Wiley CPA excel Exam Review 2014 Study Guide, Business Environment and Concepts

Appendix B: Sample Business Environment and Concepts Testlet Released by AICPA

1. In which of the following situations would there be inelastic demand?

a. A 5% price increase results in a 3% decrease in the quantity demanded.

b. A 4% price increase results in a 6% decrease in the quantity demanded.

c. A 4% price increase results in a 4% decrease in the quantity demanded.

d. A 3% decrease results in a 5% increase in the quantity demanded.

1. (a) The requirement is to identify the situation in which there is inelastic demand. Demand elasticity is measured by the change in the quantity demanded divided by the change in the price. If the ratio is greater than one, demand is said to be elastic. If the ratio is less than one, demand is inelastic, and if the ratio is equal to one, demand is unitary. Accordingly, answer (a) is correct because it is the only situation that results in a ratio less than one, 3/5 = 0.60. Answer (b) is incorrect because it indicates elastic demand, 6/4 = 1.5. Answer (c) is incorrect because it indicates unitary demand, 4/4 = 1. Answer (d) is incorrect because it indicates elastic demand, 5/3 = 1.67.

2. A project should be accepted if the present value of cash flows from the project is

a. Equal to the initial investment.

b. Less than the initial investment.

c. Greater than the initial investment.

d. Equal to zero.

2. (c) The requirement is to identify the decision rule for acceptance of a project. Answer (c) is correct because if a project’s present value of ...