C211 Global Economics for Managers

Correct Answer:

Cost of production

Explanation:

A firm’s production decisions are primarily influenced by the costs associated with producing additional units, which is captured by marginal cost. If the marginal cost of producing one more unit is less than or equal to the expected revenue from selling that unit (price), the firm will increase production. Conversely, if marginal cost exceeds revenue, the firm will reduce output to avoid losses. Understanding production costs helps firms optimize resource allocation and profitability in both competitive and monopolistic markets.

Why Other Options Are Wrong:

Market demand

While market demand affects pricing and potential sales, the immediate decision to increase or decrease production hinges on production costs rather than demand alone.

Price of the product

Price is important for revenue calculations, but production decisions are guided by comparing price to marginal cost, not price in isolation.

Competition level

Competition influences long-term strategy but does not directly dictate the immediate production decision; the cost of production relative to revenue is the key factor.

Correct Answer:

to compare different countries' currencies through a "basket of goods" approach

Explanation:

Purchasing Power Parity (PPP) is an economic theory that compares the relative value of different countries' currencies through a standardized "basket of goods." It helps determine the equilibrium exchange rate at which the same basket of goods would cost the same in two different countries. PPP is significant for international trade, investment, and global market analysis because it allows businesses and economists to make meaningful comparisons of purchasing power, price levels, and living standards across countries.

Why Other Options Are Wrong:

to mandate a single price level for worldwide target market selection

This is incorrect because PPP does not enforce prices; it is a comparative measure rather than a regulatory mandate.

to centralize decision making based on home country's purchasing decisions

This is false because PPP is a tool for comparison, not a mechanism to centralize decision-making within a company.

to coordinate regional purchasing decisions and target market selection

This is incorrect because PPP itself does not coordinate business decisions; it informs currency valuation and pricing strategies.

to ensure decentralized decision making for separate target markets in each country

This is false because PPP is not a managerial framework for decentralization; it is an economic tool for evaluating relative currency values.

Correct Answer:

PPP helps determine the relative value of currencies, which can affect pricing and competitiveness in international markets.

Explanation:

Purchasing power parity (PPP) is a theory that compares the relative value of currencies by measuring how much of a standard basket of goods can be purchased in different countries. By assessing PPP, firms can determine whether a currency is overvalued or undervalued relative to another, which directly impacts pricing, costs, and competitiveness in international trade. Decisions regarding market entry, product pricing, and sourcing are influenced by PPP to ensure that firms remain competitive and profitable in global markets.

Why Other Options Are Wrong:

PPP assesses the political stability of a country

This is incorrect because PPP focuses on currency value and purchasing power, not political factors.

PPP measures the economic growth rate of a nation

This is false because PPP is not an indicator of growth; it measures relative currency values and price levels.

PPP indicates the total amount of goods a country can export

This is incorrect because PPP does not directly measure exports; it only compares purchasing power and cost of goods across countries.

Correct Answer:

likes both bundles equally well.

Explanation:

An indifference curve represents all combinations of two goods that provide the consumer with the same level of satisfaction or utility. If two points lie on the same curve, the consumer derives equal utility from both consumption bundles. This does not indicate a preference for one over the other but rather shows that the consumer is indifferent between them. Indifference curves are fundamental tools in consumer choice theory for analyzing trade-offs and preferences.

Why Other Options Are Wrong:

is likely to pick both bundles

This is incorrect because the consumer can only choose one bundle at a time, not both simultaneously.

can afford both bundles

This is false because affordability is determined by the budget constraint, not the indifference curve. A point on the curve may or may not be within the consumer’s budget.

dislikes both bundles

This is incorrect because all points on an indifference curve represent equal satisfaction, meaning the consumer does not dislike them.

Correct Answer:

High startup costs

Explanation:

High startup costs are a significant barrier to entry in monopoly markets because they prevent potential competitors from easily entering the market. Monopolies often exist when the initial investment required to produce goods or services is prohibitively expensive, such as in utilities, telecommunications, or natural resource industries. These high costs discourage new firms from entering, allowing the monopolist to maintain market control and potentially earn long-term economic profits. Barriers like these are crucial in explaining why monopolies can persist without facing competitive pressure.

Why Other Options Are Wrong:

Minimal regulation

This is incorrect because minimal regulation would actually make market entry easier, not act as a barrier.

Easy access to resources

This is false because easy access to resources would reduce entry barriers, facilitating competition rather than sustaining a monopoly.

Low consumer demand

This is incorrect because low demand would make the market unattractive, but it is not a structural barrier to entry; it simply reduces market size.

Correct Answer:

Higher prices for oil

Explanation:

Collusion occurs when firms coordinate their actions, such as setting production levels or prices, to maximize collective profits rather than competing independently. In the case of two oil companies colluding, they can restrict output to drive prices higher than would occur in a competitive market. This reduces consumer surplus, as buyers must pay more for the same quantity of oil, and may also decrease overall market efficiency. Collusion undermines competition and can lead to regulatory scrutiny due to its negative impact on consumers.

Why Other Options Are Wrong:

Improved quality of oil products

This is incorrect because collusion focuses on controlling output and prices, not improving product quality.

Increased variety of oil products

This is false because collusion reduces competitive incentives to diversify offerings; firms are more likely to standardize products to simplify coordination.

Lower prices for oil

This is incorrect because collusion typically results in higher prices, not lower, as firms aim to maximize profits rather than compete on price.

Correct Answer:

Changes in interest rates can lead to fluctuations in exchange rates.

Explanation:

Interest rates directly influence the flow of capital between countries, affecting demand for a country’s currency. Higher interest rates offer better returns on investments denominated in that currency, attracting foreign capital and causing the currency to appreciate. Conversely, lower interest rates can lead to capital outflows and currency depreciation. This relationship is central to international finance and foreign exchange markets, where interest rate differentials between countries often drive exchange rate movements.

Why Other Options Are Wrong:

Interest rates have no impact on exchange rates

This is incorrect because changes in interest rates are a key factor affecting currency demand and valuation in the foreign exchange market.

Exchange rates determine interest rates

This is false because while exchange rates can influence monetary policy indirectly, interest rates are generally set by central banks, not dictated by currency values.

Interest rates only affect domestic currency value

This is inaccurate because interest rates can influence both domestic and foreign investment flows, thereby affecting international exchange rates.

Correct Answer:

It could lower barriers to entry and increase competition.

Explanation:

In a monopoly, high barriers to entry protect the monopolist from potential competitors. If a new technology reduces startup costs, it lowers one of these barriers, making it easier for new firms to enter the market. Increased competition can erode the monopoly’s market power, potentially leading to lower prices and greater choice for consumers. The reduction in entry costs disrupts the monopoly’s ability to maintain long-term economic profits without competitive pressure.

Why Other Options Are Wrong:

It would lead to higher prices for consumers

This is incorrect because the entry of competitors typically exerts downward pressure on prices, not increases them.

It would strengthen the monopoly's control over the market

This is false because lower startup costs encourage new entrants, which weakens, rather than strengthens, the monopoly’s control.

It would have no effect on the monopoly

This is incorrect because changes that reduce barriers to entry directly impact the monopoly’s ability to maintain market dominance and long-term profitability.

Correct Answer:

Regulative institutions set the legal framework that influences how entrepreneurs operate.

Explanation:

Regulative institutions are formal rules, laws, and regulations that establish what behaviors are acceptable and enforceable within a society. These institutions influence entrepreneurial activity by defining property rights, contract enforcement, taxation, licensing requirements, and business registration processes. Entrepreneurs rely on clear and predictable legal frameworks to plan investments, secure financing, and operate efficiently. Without strong regulative institutions, businesses face higher uncertainty, legal risks, and potential barriers to market entry, which can discourage innovation and economic growth.

Why Other Options Are Wrong:

Regulative institutions provide funding for startups

This is incorrect because regulative institutions focus on rules and enforcement rather than financial support. Funding typically comes from private investors, banks, or government programs, not the regulatory framework itself.

Regulative institutions create informal networks among entrepreneurs

This is false because informal networks are influenced by social and cultural institutions, not regulative institutions, which are formal and legally binding.

Regulative institutions have no impact on entrepreneurship

This is incorrect because regulative institutions directly shape the environment in which entrepreneurs operate, influencing risk, compliance costs, and market entry possibilities.