Amanda invests $500,000 in a new business venture. Which of the following correctly
identifies the relevant opportunity cost that she faces?
a) The potential profits from the business
b) The discounted present value of future profits from the business
c) The rate of interest that could have been earned on an a comparably risky $500,000
investment.
d) The probability of losing the initial investment of $500,000
e) The rate of return on $500,000 invested in the business
A firm might be liable for $10 million if a lawsuit is brought against it. The firm judges
that the probability the suit will be brought is .6. In addition, it believes that its chance
of winning such a suit (in which case it owes $0) is .7. The firm’s overall expected
liability is:
a) $6 million.
b) $4.2 million.
c) $3 million.
d) $1.8 million.
e) $1.2 million.
In an oligopoly, the kinked demand curve model explains:
a) the number of firms that can profitably exist.
b) the market share of each firm.
c) the outcome of price discrimination.
d) price rigidity among firms.
e) collusive price agreements between firms.
Cartels are inherently unstable because individual members:
a) face horizontal demand curves.
b) tend to produce above their quotas.
c) are culturally and politically heterogeneous.
d) produce highly differentiated products.
e) have a low elasticity of supply.
Which of the following is not a mechanism used to address the principal-agent issue in
the management of large corporations?
a) Enforcing managerial duties externally
b) Empowering shareholders
c) Strengthening corporate governance
d) Enforcing of disclosure requirements
e) Setting up a corporate lobbying group
Under patent protection, a firm has a monopoly in the production of a high-tech
component. Market demand is estimated to be P = 100 ‘“ .2Q. The firm’s economic
costs are given by AC = MC = $60 per component.
(a) Determine the firm’s output and price.
(b) After the firm’s patent expires, predict the new market output and price. Compute
the resulting change in consumer surplus. Calculate the net welfare gain. Assume that
competing suppliers have the same economic costs as the original producer.
The following table shows the total output per hour produced in a factory at various
levels of employment of labor. The firm sells each unit of output at $2 and each worker
is paid a wage of $
Table 5-1
Refer to Table 5-1. Diminishing returns occurs beyond:
a) 2 workers.
b) 3 workers.
c) 4 workers.
d) 5 workers.
e) 6 workers.
The following table shows the total output produced in a factory at various
levels of employment of labor. The firm sells each unit of output at $2 and
each worker is paid a wage of $32.
Table 5-1
Refer to Table 5-1. Diminishing returns to labor occurs beyond:
a) 4 workers.
b) 3 workers.
c) 5 workers.
d) 9 workers.
e) 8 workers.
Suppose a firm’s profit is given by the equation = ‘“200 + 80Q ‘“ .2Q2. Which of the
following is true?
a) The firm’s marginal profit is given by the equation: M = 80 ‘“ .2Q.
b) The firm’s profit-maximizing output is Q = 400.
c) The firm’s profit-maximizing output is Q = 200.
d) The firm’s marginal profit is given by the equation: M = 80 ‘“ 2Q.
e) The firm’s profit-maximizing output is Q = 800.
A firm supplies aircraft engines to the government and to private firms. It must decide
between two mutually exclusive contracts. If it contracts with a private firm, its profit
will be $2 million, $1 million, or -$1 million with probabilities .25, .4, and .35,
respectively. If it contracts with the government, its profit will be $4 million or ‘“$2.5
million with respective probabilities .4 and .6. Which contract offers the greater
expected profit or loss?
a) The private contract offers the greater expected profit.
b) The government contract offers the greater expected profit.
c) Both contracts offer the same expected profit.
d) The private contract results in a greater expected loss.
e) The government contract results in a greater expected loss.
What is meant by market skimming?
a) The strategy of setting a higher price for a good than for close substitutes of the good,
based on product differentiation.
b) The strategy of combining several products in the market such that the consumer
cannot buy the goods individually.
c) The strategy of setting a price that is lower than the current market price in order to
undercut competing firms.
d) The strategy of setting a higher price for a good when it is first introduced in the
market and then gradually lowering the price.
e) The strategy of setting a low price in order to induce consumers to buy the good and
then consequently increasing the price.
The winner’s curse occurs when:
a) buyers are realistic in their value estimates.
b) the winning bid exceeds the true value of a good.
c) the contract bidder experiences frequent cost overruns.
d) the winning bid is drawn from the left tail of the bid distribution.
e) the firm’s bid discount exceeds its (upward) estimation error.
The concentration ratio for an industry with four firms shows the:
a) percentage of sales accounted for by the four firms.
b) total market capitalization of the four firms.
c) percentage of profits accounted for by the four firms.
d) total quantity of output of the four firms.
e) total costs of production of the four firms.
You are the marketing manager of a firm that produces titanium and sells this metal to
two distinct kinds of customers: aircraft producers and golf club manufacturers.
Demand for titanium by these two market segments is quite different, as described by
the respective price equations: PA= 10 ‘“ QA/600 and PG= 12 ‘“ QG/100, where annual
quantities [QAand QG] are in thousands of pounds and prices [PAand PG] are in dollars.
Your firm estimates the marginal cost of titanium production at $4 per pound.
(a) For each segment, determine the firm’s profit-maximizing price and output. Is the
firm practicing price discrimination?
(b) Because of titanium shortages, the firm’s total production capacity drops to only 1.5
million pounds per year. Determine the firm’s optimal quantities and prices in this case.
Other factors constant, a change in _____ will cause a shift in a firm’s demand curve.
a) the price of the good or service
b) the quantity of the good offered for sale
c) the wages paid to labor employed
d) the general income level of consumers
e) the technology used in the production of the good or service
Across its facilities, a financial firm pays its back-office clerical workers in two
different ways: (i) a set wage per hours worked (hours are flexible and can vary
between 40 hours and 50 hours per week) or (ii) compensation according to the quantity
(number of tasks) and the quality of work completed. Which method would you
recommend? Explain briefly.
Briefly describe the economic cost of a college graduate serving two years in the Peace
Corps, an American volunteer program, in a remote South American village.
A company produces a hand-held global positioning system (GPS) used for hiking and
sells it for $350 per unit in the United States. The same GPS unit is also sold in Europe
at a price of $250 Euros (the equivalent of about $290). Several competing European
producers have charged the company with dumping GPS units at unfairly low prices in
Europe. What economic defense would the company’s lawyer submit for the company’s
pricing practice?
Carefully define price discrimination. What conditions must exist for it to be possible
and profitable? Explain.
Carefully define the term demand function, and explain its importance to the study of
managerial economics.
How do constant-sum games and non-constant-sum games differ from each other? Give
an example of each.
What are the essential elements of a competitive situation (modeled as a game)?
Compare the strategies bidders employ when participating in the English, sealed-bid,
and Dutch auctions.
The manager of an appliance store wishes to obtain survey responses from a sample of
at least 900 households regarding their future-purchase plans. The cost of mail surveys
(M) is $1 each, while the cost of telephone surveys (T) is $3 per call. Response rates are
60% for telephone calls and 30% for mail questionnaires. To assure sufficient response
accuracy, the manager insists on gathering at least three times as many actual telephone
responses as mail responses. The manager’s objective is to minimize the cost of the
survey (C), while meeting the stipulated goals. Formulate and solve the firm’s linear
programming problem.
What role do leading indicators play in forecasting? What are some of their limitations?