Economics Questions 1. The primary goal of the top management is to maximize the value of a firm.

Describe the commonly used valuation model. Discuss how the management decisions in different functional areas affect the value of a firm? Answer: Outcome when two firms offer discounts and earn relatively modest profits, when their secure strategy is to offer a discount price regardless of the other firms transaction. We do not necessarily have Nash equilibrium in a situation where each firm chooses its dominant strategy ones firm strategy may to choose to offer discount while the other firms dominant strategy may be something else. 2. What is the difference between economic profit and business profit? What is the difference between incremental and marginal? Answer: The difference between economic profit and business profit is that economic profit takes business profit minus the implicit costs of capital and any other owner-provided inputs, while business profit is the residual of sales minus the explicit costs of doing business. The difference between incremental and marginal is that marginal profit is the change in total profit due to a one-unit change in output while incremental is the gain or loss associated with a given managerial decision. 3. Describe the relation between total, average and marginal and explain why the total is maximized when the marginal is set equal to zero. Answer: Total is sum of marginals and if marginal is positive the total will keep increasing. It will be maximum when marginal changes the direction. Furthermore, as long as marginal is more than the average, the result of additional unit will result in average to increase. 4. Describe conditions for profit maximization, revenue maximization, and average cost minimization. Answer: Conditions for profit maximization are when inputs are employed so that price equals marginal revenue product for each input, MR = MC. Conditions for revenue maximization are when the activity level generates the highest revenue, MR = 0. The conditions for average cost minimization is that the activity level that generates the lowest average cost, MC = AC. 5. Would you expect total revenue to be maximized at an output level

that is typically greater or less than the profit-making output level? Why? 6. Distinguish between demand curve and demand function. What is the difference between change in demand and change in quantity demanded? Answer: The demand curve expresses the relation between price and the quantity demanded, holding all else constant while the demand function expresses the function between demand and factors influencing its level. The difference between the change in demand and the change in quantity demanded is that a change of demand would be express in the demand function and a change in the quantity demanded would result in a change in the demand curve. 7. Discuss some of the factors (controllable by a firm) which can cause a desirable shift in the demand curve. Also discuss some of the uncontrollable factors which could shift the demand curve outwards. Answer: Some factors which can cause a desirable shift in the demand curve would be advertising, product features, and the amount of the supply. Some uncontrollable factors which could shift the demand curve out wards are inflation, interest rates, competitive product. 8. Define Price, Income, and Cross-Price Elasticity. Discuss the implication of positive and negative values for each. Answer: Price elasticity is what measures of the responsiveness of the quantity demanded of product to price changes; Income elasticity is what measures the responsiveness of the quantity demand to changes in income; and Cross-price elasticity is what measures the responsiveness of demand for one product, Y, to changes in the price of another, X. 9. State the relationship between the total revenue of a firm and the price elasticity of demand for a price increase along a linear demand curve. 10. What factors determine the elasticity of demand for a product or service? Answer: Factors that determine elasticity of demand for a product or service are: is it luxury or necessity, the % of income spent on the product, the # of substitutes the product has, time, and durable versus non durable goods. 11. How do linear and long-linear models differ in terms of their assumptions about the nature of demand elasticity'? Answer: In the linear model approach, involves an underlying assumption of changing elasticities; while the log-linear approach, involves an underlying assumption of constant elasticities.

12. Discuss various techniques used to estimate market demand for a product or service? Answer: Various techniques used to estimate market demand for a product or service is time series techniques, cross section techniques and scatter diagram techniques. 13. What is secular trend? Why is it necessary to adjust the data for seasonality before trying to forecast the trend? Answer: A secular trend is a long-run pattern of increase or decrease in a series of economic data. It is necessary for you to adjust the data for seasonality before trying to forecast the trend because a seasonal variation does exist which will affect the pattern in sales, profits, caused by weather, habit, or social custom 14. Discuss at least five of the leading economic indicators? Define diffusion index and the multiplier. Answer: Leading economic indicators are money supply, index of consumer expectations, index of stock prices, average initial weekly claims for unemployment insurance and vendor performance. 15. What is an econometric model? Explain the difference between exogenous and endogenous variables, behavioral equations and definitions. Answer: An Econometric model is a forecasting technique that analyzes economic relations; (The causal relation between Y (the forecast value) and a series of independent X variables). The difference between exogenous and endogenous variables are what a firm can and can not control. 16. Is it always better to hire a more qualified and productive worker than a less qualified and productive one regardless of the cost differences? Why or Why not? Answer: No it is not always better to hire a more qualified and productive worker than a less qualified and productive regardless of cost differences because other factors will come into play. 17. Define MC, MP, and MRP in the context of a production process which utilizes multiple inputs. Discuss condition for optimum mix of inputs and optimum profit. Answer: Financial intermediaries are institutions, firms or individuals that serve as parties that facilitates the channelling of funds between lenders and borrowers. The function of these intermediaries is to take in deposits from savers (lenders) and then possibly lend that money to someone else to make money for themselves and the savers.

18. Describe economies and diseconomies of scale. Discuss some of the reasons for observing these. Answer: Economies of scale are the properties that the long-run average of total cost falls as the quantity of output increases. Diseconomies of scale are the forces that cause larger firms to produce goods and services at increased per-unit costs. Some of the reasons for observing these are that we would be able to have a better idea for job costing, bidding for projects and that we have a better idea as to what enables firms to produce goods and services at reduced diseconomies of scale. 19. Lists four commonly used market structures from a competitive perspective and explain the major differences between each? Answer: Four commonly used market structures from a competitive prospective are the perfect (pure) competition, which is characterized by a large # of buyers and sellers of an essentially identical product, monopoly, which is characterize by one seller of highly differentiated product.; monopolistic competition where the market is characterized by a large number of sellers of differentiated products and oligopoly a market structure characterized by a few sellers and interdependent price/output decisions. 20. What are the product and production characteristics that lead to more competition in the market? How regulations and environmental concerns impact the degree of competition? Answer: The relationship between budget deficits and interest rates is that budget deficits causes interest rates to increase. 21. From a social standpoint, what is the problem with monopoly and what is the benefit of perfect competition? Discuss Natural Monopoly. Answer: From a social standpoint, the problem with monopoly is that it leads to an inefficient allocation of productive resource and an inequitable allocation of income and in perfect competition there is an efficient allocation of productive resources and an equitable allocation of income. Naturally Monopoly is a situation where there is a preeminence of a single efficient supplier. 22. Discuss collusion, cartel, and price fixing from both legal and economic perspective.

ANSWER: Collusion is a covert, informal agreement among firms in an industry to fix prices and output levels. A cartel is a group of firms operating with a formal agreement to fix prices and output. Both practices of price fixing are illegal in the U.S.; but certain products are under systems similar to a cartel. Collusion is a covert, informal agreement among firms in an industry to fix prices and output levels. A cartel is a group of firms operating with a formal agreement to fix prices and output. Both practices of price fixing are illegal in the U.S.; but certain products are under systems similar to a cartel. 23. What is meant by kinked demand curve? How does it affect industry profitability? Answer: A kinked demand curve is a curve that has different slopes for price increases as compared with price decreases and theory that assumes that rival firms follow any decrease in price in order to maintain their respective market shares but refrain from following increases, allowing their market share to increase at the expense of the firm making the initial price increase.

24. Where should the public service commission of a state set the price for a utility: at break-even point, at market clearing price, at a point where MR equals MC, at a point where MC = AC? Why? Answer: The public service commission of a state should set the price for a utility at a market clearing price that way the quantity demanded would equal the quantity supplied. 25. What is a business cycle? Contrast it with the long run growth path of an economy. ANSWER: Definition of a business cycle: Fluctuations of output around a long-term trend, or recessions followed by recoveries and expansions. Contrasting it with Long Run growth path of an economy: In the Long Run growth path of an economy there are Macroeconomic stabilization policies that shape the environment within which households and businesses make decisions in the business cycles. These policies are designed to offset temporary economic disruptions in a business cycle In the Long Run these policies are also important tools used to pursue the goals of economic growth, full employment & stable purchasing power for the national currency. Economic growth increases social welfare because it leads to improved living standards in LR. An economic environment that 5

includes fee markets, well-designed and efficient regulation where necessary fosters such progress and legal protection of property rights.

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26. Explain the concept of Gross Domestic Product. What does it measure and what does it not measure? 27. How is inflation measured? Explain the differences between CPI, PPI, and GDP deflator. ANSWER: Measuring inflation is a difficult problem for government statisticians. To do this, a number of goods that are representative of the economy are put together into what is referred to as a "market basket." The cost of this basket is then compared over time. This results in a price index, which is the cost of the market basket today as a percentage of the cost of that identical basket in the starting year. In North America, there are two main price indexes that measure inflation:
Consumer Price Index (CPI) - A measure of price changes in consumer goods and services such as gasoline, food, clothing and automobiles. The CPI measures price change from the perspective of the purchaser. U.S. CPI data can be found here.

Producer Price Indexes (PPI) - A family of indexes that measure the average change
over time in selling prices by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. U.S. PPI data can be found here. You can think of price indexes as large surveys. Each month, the Bureau of Labor Statistics in the United States contacts thousands of retail stores, service establishments, rental units and doctors' offices to obtain price information on thousands of items used to track and measure price change in the CPI. They record the prices of about 80,000 items each month, which represent a scientifically selected sample of the prices paid by consumers for the goods and services purchased. In the long run, the various PPIs and the CPI show a similar rate of inflation. This is not the case in the short run, as PPIs often increase before the CPI. In general, investors follow the CPI more than the PPIs. Source:

http://72.14.203.104/search?q=cache:nki1Y3IC3UJ:www.investopedia.com/university/inflation/inflation2.asp+ %22How+is+inflation+measured%3F%22&hl=en&gl=us&ct=clnk&cd=2 GDP deflator: 6

In most systems of National Accounts the GDP deflator measures the difference between the real (or chain volume measure) GDP and the nominal (or current price) GDP. The formula used to calculate the deflator is: Dividing the nominal GDP by the GDP deflator would then give the figure for real GDP, hence deflating the nominal GDP into a real measure. Unlike a price index, the GDP deflator is not based on a fixed basket of goods and services. The basket is allowed to change with people's consumption and investment patterns. Therefore, new expenditure patterns are allowed to show up in the deflator as people respond to changing prices. However, the disadvantage of this approach is that the GDP deflator measures changes in both prices and the composition of the basket, and so should not be used as a measure of pure price changes in the economy. In practice the difference between the deflator and a price index on the same set of goods and services is relatively small. Look Source for formula: http://72.14.203.104/search?q=cache:DtarcZhVSkJ:en.wikipedia.org/wiki/GDP_deflator+How+is+GDP+deflator+estimated %3F&hl=en&gl=us&ct=clnk&cd=3 28. What is Monetary Policy? What tools does the Federal Reserve use to control money supply and inflation? ANSWER: The Monetary Policy is the actions taken by the Federal Reserve (the FED) that influences reserves, the money stock, and interest rates. The FED uses control over bank reserves to control money supply. 29. Explain the following terms: Prime rate of interest, Discount rate, Federal Funds rate. In what way they are related? ANSWER: The prime rate of interest is the rate of interest that serves as the benchmark for most other loans in the country. The discount rate is the interest rate that an eligible depository institution (such as a bank) is charged to borrow short term funds directly from the central bank through the discount window. The federal funds rate is the interest rate at which depository institutions lend balances (federal funds) at the Federal Reserve to other depository institutions overnight. The are all related in that each rate are interests rate dealing in borrowing are depositing money with the FED. 30. What is the effect of increasing corporate income taxes on unemployment, interest rates, and inflation?

. 31. Discuss the factors that may cause depreciation or appreciation of a countrys currency. Answer: Foreign exchange rate is the rate of exchange between two foreign currencies. The depreciation or appreciation of a currency depends on how the exchange rate moves, for example if the exchange rate between the $ and the British pound is at $2 per pound and then the exchange rate goes to $2.50 per British pound then the $ depreciates and the British pound appreciates. 32. What is fiscal policy? How does fiscal policy influence interest rates, stabilization of employment and national output? ANSWER: Fiscal policy refers to the spending and taxing policies of the federal government. Fiscal policy could play a major role in the stabilization of employment and output by affecting the incentives to work, save, invest and innovate. 33. Government spends $3 billion to buy police cars. Explain why aggregate demand might increase by more than $3billion. Answer: Factors that account for long-term economic growth are higher living standards, sustainable development, technological progress, new ideas and new innovations. The different growth rates among nations are due to each nations ability to progress technologically. The concept of investment from an economys point of view is as such an investment is a sacrificing of resource (asset) in expectation of gaining higher return or interest on your sacrifice in the future; or the purchase (and thus the production) of capital goods - goods which are not consumed but instead used in future production.