In a perfectly competitive market, industry demand is: P = 850 ‘“ 2Q, and industry
supply is: P = 250 + 4Q (Supply is the sum of the marginal cost curves of the firms in
the industry).
(a) Determine price and output under perfect competition.
(b) Now suppose that all the firms collude to form a single monopoly cartel. Given that
there is no change in the demand or cost conditions of the industry, what price and total
output would the cartel set? Compare the monopoly outcome with the competitive
outcome calculated earlier.
Which of the following is a problem in evaluating a team’s performance?
a) Some of the members may free ride on the work done by the others.
b) It is more difficult to measure team output than individual output.
c) Team decision making is inevitably marked by interpersonal conflicts.
d) Work is more efficient when it is done by individuals than when it is done by a team.
e) It is difficult to set realistic goals to gauge a team’s performance.
The following figure shows the long-run average cost curve of a firm.
Figure 6-1
Refer to Figure 6-1. The production function of the firm displays constant returns to
scale when output is increased from _____.
a) A to E
b) C to D
c) D to E
d) A to B
e) B to D
A firm is pondering the introduction of a new good with a profit contribution of $70 per
unit. Each unit of the good uses 2 units of input A and 3 units of input B. The shadow
price of A is $10, and the shadow price of input B is $15. Which of the following
statements is true?
a) The firm should produce the new good.
b) The opportunity cost of producing the new good is $75.
c) The firm should not produce the new good.
d) Producing the new good will earn a profit of $10.
e) Producing the new good will earn a loss of $5.
Suppose a firm’s inverse demand function is P = 40 ‘“ 8Q. What is the firm’s revenue
function?
a) R = 40Q ‘“ 8Q2
b) R = 40 ‘“ 16Q
c) R = ‘“8Q
d) R = 40/Q ‘“ 8
e) R = 40Q ‘“ 4Q2
A strain of bird flu has broken out in a Southeast Asian country, killing flocks of
chickens and sickening scores of rural dwellers. Raising and selling chickens (both live
and butchered) to local townspeople is the main livelihood of many rural farmers.
(a) Does the chance of chicken flu in healthy looking chickens pose problems for
transactions between farmers and local buyers? Explain.
(b) What regulatory actions might the government take to improve the performance of
the chicken market?
(c) A New Zealand poultry firm, Kiwi, Inc. raises all of its produce in domestic
facilities. Five years ago, it decided to outsource, that is, obtain about 15 percent of its
chickens (at reduced cost) from the largest food processor in the Southeast Asian
country. What are the pros and cons of this strategy? How should Kiwi deal with the
food processor to address the bird flu problem?
Which of the following is an example of moral hazard?
a) A buyer who makes a large raise in bid at an auction to discourage other bidders.
b) A doctor who performs a large number of in-office tests and is paid per test.
c) An elderly couple who elect a generous medical insurance policy.
d) A board of directors that is trying to refine the compensation system for its CEO.
e) A pitcher (about to sign with a new team) who is aware of a nagging elbow pain.
The problem of the winner’s curse can be avoided:
a) if the scope of uncertainty increases among the bidders.
b) by increasing the number of bidders.
c) by increasing the range of actual estimates and bids.
d) if the buyer bids more aggressively in the presence of more rivals.
e) if the buyer assesses the good’s acquisition value by first discounting his/her original
estimate.
The difference between the predicted value and the actual value of a variable in a
regression analysis is called:
a) absolute divergence.
b) estimation error.
c) standard error.
d) mean deviation.
e) variance.
In repeated negotiations between two firms:
a) the bargaining behavior of the firms is motivated solely by the immediate profit
available from an agreement.
b) the reputation of a firm does not play a significant role.
c) there is enhanced scope for purely opportunistic behavior by firms.
d) The firm with less bargaining power is positioned to receive a greater share of the
profit.
e) firms have extra incentives to maintain a cooperative relationship.
Which of the following is true of a pure monopoly?
a) A pure monopoly can raise the market price indefinitely.
b) A pure monopoly is typically more efficient than other firms in the market.
c) A pure monopoly faces a horizontal demand curve.
d) A pure monopoly restricts output below the competitive level.
e) A pure monopoly produces at the level where price equals marginal cost.
In the short-run, the efficient industry outcome under perfect competition occurs at the
level of output where:
a) MB = P = MC.
b) MB > P.
c) P > MC.
d) consumer surplus equals producer surplus
e) P = AC.
In comparing monopolistic competition to perfect competition, the major difference lies
in:
a) the number of firms in each industry.
b) the typical firm size in each industry.
c) the degree of entry barriers in each industry.
d) the demand curves faced by individual firms in each industry.
e) the long-run profits of firms in each industry.
A firm produces 100 units of output at an average variable cost of $5 and incurs a total
fixed cost of $700. Which of the following is true?
a) The firm’s average total cost is $12.
b) The firm’s total variable cost is $1,200.
c) The firm’s marginal cost is constant and equal to $5.
d) The firm’s average fixed cost is $5.
e) The firm’s total cost is $500.
A company is trying to decide whether to build a large plant or a small
plant to supply future sales of a new product. However, it is uncertain
about the market response to the product; whether demand will be strong or
weak. According to the firm’s marketing department, the probability of
strong demand is .3 and of weak demand is .7. The table below lists the
firm’s profits (in millions of dollars) depending on plant capacity and the
market response:
(a) The company must make its plant decision now, before it will know
what the market response will be. Which plant size maximizes its expected
profit?
(b) Now suppose the company has a third option: building a modular plant.
This is the same size as the small plant but is built so it can be expanded to
the size of the large plant at a later date. The modular plant costs $4 million
more to build than the small plant, but it allows the company the flexibility
to observe the market response to the new product and immediately expand
its capacity if demand warrants it (Note: If the modular plant is expanded,
the firm’s total cost is also $4 million more than building a large plant in
the first place). Should the company choose to build the modular plant?
(c) Suppose that the firm can take a small-scale market survey that will
help it forecast market demand. The test has two possible outcomes:
positive or negative. In the past, products that went on to enjoy strong
demand received positive test market scores in 4 of 6 cases: Pr(+|S) = 2/3.
Products generating weak demand received negative test results in 5 of 7
cases: Pr(‘“|W) = 5/7. Compute the revised probabilities, Pr(S|+) and
Pr(S|’“).
Kevin goes trick-or-treating on Halloween. His neighbor gives him 3 small bags with
two candies in each of them. One bag has two Snickers bars, one has a Tootsie Roll and
a Snickers bar, and the third bag has two Tootsie Rolls. Kevin opens one of the bags and
sees a Snickers bar. What are the odds that the other candy in the bag is also a Snickers
bar?
a) 2/5
b) 5/7
c) 1/2
d) 3/4
e) 2/3
A port authority is in the process of deciding the optimal depth (in feet) of a harbor
dredging project. Both commercial shippers and pleasure boaters use the harbor. The
total cost of dredging the harbor (in hundreds of thousand dollars) is C = 2F + .25F2,
where F is harbor depth in feet. The total benefits to commercial shippers and pleasure
boaters are: BCS = 18F ‘“ .5F2 and BPB = 8F ‘“ .25F2, respectively.
(a) Determine the optimal harbor depth.
(b) Comment on the following statement: ‘If the cost of dredging the harbor was zero,
we could have, of course, dredged the harbor 20 or even 25 feet deep.’
Which of the following is true of benefit-cost analysis?
a) It eliminates projects whose costs and benefits stretch into the distant future.
b) Its main focus is to equalize the distribution of costs and benefits across society.
c) Because it excludes the use of market prices, it is necessarily is inefficient.
d) Its methodology is designed to help the government to maximize its profit from
public projects.
e) It identifies and values a project’s many impacts on all affected members of society.
Apply the expected-value criterion to choose between these investments.
Investment A has possible outcomes: $100,000 (50% chance), $40,000 (30% chance),
and $50,000 (20% chance). Investment B has possible outcomes: $150,000, $60,000,
$20,000, and $80,000 with each outcome equally likely.
Carefully define the term production function, and explain its importance.
How can the prices of nonmarketed goods and services be calculated?
The demand for a good produced by a firm has been reliably measured by P = 100 ‘“
5Q, output Q is measured in thousands of units. If the total cost function is given by: C
= 10Q, what is the optimal level of output produced by the monopolist?
Suppose that the firm’s expected profit without test information is $75,000. There exists
a perfectly reliable test that produces a positive result with a probability of 0.75 and a
negative result otherwise. In light of a positive result, the firm’s expected profit is
$120,000; after a negative result, its expected profit is $40,000. Find the expected value
of information.
A small nation is considering upgrading its air force to incorporate new technology. It
faces two main choices. The first is to acquire a fleet of the latest fighter aircraft, with
the newest electronics and weapons. The cost of the acquisition (assuming that the U.S.
President and Congress agree to the sale) is $45 million per plane, including a stock of
spare parts that should last five years. The second choice is to buy an electronic upgrade
for existing aircraft, with a complete overhaul of the airframes. The cost of such an
upgrade is $8 million per plane, with about a 10% loss of fleet because of damage
beyond repair and ‘cannibalization’ to obtain the highest number of flyable planes. The
upgrading of existing planes results in aircraft with about 90% of the capability of the
new aircraft.
Top pilots in the small country’s air force are concerned that they may not be flying the
best aircraft, and could face a disadvantage in combat against newer planes flown by a
potential enemy. However, they acknowledge that if a numerical superiority against the
enemy can be obtained, an overall victory is still likely. Their theory is that three of the
upgraded planes should be able to win against one of the newer planes flown by an
enemy (although the pilots expect higher losses in combat). How would an economic
consultant advise the defense ministry of the small country in deciding how best to
spend its available budget for air defense? What objective(s) are important for this
decision? What are the pros and cons of the available options?