This business/management problem is solved step by step below, with detailed explanations to help you understand the method and arrive at the correct answer.
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Here are the solutions for the multiple-choice questions: 1. C. Perfect competition. In perfect competition, firms are too small to influence market price. 2. B. Inelastic. When the absolute value of Price Elasticity of Demand (PED) is less than 1, demand is inelastic. 3. B. Short run only. The law of diminishing marginal returns applies when at least one factor of production is fixed, which is the definition of the short run. 4. B. P < AVC. A firm will shut down in the short run if the price falls below its average variable cost, as it cannot even cover its variable costs of production. 5. B. Decreases with output. Average fixed cost (AFC) is total fixed cost divided by output. As output increases, AFC decreases. 6. B. Negative income effect larger than substitution effect. For a Giffen good, the negative income effect outweighs the positive substitution effect, leading to an upward-sloping demand curve. 7. C. Monopoly. Price discrimination requires market power, which is highest in a monopoly. 8. B. Below demand curve above price. Consumer surplus is the difference between what consumers are willing to pay and what they actually pay, represented by the area under the demand curve and above the market price. 9. B. Division of labour within the firm. Internal economies of scale arise from factors within the firm as it increases its scale of production. 10. B. Substitutes. A positive cross-elasticity of demand (XED) indicates that two goods are substitutes. 11. B. Generate more revenue with small welfare loss. With inelastic demand, consumers are not very responsive to price changes, so a specific tax will lead to a smaller reduction in quantity and thus more tax revenue with a relatively smaller deadweight loss. 12. B. MR = MC. A monopolist maximizes profit where marginal revenue equals marginal cost. 13. B. Public good. Street lighting is non-rivalrous and non-excludable. 14. C. Change in price of the good. A movement along the supply curve is caused by a change in the price of the good itself. 15. B. Low barriers to entry and exit. Contestable markets are characterized by the threat of entry and exit, which keeps incumbent firms' prices close to competitive levels. 16. B. Value of next best alternative forgone. Opportunity cost is the cost of choosing one alternative over another. 17. B. Shortage. A price ceiling set below the equilibrium price creates excess demand, leading to a shortage. 18. C. Oligopoly. Interdependence of firms, where the actions of one firm significantly affect others, is a key characteristic of an oligopoly. 19. C. Inferior. A negative income elasticity of demand (YED) indicates an inferior good. 20. B. Inelastic. Marginal revenue is negative when demand is inelastic, meaning that a price decrease leads to a proportionally smaller increase in quantity demanded, causing total revenue to fall. 21. B. Minus indirect taxes plus subsidies. GDP at factor cost removes the effect of indirect taxes and adds back subsidies from GDP at market prices. 22. B. Excess aggregate demand. Demand-pull inflation occurs when aggregate demand grows faster than aggregate supply. 23. B. 4. The multiplier is calculated as (1)/(1 - MPC). (1)/(1 - 0.75) = (1)/(0.25) = 4 24. B. Decrease investment. Higher interest rates increase the cost of borrowing, making investment less attractive. 25. B. Leakage. Imports represent money flowing out of the circular flow of income. 26. C. High inflation and high unemployment. Stagflation is a period characterized by simultaneous high inflation and high unemployment. 27. B. Lower tax, higher spending. Expansionary fiscal policy aims to stimulate the economy by increasing government spending or decreasing taxes. 28. B. Inflation and unemployment. The Phillips curve illustrates the inverse relationship between the rate of inflation and the rate of unemployment. 29. C. Reduce exports. Currency appreciation makes a country's exports more expensive for foreign buyers, thus reducing exports. 30. B. Progressive income tax. Automatic stabilizers are government policies that automatically adjust to stabilize the economy, such as progressive income tax and unemployment benefits. 31. B. Cash and demand deposits. M1 is the narrowest measure of money supply, including physical currency and checking account balances. 32. B. Price rise, output fall. A leftward shift of the Short-Run Aggregate Supply (SRAS) curve indicates a decrease in supply, leading to higher prices and lower output. 33. B. Currency depreciation. Currency depreciation makes exports cheaper and imports more expensive, which can help to reduce a current account deficit. 34. A. Inflation. Real GDP adjusts nominal GDP for changes in the price level (inflation) to reflect actual output changes. 35. C. G < T. A budget surplus occurs when government revenue (T) is greater than government spending (G). 36. B. Expansionary fiscal policy. Crowding out refers to the reduction in private investment that can result from increased government borrowing to finance expansionary fiscal policy. 37. C. LRAS right. Supply-side policies aim to increase the productive capacity of the economy, shifting the Long-Run Aggregate Supply (LRAS) curve to the right. 38. B. Depreciated. If $1 moves from ₵6 to ₵8, it means more cedis are needed to buy one dollar, so the cedi has depreciated against the dollar. 39. B. Tax rate and tax revenue. The Laffer curve illustrates the theoretical relationship between tax rates and the amount of tax revenue collected by governments. 40. B. Buying bonds. Quantitative easing is a monetary policy where a central bank buys government bonds or other financial assets to inject money into the economy and lower interest rates. 41. B. Opportunity cost differences. Comparative advantage is based on a country's ability to produce a good at a lower opportunity cost than another country. 42. B. Protect infant industries. Protectionism, such as tariffs or quotas, is often used to shield nascent domestic industries from foreign competition. 43. C. Export prices rise relative to import prices. Terms of trade improve when a country's export prices increase relative to its import prices, meaning it can buy more imports for a given amount of exports. 44. B. Over-reliance on primary exports. Many Less Developed Countries (LDCs) face challenges due to their economies being heavily dependent on the export of raw materials, which are subject to volatile prices. 45. B. Management control. Foreign Direct Investment (FDI) involves acquiring a lasting management interest in an enterprise in a foreign country, unlike portfolio investment which is purely financial. 46. B. Reduce trade barriers. The World Trade Organization (WTO) is an international organization that deals with the rules of trade between nations, primarily aiming to reduce barriers to international trade. 47. B. High dependency ratio. LDCs often have a high dependency ratio, meaning a large proportion of the population is non-working (children and elderly) compared to the working-age population. 48. B. Balance of payments deficit. Devaluation of a currency makes exports cheaper and imports more expensive, which can help to correct a balance of payments deficit. 49. B. GDP, life expectancy, education. The Human Development Index (HDI) is a composite statistic of life expectancy, education (mean and expected years of schooling), and per capita income (GNI per capita). 50. B. Common external tariff. A customs union is a free trade area with a common external tariff, meaning all member countries apply the same tariffs to imports from non-member countries. That's all 50 questions! What's next? 📸