Questions and Answers of Essentials of Economics

If a cinema could sell all its seats to adults in the evenings at the end of the week, but only a few on Mondays and Tuesdays, what price discrimination policy would you recommend to the cinema in
How will a business’s pricing strategy differ at each stage of its product’s life cycle? First assume that the business has a monopoly position at the launch stage; then assume that it faces a
What do you understand by the term ‘business strategy’? Explain why different types of business will see strategic management in different ways? Give examples.
Outline the Five Forces Model of competition. Identify both the strengths and weaknesses of analysing industry in this manner.
Investigate a particular industry and assess its competitive environment using the Five Forces approach.
Distinguish between a business’s primary and support activities in its value chain. Why might a business be inclined to outsource its support activities? Can you see any weaknesses in doing this?
What do you understand by the term ‘core competence’ when applied to a business? What are the arguments for and against a firm narrowly focusing on its core competencies?
Explain the two-way relationship between a business’s rate of growth and its profitability.
Distinguish between an internal and external growth strategy. Identify a range of factors which might determine whether a firm chooses to pursue an internal or external strategy.
What is meant by the term ‘vertical integration’? Why might a business wish to pursue such a growth strategy?
A firm can grow by merging with or taking over another firm. Such mergers or takeovers can be of three types: horizontal, vertical or conglomerate. Which of the following is an example of which type
To what extent will consumers gain or lose from the three different types of merger identified above?
Assume that an independent film company, which has always specialised in producing documentaries for a particular television broadcasting company, now wishes to expand. Identify some possible
What are the advantages and disadvantages for a company in using the stock market to raise finance for expansion?
In what sense can the stock market be said to be efficient? Why is it unlikely to be perfectly efficient?
Compare and contrast the competitive advantages held by both small and big business.
How do you think the weak economic climate after 2008 and during/after COVID-19 affected small businesses? Do you think it is easier or more difficult to set up a business during a recession? Explain
What do you understand by the term ‘economic globalisation’? Is it a good thing?
Using the UNCTAD FDI database in the statistics section of the UNCTAD website at https://unctadstat.unctad.org/EN/, find out what has happened to FDI flows over the past five years(a) worldwide;(b)
What are the advantages and disadvantages to a developed economy of having a large multinational sector?
How might the structure of a multinational differ depending on whether its objective of being multinational is to reduce costs or to grow?
Choose a multinational company and then, by using its website, assess its global strategy.
How might a business’s strategy in the domestic and global economy be affected by the onset of recession?
If reducing costs is so important for many multinationals, why is it that they tend to locate production not in low-cost developing economies, but in economies within the developed world?
‘Going global, thinking local’. Explain this phrase, and identify the potential conflicts for a business in behaving in this way.
Explain the link between the life cycle of a product and multinational business.
Assess the advantages and disadvantages facing a host state when receiving MNC investment.
Debate the followings statement: ‘Multinational investment can be nothing but good for developing economies seeking to grow and prosper.’
Briefly explain whether you agree with the following statement: “Japan has always been much more heavily involved in international trade than are most other nations. In fact, today Japan exports a
If the exchange rate between the Japanese yen and the U.S. dollar expressed in terms of yen per dollar is ¥115 = $1, what is the exchange rate when expressed in terms of dollars per yen?
Suppose that the current exchange rate between the dollar and the euro is €0.85 = $1. If the exchange rate changes to €0.90 = $1, has the euro appreciated or depreciated against the dollar?
In its 2016 Annual Report, Amazon stated, “We have foreign exchange risk.”a. Briefly explain why Amazon is exposed to foreign exchange risk.b. If Amazon did not have operations in foreign
Were the shares of stock issued as a result of Snap’s initial public offering (IPO) sold in a primary market or a secondary market? Was the IPO an example of direct finance or indirect finance?
According to an article by Reuters News Agency, in November 2016, Fitch Ratings cut its rating on McDonald’s bonds from BBB+ to BBB.a. What is Fitch’s top bond rating? Under what circumstances
Suppose that the following table gives data on the price of rye and the number of bushels of rye sold in 2017 and 2018:a. Calculate the change in the quantity of rye demanded divided by the change in
Which of the following are examples of a firm experiencing positive technological change?a. A fall in the wages JetBlue pays its mechanics leads it to lower its ticket prices.b. A training program
Explain why it is true that for a firm in a perfectly competitive market, the profit-maximizing condition MR = MC is equivalent to the condition P = MC.
An article in the Wall Street Journal noted that demand for organic foods was growing rapidly in the United States.According to the article, “meat and egg companies like Pilgrim’s Pride Corp.,
Sony suffered losses selling televisions from 2004 to 2013, before finally earning a small profit on this business from 2014 to 2016.Given the strong consumer demand for plasma, LCD, and LED
Under what circumstances might a monopolistically competitive firm continue to earn an economic profit as new firms enter its market?
In the following graph, reproduced from the answer to Solved Problem 11.3, indicate the area representing the Red Robin restaurant’s profit when the demand curve is D1 and the area representing its
The market for athletic shoes is intensely competitive. In 2016, Sports Authority, one of the firms in the market, declared bankruptcy and closed its 460 stores. An Associated Press article discussed
UPS and FedEx both struggle to deliver the surge of packages they receive during the December holiday season. According to an article in the Wall Street Journal, in 2014, both firms considered
The U.S. Department of Justice investigated whether the four major U.S. airlines were colluding. Some analysts believed the airlines were restraining increases in capacity by failing to buy more
An article in the Wall Street Journal stated that a change in inventories “dragged down the overall growth in GDP by nearly a full percentage point” below what it otherwise would have been. For
What is the underground economy? Why do some countries have larger underground economies than other countries?
An article in the Wall Street Journal noted that many economists believe that GDP data for India are unreliable because“most enterprises are tiny and unregistered, and most workers are employed off
As of 2017, 19 countries in Europe had adopted the euro as their common currency. These countries are called the euro zone. According to an article in the Economist, “The euro zone’s GDP grew at
Use the data in the following table to calculate the GDP deflator for each year (values are in billions of dollars).Which year from 2013 to 2016 saw the largest percentage increase in the price
Suppose Switzerland has many of its citizens temporarily working in other countries, and many of its firms have facilities in other countries. Furthermore, suppose relatively few citizens of foreign
Fill in the missing values in the following table of data collected in the household survey for February 2017: Working-Age Population Employment Unemployment Unemployment rate Labor force Labor force
In 1924, the famous novelist F. Scott Fitzgerald wrote an article for the Saturday Evening Post titled “How to Live on $36,000 a Year,” in which he wondered how he and his wife had managed to
Use the information in the following table to determine the percentage changes in the U.S. and French real minimum wages between 1957 and 2016. Does it matter for your answer that you have not been
In an article in the Wall Street Journal, a professor of financial planning noted the effect of rising prices on purchasing power:“Today, $2,000 a month seems reasonable [as an income for a retired
The following table shows the top 10 films of all time through May 2017, measured by box office receipts in the United States, as well as several other notable films farther down the list.The CPI in
An article in the Economist about Venezuela stated, “The economy is in such an appalling state, and inflation is so high, that Venezuelans greeted a rise of 60% in the minimum wage on May 1st with
What is “stagflation”? Why might a supply shock result in it?
An article in the Wall Street Journal discussing the relatively slow adoption of bitcoins by individuals and businesses noted,“The vast majority of consumers, certainly in the developed world,
Why did Congress decide to establish the Federal Reserve System in 1913?
A columnist in the New York Times noted, “Normally when we say that a central bank like the Federal Reserve or European Central Bank creates money from thin air, it does so by buying up bonds.”
Suppose that the Federal Reserve engages in an open market sale of $25 million in U.S. Treasury bills to banks. Fill in the missing information in the following T-accounts for the Fed and for the
Use the graph in the next column to answer the following questions.a. If the Fed does not take any policy action, what will be the level of real GDP and the price level in 2021?b. If the Fed wants to
The hypothetical information in the following table shows what the situation will be in 2021 if the Fed does not use monetary policy.a. If the Fed wants to keep real GDP at its potential level in
What is supply-side economics?
According to the FBI Bank Crime Statistics, there were more than 4,000 bank robberies in the United States in 2015, an increase of 3.9 percent over 2014. The FBI claims that banks have made
The Apply the Concept feature explains that there are both positive and normative aspects to the debate over whether the federal government should enact tariffs on imports of cars from Mexico. What
Using the information in Figure 1A.2, calculate the percentage change in Ford’s auto sales from one year to the next. During which year did sales fall at the highest rate?Figure 1A.2 Sales 7.0
According to an article in the Wall Street Journal, Staples Inc., an office supply store, “has found a new use for some of its roomy office-supply stores: make parts of them into offices.”
State government Medicaid programs provide medical insurance to poor and disabled people. A news article described a new prescription drug that costs as much as “$94,000 for one 12-week treatment
Suppose that many cities begin to pass taxes on carbonated sodas, while at the same time scientists discover a cure for citrus greening, which is reducing orange crops in Florida and Brazil. Use a
In early 2017, an article in the Financial Times about the oil market quoted the chief economist of oil company BP as saying, “Pricing pressure is likely to come from the supply side, because of
On a shopping trip, Melanie decided to buy a light blue coat that had a price tag of $79.95. When she brought the coat to the store’s sales clerk, Melanie was told that the coat was on sale, and
An economist for the Brookings Institution argued that “a price on carbon would minimize the cost of steering economic activity away from the greenhouse gas emissions that threaten the
A country’s labor force is the sum of the number of employed and unemployed workers. The accompanying table provides data on the size of the labor force and the number of unemployed workers for
Access the Discovering Data exercise for Chapter 14 Problem 5 online to answer the following questions.a. What is the current federal minimum wage?b. In what year was the federal minimum wage last
The accompanying table provides the inflation rate in the year 2005 and the average inflation rate over the period 2006–2015 for seven different countries.a. Given the expected relationship between
Access the Discovering Data exercise for Chapter 14 Problem 12 online to answer the following questions.a. What is the current level of employment for individuals without a high school diploma?b. How
The accompanying diagram shows the inflation rate in the United Kingdom from 1980 to 2016.a. Between 1980 and 1985, policy makers in the United Kingdom worked to lower the inflation rate. What would
Before there was the internet, there was mail order, and for rural and small-town America that meant, above all, the Montgomery Ward catalog. Starting in 1872, that catalog made it possible for
In early 2016 the Wall Street Journal reported that a number of big financial players, including the legendary speculator George Soros, had taken an interest in the future performance of the Chinese
“Moving is the worst. Yard work is the worst. Building IKEA furniture is the worst.” So began a 2015 report on TaskRabbit, a company founded in 2008 (under the name RunMyErrand), that helps
The accompanying table shows data from the World Bank, World Development Indicators, for real GDP per capita in 2010 U.S. dollars for Argentina, Ghana, South Korea, and the United States for 1960,
According to the U.S. Energy Information Administration, the proven oil reserves existing in the world in 2015 consisted of 1,663 billion barrels. In that year, the U.S. Energy Information
The accompanying table shows data from the World Bank, World Development Indicators for real GDP per capita (2010 U.S. dollars) for Argentina, Ghana, South Korea, and the United States in 1960 and
Access the Discovering Data exercise for Chapter 15 online to answer the following questions.a. What was the ratio of Japanese GDP per capita relative to the United States in 1950 and 1991?b. Why has
Suppose someone says, “Using monetary or fiscal policy to pump up the economy is counterproductive—you get a brief high, but then you have the pain of inflation.”a. Explain what this means in
In 2008, in the aftermath of the collapse of the housing bubble and a sharp rise in the price of commodities, particularly oil, there was much internal disagreement within the Fed about how to
The Conference Board publishes the Consumer Confidence Index (CCI) every month based on a survey of 5,000 representative U.S. households. It is used by many economists to track the state of the
If you or someone you know bought a new car recently, the odds are pretty good that it was manufactured by one of two Japanese companies, Toyota or Honda. Together, these companies account for almost
Explain how each of the following events would affect the public debt or implicit liabilities of the U.S. government, other things equal. Would the public debt or implicit liabilities be greater or
Suppose the economy is in a slump and the current public debt is quite large. Explain the trade-off of short-run versus long-run objectives that policy makers face when deciding whether or not to
Explain how a contractionary fiscal policy like austerity can make it more likely that a government is unable to pay its debts.
Access the Discovering Data exercise for Chapter 17 online to answer these questions.a. Which of these six countries—the United States, France, Italy, Greece, Germany, and the United Kingdom—had
Unlike households, governments are often able to sustain large debts. For example, in 2016, the U.S. government’s total debt reached $19.5 trillion, approximately equal to 106.1% of GDP. At the
Why were extraordinary measures needed to deal with the financial crisis of 2008?
The following table shows the components of M1 and M2 in billions of dollars for the month of December in the years 2006 to 2016, reported by the Federal Reserve Bank of St. Louis. Complete the table
Show the changes to the T-accounts for the Federal Reserve and for commercial banks when the Federal Reserve sells$30 million in U.S. Treasury bills. If the public holds a fixed amount of currency
There are three types of money: commodity money, commodity-backed money, and fiat money. Which type of money is used in each of the following situations?a. Bottles of rum were used to pay for goods
The government of Eastlandia uses measures of monetary aggregates similar to those used by the United States, and the central bank of Eastlandia imposes a required reserve ratio of 10%. Given the
Although the U.S. Federal Reserve doesn’t use changes in reserve requirements to manage the money supply, the central bank of Albernia does. The commercial banks of Albernia have $100 million in

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