Certified Public Accountant CPA Questions + Answers Part 11
Posted: Tue Feb 22, 2022 6:15 pm
QUESTION 190
In which stage of supply chain management will integration move 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?
A. Cross-functionalteams.
B. Integratedenterprise.
C. Extendedsupplychain.
D. Supplychaincommunities.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. 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 "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 "b" is incorrect. 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 "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.
QUESTION 191
An increase in the quantity demanded for a product would be associated with a(n): A. Increaseinthepriceofacomplementaryproduct.
B. Increaseinaveragehouseholdincome.
C. Decrease in the price of that product.
D. Decrease in the price of a substitute product.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The fundamental law of demand holds that there is an inverse relationship between price of the product and the quantity demanded. We move along the demand curve D-D. Choice "a" is incorrect. An increase in complementary product prices would decrease the demand curve (e.g., if PC prices increase, the demand for printers and other peripherals decrease). Choice "b" is incorrect. Increases in consumers and consumer income shift the demand curve itself. Choice "d" is incorrect. A decrease in price for a substitute product (like Pepsi) decreases demand for the other product (Coke).
QUESTION 192
An increase in the market supply of beef would result in a(n):
A. Decreaseinthequantityofbeefdemanded. B. Increaseinthepriceofbeef.
C. Decrease in the demand for beef.
D. Increase in the quantity of beef demanded.
Correct Answer: D
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. As illustrated above, a shift outward (increase) in supply, increases quantity demanded (Q2) at equilibrium, accompanied by a decline in price. Thus, an increase in the market supply of beef would result in an increase in the quantity of beef demanded. Choices "a" and "b" are incorrect, as seen in the graph above. There is an increase in the quantity of beef demanded and a decrease in the price of beef.
Choice "c" is incorrect, because there is no information in the question pertaining to any "shift" in the beef demand curve or in the demand for any complimentary products (e.g., pork).
QUESTION 193
In competitive markets, an increase in demand for a product causes a(n):
A. Increaseinproductsupply.
B. Reductioninpurchasesbyconsumers.
C. Reduction in the number of buyers of the product. D. Increase in the price of the product.
Correct Answer: D
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Rule of economic reasoning: "Draw the graph!"
Choice "d" is correct. When demand increases and supply has not increased (as implied by the question), suppliers will raise the price of the product and more product will be bought (but the supply curve does not change). Because consumers are demanding more product than is available, they are "willing" to pay a higher price.
Choice "a" is incorrect. Although buyers would pay higher prices and purchase more products, the supply "curve" has not changed. Therefore, the quantity supplied remains the same. Choice "b" is incorrect. Because consumer demand has increased (not decreased). Choice "c" is incorrect. An increase in demand has an indeterminate (and irrelevant) impact on the number of buyers. For example, there could be the same number of buyers in the market, but that each demands a higher quality.
QUESTION 194
Which one of the following statements about supply and demand is true?
A. Ifsupplyincreasesanddemandremainsconstant,equilibriumpricewillrise. B. Ifdemandincreasesandsupplyincreases,equilibriumquantitywillfall.
C. If demand increases and supply decreases, equilibrium price will increase. D. If demand increases and supply remains constant, equilibrium price will fall.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. If quantity demanded for a product goes up, this drives price up. Additionally, if supply decreases, this will also drive prices up. Therefore, it is a certainty that price will be driven up, given an increase in demand and a decrease in supply.
Choice "a" is incorrect. Increased supply will reduce (not increase) prices, assuming demand remains constant.
Choice "b" is incorrect. Increased demand will increase price, and increased supply will reduce price. The net impact on price cannot be determined without more facts. Choice "d" is incorrect. Increased demand will increase (not reduce) price, assuming supply remains constant.
QUESTION 195
An increase in the price of crude oil will have what affect on the equilibrium price and quantity of gasoline?
A. Pricewillfallandquantitywillrise. B. Pricewillriseandquantitywillfall. C. Price will fall and quantity will fall. D. Price will rise and quantity will rise.
Correct Answer: B
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Crude oil is an input to the production of gasoline. When the price of an input increases, supply shifts left, causing equilibrium price to rise and equilibrium quantity to fall.
Choice "a" is incorrect, since price will rise and quantity will fall. Choice "c" is incorrect, since price will rise.
Choice "d" is incorrect, since quantity will fall.
QUESTION 196
When the supply of and demand for a good both increase:
A. Equilibriumpricewillincrease.
B. Equilibriumpricewilldecrease.
C. Equilibrium price may increase, decrease, or remain unchanged.
D. Equilibrium quantity may increase, decrease, or remain unchanged.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. When the supply of and demand for a good both increase, equilibrium quantity increases. However, the impact on price is indeterminate. If demand and supply increase by the same amount, price will remain unchanged (as illustrated above). However, if demand increases by more than supply, price will increase. Conversely, if supply increases by more than demand, price will decrease.
Choices "a" and "b" are incorrect, since the impact on price is indeterminate. Choice "d" is incorrect, since equilibrium quantity will increase.
QUESTION 197
A basic determinant of the elasticity of demand for a normal good is the:
A. Lengthoftimeproducershavetorespondtomarketchanges. B. Numberofsubstitutesavailablefortheproduct.
C. Number of sellers of the product.
D. Number of complements available for the product.
Correct Answer: B
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The change in demand for a product, based upon a given change in that product's price, is dependent on whether or not other (presumably cheaper) goods can be substituted for the product.
Choice "a" is incorrect. The elasticity of supply (not demand) would take into account the response time producers might have to market changes.
Choice "c" is incorrect. The number of sellers is irrelevant when calculating the elasticity of demand. Choice "d" is incorrect. A complement good's demand is the same as the primary gooD. For example, an increase in the demand for a given food would cause the demand for its complement to also increase.
The increased demand of the complement is irrelevant when calculating the elasticity of demand.
QUESTION 198
If the elasticity of demand for a normal good is estimated to be 1.5, then a 10% reduction in its price would cause:
A. T otal revenue to fall by 10%.
B. T otal revenue to fall by 15%.
C. Quantity demanded to rise by 15%.
D. Demand to decrease by 10%.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The elasticity of demand is calculated as:
% Change in demand % Change in price
If the elasticity of demand is 1.5 (assumed to be the absolute value, as the elasticity of demand for a normal good is always negative), then a 10% price reduction would cause an increase in the quantity demanded by 15% (a ratio of 15 to 10 or 1.5).
Choices "a", "b", and "d" are incorrect, per Explanation: above.
QUESTION 199
If the demand for a normal good is inelastic, then the sales price of the product would increase following a(n):
A. Decreaseinthepriceofasubstitutegood.
B. Increaseinthesupplyoftheproduct.
C. Decrease in the supply of the product.
D. Increase in the number of suppliers of the product.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. If demand is perfectly inelastic (or not price sensitive), there will be no change in quantity demanded for a change in price. This means that consumers of the product will demand a constant quantity, regardless of the price. If the quantity supplied is reduced (presumably below an equilibrium point where supply equals demand), there will be excess demand for the product and sales price will go up. The increase in sales price will have no impact on demand (because demand is assumed to be perfectly price inelastic).
Choices "a", "b", and "d" are incorrect, per the above Explanation: .
QUESTION 200
The Waymand family typically ate hamburger as a regular staple in their diet. In the last few years, the family income has doubled, and they have now replaced hamburger with steak as a regular staple in their diet. This is an example where the demand for hamburger:
A. Isrelativelyelastic.
B. Isperfectlyelastic.
C. Responds as an inferior good. D. Is perfectly inelastic.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An inferior good is one for which the demand declines as income increases. A normal good would experience an increase in demand in response to an increase in income. Because the demand for hamburger went down as income increased, it is an inferior good. Choices "a", "b", and "d" are incorrect. The elasticity of demand for a good is calculated by measuring the change in quantity demanded over the change in price (not income). The question does not have sufficient information to calculate the elasticity of the demand for hamburger.
QUESTION 201
A perfectly inelastic supply curve in a competitive market:
A. Meanstheequilibriumpricemustbezero. B. Impliesaverticaldemandcurve.
C. Exists when firms cannot vary input usage. D. Says the market supply curve is horizontal.
Correct Answer: C
Section: Business Environment and Concepts (Volume C)
Explanation Explanation/Reference:
Explanation:
Choice "c" is correct. Price elasticity of supply is calculated the same way as demand except that quantity supplied is measured:
Perfectly inelastic supply curves are also vertical representing that supply is insensitive to changes in price; i.e., the quantity supplied will not change as price changes. Perfectly inelastic supply curves would exist if firms cannot vary input usage. Regardless of price, the firm has to use all inputs if it produces at all. Choices "a", "b", and "d" are incorrect, as they are far-out distractors.
QUESTION 202
In the pharmaceutical industry where a diabetic must have insulin no matter what the cost and where there is no substitute, the diabetic's demand curve is best described as:
A. Perfectlyelastic. B. Perfectlyinelastic. C. Elastic.
D. Indifferent.
Correct Answer: B
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When a good is demanded, no matter what the price, demand is described as perfectly inelastic. The demand "curve" is a vertical line at the
quantity demanded with price making no difference.
Choices "a" and "c" are incorrect. There is no such thing as perfect elasticity. However, the more elastic demand is, the greater the change in quantity demanded for price changes. Choice "d" is incorrect. Diabetics are indifferent to changes in the price of insulin, and to economists, this is perfectly inelastic demand.
QUESTION 203
Demand for a product tends to be price inelastic if:
A. Theproductisconsideredaluxuryitem.
B. Fewgoodcomplementsfortheproductareavailable.
C. People spend a large share of their income on the product. D. Few good substitutes are available for the product.
Correct Answer: D
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Demand for a product tends to be price inelastic if few good substitutes are available for the product. Even if price increases, consumers are then unable to switch to substitute goods, because there aren't any.
Choice "a" is incorrect. Luxury items may have good substitutes available. Choice "b" is incorrect. Complementary goods are those whose demand fluctuates in unison; substitute goods are more relevant here.
Choice "c" is incorrect. If consumers spend a large share of their income on the product, they will be very sensitive to any price changes and hence product demand would be more "elastic."
QUESTION 204
Long Lake Golf Course has raised green fees to a nine-hole game due to an increase in demand.
Which of the following is correct?
A. Theregularweekdayandweekenddemandisinelastic.
B. Theregularweekdayandweekenddemandiselastic.
C. The senior citizen and weekend demand is inelastic.
D. The senior citizen demand is elastic and weekend demand is inelastic.
Correct Answer: D
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Demand is elastic if a decline in price (P) results in an increase in total revenue (TR); or if an increase in P results in a decline in TR. On the other hand, if demand is inelastic, a decline in P will result in a decline in TR or an increase in P will result in an increase in TR. First, the total revenues at both the new and the previous rate must be computed. The (new or previous) rate* average games played (AGP) = the total revenue. As a result, TR at the previous rate (PR) is 800 for regular weekday (RW), 900 for senior citizen (SC), and 3315 for the weekend (WE). TR at the new rate (NR) is 770 for RW, 656 for SC, and 4460 for WE.
So, demand for RW and SC is elastic because the increase in P results in a decline in total revenue. The demand for WE is inelastic because the increase in P results in an increase in TR.
As a result, choices "a", "b", and "c" are incorrect.
Note: if TR remains constant after a change in P, the demand is unit elastic.
QUESTION 205
In the long run in a competitive market, a maximum or ceiling price set below the equilibrium price will:
A. Causeasurplustobeproduced. B. Havenoeffectonthemarket.
C. Cause a shortage to be created. D. Result in a decrease in price.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Setting a ceiling price below the price dictated by market forces (which is the equilibrium price set by the supply and demand curves) would create excess demand for the product (at its reduced price) and, consequently, a shortage.
Choice "a" is incorrect. A surplus would be produced if a floor price (under which no supplier could sell) were set above the equilibrium price, because suppliers would supply excess product at the inflated price.
Choices "b" and "d" are incorrect, per the above Explanation: .
QUESTION 206
A government price support program will:
A. Leadtosurpluses.
B. Leadtoshortages.
C. Improve the rationing function of prices.
D. Not influence the rationing function of prices.
Correct Answer: A
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A government price support program acts as a subsidy that will encourage suppliers to increase supply beyond an equilibrium point (the point where supply and demand curves intersect). This excess of supply over demand will create surpluses in the market. Choices "b", "c", and "d" are incorrect, per the above Explanation: .
QUESTION 207
Strategic planning activities normally involve which of the following efforts:
A. StrategicPositioning.
II. Value Chain Analysis.
III. Balance Scorecard Development.
B. I.
C. IandII.
D. I and III.
E. I,II,andIII.
Correct Answer: D
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Strategic planning activities are normally acknowledged to include each of three operations including:
I. Strategic positioning. Strategic positioning includes the process of identifying mission, identifying overall strategy, identifying factors critical to succeeding given the assumed strategy and identifying internal and external factors that contribute or detract from achieving the strategy. II. Value chain analysis. Value chain analysis includes the process of identifying the functional characteristics of an organization and the manner in which each one of those functions adds value to the firm's customers.
III. Balanced scorecard development. Development of a balanced scorecard identifies measurements of value that are both financial and non-financial to be used to monitor and evaluate performance.
Choice "a" is incorrect. All three activities are integral to strategic planning. Choice "b" is incorrect. All three activities are integral to strategic planning. Choice "c" is incorrect. All three activities are integral to strategic planning.
QUESTION 208
Economic theory identifies two basic types of goods: inferior goods and superior goods. As consumer income rises, a lower percentage of earnings are expended on inferior goods while a higher percentage of earnings are spent on superior goods. Overall strategies for achieving organizational missions would most likely match with types of goods as follows:
A. Costleadershipstrategiesforsuperiorgoods,differentiationstrategiesforinferiorgoods. B. Costleadershipstrategiesforinferiorgoods,differentiationstrategiesforsuperiorgoods. C. Cost leadership strategies would most likely be used for both inferior and superior goods. D. Differentiation strategies would most likely be used for both inferior and superior goods.
Correct Answer: B
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Rule: Overall strategies are divided into two different types that are defined as follows:
Cost leadership: Organization seeks to capture market share through maintaining the lowest cost. Differentiation: Organization seeks to capture market share by demonstrating product value. Choice "b" is correct. Organizations that sell economically inferior goods (necessities such as cotton swabs, light bulbs, etc.) are more likely to posture themselves as cost leaders than organizations that sell economically superior goods (luxuries such as cruise packages, fine china, jewelry, etc.) who will likely seek to differentiate the value of their product as part of their strategy. Choice "a" is incorrect. Economically inferior products would likely be associated with cost leadership, not differentiation while economically superior products would likely be associated with differentiation.
Choice "c" is incorrect. Economically inferior products would likely be associated with cost leadership, not differentiation while economically superior products would likely be associated with differentiation.
Choice "d" is incorrect. Economically inferior products would likely be associated with cost leadership, not differentiation while economically superior products would likely be associated with differentiation.
QUESTION 209
Having identified their mission, overall strategy, and critical success factors, organizations often review the internal and external factors that will contribute to their success. This analysis is often referred to
as:
A. TOCevaluation.
B. Brainstorming.
C. Balanced scorecard review. D. SWOT analysis.
Correct Answer: D
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Evaluation of internal and external factors contributing to an organization's success is referred to as Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis. Strengths and weaknesses focus on internal factors while opportunities and threats relate to external factors. Choice "a" is incorrect. The acronym TOC stands for Theory of Constraints, which is an evaluation technique for optimizing throughput time, it does not relate to overall strategy evaluation. Choice "b" is incorrect. Brainstorming is a meeting technique used to generate ideas. Although brainstorming could be used as part of an organization's approach to SWOT analysis, it is not, itself, the evaluation of internal and external factors.
Choice "c" is incorrect. A review of the balanced scorecard, which summarizes measures of achievement of critical success factors, does not represent the objective review of internal and external factors that may impact achievement of strategy.
QUESTION 210
Under which of the following conditions is the supplier most able to influence or control buyers?
A. Whenthesupplier'sproductsarenotdifferentiated.
B. Whenthesupplierdoesnotfacethethreatofsubstituteproducts.
C. When the industry is controlled by a large number of companies.
D. When the purchasing industry is an important customer to the supplying industry.
Correct Answer: B
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When there are few good substitutes for a supplier's product, the supplier has market power (think of a monopoly). As a result, the supplier is better able to control buyers and act as a price setter rather than a price taker.
Choice "a" is incorrect. When supplier's products are not differentiated, buyers will be indifferent about which supplier they purchase from. In other words, if firms sell identical products (think of perfect competition) the product of one firm is a perfect substitute for the product of another firm. In this case, firms are price takers, not price setters.
Choice "c" is incorrect. When there are a large number of firms, no one firm has much market power. This is the case of either perfect competition (if all firms sell identical products) or monopolistic competition (if all firms sell slightly differentiated products). Choice "d" is incorrect. If the purchasing industry is an important customer of the supplier, the purchasing industry (i.e. the buyer) will have some market power. This will diminish the ability of the supplier to influence or control the buyer.
QUESTION 211
Which of the following inputs would be most beneficial to consider when management is developing the capital budget?
A. Supply/demandforthecompany'sproducts. B. Currentproductsalespricesandcosts.
C. Wage trends.
D. Profit center equipment requests.
Correct Answer: D
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. In developing its capital budget, management would find the employee input associated with equipment requests from various profit centers most helpful. Departmental requests, appropriately justified, would provide key insights into the capital requirements of the business that are not otherwise known. Choice "a" is incorrect. Supply and demand for company products is a crucial strategic input in forecasting the future capital requirements. Current year capital budgeting would not benefit as directly from this information, however, as profit center equipment requests. Choice "b" is incorrect. Current product sales prices and costs represent operating data most relevant to operating rather than capital budgeting.
Choice "c" is incorrect. Wage trends represent operating data most relevant to operating than capital budgeting.
Comments:
Some people have questioned why the answer is not choice "a." However, the answer to the question is very clear.
The question really is what are the best (most beneficial to consider) inputs to a capital budget. The "supply and demand for the company's products" is very indirect. The demand for the company's products may or may not result in the company spending any capital money because the demand may be able to be satisfied with the current capital equipment. But, equipment requests, if approved, will most likely result in spending money (assuming that the money in the budget is actually spent) and thus should go into the capital budget. The supply and demand might affect future capital budgets if the demand is not able to be satisfied with the current capital equipment. But the question asks for the best inputs for presumably the current capital budget.
QUESTION 212
A city ordinance that freezes rent prices may cause:
A. Thedemandcurveforrentalspacetofall.
B. Thesupplycurveforrentalspacetorise.
C. The quantity demanded of rental space exceeds the quantity supplied. D. The quantity supplied of rental space exceeds the quantity demanded.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A city ordinance that freezes rent prices (such as rent control and rent stabilization in New York City) may cause the quantity demanded for rental space to exceed the quantity supplied.
This occurs if the rent controlled price is set below the market clearing price. At the controlled price, the quantity supplied will be constrained due to the low rent prices for the rent-controlled and rent- stabilized properties; builders will not want to build and rent properties for less than they are worth on the open market. The quantity demanded for the rental space will still be artificially high due to the city ordinance, which sets the controlled price below the market price. Thus, the quantity demanded will exceed the quantity supplied. New York City rent control is a perfect example of the effect of a price ceiling and the problems that it can cause.
Choice "a" is incorrect. A city ordinance that freezes rent prices will not cause the demand curve for rental space to fall. Price changes cause movements along the demand curve, not shifts in the demand curve.
Choice "b" is incorrect. A city ordinance that freezes rent prices will not cause the supply curve for rental space to rise. Price changes cause movements along the supply curve, not shifts in the supply curve.
Choice "d" is incorrect. A city ordinance that freezes rent prices will not cause the quantity supplied to exceed the quantity demanded. This choice is backwards.
QUESTION 213
What is strategic planning?
A. Itestablishesthegeneraldirectionoftheorganization.
B. Itestablishestheresourcesthattheplanwillrequire.
C. It establishes the budget for the organization.
D. It consists of decisions to use parts of the organization's resources in specified ways.
Correct Answer: A
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Strategic planning is the creation of an overall strategic plan for an organization to achieve its overall "business objectives." The strategic plan will establish the general direction of the organization.
Choice "b" is incorrect. Strategic planning will not establish the resources that the plan will require. The resources that the plan will require are part of the implementation of the strategic plan, not part of the plan itself.
Choice "c" is incorrect. Strategic planning will not establish the budget for the organization. Budgets are even further down implementing the plan than are the resources that the plan will require. Choice "d" is incorrect. Strategic planning does not consist of decisions to use parts of the organization's resources in specified ways. Again, these decisions are part of the implementation of the strategic plan, not part of the plan itself.
Implications of Dealing in Foreign Currencies
QUESTION 214
Which of the following is not correct about the purchasing power parity theory of explaining changes in exchange rates?
A. Purchasingpowerofacommoncurrencyindifferenteconomiesforsimilarproductswillremainthesame.
B. Inflationaryforcesonforeignanddomesticcurrencieswillcausetheexchangeratestoautomaticallyadjusttoensurethatacommoncurrencywillhave identical or similar purchasing power in each economy for similar goods.
C. Interest rates include a premium or discount that ensures purchasing power parity. D. The purchasing power parity theory is presented in both absolute and relative form.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The purchasing power parity theory holds that inflation will cause exchange rates to automatically adjust to ensure that an equal amount of a common currency will purchase similar goods in separate economies. The International Fischer effect considers the premium or discount on interest rates as an indicator of inflation.
Choice "a" is incorrect. The basic idea underlying the purchasing power parity theory is that the purchasing power of a common currency in different economies for similar products will remain the same and that inflation in any particular economy will cause exchange rates to adjust until parity is consistently achieved.
Choice "b" is incorrect. The purchasing power parity theory holds that inflationary forces on foreign and domestic currencies will cause the exchange rates to automatically adjust to ensure that a common currency will have identical or similar purchasing power in each economy for similar goods. Choice "d" is incorrect. The purchasing power parity theory is presented as both an absolute theory of parity determination regardless of market imperfections and as a relative concept that considers market imperfections.
QUESTION 215
Which of the following methods of measuring transaction exposure to exchange rate risk uses standard deviation, coefficient of correlation and other formal
statistical techniques?
A. Measurementofcurrencyvariability.
II. Measurement of currency correlations.
B. Ionly.
C. II only.
D. Both I and II.
E. NeitherIandII.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The currency variability approach uses standard deviations as a means of predicting future exchange rates while the currency correlation approach is often applied to circumstances involving multiple currencies and evaluates exposure in relation to the statistically computed degree of correlation between the movements of different currencies. Choices "a", "b", and "d" are incorrect, per above Explanation: .
QUESTION 216
Which of the following methods is designed to measure transaction exposure in terms of the maximum one day loss related to holdings denominated in foreign currency?
A. Measurementofcurrencyvariability.
II. Measurement of currency correlations. III. Value at risk.
B. Ionly.
C. II only.
D. III only.
E. I,II,andIII.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The value at risk method seeks to quantify the exposure of business to a one day loss in the value of its positions in foreign currencies. Choices "a", "b", and "d" are incorrect, per above Explanation: .
QUESTION 217
Atlas Worldwide Industries conducts business in a number of different countries and is trying to evaluate its economic exposure to exchange rate risk. Which of the following statements is not correct?
A. Atlaswillsufferaneconomiclossintheeventithasnetcashoutflowsofaforeigncurrencyandtheforeigncurrencyappreciates. B. Atlaswillenjoyaneconomicgainintheeventithasnetcashoutflowsofaforeigncurrencyandtheforeigncurrencydepreciates. C. Atlas will suffer an economic loss in the event it has net cash inflows of a foreign currency and the foreign currency appreciates. D. Atlas will suffer an economic loss in the event it has net cash inflows of a foreign currency and the foreign currency depreciates.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Atlas will benefit from an economic gain in the event that it has net cash inflows of a foreign currency and the foreign currency appreciates (the domestic currency depreciates). Atlas will collect a more valuable currency that can buy more of its domestic currency. Choices "a", "b", and "d" are incorrect because they are correct statements.
QUESTION 218
Universal Industries limits its operations to exports to foreign countries. What can be said about Universal's exposures to exchange rate risk?
A. Universalissubjecttopotentialtransaction,economicandtranslationexposurestoexchangeraterisk. B. Universalissubjecttopotentialtransactionandeconomicexposurestoexchangeraterisk.
C. Universal is subject to economic and translation exposures to exchange rate risk.
D. Universal is subject transaction and translation exposures to exchange rate risk.
Correct Answer: B
Section: Business Environment and Concepts (Volume C)
Explanation Explanation/Reference:
Explanation:
Choice "b" is correct. Universal is subject to transaction risks associated with settlement of export transactions and is subject to economic risks associated with the satisfaction of domestic expenses denominated in domestic currencies with imported revenues denominated in a foreign currency. No translation exposure exists since there is no foreign investment or subsidiary. Choices "a", "c", and "d" are incorrect, per the above Explanation: .
QUESTION 219
Hedgehog International owes 500,000 local currency units to its foreign supplier in 90 days. The current spot rate of the local currency unit is $.60. Hedgehog purchases a call option to buy the local currency unit in 90 days for $.61 for a premium of $.005. The exchange rate for the local currency increases to $.63 in 90 days. What will Hedgehog do on the payables' settlement date?
A. Hedgehogwillexerciseitsoptionandsettlethepayableswithproceedsfromtheoptioncontractatagain.
B. Hedgehogwillnotexercisetheoptionandsettlethepayablesafterpurchaseofthelocalcurrencyunitatthespotrate.
C. Hedgehog will be indifferent as to whether it exercises the option or not.
D. Hedgehog will sell the option at the settlement date and use its proceeds along with local currency units purchased at the spot rate to satisfy the amount payable.
Correct Answer: A
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Hedgehog will exercise its option and liquidate the payables associated with the proceeds. The exercise of the option represents a less costly alternative than acquisition of proceeds at the spot rate at the time the payables are due. The net impact of exercise of the option is computed as follows:
The premium is a sunk cost and is irrelevant to the decision. Note that the premium is a factor in determining the net gain (loss) but not in deciding whether to exercise the option. Choices "b", "c", and "d" are incorrect, per computation above.
QUESTION 220
Hedgehog International has a receivable valued at 500,000 local currency units from its foreign customer due in 90 days. The current spot rate of the local currency unit is $.60. Hedgehog purchases a put option to sell the local currency unit in 90 days for $.61 for a premium of $.005. The exchange rate for the local currency increases to $.63 in 90 days. What will Hedgehog do on the receivable's settlement date?
A. Hedgehogwillexerciseitsoptionandselltheproceedsofitsaccountsreceivablecollectionundertheprovisionsoftheoptioncontractatagain.
B. Hedgehogwillnotexercisetheoptionandselllocalcurrencyunitscollectedfromitsreceivableatthespotrate.
C. Hedgehog will be indifferent as to whether it exercises the option or not.
D. Hedgehog will sell the option at the settlement date and combine its proceeds along with local currency units purchased at the spot rate to maximize its revenue.
Correct Answer: B
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Hedgehog will not exercise its option and will, instead convert the local currency units collected from the receivables to its domestic currency by selling that currency at the spot rate at the time of collection. The exercise of the option represents a less profitable alternative than sale of the accounts receivable proceeds at the spot rate at the time the receivables are collected. The exercise of the option in comparison to allowing the option to expire is computed as follows:
The premium is a sunk cost and is irrelevant to the Explanation: . Note that the premium is a factor in determining the net gain (loss) but not in deciding whether to exercise option. Choices "a", "c", and "d" are incorrect, per computation above.
QUESTION 221
Hedgehog International has numerous foreign exchange transactions. Management has elected to hedge transactions as a means of mitigating transaction exposure to exchange rate risk. What is the most effective means that Hedgehog International can use to avoid overhedging?
A. Hedgehogshouldacquireparallelloanstoprovideameansforliquidatingunneededhedgesecurities. B. Hedgehogshouldacquirethemaximumamountrequiredtohedgeknownandprojectedtransactions.
C. Hedgehog should acquire the minimum amount required to hedge known transactions. D. Hedgehog should enter into a cross hedging agreement.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Hedgehog should only acquire the minimum amount of hedge contracts needed to offset the effect of known transactions.
Choice "a" is incorrect. Parallel loans represent a swap contract for hedging long-term transaction exposure and are not specifically designed to mitigate the risk of overhedging. Choice "b" is incorrect. Acquisition of the maximum number of hedge contracts for known and projected transactions exposes the organization to greater risk of overhedging since projected transactions might not materialize.
Choice "d" is incorrect. Cross hedging involves techniques related to currencies that do have hedge instruments available to mitigate risk and are not specifically designed to avoid overhedging.
QUESTION 222
An American importer expects to pay a British supplier 500,000 British pounds in three months. Which of the following hedges is best for the importer to fix the price in dollars?
A. BuyingBritishpoundcalloptions. B. BuyingBritishpoundputoptions. C. Selling British pound put options. D. Selling British pound call options.
Correct Answer: A
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. To fix a price in dollars to buy British pounds, British pound call options should be purchased. Call options would allow, but not require, the purchaser of the call to acquire the currency (British pounds) for a specified price at or before a specified time in the future. If the price goes down, the purchaser (the importer) would exercise the options; if not, the purchaser (importer) would buy the British pounds in the market and let the options expire. British pound futures could also be used, but that was not one of the choices listed.
Choice "b" is incorrect. Buying British pound put options would allow, but not require, the purchaser of the put to sell the currency for a specified price at a specified time in the future. Since the importer needs British pounds, buying put options would not work. The importer needs to end up with British pounds.
Choice "c" is incorrect. Selling British pound put options would not work. The importer needs to end up with British pounds. Selling put options could work, but the
option would be exercised, or not, by the purchaser and not by the importer. If the options were not exercised, the importer could end up with nothing (other than the option premium).
Choice "d" is incorrect. Selling British pound call options would not work. The importer needs to end up with British pounds; if call options are sold, the other party can exercise the options or let them expire, and if the options were exercised, the importer would have to supply the British pounds. This answer is backwards.
QUESTION 223
What is the effect when a foreign competitor's currency becomes weaker compared to the U.S. dollar?
A. TheforeigncompanywillhaveanadvantageintheU.S.market.
B. TheforeigncompanywillbedisadvantagedintheU.S.market.
C. The fluctuation in the foreign currency's exchange rate has no effect on the U.S. company's sales or cost of goods sold. D. It is better for the U.S. company when the value of the U.S. dollar strengthens.
Correct Answer: A
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
In which stage of supply chain management will integration move 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?
A. Cross-functionalteams.
B. Integratedenterprise.
C. Extendedsupplychain.
D. Supplychaincommunities.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. 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 "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 "b" is incorrect. 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 "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.
QUESTION 191
An increase in the quantity demanded for a product would be associated with a(n): A. Increaseinthepriceofacomplementaryproduct.
B. Increaseinaveragehouseholdincome.
C. Decrease in the price of that product.
D. Decrease in the price of a substitute product.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The fundamental law of demand holds that there is an inverse relationship between price of the product and the quantity demanded. We move along the demand curve D-D. Choice "a" is incorrect. An increase in complementary product prices would decrease the demand curve (e.g., if PC prices increase, the demand for printers and other peripherals decrease). Choice "b" is incorrect. Increases in consumers and consumer income shift the demand curve itself. Choice "d" is incorrect. A decrease in price for a substitute product (like Pepsi) decreases demand for the other product (Coke).
QUESTION 192
An increase in the market supply of beef would result in a(n):
A. Decreaseinthequantityofbeefdemanded. B. Increaseinthepriceofbeef.
C. Decrease in the demand for beef.
D. Increase in the quantity of beef demanded.
Correct Answer: D
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. As illustrated above, a shift outward (increase) in supply, increases quantity demanded (Q2) at equilibrium, accompanied by a decline in price. Thus, an increase in the market supply of beef would result in an increase in the quantity of beef demanded. Choices "a" and "b" are incorrect, as seen in the graph above. There is an increase in the quantity of beef demanded and a decrease in the price of beef.
Choice "c" is incorrect, because there is no information in the question pertaining to any "shift" in the beef demand curve or in the demand for any complimentary products (e.g., pork).
QUESTION 193
In competitive markets, an increase in demand for a product causes a(n):
A. Increaseinproductsupply.
B. Reductioninpurchasesbyconsumers.
C. Reduction in the number of buyers of the product. D. Increase in the price of the product.
Correct Answer: D
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Rule of economic reasoning: "Draw the graph!"
Choice "d" is correct. When demand increases and supply has not increased (as implied by the question), suppliers will raise the price of the product and more product will be bought (but the supply curve does not change). Because consumers are demanding more product than is available, they are "willing" to pay a higher price.
Choice "a" is incorrect. Although buyers would pay higher prices and purchase more products, the supply "curve" has not changed. Therefore, the quantity supplied remains the same. Choice "b" is incorrect. Because consumer demand has increased (not decreased). Choice "c" is incorrect. An increase in demand has an indeterminate (and irrelevant) impact on the number of buyers. For example, there could be the same number of buyers in the market, but that each demands a higher quality.
QUESTION 194
Which one of the following statements about supply and demand is true?
A. Ifsupplyincreasesanddemandremainsconstant,equilibriumpricewillrise. B. Ifdemandincreasesandsupplyincreases,equilibriumquantitywillfall.
C. If demand increases and supply decreases, equilibrium price will increase. D. If demand increases and supply remains constant, equilibrium price will fall.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. If quantity demanded for a product goes up, this drives price up. Additionally, if supply decreases, this will also drive prices up. Therefore, it is a certainty that price will be driven up, given an increase in demand and a decrease in supply.
Choice "a" is incorrect. Increased supply will reduce (not increase) prices, assuming demand remains constant.
Choice "b" is incorrect. Increased demand will increase price, and increased supply will reduce price. The net impact on price cannot be determined without more facts. Choice "d" is incorrect. Increased demand will increase (not reduce) price, assuming supply remains constant.
QUESTION 195
An increase in the price of crude oil will have what affect on the equilibrium price and quantity of gasoline?
A. Pricewillfallandquantitywillrise. B. Pricewillriseandquantitywillfall. C. Price will fall and quantity will fall. D. Price will rise and quantity will rise.
Correct Answer: B
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Crude oil is an input to the production of gasoline. When the price of an input increases, supply shifts left, causing equilibrium price to rise and equilibrium quantity to fall.
Choice "a" is incorrect, since price will rise and quantity will fall. Choice "c" is incorrect, since price will rise.
Choice "d" is incorrect, since quantity will fall.
QUESTION 196
When the supply of and demand for a good both increase:
A. Equilibriumpricewillincrease.
B. Equilibriumpricewilldecrease.
C. Equilibrium price may increase, decrease, or remain unchanged.
D. Equilibrium quantity may increase, decrease, or remain unchanged.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. When the supply of and demand for a good both increase, equilibrium quantity increases. However, the impact on price is indeterminate. If demand and supply increase by the same amount, price will remain unchanged (as illustrated above). However, if demand increases by more than supply, price will increase. Conversely, if supply increases by more than demand, price will decrease.
Choices "a" and "b" are incorrect, since the impact on price is indeterminate. Choice "d" is incorrect, since equilibrium quantity will increase.
QUESTION 197
A basic determinant of the elasticity of demand for a normal good is the:
A. Lengthoftimeproducershavetorespondtomarketchanges. B. Numberofsubstitutesavailablefortheproduct.
C. Number of sellers of the product.
D. Number of complements available for the product.
Correct Answer: B
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The change in demand for a product, based upon a given change in that product's price, is dependent on whether or not other (presumably cheaper) goods can be substituted for the product.
Choice "a" is incorrect. The elasticity of supply (not demand) would take into account the response time producers might have to market changes.
Choice "c" is incorrect. The number of sellers is irrelevant when calculating the elasticity of demand. Choice "d" is incorrect. A complement good's demand is the same as the primary gooD. For example, an increase in the demand for a given food would cause the demand for its complement to also increase.
The increased demand of the complement is irrelevant when calculating the elasticity of demand.
QUESTION 198
If the elasticity of demand for a normal good is estimated to be 1.5, then a 10% reduction in its price would cause:
A. T otal revenue to fall by 10%.
B. T otal revenue to fall by 15%.
C. Quantity demanded to rise by 15%.
D. Demand to decrease by 10%.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The elasticity of demand is calculated as:
% Change in demand % Change in price
If the elasticity of demand is 1.5 (assumed to be the absolute value, as the elasticity of demand for a normal good is always negative), then a 10% price reduction would cause an increase in the quantity demanded by 15% (a ratio of 15 to 10 or 1.5).
Choices "a", "b", and "d" are incorrect, per Explanation: above.
QUESTION 199
If the demand for a normal good is inelastic, then the sales price of the product would increase following a(n):
A. Decreaseinthepriceofasubstitutegood.
B. Increaseinthesupplyoftheproduct.
C. Decrease in the supply of the product.
D. Increase in the number of suppliers of the product.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. If demand is perfectly inelastic (or not price sensitive), there will be no change in quantity demanded for a change in price. This means that consumers of the product will demand a constant quantity, regardless of the price. If the quantity supplied is reduced (presumably below an equilibrium point where supply equals demand), there will be excess demand for the product and sales price will go up. The increase in sales price will have no impact on demand (because demand is assumed to be perfectly price inelastic).
Choices "a", "b", and "d" are incorrect, per the above Explanation: .
QUESTION 200
The Waymand family typically ate hamburger as a regular staple in their diet. In the last few years, the family income has doubled, and they have now replaced hamburger with steak as a regular staple in their diet. This is an example where the demand for hamburger:
A. Isrelativelyelastic.
B. Isperfectlyelastic.
C. Responds as an inferior good. D. Is perfectly inelastic.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An inferior good is one for which the demand declines as income increases. A normal good would experience an increase in demand in response to an increase in income. Because the demand for hamburger went down as income increased, it is an inferior good. Choices "a", "b", and "d" are incorrect. The elasticity of demand for a good is calculated by measuring the change in quantity demanded over the change in price (not income). The question does not have sufficient information to calculate the elasticity of the demand for hamburger.
QUESTION 201
A perfectly inelastic supply curve in a competitive market:
A. Meanstheequilibriumpricemustbezero. B. Impliesaverticaldemandcurve.
C. Exists when firms cannot vary input usage. D. Says the market supply curve is horizontal.
Correct Answer: C
Section: Business Environment and Concepts (Volume C)
Explanation Explanation/Reference:
Explanation:
Choice "c" is correct. Price elasticity of supply is calculated the same way as demand except that quantity supplied is measured:
Perfectly inelastic supply curves are also vertical representing that supply is insensitive to changes in price; i.e., the quantity supplied will not change as price changes. Perfectly inelastic supply curves would exist if firms cannot vary input usage. Regardless of price, the firm has to use all inputs if it produces at all. Choices "a", "b", and "d" are incorrect, as they are far-out distractors.
QUESTION 202
In the pharmaceutical industry where a diabetic must have insulin no matter what the cost and where there is no substitute, the diabetic's demand curve is best described as:
A. Perfectlyelastic. B. Perfectlyinelastic. C. Elastic.
D. Indifferent.
Correct Answer: B
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When a good is demanded, no matter what the price, demand is described as perfectly inelastic. The demand "curve" is a vertical line at the
quantity demanded with price making no difference.
Choices "a" and "c" are incorrect. There is no such thing as perfect elasticity. However, the more elastic demand is, the greater the change in quantity demanded for price changes. Choice "d" is incorrect. Diabetics are indifferent to changes in the price of insulin, and to economists, this is perfectly inelastic demand.
QUESTION 203
Demand for a product tends to be price inelastic if:
A. Theproductisconsideredaluxuryitem.
B. Fewgoodcomplementsfortheproductareavailable.
C. People spend a large share of their income on the product. D. Few good substitutes are available for the product.
Correct Answer: D
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Demand for a product tends to be price inelastic if few good substitutes are available for the product. Even if price increases, consumers are then unable to switch to substitute goods, because there aren't any.
Choice "a" is incorrect. Luxury items may have good substitutes available. Choice "b" is incorrect. Complementary goods are those whose demand fluctuates in unison; substitute goods are more relevant here.
Choice "c" is incorrect. If consumers spend a large share of their income on the product, they will be very sensitive to any price changes and hence product demand would be more "elastic."
QUESTION 204
Long Lake Golf Course has raised green fees to a nine-hole game due to an increase in demand.
Which of the following is correct?
A. Theregularweekdayandweekenddemandisinelastic.
B. Theregularweekdayandweekenddemandiselastic.
C. The senior citizen and weekend demand is inelastic.
D. The senior citizen demand is elastic and weekend demand is inelastic.
Correct Answer: D
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Demand is elastic if a decline in price (P) results in an increase in total revenue (TR); or if an increase in P results in a decline in TR. On the other hand, if demand is inelastic, a decline in P will result in a decline in TR or an increase in P will result in an increase in TR. First, the total revenues at both the new and the previous rate must be computed. The (new or previous) rate* average games played (AGP) = the total revenue. As a result, TR at the previous rate (PR) is 800 for regular weekday (RW), 900 for senior citizen (SC), and 3315 for the weekend (WE). TR at the new rate (NR) is 770 for RW, 656 for SC, and 4460 for WE.
So, demand for RW and SC is elastic because the increase in P results in a decline in total revenue. The demand for WE is inelastic because the increase in P results in an increase in TR.
As a result, choices "a", "b", and "c" are incorrect.
Note: if TR remains constant after a change in P, the demand is unit elastic.
QUESTION 205
In the long run in a competitive market, a maximum or ceiling price set below the equilibrium price will:
A. Causeasurplustobeproduced. B. Havenoeffectonthemarket.
C. Cause a shortage to be created. D. Result in a decrease in price.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Setting a ceiling price below the price dictated by market forces (which is the equilibrium price set by the supply and demand curves) would create excess demand for the product (at its reduced price) and, consequently, a shortage.
Choice "a" is incorrect. A surplus would be produced if a floor price (under which no supplier could sell) were set above the equilibrium price, because suppliers would supply excess product at the inflated price.
Choices "b" and "d" are incorrect, per the above Explanation: .
QUESTION 206
A government price support program will:
A. Leadtosurpluses.
B. Leadtoshortages.
C. Improve the rationing function of prices.
D. Not influence the rationing function of prices.
Correct Answer: A
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A government price support program acts as a subsidy that will encourage suppliers to increase supply beyond an equilibrium point (the point where supply and demand curves intersect). This excess of supply over demand will create surpluses in the market. Choices "b", "c", and "d" are incorrect, per the above Explanation: .
QUESTION 207
Strategic planning activities normally involve which of the following efforts:
A. StrategicPositioning.
II. Value Chain Analysis.
III. Balance Scorecard Development.
B. I.
C. IandII.
D. I and III.
E. I,II,andIII.
Correct Answer: D
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Strategic planning activities are normally acknowledged to include each of three operations including:
I. Strategic positioning. Strategic positioning includes the process of identifying mission, identifying overall strategy, identifying factors critical to succeeding given the assumed strategy and identifying internal and external factors that contribute or detract from achieving the strategy. II. Value chain analysis. Value chain analysis includes the process of identifying the functional characteristics of an organization and the manner in which each one of those functions adds value to the firm's customers.
III. Balanced scorecard development. Development of a balanced scorecard identifies measurements of value that are both financial and non-financial to be used to monitor and evaluate performance.
Choice "a" is incorrect. All three activities are integral to strategic planning. Choice "b" is incorrect. All three activities are integral to strategic planning. Choice "c" is incorrect. All three activities are integral to strategic planning.
QUESTION 208
Economic theory identifies two basic types of goods: inferior goods and superior goods. As consumer income rises, a lower percentage of earnings are expended on inferior goods while a higher percentage of earnings are spent on superior goods. Overall strategies for achieving organizational missions would most likely match with types of goods as follows:
A. Costleadershipstrategiesforsuperiorgoods,differentiationstrategiesforinferiorgoods. B. Costleadershipstrategiesforinferiorgoods,differentiationstrategiesforsuperiorgoods. C. Cost leadership strategies would most likely be used for both inferior and superior goods. D. Differentiation strategies would most likely be used for both inferior and superior goods.
Correct Answer: B
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Rule: Overall strategies are divided into two different types that are defined as follows:
Cost leadership: Organization seeks to capture market share through maintaining the lowest cost. Differentiation: Organization seeks to capture market share by demonstrating product value. Choice "b" is correct. Organizations that sell economically inferior goods (necessities such as cotton swabs, light bulbs, etc.) are more likely to posture themselves as cost leaders than organizations that sell economically superior goods (luxuries such as cruise packages, fine china, jewelry, etc.) who will likely seek to differentiate the value of their product as part of their strategy. Choice "a" is incorrect. Economically inferior products would likely be associated with cost leadership, not differentiation while economically superior products would likely be associated with differentiation.
Choice "c" is incorrect. Economically inferior products would likely be associated with cost leadership, not differentiation while economically superior products would likely be associated with differentiation.
Choice "d" is incorrect. Economically inferior products would likely be associated with cost leadership, not differentiation while economically superior products would likely be associated with differentiation.
QUESTION 209
Having identified their mission, overall strategy, and critical success factors, organizations often review the internal and external factors that will contribute to their success. This analysis is often referred to
as:
A. TOCevaluation.
B. Brainstorming.
C. Balanced scorecard review. D. SWOT analysis.
Correct Answer: D
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Evaluation of internal and external factors contributing to an organization's success is referred to as Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis. Strengths and weaknesses focus on internal factors while opportunities and threats relate to external factors. Choice "a" is incorrect. The acronym TOC stands for Theory of Constraints, which is an evaluation technique for optimizing throughput time, it does not relate to overall strategy evaluation. Choice "b" is incorrect. Brainstorming is a meeting technique used to generate ideas. Although brainstorming could be used as part of an organization's approach to SWOT analysis, it is not, itself, the evaluation of internal and external factors.
Choice "c" is incorrect. A review of the balanced scorecard, which summarizes measures of achievement of critical success factors, does not represent the objective review of internal and external factors that may impact achievement of strategy.
QUESTION 210
Under which of the following conditions is the supplier most able to influence or control buyers?
A. Whenthesupplier'sproductsarenotdifferentiated.
B. Whenthesupplierdoesnotfacethethreatofsubstituteproducts.
C. When the industry is controlled by a large number of companies.
D. When the purchasing industry is an important customer to the supplying industry.
Correct Answer: B
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When there are few good substitutes for a supplier's product, the supplier has market power (think of a monopoly). As a result, the supplier is better able to control buyers and act as a price setter rather than a price taker.
Choice "a" is incorrect. When supplier's products are not differentiated, buyers will be indifferent about which supplier they purchase from. In other words, if firms sell identical products (think of perfect competition) the product of one firm is a perfect substitute for the product of another firm. In this case, firms are price takers, not price setters.
Choice "c" is incorrect. When there are a large number of firms, no one firm has much market power. This is the case of either perfect competition (if all firms sell identical products) or monopolistic competition (if all firms sell slightly differentiated products). Choice "d" is incorrect. If the purchasing industry is an important customer of the supplier, the purchasing industry (i.e. the buyer) will have some market power. This will diminish the ability of the supplier to influence or control the buyer.
QUESTION 211
Which of the following inputs would be most beneficial to consider when management is developing the capital budget?
A. Supply/demandforthecompany'sproducts. B. Currentproductsalespricesandcosts.
C. Wage trends.
D. Profit center equipment requests.
Correct Answer: D
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. In developing its capital budget, management would find the employee input associated with equipment requests from various profit centers most helpful. Departmental requests, appropriately justified, would provide key insights into the capital requirements of the business that are not otherwise known. Choice "a" is incorrect. Supply and demand for company products is a crucial strategic input in forecasting the future capital requirements. Current year capital budgeting would not benefit as directly from this information, however, as profit center equipment requests. Choice "b" is incorrect. Current product sales prices and costs represent operating data most relevant to operating rather than capital budgeting.
Choice "c" is incorrect. Wage trends represent operating data most relevant to operating than capital budgeting.
Comments:
Some people have questioned why the answer is not choice "a." However, the answer to the question is very clear.
The question really is what are the best (most beneficial to consider) inputs to a capital budget. The "supply and demand for the company's products" is very indirect. The demand for the company's products may or may not result in the company spending any capital money because the demand may be able to be satisfied with the current capital equipment. But, equipment requests, if approved, will most likely result in spending money (assuming that the money in the budget is actually spent) and thus should go into the capital budget. The supply and demand might affect future capital budgets if the demand is not able to be satisfied with the current capital equipment. But the question asks for the best inputs for presumably the current capital budget.
QUESTION 212
A city ordinance that freezes rent prices may cause:
A. Thedemandcurveforrentalspacetofall.
B. Thesupplycurveforrentalspacetorise.
C. The quantity demanded of rental space exceeds the quantity supplied. D. The quantity supplied of rental space exceeds the quantity demanded.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A city ordinance that freezes rent prices (such as rent control and rent stabilization in New York City) may cause the quantity demanded for rental space to exceed the quantity supplied.
This occurs if the rent controlled price is set below the market clearing price. At the controlled price, the quantity supplied will be constrained due to the low rent prices for the rent-controlled and rent- stabilized properties; builders will not want to build and rent properties for less than they are worth on the open market. The quantity demanded for the rental space will still be artificially high due to the city ordinance, which sets the controlled price below the market price. Thus, the quantity demanded will exceed the quantity supplied. New York City rent control is a perfect example of the effect of a price ceiling and the problems that it can cause.
Choice "a" is incorrect. A city ordinance that freezes rent prices will not cause the demand curve for rental space to fall. Price changes cause movements along the demand curve, not shifts in the demand curve.
Choice "b" is incorrect. A city ordinance that freezes rent prices will not cause the supply curve for rental space to rise. Price changes cause movements along the supply curve, not shifts in the supply curve.
Choice "d" is incorrect. A city ordinance that freezes rent prices will not cause the quantity supplied to exceed the quantity demanded. This choice is backwards.
QUESTION 213
What is strategic planning?
A. Itestablishesthegeneraldirectionoftheorganization.
B. Itestablishestheresourcesthattheplanwillrequire.
C. It establishes the budget for the organization.
D. It consists of decisions to use parts of the organization's resources in specified ways.
Correct Answer: A
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Strategic planning is the creation of an overall strategic plan for an organization to achieve its overall "business objectives." The strategic plan will establish the general direction of the organization.
Choice "b" is incorrect. Strategic planning will not establish the resources that the plan will require. The resources that the plan will require are part of the implementation of the strategic plan, not part of the plan itself.
Choice "c" is incorrect. Strategic planning will not establish the budget for the organization. Budgets are even further down implementing the plan than are the resources that the plan will require. Choice "d" is incorrect. Strategic planning does not consist of decisions to use parts of the organization's resources in specified ways. Again, these decisions are part of the implementation of the strategic plan, not part of the plan itself.
Implications of Dealing in Foreign Currencies
QUESTION 214
Which of the following is not correct about the purchasing power parity theory of explaining changes in exchange rates?
A. Purchasingpowerofacommoncurrencyindifferenteconomiesforsimilarproductswillremainthesame.
B. Inflationaryforcesonforeignanddomesticcurrencieswillcausetheexchangeratestoautomaticallyadjusttoensurethatacommoncurrencywillhave identical or similar purchasing power in each economy for similar goods.
C. Interest rates include a premium or discount that ensures purchasing power parity. D. The purchasing power parity theory is presented in both absolute and relative form.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The purchasing power parity theory holds that inflation will cause exchange rates to automatically adjust to ensure that an equal amount of a common currency will purchase similar goods in separate economies. The International Fischer effect considers the premium or discount on interest rates as an indicator of inflation.
Choice "a" is incorrect. The basic idea underlying the purchasing power parity theory is that the purchasing power of a common currency in different economies for similar products will remain the same and that inflation in any particular economy will cause exchange rates to adjust until parity is consistently achieved.
Choice "b" is incorrect. The purchasing power parity theory holds that inflationary forces on foreign and domestic currencies will cause the exchange rates to automatically adjust to ensure that a common currency will have identical or similar purchasing power in each economy for similar goods. Choice "d" is incorrect. The purchasing power parity theory is presented as both an absolute theory of parity determination regardless of market imperfections and as a relative concept that considers market imperfections.
QUESTION 215
Which of the following methods of measuring transaction exposure to exchange rate risk uses standard deviation, coefficient of correlation and other formal
statistical techniques?
A. Measurementofcurrencyvariability.
II. Measurement of currency correlations.
B. Ionly.
C. II only.
D. Both I and II.
E. NeitherIandII.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The currency variability approach uses standard deviations as a means of predicting future exchange rates while the currency correlation approach is often applied to circumstances involving multiple currencies and evaluates exposure in relation to the statistically computed degree of correlation between the movements of different currencies. Choices "a", "b", and "d" are incorrect, per above Explanation: .
QUESTION 216
Which of the following methods is designed to measure transaction exposure in terms of the maximum one day loss related to holdings denominated in foreign currency?
A. Measurementofcurrencyvariability.
II. Measurement of currency correlations. III. Value at risk.
B. Ionly.
C. II only.
D. III only.
E. I,II,andIII.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The value at risk method seeks to quantify the exposure of business to a one day loss in the value of its positions in foreign currencies. Choices "a", "b", and "d" are incorrect, per above Explanation: .
QUESTION 217
Atlas Worldwide Industries conducts business in a number of different countries and is trying to evaluate its economic exposure to exchange rate risk. Which of the following statements is not correct?
A. Atlaswillsufferaneconomiclossintheeventithasnetcashoutflowsofaforeigncurrencyandtheforeigncurrencyappreciates. B. Atlaswillenjoyaneconomicgainintheeventithasnetcashoutflowsofaforeigncurrencyandtheforeigncurrencydepreciates. C. Atlas will suffer an economic loss in the event it has net cash inflows of a foreign currency and the foreign currency appreciates. D. Atlas will suffer an economic loss in the event it has net cash inflows of a foreign currency and the foreign currency depreciates.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Atlas will benefit from an economic gain in the event that it has net cash inflows of a foreign currency and the foreign currency appreciates (the domestic currency depreciates). Atlas will collect a more valuable currency that can buy more of its domestic currency. Choices "a", "b", and "d" are incorrect because they are correct statements.
QUESTION 218
Universal Industries limits its operations to exports to foreign countries. What can be said about Universal's exposures to exchange rate risk?
A. Universalissubjecttopotentialtransaction,economicandtranslationexposurestoexchangeraterisk. B. Universalissubjecttopotentialtransactionandeconomicexposurestoexchangeraterisk.
C. Universal is subject to economic and translation exposures to exchange rate risk.
D. Universal is subject transaction and translation exposures to exchange rate risk.
Correct Answer: B
Section: Business Environment and Concepts (Volume C)
Explanation Explanation/Reference:
Explanation:
Choice "b" is correct. Universal is subject to transaction risks associated with settlement of export transactions and is subject to economic risks associated with the satisfaction of domestic expenses denominated in domestic currencies with imported revenues denominated in a foreign currency. No translation exposure exists since there is no foreign investment or subsidiary. Choices "a", "c", and "d" are incorrect, per the above Explanation: .
QUESTION 219
Hedgehog International owes 500,000 local currency units to its foreign supplier in 90 days. The current spot rate of the local currency unit is $.60. Hedgehog purchases a call option to buy the local currency unit in 90 days for $.61 for a premium of $.005. The exchange rate for the local currency increases to $.63 in 90 days. What will Hedgehog do on the payables' settlement date?
A. Hedgehogwillexerciseitsoptionandsettlethepayableswithproceedsfromtheoptioncontractatagain.
B. Hedgehogwillnotexercisetheoptionandsettlethepayablesafterpurchaseofthelocalcurrencyunitatthespotrate.
C. Hedgehog will be indifferent as to whether it exercises the option or not.
D. Hedgehog will sell the option at the settlement date and use its proceeds along with local currency units purchased at the spot rate to satisfy the amount payable.
Correct Answer: A
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Hedgehog will exercise its option and liquidate the payables associated with the proceeds. The exercise of the option represents a less costly alternative than acquisition of proceeds at the spot rate at the time the payables are due. The net impact of exercise of the option is computed as follows:
The premium is a sunk cost and is irrelevant to the decision. Note that the premium is a factor in determining the net gain (loss) but not in deciding whether to exercise the option. Choices "b", "c", and "d" are incorrect, per computation above.
QUESTION 220
Hedgehog International has a receivable valued at 500,000 local currency units from its foreign customer due in 90 days. The current spot rate of the local currency unit is $.60. Hedgehog purchases a put option to sell the local currency unit in 90 days for $.61 for a premium of $.005. The exchange rate for the local currency increases to $.63 in 90 days. What will Hedgehog do on the receivable's settlement date?
A. Hedgehogwillexerciseitsoptionandselltheproceedsofitsaccountsreceivablecollectionundertheprovisionsoftheoptioncontractatagain.
B. Hedgehogwillnotexercisetheoptionandselllocalcurrencyunitscollectedfromitsreceivableatthespotrate.
C. Hedgehog will be indifferent as to whether it exercises the option or not.
D. Hedgehog will sell the option at the settlement date and combine its proceeds along with local currency units purchased at the spot rate to maximize its revenue.
Correct Answer: B
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Hedgehog will not exercise its option and will, instead convert the local currency units collected from the receivables to its domestic currency by selling that currency at the spot rate at the time of collection. The exercise of the option represents a less profitable alternative than sale of the accounts receivable proceeds at the spot rate at the time the receivables are collected. The exercise of the option in comparison to allowing the option to expire is computed as follows:
The premium is a sunk cost and is irrelevant to the Explanation: . Note that the premium is a factor in determining the net gain (loss) but not in deciding whether to exercise option. Choices "a", "c", and "d" are incorrect, per computation above.
QUESTION 221
Hedgehog International has numerous foreign exchange transactions. Management has elected to hedge transactions as a means of mitigating transaction exposure to exchange rate risk. What is the most effective means that Hedgehog International can use to avoid overhedging?
A. Hedgehogshouldacquireparallelloanstoprovideameansforliquidatingunneededhedgesecurities. B. Hedgehogshouldacquirethemaximumamountrequiredtohedgeknownandprojectedtransactions.
C. Hedgehog should acquire the minimum amount required to hedge known transactions. D. Hedgehog should enter into a cross hedging agreement.
Correct Answer: C
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Hedgehog should only acquire the minimum amount of hedge contracts needed to offset the effect of known transactions.
Choice "a" is incorrect. Parallel loans represent a swap contract for hedging long-term transaction exposure and are not specifically designed to mitigate the risk of overhedging. Choice "b" is incorrect. Acquisition of the maximum number of hedge contracts for known and projected transactions exposes the organization to greater risk of overhedging since projected transactions might not materialize.
Choice "d" is incorrect. Cross hedging involves techniques related to currencies that do have hedge instruments available to mitigate risk and are not specifically designed to avoid overhedging.
QUESTION 222
An American importer expects to pay a British supplier 500,000 British pounds in three months. Which of the following hedges is best for the importer to fix the price in dollars?
A. BuyingBritishpoundcalloptions. B. BuyingBritishpoundputoptions. C. Selling British pound put options. D. Selling British pound call options.
Correct Answer: A
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. To fix a price in dollars to buy British pounds, British pound call options should be purchased. Call options would allow, but not require, the purchaser of the call to acquire the currency (British pounds) for a specified price at or before a specified time in the future. If the price goes down, the purchaser (the importer) would exercise the options; if not, the purchaser (importer) would buy the British pounds in the market and let the options expire. British pound futures could also be used, but that was not one of the choices listed.
Choice "b" is incorrect. Buying British pound put options would allow, but not require, the purchaser of the put to sell the currency for a specified price at a specified time in the future. Since the importer needs British pounds, buying put options would not work. The importer needs to end up with British pounds.
Choice "c" is incorrect. Selling British pound put options would not work. The importer needs to end up with British pounds. Selling put options could work, but the
option would be exercised, or not, by the purchaser and not by the importer. If the options were not exercised, the importer could end up with nothing (other than the option premium).
Choice "d" is incorrect. Selling British pound call options would not work. The importer needs to end up with British pounds; if call options are sold, the other party can exercise the options or let them expire, and if the options were exercised, the importer would have to supply the British pounds. This answer is backwards.
QUESTION 223
What is the effect when a foreign competitor's currency becomes weaker compared to the U.S. dollar?
A. TheforeigncompanywillhaveanadvantageintheU.S.market.
B. TheforeigncompanywillbedisadvantagedintheU.S.market.
C. The fluctuation in the foreign currency's exchange rate has no effect on the U.S. company's sales or cost of goods sold. D. It is better for the U.S. company when the value of the U.S. dollar strengthens.
Correct Answer: A
Section: Business Environment and Concepts (Volume C) Explanation
Explanation/Reference:
Explanation: