BA1 Fundamentals of Business Economics Questions and Answers

Demand is elastic

Unit costs fall

The demand curve shifts rightwards

Marginal revenue is greater than marginal cost

Availability of new cheaper substitutes such as downloads

Increased competition due to entry to the market by supermarket and internet sellers of CDs

Decline in the number of CD shops due to bankruptcy and closure

Growth in popularity of alternative goods such as mobile phones and video games

Price will stay high as farmers restrict supply to make extra profits

Price will fall because the high price in 201X gave an incentive to farmers to plant more and flood the market with extra supply

Price will fall as consumers find cheaper substitutes to the high-priced crop

Price will rise further as buyers stockpile the new harvest to avoid suffering higher prices for a second year

Significant economies of scale in production

The existence of entry barriers to the industry

High initial capital costs in production

Extensive consumer knowledge of products and prices

Access to cheaper sources of supply in emerging economies

Increased competition on world markets for manufactured goods

Decreased international transportation and communications costs

The ability to shift production to low cost locations

Cheaper procurement via on line search and ordering

Reduced transport costs from internet buying

Lower entry barriers by reducing the need for expensive premises

Reduced transactions costs leading to low variable costs

A fixed exchange rate relative to non union currencies.

Free movement of goods and services between member states.

A common external tariff.

Free movement of factors of production between member states.

This is an example of

Translation risk avoidance

Arbitrage

hedging

A focus on sales rather than profits would mean shareholder dividends may decrease

An increase in the number of products in Foodgo stores will likely lead to increased footfall and hence increased sales and profits

The increase of sales from £23bn a year to £30bn a year is not ambitious enough and needs to be revised

An increase in sales will lead to a fall in the price of shares in Foodgo Pic, meaning shareholders will receive less in dividends

The bank offering cheap loans to large companies

The local government runs a scheme which allows business to get rid of their rubbish without charge

A university discovers a new algorithm which makes manufacturing 3x faster

A new highway is built from a large port into a manufacturing town

The ad valorem tax acts as a sales tax

Both taxes can be classed as multi-stage consumption taxes

The unit tax is otherwise known as stamp duty

The taxes levied on the brandy are charged in a similar way to sales tax in the United States

The taxes levied on the brandy are proportional

Use Pearson ' s coefficient to accurately draw a line of best fit

Draw a line of best fit by eye and estimate how much of a correlation there is between store sales and population

Rearrange the data points on the scatter diagram so that it shows any correlation more clearly

Use the diagram to interpret that two of the stores with the highest sales are in areas with a medium-sized population

Use the diagram to interpret that the store with the lowest sales was in an area with a population of 5000

A lack of investment from businesses in the long-term

Some investment in the short-term due to high interest rates

Other countries responding to Vencia ' s ' dirty floating ' in a protectionist manner

The Bank of Vencia buying treasury bonds to loosen its monetary policy

The government of Vencia increasing its VAT and basic rate of income tax further

Redundancies in shipbuilding caused by competition from abroad.

Falling employment in manufacturing industry resulting from a decline in consumer incomes.

Unemployment in coal mining caused by the advent of new energy sources.

Above average unemployment rates among low skilled workers.

Agricultural products have low price elasticities of supply

Output is affected by non-controllable factors such as climate

Supply decisions are based on the prices of the present time period

Markets have a low price elasticity of demand

The quantities of the good firms actually sell at different possible prices

The quantities of the good firms are prepared to supply at different possible prices

Different possible equilibrium prices

Quantity supplied varying inversely with price

The pay of the directors of XYZ is not related to the company ' s financial performance

XYZ loses money following a risky investment in a new line of business

The family of the Chief Executive of XYZ use the company jet for shopping trips

XYZ ' s Board conceals information about losses from shareholders

Higher price, more sold, fall in revenues of cheese makers

Higher price, less sold, fall in revenues of cheese makers

Higher price, more sold, rise in revenues of cheese makers

Higher price, less sold, rise in revenues of cheese makers

A price floor (minimum price) has been set above free market price

A price ceiling (maximum price) has been set above free market price

A price floor (minimum price) has been set below free market price

A price ceiling (maximum price) has been set below free market price

High power, low interest

High power, high interest

Low power, high interest

Low power, low interest

Structural unemployment

Cyclical (or demand deficient) unemployment

Frictional unemployment

Real wage unemployment

a shift in the aggregate demand curve to the right, a fall in output and employment and a rise in the price level

a shift in the aggregate demand curve to the left, a fall in output and employment and a fall in the price level

a shift in the aggregate demand curve to the left, a fall in output and employment and a rise in the price level

a shift in the aggregate demand curve to the right, a rise in output and employment and a rise in the price level

private business providers would exploit consumers and make excess profits

it would be an unprofitable activity for private business because of the free-rider problem

governments are more efficient producers of such goods

there are significant external costs in the production process

Purchase oil produced within the country in order to support the domestic oil industry

Invest in retraining those working in the oil industry so they can enter other domestic industries which are currently more profitable

Dump its oil exports into the trading bloc by exporting the oil at an artificially low price

Begin extracting and exporting coal as a substitute for oil

Allow the oil industry in Country X without any further investment to fail as it is a sunset industry

£20 million

£40 million

£80 million

£400 million

It limits the control of one layer of management over another

It can lead to dubious managerial practices within the company

It leads to higher profits which ultimately benefit a business

Higher sales means the business will perform well regardless of managerial practice

Co-ordination needs to be good in order for multiple layers of management to function well

£1,021

£1,070

£1,225.15

£1,155.12

Heineken/Punch Pubs will not be able to charge excessive prices for alcoholic beverages served at their pubs

There will be a greater variety of pubs for consumers to choose from in certain areas

Heineken will divest in a certain number of pubs where the merger would have created monopolies

The companies ' divestment of pubs in certain areas could lead to the closure of the majority of pubs in said area

The CMA will use this decision as a precedent for others in the future

Import prices must be falling

The volume of goods exported must be falling

Aggregate demand is falling

The difference between government spending and tax revenue is growing

£53,460.10

£44,024.23

£30,609.75

£60,455.63

Decrease the interest rates across the whole economy to limit foreign investment

Reduce bureaucracy by removing quotas and obligations for imported goods

Increase the rate of income tax by 10% in each bracket

Increase the rate of interest in the economy by 5%

Establish a regulatory body to prevent a regional monopoly

Rerun the franchise bidding process if it found that IstClass are imposing additional price rises due to the regional monopoly

Allow the regional monopoly to exist, increasing fare prices for passengers on trains in both north-western and north-eastern Messu Potami

Impose a uniform sales tax on all railway tickets which would equalise prices across the country

Immediately nationalise the railway network, ending all private franchises and thus any regional monopolies

The rate of interest charged by banks on loans.

The nominal rate of interest adjusted for inflation.

The compound rate of interest.

The rate of interest charged on loans plus administrative charges.

An increase in the deficit in the country ' s balance of payments on current account

Foreign investors purchasing shares on the country ' s capital markets

An increase in the country ' s money supply

An increase in rates of interest within the country

(i) and (ii) only

(ii) and (iii) only

(iii) and (iv) only

(ii), (iii) and (iv) only

financial intermediation

the savings function

money transfer

credit creation

Lift quantitative restrictions on bank lending

Lower the capital adequacy requirements for banks

Buy government bonds from the banks

Ease the liquidity ratios banks need to hold

are the result of the operation of the law of diminishing returns

occur because all firms face a U shaped short run average cost curve

cause the long run average cost curve to rise

are the result of businesses adopting a divisional structure

A bond denominated in Euros

A bond issued to markets anywhere in Europe

A bond denominated in a currency that differs from the domestic currency of the country where the bond was issued

A bond issued by the European Central Bank

A market for government bonds.

A market for foreign exchange.

A market for company shares.

A market for short term loans.

Taxes on the consumption of the product

Subsidies to the producers

The auctioning of pollution permits

Legal controls to limit pollution levels

Retained profits

Dividends

Term loans

Issuing corporate bonds

The quantity of money

The yield of government bonds

The liquid reserves of banks

The price of government bonds

Signaling of consumers ' requirements

Allocation of adequate resources for future investment

Rationing of scarce resources between potentially unlimited demands

Setting of rewards to factors of production

Reduced transaction costs on overseas transactions.

Exchange rate certainty.

A common monetary policy.

Reduced price transparency.

(i) and (ii) only

(ii) and (iv) only

(iii) and (iv) only

(i), (iii) and (iv) only

They provide automatic correction of imbalances in the balance of payments

Countries no longer need to hold foreign exchange reserves to manage the currency

Countries with inflationary problems can avoid losing international price competitiveness

They encourage international trade by eliminating foreign exchange transactions costs

the expected cash flows from the project

the scrap value of the capital at the end of the project ' s life

interest rates

the net present value of alternative projects

free trade area

customs union

common (or single) market

economic union

£0.28bn

£2.15bn

£14bn

£28.57bn

Retained profits

Certificates of deposit

New share issues

Mortgages

Using its cash reserves

A bank overdraft

Issuing shares

Factoring

Helping countries overcome the lack of synchronization between payments and receipts over the long run

Channeling funds from deficit countries to surplus countries

Enabling developed countries to transform their financial risks

Enabling maturity transformation

Basel 3

GATT

G20

Competition Act

0.04

1.47

3.03

3.125

A fall in the country ' s interest rates

An expected depreciation of the country ' s exchange rate

The abolition by the country of previously-imposed exchange controls which deterred inward investment

Foreign-based multinational companies locating new factories in the country

To influence commercial banks ' ability to create credit

To avoid the commercial banks running out of liquidity

To regulate the profits of commercial banks

To prevent the collapse of the banking system

(i) and (iv) only

(i) and (ii) only

(ii), (iii) and (iv) only

(i), (ii) and (iii)

Excessive lending to the sub-prime mortgage market

Excessive lending by commercial banks against limited reserves

Economic recession and the credit crunch

Excessively complicated financial assets which disguised risks

(i) and (ii) only

(i), (ii) and (iv) only

(iii) and (iv) only

(ii), (iii) and (iv) only

To ensure that managers have attractive compensation packages

To implement clear career progression routes for employees

To ensure that customers ' needs are addressed

To ensure that a company is run in a legal and ethical manner

To implement incentives for managers to pursue long term financial sustainability

To increase transparency in company reporting

The European Central Bank

The World Trade Organisation

The International Monetary Fund

The World Bank

The opportunity to participate in building international alliances.

The opportunity to comply with national standards

The benefits of protectionist measures

The opportunity to lobby the government for less regulation

By opening up new markets, the opportunity to increase sales

The opportunity to relocate production in countries where the labor cost is lower

Mobile MNCs mean that operations can easily be transferred from one economy to another.

MNCs provide employment opportunities in other countries for skilled workers from the host country.

Local producers can copy superior processes from the MNC which raises productivity within the recipient economy.

Direct financial investment should improve economic welfare as capital is transferred to economies where the marginal rate of return on capital is highest

MNCs can use transfer pricing to ensure taxes are minimised within a recipient economy.

There are few barriers to entry into the industry.

Many firms in the industry have unused production capacity.

Most firms in the industry have high stock levels of finished goods.

Newly employed workers in the industry require high levels of initial training.

To devolve decision-making

To pool resources

To share skills and knowledge

To specialise

To earn profits

To create hierarchies

commercial banks m providing credit facilities for customers

banks in providing business customers with access to financial markets

the financial system in linking net savers with net borrowers.

central banks as providers of liquidity to the banking system

Future

Option

Forward contract

Floating exchange rate

Global firms can lobby governments to open up markets for free trade

Global firms can bring stability to international stock markets

Global firms can be immune from national concerns

Global firms can forfeit national laws under certain conditions

Global firms can lead to greater homogemsation of tastes and values across different countries.

A company financing a short term cash flow shortage by borrowing from a financial intermediary.

A company investing its excess liquidity by purchasing shares.

A company selling off some of its tangible assets to pay for debts.

A company financing its liquidity deficit by issuing shares.

Progressive

Regressive

Retentive

Proportional

The cost of complying with government regulations.

The cost of borrowing from private lenders.

The cost of accessing government subsidies

The cost of procuring intermediate goods.

(1)only

(3) only

(1)and

(1),(2)and(3)

improving the working condition and pay levels for the employees

Maximising shareholder wealth

Meeting the legally required environmental standards in the industry

Raising the level of dividends paid out

Increasing the remuneration packages of the company directors

$2, 400

$1, 400

$2, 500

$4, 000

The price of imports into country A will rise

The price of imports into country A will fall

The quantity of imports into country A will fall

The quantity of imports into country A will rise

Four entrepreneurs were aged between 30 and 40

The sample included 10 entrepreneurs

The sample did not include any entrepreneurs older than 65.

Two entrepreneurs were aged between 40 and 50

The sample did not include any entrepreneurs younger than 20

Most entrepreneurs were younger than 40.

the price that is determined by demand and supply.

the price that includes tax

the value that is adjusted for inflation.

the price that maximise profits.

Revaluation of the domestic currency

Deflationary policy to prevent rising inflationary pressure

Reduce aggregate demand by raising interest rates, taxation, and reducing public expenditure.

Raise aggregate demand by lowering interest rates, reducing taxation and raising public expenditure

Resources4U ' s lack of business history

The cost of increasing the number of staff on the payroll

The small size of Bishops Financial Services as a business

The possibility of contract renegotiation at a future date

The high interest rate means that it is more expensive to borrow to invest

Many customers have decided to save rather than invest due to the high interest rate

The high interest rate means customers are less confident about investing

The high interest rate has caused prices to rise, meaning customers have not got enough disposable cash to make investments

The high interest rate has resulted in customers ' purchasing power decreasing

Sell government bonds to decrease interest rates, encouraging borrowing from the bank ' s customers

Lower the capital adequacy ratio

Raise the capital adequacy ratio

Buy government bonds, discouraging customers from borrowing and encouraging them to save their money

Sell treasury bonds to limit the amount of credit in the economy

The videogames industry is international, therefore the company should adopt the model of a virtual organisation

The small number of staff the company has means it has to form a strategic alliance with RPGInternational in order to distribute its games

The company needs to be technologically advanced so as to remain a market leader in the industry

The company has no direction, therefore does not stick to one particular business model

The company does not have the revenue to increase its staff numbers

The company is at risk of not succeeding if it does not adopt various business models

(1)and(3)

(3) and (4)

(1)and(2)

(2) and (4)

Demand would fall as consumers would look for alternative teddy bears to buy

Demand would increase because the teddy bears would be seen as more prestigious by consumers due to their higher prices

Demand would fall as the relationship between price and demand as shown in the graph is inelastic

Demand would increase as the relationship between price and demand as shown in the graph is elastic

Impose a fixed tariff on imports coming from Messu Potami

Impose an embargo on imports coming from Messu Potami

Negotiate a VERA which would restrict the amount of Messu Potamian products entering these countries ' domestic markets

Provide a subsidy to markets directly competing with Messu Potamian exports to eliminate any unfair competition

Release a new protein shake, QuenchFit

Publishing an advert in a major magazine promoting QuenchFit and the benefits of healthy living

Relocate the company to a country with less strict public health guidelines

Continue as normal

Appoint a new CEO

Lease cereal-producing equipment at a fixed price for the next six months

Lease a small factory at a fixed price in order to increase production capacity

Construct a new factory, increasing both staff within the business and the company ' s production capacity

Invest in research and development so as to perfect the cereal-making process and maintain the company ' s position as a market leader

Build a long-term marketing strategy involving social media to boost product awareness and hence sales

Overseas investment by a domestic multinational company

Expenditure in the country by an overseas visitor

A flow of company profits to the parent company based in another country

Payment by an overseas company for services provided in the country

Expenditure in its shops by foreign diplomats based in the country

The country ' s contribution to foreign aid

A foreign company signing a contract guaranteeing to invest in a new factory in the country

Repayment of an IMF loan by the country ' s government

Controlled performance of its activities

Social goals towards society

Collective goals towards society

Social arrangement of people

cut public expenditure, reduce taxes, and lower interest rates

raise public expenditure, reduce taxes and lower interest rates

raise public expenditure, raise taxes and lower interest rates

cut public expenditure, raise taxes and raise interest rates

Interest rates will tend to fall, thus reducing business costs.

Inflation will fall and thus demand in the economy will expand.

Consumer credit will contract thus reducing consumer demand.

The exchange rate will fall thus making business more internationally competitive.

Depreciation of the currency.

The imposition of an import tax.

Increased income tax.

The use of import quotas.

Interest payments on financial assets held overseas.

Exports of manufactured goods.

Outflows of capital.

Expenditure by visiting foreign tourists.

it exports its products to more than one country.

its production process uses inputs from more than one country.

it has production facilities in more than one country.

it has shareholders in more than one country.

Tax cuts, reduced public expenditure and lower interest rates.

Monetary expansion, increases in public expenditure and an appreciation of the exchange rate.

Reduction of the fiscal deficit and increased money supply.

Tax cuts, monetary expansion and a depreciation of the exchange rate.

Retail supermarkets

Food processing industry

Petrol retailing

Luxury good manufacturers

The stock of output available for sale in an economy

The full employment level of output of the economy

The flow of goods and services produced by an economy during the year

The level of prices at which output can be sold in an economy

A leftward shift of the short-run aggregate supply curve

A rightward shift of the aggregate demand curve

A rightward shift of the long-run aggregate supply curve

A leftward shift of the aggregate demand curve

Value for money

Maximization of financial surpluses

Serving the public interest effectively

Efficient use of physical and human resources

Improve the country ' s balance of payments on current account

Improve the price competitiveness of manufacturing firms in the country

Cause the country ' s terms of trade to deteriorate

Increase GDP but not GNP in the country

Withdrawals exceeding injections

Aggregate demand exceeding aggregate supply

Injections exceeding withdrawals

A fiscal deficit

the short run Phillips curve is steeper that the long run Phillips curve.

nominal wages rise faster the prices in the long run.

governments cannot reduce unemployment below this level.

there is no trade-off between inflation and unemployment in the long run.

Increased flows of factors of production between economies.

Higher international disparities in rates of return on capital.

Increasing interdependence between economies.

Higher levels of trade in components and semi-finished goods.

Shareholder wealth considers financial returns over a longer period than profit

Shareholder wealth takes risk into account

Shareholder wealth is a discounted present value of anticipated future earnings but profit is just a short term measure of past earnings

Shareholder wealth influences share prices but profit does not

The market price of ABC ' s share

The number of shares ABC has in issue

The most recent earnings after interest and tax of ABC

The dividend payment made to holders of preference shares

cannot use monetary policy to reduce the level of unemployment without causing a rise in interest rates.

can only use fiscal policy to reduce the rate of unemployment in the short run but not in the long run.

can only use expansionary policy to reduce the level of unemployment if it is prepared to accept a higher rate of inflation.

in the long run expansionary fiscal and monetary policy can only lead to higher inflation and higher unemployment.

A significant appreciation of the exchange rate

A decline in business investment

A significant fall in personal savings rates

An increase in the government budget deficit

an extension in demand, a contraction in supply and a market shortage

a decrease in demand, an extension in supply and a market surplus

a contraction in demand, an increase in supply and a market surplus

a contraction in demand, an extension in supply and market surplus

An increase in the size of a firm ' s capacity and plant

A bus company replacing smaller buses with larger buses

A factory employing two shifts of workers rather than one shift per day

Increased firm size allowing the firm to employ specialist managers

There are few close substitutes for salt

Salt is a small proportion of household expenditure

Salt is a necessity

Supply rises quickly if demand rises because salt is easy to make

A lack of consultation of shareholders by directors

Personal goals are pursued by directors that are inconsistent with the welfare of shareholders

Shareholders don ' t always know what management is doing

Directors get paid too much for the job they do

Because the price of a product falls as more is supplied to the market the curve is not a straight line

Price elasticity of demand for the product = 1 at the highest point of the curve

If price of the product rose the curve would pivot upwards

The curve would be a horizontal straight line if demand for the product were perfectly price elastic

Diseconomies of scale

Rising unit costs

Diminishing marginal returns

Diminishing returns to scale

Increase monopoly power

Increase consumer expenditure on the good

Increase consumer expenditure on a good in joint demand

Decrease total consumer expenditure on the good

Private goods

Public goods

Free goods

Externalities

The demand curve to the right

The supply curve to the right

The demand curve to the left

The supply curve to the left

Supply curve to shift to the right

Demand curve to shift to the right

Demand curve to shift to the left

Supply curve to shift to the left

MNO can choose from a wider choice of suppliers or production locations

The move will increase the length of MNO ' s supply chains

MNO may benefit from a superior skill base in some emerging economies

Reduced employment regulation in some emerging economies may cut staff costs

Expenditure on the product accounts for a large part of total household spending

There are many close substitutes for the product

The product is regarded as a luxury

The price changed a short while ago

Increasing productivity of labor

Increasing returns to scale

External economies of scale

The benefits of the division of labor

It is not possible to exclude non-payers from enjoying the good

It is always provided by the state or public sector

It does not get used up by more people enjoying it

It has no price

Greater opportunities for technological change

The ability to spread some marketing cost over a larger output

The ability to employ specialist managers

Access to cheaper finance

It will create a shortage of the product and incentives for producers and consumers to evade the policy

It will create a surplus of unsold produce that will need to be paid for from taxation

It will not affect market price or producer incomes at the present time

It will increase farm incomes but eventually force the government to introduce maximum quotas on production