Question 1

Holding all else equal, the return on stockholders' equity will rise with a decline in:&#10;A)the book value of stockholders' equity.&#10;B)economic profits.&#10;C)accounting net income.&#10;D)prices.

Accepted Answer

The return on stockholders' equity increases when the book value of stockholders' equity decreases, holding all else equal, because the return on equity is calculated as net income divided by stockholders' equity. A lower denominator (stockholders' equity) leads to a higher return on equity if net income remains constant.

Question 2

Tradable emission permits:&#10;A)are often worthless.&#10;B)are granted by the government and allow an increase in pollution.&#10;C)can harm environmentally sensitive firms and consumers, at least on a relative basis.&#10;D)force polluters to spend millions of euros on new equipment to meet pollution abatement regulations.

Accepted Answer

Tradable emission permits can harm environmentally sensitive firms and consumers as they may end up paying higher costs to buy permits to continue polluting, compared to firms that have already reduced their emissions. This creates a relative advantage for firms that have already reduced their emissions and a disadvantage for those who have not. Tradable emission permits can harm environmentally sensitive firms and consumers, at least on a relative basis because they allow polluters to continue to emit carbon dioxide, even if they purchase permits to do so. This puts firms that are trying to reduce their emissions at a competitive disadvantage, and encourages consumers to continue to use high-emission products. Additionally, the permits themselves can be expensive and are often controlled by large corporations, making it difficult for smaller firms to afford them.

Question 3

Externalities exist when:&#10;A)private costs equal social costs.&#10;B)private costs and benefits equal social costs and benefits.&#10;C)private benefits equal social benefits.&#10;D)private benefits exceed social benefits.

Accepted Answer

Externalities exist when the private benefits of an activity do not match the social benefits or when the private costs of an activity do not match the social costs. In this case, when private benefits exceed social benefits, it is a negative externality (such as pollution), while when private costs are lower than social costs, it is a positive externality (such as education or vaccination). Externalities occur when there are costs or benefits that are not reflected in the private costs and benefits of the parties involved but affect society as a whole. When private benefits exceed social benefits, it means there is an externality in the form of a positive externality. This can happen when a person's actions create benefits for others without the person receiving compensation for it.

Question 4

The incidence of a percentage sales tax will fall primarily on business when:&#10;A)the tax is collected from businesses.&#10;B)demand is highly elastic with respect to price.&#10;C)demand is highly inelastic with respect to price.&#10;D)the elasticity of demand equals 1.

Accepted Answer

The answer of The incidence of a percentage sales tax...

Question 5

Regulatory costs are partially borne by workers when:&#10;A)demand is perfectly inelastic.&#10;B)supply is perfectly elastic.&#10;C)supply is perfectly inelastic.&#10;D)none of these.

Accepted Answer

The answer of Regulatory costs are partially borne by workers...

Question 6

When demand is perfectly elastic, regulatory costs are never borne by:&#10;A)consumers.&#10;B)management.&#10;C)stockholders.&#10;D)government.

Accepted Answer

When demand is perfectly elastic, any increase in price due to regulatory costs will cause consumers to switch to a substitute product with a lower price, resulting in a complete loss of market share for the affected product. Therefore, regulatory costs cannot be passed on to consumers in the form of higher prices. When demand is perfectly elastic, even a small increase in price would cause consumers to switch to a substitute product, resulting in a significant decrease in demand for the regulated product. Therefore, producers cannot pass on the regulatory costs to consumers, as the consumer would simply switch to a competing product that is cheaper. Thus, regulatory costs are never borne by consumers in a perfectly elastic demand scenario.

Question 7

The burden of a percentage sales tax will fall primarily on business when:&#10;A)the tax is collected from businesses.&#10;B)demand is highly elastic with respect to price.&#10;C)demand is highly inelastic with respect to price.&#10;D)the elasticity of demand equals 1.

Accepted Answer

The answer of The burden of a percentage sales tax...

Question 8

Regulation of business has the potential to yield economic benefits to society by:&#10;A)increasing positive and negative externalities.&#10;B)increasing the availability of substitutes.&#10;C)restricting entry.&#10;D)mandating economies of scale.

Accepted Answer

Regulation can lead to economic benefits by increasing the availability of substitutes, which enhances competition and can lead to lower prices and more choices for consumers. Regulations can ensure that markets remain competitive and that monopolies or oligopolies do not limit consumer options.

Question 9

A per unit tax will typically cause output prices to increase most when:&#10;A)average cost is falling.&#10;B)average cost is constant.&#10;C)average cost is rising.&#10;D)none of these.

Accepted Answer

The answer of A per unit tax will typically cause...

Question 10

The perfectly competitive demand curve for a commodity product is:&#10;A)upward sloping.&#10;B)downward sloping.&#10;C)horizontal.&#10;D)vertical.

Accepted Answer

In perfect competition, there are many firms producing identical products and consumers have no preference for one seller over another. Therefore, the demand curve faced by each individual firm is perfectly elastic or horizontal at the market price. If a firm raises its price even a little, buyers will switch to another firm's product. Conversely, if a firm lowers its price just a little, it will capture the entire market demand because buyers do not have a preference for one seller over another. In perfect competition, there are many buyers and sellers of the product and the product is homogeneous, meaning it is identical from all sellers. Therefore, each seller has no market power to influence the price and must accept the market price. This results in a horizontal demand curve at the market price because any increase in price will cause buyers to purchase from other sellers and any decrease in price will cause other sellers to offer a lower price. Thus, the demand curve is perfectly elastic.

Deck 11: Performance and Strategy in Competitive Markets