MECO (No Multiple Choice)

Question 1

How do mergers create wealth?

Answer 1

Mergers create wealth by combining the strengths of two companies like people, resources and capabilities.

Question 2

What is the role of government in wealth creation?

Answer 2

establish and maintain a stable legal and social framework that supports economic activity

Question 3

According to the One Lesson of Economics, economic analysis should focus on:

Answer 3

the unintended consequences and long-term effects of policies and actions, considering the broader impact beyond immediate benefits; essentially, looking at the “invisible” ripple effects rather than just the immediate results.

Question 4

How can taxes destroy wealth?

Answer 4

Taxes can reduce wealth if they exceed the rate at which wealth grows, or if they discourage investment.

Question 5

How do businesses profit from inefficiencies in the market?

Answer 5

Taxes create a profit opportunity.
Subsidies create opportunity.
Price-controls create opportunity.

Question 6

Costs are associated with:

Answer 6

to a specific activity, project, product, or service

Question 7

A firm’s depreciation expense is an example of:

Answer 7

is an example of a non-cash expense.

Question 8

Economic Value Added (EVA) is useful because:

Answer 8

it provides a clear measure of how much wealth a company is actually creating

Question 9

A firm can increase profitability by:

Answer 9

reducing costs, increasing turnover, increasing productivity, and increasing efficiency.

Question 10

What mistake did Big Coal Power Company make?

Answer 10

They switch to a low quality coal which has a lower price but also has less power because the manager thought that they can save money but instead the company profit reduced. But the company requires more coal to generate electricity

Question 11

Which of the following is an example of an implicit cost?

Answer 11

The Cadbury Example

Question 12

Which of the following is NOT an opportunity cost?

Answer 12

The money a student spends on rent for his apartment while attending school.

Question 13

A common mistake in decision-making is:

Answer 13

relying heavily on readily available information

Question 14

What led to Cadbury’s decision to sell unused apartments?

Answer 14

Because the unused apartment is still incurred. But there’s no benefit out of it. The company will earn money out of the sale of the apartment.

Question 15

What is the purpose of goal alignment in a firm?

Answer 15

to ensure that all individuals, teams, and departments within the organization are working towards the same overarching objectives

Question 16

What does the subprime mortgage crisis illustrate?

Answer 16

Lending money to high risk borrowers who cannot pay the loan in time. The result is that the company became bankrupt

Question 17

What is the opportunity cost of using capital in a business?

Answer 17

refers to the potential return a company gives up by investing its capital in one project or activity instead of another

Question 18

What is the opportunity cost of using capital in a business?

Answer 18

refers to the potential return a company gives up by investing its capital in one project or activity instead of another

Question 19

The hidden-cost fallacy in business is often caused by:

Answer 19

Ignoring relevant cost in decision making

Question 20

Why do companies use Economic Value Added (EVA)?
Loss aversion is a bias where individuals:

Answer 20

tend to feel the pain of losing something much more intensely than the pleasure of gaining something of equal value

Question 21

Confirmation bias in business decision-making means:

Answer 21

the tendency for decision-makers to prioritize and interpret information that supports their existing beliefs or opinions, while overlooking or downplaying evidence that contradicts them, leading to potentially flawed decisions based on a skewed perspective

Question 22

What was one unsuccessful solution that NAR tried to solve the unethical repair issue?

Answer 22

NAR should review the prices of its spare parts and services and come up with a fair pricing.

Question 23

What is a suggested way to prevent mechanics from making unethical repair recommendations?

Answer 23

Add an additional performance evaluation metric to original commission scheme

Question 24

The rational-actor paradigm can make students uncomfortable because it seems to:

Answer 24

disregard personal ethics that guide behavior

Question 25

How does economics differ from deontological ethics?

Answer 25

Deontologists: actions are good if they conform to a set of principles. Economics uses analysis to understand the consequences of different solutions.

Question 26

According to the One Lesson of Business, voluntary transactions create wealth by:

Answer 26

moving assets from lower-valued to higher-valued uses

Question 27

What is one factor that destroys wealth?

Answer 27

taxes, subsidies, and price controls

Question 28

In the kidney transplant example, what prevents the efficient allocation of organs?

Answer 28

Because kidney transplants considers compatibility with the recipient.

Question 29

What is a key element of Capitalism 101 according to the chapter?

Answer 29

The motive to make a profit

Question 30

In the housing example, what determines the surplus in a transaction?

Answer 30

Gains from trade

Question 31

What is the anchoring bias?

Answer 31

Relates the effects of how the information is presented

Question 32

Overconfidence bias can lead managers to:

Answer 32

too much credit to themselves

Question 33

What was Coca-Cola’s mistake in the 1980s?

Answer 33

Coca-Cola decided to change its secret formula, that beloved taste savored by millions, in favor of a sweeter version, aiming to compete with the sweetness of Pepsi.

Question 34

The opportunity cost of an action is always:

Answer 34

the value of the next best alternative that is given up when making a decision.

Question 35

Why are sunk costs irrelevant in decision-making?

Answer 35

because they represent expenses that have already been incurred and cannot be recovered

Question 36

The role of government in business includes:

Answer 36

establishing a legal framework, regulating market activity to ensure fair competition, protecting consumer rights, providing public goods and services, managing the economy through fiscal and monetary policies, and promoting economic stability through interventions like taxation and trade policies

Question 37

A good economic decision considers:

Answer 37

the costs and benefits of different options, including opportunity costs,

Question 38

Firms maximize profit when:

Answer 38

marginal revenue equals marginal cost (MR = MC)

Question 39

In the National Auto Repair (NAR) case, why did mechanics recommend unnecessary repairs?

Answer 39

pressure from their employers to generate high sales and profits

Question 40

The opportunity cost of an alternative is:

Answer 40

the value of the next best alternative that is given up when choosing one option over another

Question 41

Which of the following costs vary with output?

Answer 41

Variable cost

Question 42

What is an example of a fixed cost?

Answer 42

Rent

Question 43

The fixed-cost fallacy means:

Answer 43

is when a business considers sunk costs, or irrelevant costs, when making decisions

Question 44

Hidden-cost fallacy occurs when:

Answer 44

someone fails to consider all relevant costs associated with a decision

Question 45

Economic profit differs from accounting profit because:

Answer 45

Economic profit is money earned after taking explicit and implicit costs into account. Accounting profit is the net income for a company or revenue minus expenses.