Certified Public Accountant CPA Questions + Answers Part 10

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QUESTION 139
Which of the following would lead to a reduction in inflation?
A. Increasingaggregatedemandandincreasingaggregatesupply. B. Decreasingaggregatedemandandincreasingaggregatesupply. C. Decreasing aggregate demand and decreasing aggregate supply. D. Increasing aggregate demand and decreasing aggregate supply.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Decreasing aggregate demand and increasing aggregate supply will reduce the inflationary pressures.
Choice "a" is incorrect. Increasing aggregate demand causes the price level to rise. Choice "c" is incorrect. Decreasing aggregate supply causes the price level to rise. Choice "d" is incorrect. Both of these would cause the price level to rise.
QUESTION 140
Initially the nominal interest rate is 8 percent and the inflation rate is 6 percent. One year later, the nominal interest rate rises to 12 percent while the inflation rate rises to 10 percent. It follows that the real rate of interest:
A. Hasremainedthesame.
B. Hasfallen.
C. Has risen.
D. Insufficient information given for an answer.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The real interest rate equals the nominal interest rate minus the inflation rate. Thus, the real interest rate in the first year is: real interest rate = 8 - 6 = 2 and the real interest rate in the next year is: real interest rate = 12 - 10 = 2.

QUESTION 141
If consumption is $70b, investment $50b, government spending $20b, exports $7b, and imports $5b, what is GDP?
A. $152b. B. $138b. C. $140b. D. $142b.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. By the expenditure approach to measuring GDP, GDP equals: Consumption + Investment + Government Spending + Exports - Imports. Thus, GDP = 70 + 50 + 20 + 7 - 5 = 142b.
QUESTION 142
When a worker quits work to stay at home with the children, it is an example of:
A. Frictionalunemployment.
B. Structuralunemployment.
C. Cyclical unemployment.
D. Not counted in unemployment figures.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Unemployment only tallies workers actively seeking employment; it does not count retirees or stay-at-home parents.
Choice "a" is incorrect. Frictional unemployment describes workers who leave work voluntarily to seek a better position.
Choice "b" is incorrect. Structural unemployment describes workers whose skills are no longer needed. Choice "c" is incorrect. Cyclical unemployment describes workers unemployed due to the business cycle.
QUESTION 143

The CPI jumps from 131 in year 1 to 136.5 in year 2. What is annual inflation rate?
A. 4.2% B. 3%
C. 1.38% D. 13.8%
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The inflation rate is measured as:
QUESTION 144
The inflation rate measures:
A. TherateatwhichnominalGDPincreases.
B. Howthepriceofaparticulargoodchangesovertime. C. How nominal interest rate changes over time.
D. The rate at which the overall price level increases.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:

Choice "d" is correct. The inflation rate measures the rate of increase in the overall price level in the economy.
Choice "a" is incorrect. The inflation rate is associated with price level changes not changes in the nominal value of output. Choice "b" is incorrect. Inflation refers to a sustained increase in the overall price level. Not the price of a particular good. Choice "c" is incorrect. The inflation rate is associated with price level changes not interest rate changes.
QUESTION 145
Stagflation refers to:
A. AcombinationofrisingunemploymentandrisingrealGDP. B. Acombinationofrisingunemploymentandarisingpricelevel. C. High inflation rates.
D. High unemployment rates.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Stagflation occurs when the economy suffers a recession that is characterized by falling output, rising unemployment, and a rising price level. Choice "a" is incorrect. Real GDP is falling during stagflation, not rising. Choice "c" is incorrect. High inflation rates is just one aspect of stagflation; the other is falling output and rising unemployment.
Choice "d" is incorrect. High unemployment rates are just one aspect of stagflation; the other is a rising overall price level (high inflation).
QUESTION 146
When the overall price level is rising, nominal interest rates tend to be:
A. Unaffectedbychangesinthepricelevel. B. Falling.
C. Rising.
D. None of the above.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The relationship between nominal interest rates and inflation can be seen by rearranging the equation for real interest rates as follows:

Nominal Interest Rate = Real Interest Rate + Inflation
Thus, if real interest rates do not change, a 1% increase in the inflation rate will lead to a 1% increase in nominal interest rates.
QUESTION 147
Inflation can be caused by:
A. Increasesinaggregatedemandonly.
B. Increasesinaggregatesupplyonly.
C. Decreases in aggregate demand and increases in aggregate supply. D. Increases in aggregate demand and decreases in aggregate supply.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Both an increase in aggregate demand and a decrease in aggregate supply can cause inflation.
Choice "a" is incorrect. While an increase in aggregate demand can cause inflation, it is not the only cause of inflation.
Choice "b" is incorrect. An increase in aggregate supply would lower the overall price level, not increase the overall price level. Choice "c" is incorrect. A decrease in aggregate demand would lower the overall price level, not increase the overall price level.
QUESTION 148
To address the problem of a recession, the Federal Reserve Bank most likely would take which of the following actions?
A. Lowerthediscountrateitchargestobanksforloans.
B. SellU.S.governmentbondsinopen-markettransactions.
C. Increase the federal funds rate charged by banks when they borrow from one another. D. Increase the level of funds a bank is legally required to hold in reserve.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. During a recession, real GDP has fallen and unemployment has risen. To stimulate the economy, the Fed can lower the discount rate. This causes the money supply to increase, which, in turn, causes aggregate demand to shift right. As a result, real GDP would increase and unemployment would decrease.

Choice "b" is incorrect. If the Fed sells U.S. government bonds in the open market, the money supply will decrease. This causes aggregate demand to shift left. As a result, real GDP would decrease and unemployment would increase.
Choice "c" is incorrect. Increasing the federal funds rate would increase interest rates. Higher interest rates cause the aggregate demand curve to shift left. As a result, real GDP would decrease and unemployment would increase.
Choice "d" is incorrect. An increase in the required reserve ratio causes the money supply to decrease. This causes aggregate demand to shift left. As a result, real GDP would decrease and unemployment would increase.
QUESTION 149
Which of the following actions is the acknowledged preventive measure for a period of deflation?
A. Increasinginterestrates.
B. Increasingthemoneysupply. C. Decreasing interest rates.
D. Decreasing the money supply.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Deflation is a general decline in the overall price level (i.e., when the inflation rate is negative). Increasing the money supply causes the overall price level to rise. As a result, it helps eliminate deflation.
Choice "a" is incorrect. Increasing interest rates causes aggregate demand to shift left. As a result, the aggregate price level will fall even further. This will exasperate deflation. Choice "c" is not wrong but it is not as good an answer as "b". A decrease in interest rates causes the aggregate demand curve to shift right. As a result, the aggregate price level will rise. This helps eliminate deflation. However, there are times when interest rates are already so low that lowering interest rates is not an option. Thus, the preferred or "acknowledged" preventative measure for deflation is increasing the money supply.
Choice "d" is incorrect. Decreasing the money supply causes the overall price level to fall. This would obviously exasperate deflation.
QUESTION 150
All of the following are components of the formula used to calculate gross domestic product, except:
A. Householdincome.
B. Foreignnetexportspending. C. Government spending.
D. Gross investment.
Correct Answer: A
Section: Business Environment and Concepts (Volume B)

Explanation Explanation/Reference:
Explanation:
Choice "a" is correct. Gross domestic product (GDP) is calculated in two different ways. The first, which is the expenditure approach and can be used to answer this question, is the mnemonic GICE, or government purchases plus private domestic investment plus personal consumption expenditures plus net exports. Household income is the only one of the answers that is not included in this mnemonic. Choice "b" is incorrect. Foreign net export spending is included in the mnemonic (E) for GDP; although, it is called simply net exports in the mnemonic and not foreign net export spending. Choice "c" is incorrect. Government spending is included in the mnemonic (G) for GDP. Choice "d" is incorrect. Gross investment is included in the mnemonic (I) for GDP, although it is called private domestic investment in the mnemonic.
QUESTION 151
Gross domestic product includes which of the following measures?
A. Thesizeofapopulationthatmustshareagivenoutputwithinoneyear.
B. Thenegativeexternalitiesoftheproductionprocessofanationwithinoneyear.
C. The total monetary value of all final goods and services produced within a nation in one year.
D. The total monetary value of goods and services including barter transactions within a nation in one year.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Gross domestic product (GDP) is the total dollar (monetary) value of all new final products and services produced with the economy in a given time perioD. The emphasis is on the final goods and services.
Choice "a" is incorrect. The size of a population that must share a given output within one year is not a part of the GDP calculation.
Choice "b" is incorrect. The negative (or positive) externalities of the production process of a nation within one year are not a part of the GDP calculation. In economics, externalities are the effects that the acts of consumers or producers have on each other. Externalities range from technological changes to changes in the range of options available to consumers. Externalities may also be regarded as the unanticipated side effects of courses of action.
Choice "d" is incorrect. The total monetary value of goods and services, including barter transactions, is not a part of the GDP calculation. GDP includes only monetary value, not barter value.
QUESTION 152
Which of the following is correct regarding the consumer price index (CPI) for measuring the estimated decrease in a company's buying power? A. TheCPIismeasuredonlyonceevery10years.

B. Theproductsacompanybuysshoulddifferfromwhataconsumerbuys. C. The CPI measures what consumers will pay for items.
D. The CPI is skewed by foreign currency translations.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The consumer price index measures the costs of a market basket of specific goods commonly purchased by consumers. It measures consumer buying power and is not distorted by items generally bought by industry.
Choice "a" is incorrect. The Consumer Price Index (CPI) represents monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. Choice "c" is incorrect. The Consumer Price Index measures what has been paid for items, not what consumers will pay for items.
Choice "d" is incorrect. The Consumer Price Index measures what has been paid by consumers in over eighty urban areas in the United States. The amounts paid are denominated in US dollars and would not be skewed by foreign currency translations.
QUESTION 153
The following table contains Emerald Corp.'s quarterly revenues, in thousands, for the past three years. During that time, there were no major changes to Emerald's selling strategies and total capital investment.
Which of the following statements best describes the likely cause of the fluctuations in Emerald's revenues and the best response to those fluctuations?
A. Thefluctuationsarefromchangesintheeconomy,andEmeraldshouldexamineitscoststructureforpotentialchanges.
B. Thefluctuationsarefromchangesintheeconomy,andEmeraldshouldmanageitsinventoriesandcashflowtomatchthecycle.
C. The fluctuations are from the seasonal demand for Emerald's products, and Emerald should examine its cost structure for potential changes.
D. The fluctuations are from the seasonal demand for Emerald's products, and Emerald should manage its inventories and cash flow to match the cycle.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation

Explanation/Reference:
Explanation:
Choice "d" is correct. Relatively stable demand over a three year period in each of the first three quarters of the year followed by an increase of between 40 and 50 percent in the final quarter of the year over average sales in the first three quarters in each of the three years presented is indicative of seasonal fluctuations in demand for Emerald's product that would require appropriate inventory management.
Choice "a" is incorrect. The consistent volume levels and fluctuation percentages displayed for the activity in each quarter for each year are indicative of changes in seasonal demand rather than changes in the economy generally.
Choice "b" is incorrect. The consistent volume levels and fluctuation percentages displayed for the activity in each quarter for each year are indicative of changes in seasonal demand rather than changes in the economy generally.
Choice "c" is incorrect. Relatively stable demand over a three year period in each of the first three quarters of the year followed by an increase of between 40 and 50 percent in the final quarter of the year over average sales in the first three quarters in each of the three years presented is indicative of seasonal fluctuations in demand for Emerald's product. The company should be more attentive to the timing of inventory purchases to meet demand, however, rather than the company's overall cost structure.
Market Influences on Business Strategies
QUESTION 154
When markets are perfectly competitive, consumers:
A. Havegoodsandservicesproducedatthelowestcostinthelongrun.
B. Mustchoosethebrandstheybuysolelyonthebasisofinformationaladvertising. C. Do not receive any consumer surplus unless producers choose to overproduce. D. Must search for the lowest price for the products they buy.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Since price is barely sufficient to give a firm a normal profit and stay in business, the consumer obtains the product at as low a price as is economically feasible. In addition, every firm is forced to produce at the most efficient output rate.
Choice "b" is incorrect. Brand differentiation is present in monopolistic competition, not perfect competition.
Choice "c" is incorrect. This is a far-out distractor.
Choice "d" is incorrect. Also far out. Individual consumers are also price takers at the market equilibrium price.
QUESTION 155
Which one of the following is not a key assumption of perfect competition? A. Customersareindifferentaboutwhichfirmtheybuyfrom.

B. Thelevelofafirm'soutputissmallrelativetotheindustry'stotaloutput. C. Each firm can price its product above the industry price.
D. There is freedom of entry into and exit out of the industry.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A key assumption of perfect competition is that the firm is a "price taker," that is, it cannot fix the price. Accordingly, it is not true that each firm can price its product above the industry price.
Key assumptions of perfect competition include:
A. Customers are indifferent about which firm they buy from. B. The level of a firm's output is small relative to the industry's total output. D. There is freedom of entry into and exit out of the industry.
QUESTION 156
In order to sell at the rate of output in markets controlled by monopolists, price is set where:
A. Priceequalsmarginalcost.
B. Marginalrevenueequalsmarginalcost.
C. Marginal revenue equals average total cost. D. Price equals average total cost.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. In order to sell at the rate of output in markets controlled by monopolists, the price is set where marginal revenue equals marginal cost. No matter which model is representative of the industry in which the firm operates, the firm will maximize profits by producing at MR = MC. The monopolist's price will be higher than MR.
Choice "a" is incorrect. Price exceeds both MR and MC.
Choices "c" and "d" are incorrect, which are far-out distractors.
QUESTION 157

The kinked demand curve is associated with:
A. Theanalysisofagriculturalmarkets.
B. Theanalysisofmonopolisticcompetition. C. The analysis of pure competition.
D. The analysis of oligopoly.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The demand curve for any individual oligopolist is kinked sharply downward. This occurs because, in oligopoly market conditions, the other firms in the market will match any price reduction so they do not lose market share but will not match any price increase of an individual firm. Therefore, for the individual firm attempting to raise its prices beyond equilibrium, consumers will quickly buy from other firms in the market and demand will drop off sharply creating a kinked demand curve.
Choices "a", "b", and "c" are incorrect, per the above Explanation: .
QUESTION 158
Karen Parker wants to establish an environmental testing company that would specialize in evaluating the quality of water found in rivers and streams. However, Parker has discovered that she needs either certification or approval from five separate local and state government agencies before she can commence business. Also, the necessary equipment to begin would cost several million dollars. However, Parker believes that if she is able to obtain capital resources, she can gain market share from the two major competitors.
The market structure Karen Parker is attempting to enter is best described as:
A. Purecompetition.
B. Anaturalmonopoly.
C. An oligopoly.
D. Monopolistic competition.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Major competitors and substantial capital requirements (high barriers to entry) are oligopolistic market conditions.

Choice "a" is incorrect. Pure competition has small barriers to entry and numerous suppliers. Choice "b" is incorrect. A natural monopoly suggests that economic conditions allow only one supplier for efficiency purposes.
Choice "d" is incorrect. Monopolistic competition has easier barriers to entry and more firms competing to supply the market than oligopoly.
QUESTION 159
Any business firm that has the ability to control the price of the product it sells:
A. Facesadownward-slopingdemandcurve.
B. Doesnothaveanyentryorexitbarriersinitsindustry. C. Has a supply curve that is horizontal.
D. Has a demand curve that is horizontal.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Any business firm that has the ability to control the price of the product it sells faces a downward-sloping demand curve for the firm. Only the firm in a competitive market is a price- taker facing a horizontal demand curve at the market equilibrium price. Choice "b" is incorrect. Firms in competitive industries have no entry or exit barriers and are price- takers.
Choice "c" is incorrect, this is a far-out distractor.
Choice "d" is incorrect. Only firms in perfectly competitive markets (price-takers) face horizontal demand curves.
QUESTION 160
If a group of consumers decide to boycott a particular product, the expected result would be:
A. Anincreaseintheproductpricetomakeuplostrevenue.
B. Adecreaseinthedemandfortheproduct.
C. Anincreaseinproductsupplybecauseofincreasedavailability.
D. That companies in the industry would experience higher economic profits.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:

Choice "b" is correct. A consumer boycott will decrease demand for the product being boycotted. Choice "a" is incorrect. Increasing price will further reduce the quantity demanded. The effect on revenue is uncertain.
Choice "c" is incorrect. Supply will be unaffected by a boycott. Choice "d" is incorrect. A boycott of a particular product will reduce the overall profits of the industry.
QUESTION 161
In competitive markets, an increase in an effective minimum wage will:
A. Haveaneutraleffectonthedemandforlabor. B. Decreasethesupplyoflabor.
C. Decrease unemployment.
D. Increase unemployment.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. When the "minimum" wages are increased, employers may elect to hire fewer employees thereby increasing unemployment.
Choice "a" is incorrect. An increase in the minimum wage will have an effect on the demand for labor. Choice "b" is incorrect. The supply of labor will likely go up as the wage being paid increases. Choice "c" is incorrect. As the minimum wage increases, unemployment will increase.
QUESTION 162
In a competitive market, an increase in the minimum wage will likely have the following effects:
A. Firmscurrentlypayingabovethenewminimumwagewouldgenerallyraisetheirpayrates(althoughthenewminimumwagecreatesanewfloorforemployee wage bargaining purposes).
B. Firmspayingatthecurrentminimumwageratewouldgenerallybeunaffectedifthemarginalrevenueproducedbythelowestpaidworkersdoesnotexceedthe new higher cost of the worker. Many firms would thus be forced to work more efficiently.
C. Total employment will likely decrease in affected industries and generate unemployment.
Employers will demand a smaller number of workers while a larger number of workers will be attracted by the higher wage.
D. If a marginally more expensive form of capital is available to substitute for labor (e.g., due to technological advances), firms will reduce their use of labor.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:

Choice "c" is correct. With an increase in the minimum wage, total employment will likely decrease in affected industries and generate unemployment. Employers will demand a smaller number of workers while a larger number of workers will be attracted by the higher wage. Choice "a" is incorrect. Firms currently paying above the new minimum wage would generally be unaffected, not raise their pay rates.
Choice "b" is incorrect. Firms paying at the current minimum wage rate would attempt to reduce labor, not generally be unaffected.
Choice "d" is incorrect. If a marginally cheaper, not more expensive.
QUESTION 163
Suppose the equilibrium wage for low skilled workers in California is $6.00 an hour. If the government increases the minimum wage to $7.00 an hour, what would be the effect on the market for low skilled labor?
A. Anexcessdemandforlaborwouldresult. B. Anexcesssupplyoflaborwouldresult. C. The demand for labor would decrease. D. The supply of labor would increase.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A minimum wage that is set above the equilibrium wage will result in an excess supply (or surplus) of labor.

Choice "a" is incorrect, since the quantity demanded of labor at $7 is less than the quantity supplied, implying an excess supply not an excess demand.
Choice "c" is incorrect. An increase in the minimum wage causes a decrease in quantity demanded of labor, not a decrease in the demand (shift in demand) for labor.
Choice "d" is incorrect, per the above Explanation: .
QUESTION 164
In a competitive labor market, a minimum wage that is set above the equilibrium wage will result in which of the following:
A. Adecreaseinthequantitydemandedoflabor. B. Anincreaseinthequantitysuppliedoflabor. C. A decrease in total employment.
D. All of the above.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. As illustrated in the graph, a minimum wage that is set above the equilibrium wage results in a decrease in the quantity demanded of labor

(falls to LD), an increase in the quantity supplied of labor (increases to LS), and a decrease in total employment (total employment falls from L* to LD).
Choices "a", "b", and "c" are incorrect. All are true, making choice "d" the only right answer.
QUESTION 165
The continual process of re-evaluating the strategic plans includes all of the following significant questions a firm should be concerned with, except:
A. Hasthefirmbeenabletoattainormaintaincompetitiveadvantage?
B. Isthefirmabletobeprofitableunderthecurrentstrategy?
C. Does the current strategy continue to be aligned with the established goals of the firm? D. Has the firm been able to adapt to the preferences of its employees?
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Although the firm needs to be flexible with respect to changes in many situations and then adapt to them, the ability to adapt to the preferences of its employees is not nearly as significant to the process as the other three choices, which are crucial to the success of the strategic plan. Choices "a", "b", and "c" are incorrect because they are all significant questions a firm should be concerned with when re-evaluating the strategic plan.

QUESTION 166
Under monopolistic competition, strategic plans focus on:
A. Profitabilityfromproductionlevelsthatmaximizeprofits.
B. Maintainingthemarketshareandbeingresponsivetomarketconditionsrelatedtosalesprice.
C. Maintaining the market share and planning for enhanced product differentiation.
D. Maintaining the market share, ensuring product differentiation, and adapting to price changes or required changes in production volume.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Under monopolistic competition, strategic plans include maintaining the market share (as with pure competition), but they also likely include plans for enhanced product differentiation and allocation of resources to advertising, product research, etc. Choices "a", "b", and "d" are incorrect because they are characteristics of other types of market structures.
QUESTION 167
Under monopoly, strategic plans focus on:
A. Profitabilityfromproductionlevelsthatmaximizeprofits.
B. Maintainingthemarketshareandbeingresponsivetomarketconditionsrelatedtosalesprice.
C. Maintaining the market share and planning for enhanced product differentiation.
D. Maintaining the market share, ensuring product differentiation, and adapting to price changes or required changes in production volume.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Under monopoly, strategic plans ignore market share and focus on profitability from production levels that will maximize profits. Choices "b", "c", and "d" are incorrect because they are characteristics of other types of market structures.
QUESTION 168
With respect to price elasticity of demand:

A. Theshorterthetimeperiod,themoreproductdemandbecomeselasticbecauselesschoicesareavailable. B. Productdemandismoreelasticwhenfewersubstitutesareavailable.
C. Product demand is more inelastic when more substitutes are available.
D. Product demand is more elastic when more substitutes are available.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Product demand is more elastic when more substitutes are available. Choice "a" is incorrect. The longer the time period, the more product demand becomes elastic because more choices are available.
Choice "b" is incorrect. Product demand is more elastic when more substitutes are available, not fewer substitutes.
Choice "c" is incorrect. Product demand is more inelastic when few substitutes are available.
QUESTION 169
If demand is price inelastic:
A. Anincreaseinpricewillresultinadecreaseintotalrevenue.
B. Anincreaseinpricewillresultinanincreasethequantitydemandedthatismorethantheincreaseinprice. C. Anincreaseinpricewillresultinanincreaseintotalrevenue.
D. Anincreaseinpricewillhavenoeffectontotalrevenue.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. If demand is price inelastic, an increase in price will result in an increase in total revenue (positive relationship).
Choice "b" is incorrect. When demand is price inelastic, an increase in price results in a decrease in quantity demanded that is proportionately smaller than the increase in price, thus having the result of an increase in total revenue (price multiplied by quantity). Choices "a" and "d" are incorrect, per the above statement.
QUESTION 170
If demand is price elastic:

A. Anincreaseinpricewillresultinadeclineintotalrevenue.
B. Anincreaseinpricewillresultinadeclinethequantitydemandedthatislessthantheincreaseinprice. C. Anincreaseinpricewillresultinanincreaseintotalrevenue.
D. Anincreaseinpricewillhavenoeffectontotalrevenue.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. If demand is price elastic, an increase in price will result in a decline in total revenue (negative relationship).
Choice "b" is incorrect. When demand is price elastic, an increase in price results in a decline in quantity demanded that is proportionately larger than the increase in price, thus having the result of a decline in total revenue (price multiplied by quantity). Choices "c" and "d" are incorrect, per the above statement.
QUESTION 171
If demand is unit elastic:
A. Anincreaseinpricewillresultinadeclineintotalrevenue.
B. Anincreaseinpricewillresultinadeclinethequantitydemandedthatislessthantheincreaseinprice. C. Anincreaseinpricewillresultinanincreaseintotalrevenue.
D. Anincreaseinpricewillhavenoeffectontotalrevenue.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. If demand is unit elastic, a change in price will have no effect on total revenue. Choices "a", "b", and "c" are incorrect, per the above statement.
QUESTION 172
Which of the following is incorrect with regard to government intervention in market operations?
A. Governmentinterventionmaycreateapricedifferentfromthemarketprice,thuscausingeitherasurplusorashortage. B. Apriceceilingisapricethatisestablishedabovetheequilibriumprice,whichcausesasurplustodevelop.

C. Price floors are minimum prices established by law, such as minimum wages and agricultural price supports.
D. Rationing limits the availability of certain goods to a specified level, which lowers demand and prices for a given supply.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is an incorrect statement and the correct choice. A price ceiling is a price that is established below the equilibrium price, which causes a shortage to develop. The statement in choice "b" defines a price floor.
Choices "a", "c", and "d" are correct statements.
QUESTION 173
Which of the following is incorrect with regard to value chain analysis?
A. Valuechainanalysismustbeusedinconjunctionwiththestrategicplanoftheorganization.
B. Valuechainanalysisiscriticaltoassessingthecompetitiveadvantageofafirm.
C. Value chain analysis is a strategic tool that assists the firm in determining how important the perceived value of the buyers is with respect to the market the firm operates in.
D. The value chain starts with the firm and goes all the way through to the end users of the product.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is an incorrect statement and the correct choice. The best description of a value chain is that value starts with the suppliers who provide the raw materials for a production process, continues with the firm and its strategic plan, continues with the value created by the customers, and then ends with the disposal and recycling of the materials.
Choices "a", "b", and "c" are incorrect, as all are correct statements with regard to value chain analysis.
QUESTION 174
According to Michael Porter, which of the following are the two major categories of business activities?
A. Demandactivitiesandsupplyactivities. B. Firmactivitiesandcustomeractivities.

C. Primary activities and support activities. D. Internal activities and external activities.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. According to Michael Porter, the two major categories of business activities are primary activities and support activities. Choices "a", "b", and "d" are incorrect, per the above statement.
QUESTION 175
Which of the following activities is considered a support activity?
A. Deliveryofproducts.
B. Procurementofmaterials. C. Product advertising.
D. In-homewarrantyservice.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Support activities are those activities that are performed by the support staff of an organization (e.g., purchasing of materials and supplies, development of the technology used, management of employees, accounting, finance, strategic planning, etc.). Choices "a", "c", and "d" are incorrect, as these are all considered primary activities. Primary activities are those that are involved with the direct manufacture of products, the delivery of products through distribution channels, and the support of the product that exists after the sale is made (e.g., handling the raw materials, the manufacturing process, taking orders for the product, advertising the product, and servicing the product after it is sold).
QUESTION 176
When applying value chain analysis, a firm sends its production manager to visit the operations of its major supplier in an attempt to determine if there are cost- savings capabilities that could be implemented at the supplier's warehouse. The firm is performing which form of value chain analysis?
A. Internaldifferentiationanalysis. B. Internalcostsanalysis.

C. Vertical linkage analysis. D. None of the above.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Analyzing the vertical linkage of a firm means understanding the activities of the suppliers and buyers of the product and determining where value can be created external to the firm's operations.
Choices "a", "b", and "d" are incorrect, per the above Explanation: .
QUESTION 177
Which of the following is not a type of major strategic framework that has proven useful for value chain analysis?
A. Corecompetenciesanalysis. B. Customerpreferenceanalysis. C. Industrystructureanalysis.
D. Segmentation analysis.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Customer preference analysis is not a major strategic framework that has been proven to be useful for value chain analysis.
Choices "a", "c", and "d" are incorrect, as the three major types of strategic frameworks that have been proven to be useful for value chain analysis are industry structure analysis, core competencies analysis, and segmentation analysis.
QUESTION 178
Jordan Industries is the leader in its market for producing high-quality cat food for cats that require special diets. While it has been able to sustain competitive advantage for years, Jordan's management has implemented a strategic framework that focuses on why the firm has been so successful in its market. Jordan Industries has implemented which type of strategic framework?
A. Industrystructureanalysis. B. Corecompetenciesanalysis.

C. Segmentation analysis. D. None of the above.
Correct Answer: B
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Analysis of the core competencies of a firm help it to determine why it is able to create, attain, and sustain new types of competitive advantage and profits and reveal what it is within the firm that enables it to obtain competitive advantage. Choice "a" is incorrect. Industry structure analysis assists in determining what it is that makes a firm more profitable compared to another firm, and it looks at five forces that influence profitability of an industry or market and, thus, the competitive environment. Choice "c" is incorrect. Segmentation analysis is a possibility when a firm is vertically integrated and when the industry structure and core competencies vary among activities in the value chain. Choice "d" is incorrect, as choice "b" is the answer to the question.
QUESTION 179
If a nation has superior conditions in which to grow coffee beans and firms are able to grow them at very low costs, which of the four major factors that Michael Porter has indicated impact the global competitive environment would allow this nation to fare better with respect to global competitive advantage?
A. Conditionsofthefactorsofproduction. B. Conditionsofdomesticdemand.
C. Related and supporting industries.
D. Firm strategy, structure, and rivalry.
Correct Answer: A
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. If a nation has a strong set of factors of production (such as low cost, high quality raw material inputs), that are required in a given industry, it will fare better with regard to competitive advantage.
Choice "b" is incorrect. Conditions of domestic demand relate to the nation's domestic demand for the product, which is directly related to the ability of the nation to fare better with regard to competitive advantage.
Choice "c" is incorrect. The factor of related and supporting industries deals with whether there are suppliers of material inputs that exist within a nation or whether there are rival firms who are competitive in the international environment, both of which would increase the nation's competitive advantage.
Choice "d" is incorrect. The factor of firm strategy, structure, and rivalry relates to the practices of a nation with respect to how the companies are managed and organized, long with the laws of the nation that regulate the formation of the companies, and how intense the rivalry is with respect to competing firms in the nation.

QUESTION 180
Factors internal to the organization that impact strategy and are sources of strengths and weaknesses include all of the following, except:
A. Marketingeffectiveness.
B. Competenceofmanagement. C. Innovation of product lines.
D. Regulations and laws.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Regulations and laws are external factors of opportunities and threats that affect the overall industry. Choices "a", "b", and "c" are incorrect, as all of these factors are examples of internal factors of an organization.
QUESTION 181
When does competition not become an even stronger force impacting the profitability of a firm?
A. Themarketconsistsofseveralequal-sizedfirms.
B. Customersdonothavestrongbrandpreferences.
C. The market is fast-growing.
D. The costs of exiting the market exceed the costs of continuing to operate.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct, as it is not a factor that would cause market competitiveness to be even stronger. Choices "a", "b", and "d" are incorrect because they are all reasons that competition becomes an even stronger force that impacts the firm's profitability. The following are situations that would cause competition to be an even stronger force impacting the profitability of a firm:
· The market is not growing fast.
· There are several equal-sized firms in the market. · Customers do not have strong brand preferences.

· The costs of exiting the market exceed the costs of continuing to operate. · Some firms profit from making certain moves to increase market share. · The various firms in the market use different types of strategic plans.
QUESTION 182
Which of the following statements regarding the existence of substitute products is correct?
A. Theimpactofsubstituteswillhavemoreofaneffectonthecompetitiveenvironmentofafirmifthesubstitutesaredifficultforcustomerstoobtain.
B. Whenthecostofbuyersswitchingtonewproductsishigh,theeffectofsubstitutesonthecompetitiveenvironmentofafirmishigh.
C. If few substitutes exist, buyers have little choice of products and may be willing to pay a higher price for the products that are available.
D. If few substitutes exist, buyers may have a limit on the maximum price that they are willing to pay and may choose to not purchase the firm's product if the price is too high.
Correct Answer: C
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. If few substitutes exist, buyers have little choice of products and may be willing to pay a higher price for the products that are available. Choice "a" is incorrect. The impact of substitutes will have more of an effect on the competitive environment of a firm if the substitutes are readily available to consumers (not difficult to obtain). Choice "b" is incorrect. When the cost of buyers switching to new products is low (not high), the effect of substitutes on the competitive environment of a firm is high. Choice "d" is incorrect. If many (not few) substitutes exist, buyers may have a limit on the maximum price that they are willing to pay and may choose to not purchase the firm's product if the price is too high.
QUESTION 183
Which of the following is not considered a factor that increases the bargaining power of the customer?
A. Muchinformationisavailabletothecustomertocompareandcontrastfeaturesofallproductsonthemarket. B. Onegroupofcustomersmakesupalargevolumeofthefirm'sbusiness.
C. Buyers have low switching costs of changing products.
D. The firm is unable to change suppliers easily.
Correct Answer: D
Section: Business Environment and Concepts (Volume B) Explanation
Explanation/Reference:
Explanation:

Choice "d" is correct. When a firm is unable to change suppliers easily, that is a factor that increases the bargaining power of the suppliers. Choices "a", "b", and "c" are incorrect because they all are factors that increase the bargaining power of the customer, which are:
· Customers make up a large volume of a firm's business. · There is much information available to customers.
· The buyers have low switching costs.
· There are a high number of alternate suppliers.
QUESTION 184
When do cost leadership strategies fail?
A. Buyershavelargeamountsofbargainingpowerinthemarket.
B. Heavypricecompetitionexistsinthemarket.
C. Buyers become less price sensitive and start to have brand loyalty.
D. New entry firms are able to influence buyers to switch to their product by cutting the price of their product for a period of time in an effort to gain market share and increase profits.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. If firms overlook the fact that few customers care about the fact that a product is priced lower than others and care more about brand loyalty, cost leadership strategies will fail. Choices "a", "b", and "d" are incorrect, as these are all situations in which cost leadership strategies work well.
QUESTION 185
Which of the following is not correct regarding best cost provider strategies?
A. Theoveralllowestcostintheindustryisnotaviableoptioninbestcoststrategiesbecausethefirmcouldnotcompeteprofit-wisewithitsdifferentiationstrategy component.
B. Whengenericproductsarenotacceptabletobuyers,yettheystillremainpricesensitivetothevaluetheyarereceivingfortheirmoney,thebestcoststrategy may work well.
C. The best cost strategy is a combination of the benefits of the cost leadership and differentiation strategies.
D. The best cost strategy strives to have the firm evaluate and change its value chain such that it can achieve the highest cost among its closest competitors with a quality differentiated product in an effort to obtain the highest profits.
Correct Answer: D
Section: Business Environment and Concepts (Volume C)

Explanation Explanation/Reference:
Explanation:
Choice "d" is correct because it is not a correct statement. The best cost strategy strives to have the firm evaluate and change its value chain such that it can achieve the lowest (not highest) cost among its closest competitors while matching them on the features desired by consumers. Choices "a", "b", and "c" are incorrect, as they are all true statements regarding best cost provider strategies.
QUESTION 186
Considering the SCOR Model of supply chain operations, which of the following key management processes does assessing the ability of the suppliers to supply resources fall into?
A. Plan. B. Source. C. Make. D. Deliver.
Correct Answer: A
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The process of planning consists of developing a way to properly balance aggregate demand and aggregate supply within the goals and objectives of the firm and plan for the necessary infrastructure. Assessing the ability of the suppliers to supply resources is part of the "plan" process. Choices "b", "c", and "d" are incorrect, per the above Explanation: .
QUESTION 187
Considering the SCOR Model of supply chain operations, which of the following key management processes does implementing changes in engineering fall into?
A. Plan. B. Source. C. Make. D. Deliver.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation

Explanation/Reference:
Explanation:
Choice "c" is correct. The "make" process encompasses all the activities that turn the raw materials into finished products that are produced to meet a planned demand. Implementing changes in the engineering process falls into the "make" process.
Choices "a", "b", and "d" are incorrect, per the above Explanation: .
QUESTION 188
Considering the SCOR Model of supply chain operations, which of the following key management processes does collecting and processing vendor payments fall into?
A. Plan. B. Source. C. Make. D. Deliver.
Correct Answer: B
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Once demand has been planned, it is necessary to procure the resources required to meet it and to manage the infrastructure that exists for the sources. Collecting and processing vendor payments falls into the "source" process.
Choices "a", "c", and "d" are incorrect, per the above Explanation: .
QUESTION 189
In which stage of supply chain management will management move away from simple consolidation of its operations to an internally-integrated supply chain, which all work together towards the main business issue of the cost of customer service?
A. Cross-functionalteams.
B. Integratedenterprise.
C. Extendedsupplychain.
D. Supplychaincommunities.
Correct Answer: B
Section: Business Environment and Concepts (Volume C) Explanation

Explanation/Reference:
Explanation:
Choice "b" is correct. In the integrated enterprise stage of supply chain management, the firm's management will move away from simple consolidation of its operations to an internally-integrated supply chain, which all work together towards the main business issue of the cost of customer service. Choice "a" is incorrect. In the cross-functional teams stage of supply chain management, the firm's management will turn its attention to consolidation of the various departments that make up operations in order to solve the firm's problems, and the focus will be on customer service. Choice "c" is incorrect. In the extended supply chain stage of supply chain management, integration moves external to the firm to involve those outside the firm who are able to work as a unified team in an attempt to obtain slow, profitable growth.
Choice "d" is incorrect. In the supply chain communities stage of supply chain management, the extended supply chain forms a single competitive entity with a synchronized supply chain and a complex system of networks.