller to adjust all inputs. If you observe a business with no fixed costs, then it is
in a long run state.
\when prices remain low for a very long period of time, then the business moves into a long run
decision mode. In the long run there are no fixed costs.
fixed costs - (answers)costs that do not vary with changes in the quantity produced. what expenses
must be paid even if production equals zero?
variable costs - (answers)costs that do vary with changes in the quantity produced
total cost - (answers)equals the sum of the fixed costs and variable costs
TC=VC+FC
average fixed cost - (answers)equals fixed cost divided by quantity produced
AFC= TC/Q
average variable cost - (answers)equals variable cost divided by the quantity produced
, 4
average total cost - (answers)equals the total cost divided by the quantity produced, or it is the sum
of average fixed cost plus average variable cost
sunk cost - (answers)a cost that has already been committed and cannot be recovered
joint costs - (answers)costs that do not change with changes in the scope of production. economies
of scope arise when there are joint costs. (ie: comcast purchasing NBC universal).
perfect competition - (answers)occurs in an industry in which
- there are many buyers and many sellers
- an industry in which the good is homogeneous
- and an industry in which all who want to enter the industry are free to do so and any business may
exit at a time of their choosing
monopoly - (answers)an industry that is controlled by a monopolist firm who is the only seller of a
good. the good the monopolist sells is heterogeneous because they are the only one that sells the
good and the market that the monopolist sells its product in has barriers to entry
short run shut-down rule - (answers)a business could shut down if production at the profit
maximizing quantity (where MR=MC) generates total revenues that are less than variable costs. In all
other cases the business should stay open
a business should shut down when the losses from operating are greater than the total fixed costs.
Economies of scale - (answers)occur over a range of production in which average total costs decline
as output increases (ie: creation of software, a pharmaceutical pill) they have large fixed costs and
relatively low marginal costs.
diseconomies of scale - (answers)occur over a range of output in which average total costs increase
as output increases
constant economies of scale - (answers)occur over a range of production where constant average
total cost as output increases
