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Predatory pricing:
a) occurs when a large company sets price below cost to drive smaller firms out of
business.
b) is the practice of selling the same good at different prices to different consumers.
c) means setting a very high price for a product to signal high product quality.
d) occurs when firms in a market collude to set a high price for the product.
e) occurs when a firm extracts price reductions from its suppliers.
Which of the following production functions displays decreasing returns to scale?
a) Q = aL + bK2
b) Q = aL + bK
c) Q = bLK
d) Q = cL.2K.5
e) Q = cL2K5
The following matrix gives the payoffs for Firm 1 and Firm 2 from three possible
pricing strategies:
Table 10-1
Refer to Table 10-1. The payoff table represents a:
a) prisoner's dilemma.
b) constant-sum game.
c) dominant strategy equilibrium.
d) sequential game.
e) price war.
In a linear programming problem, the objective function:
a) formulates the target in terms of the relevant decision variables.
b) restricts the values of decision variables.
c) shows the feasible region.
d) defines each resource constraint.
e) None of these are correct.
A shadow price measures the:
a) impact of all nonbinding constraints on the objective function simultaneously.
b) market price of the resource in question.
c) total profit earned from the firm's given decisions.
d) change in the value of the objective function associated with a unit change in the
resource.
e) loss incurred by not operating at the optimal point of the feasible region.
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. What is the marginal product of the 5th worker?
a) 9 units
b) 2 units
c) 8 units
d) 6 units
e) 11 units
A manager at a firm wants to increase the effort put in by his team. Which of the
following measures should he adopt?
a) He should increase the average size of the teams.
b) He should pay the workers fixed wages.
c) He should increase the workers' share in company profits.
d) He should centralize the firm's decision making process.
e) He should use aggregate performance measures to evaluate the workers.
Kiwi Inc. dominates the wholesale chicken market in New Zealand. Its production cost
is: long-run average cost [LAC] = long-run marginal cost [LMC] = $2 per pound and
demand is given by P = 6 '“ 2Q, where P denotes price per pound and Q denotes output
(in millions of pounds).
(a) Determine Kiwi's output and price (presuming it faces no other competitors).
(b) Over the last five years, a Southeast Asian nation has dramatically increased its
exports of chicken to New Zealand. That nation's cost structure (with lower labor costs
and higher shipping costs) is the same as Kiwi's. Find the long-run output and price
under perfect competition.
(c) New Zealand lawmakers have decided to enact a $1 per pound tariff on all chicken
imports. What is the new equilibrium price? Suppose that imports fall to QI = .5 million
pounds, what is Kiwi's output? Compute consumer surplus and Kiwi's profit. How has
the tariff affected total welfare?
Heteroscedasticity occurs when:
a) the variance of the random error is non-constant over the sample.
b) the regression coefficient estimates are highly unstable.
c) the random errors are correlated over time.
d) two or more explanatory variables are highly correlated.
e) the dependent and the explanatory variables are highly uncorrelated.
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 decreasing returns to
scale at all levels of output between _____.
a) A to E
b) C to D
c) D to E
d) A to B
e) B to D
Firm Z is one of 4 bidders, each with a value independently drawn from the range
$20,000 to $60,000 with all values in between being equally likely. In a sealed-bid
auction, Firm Z's equilibrium bidding strategy is:
a) bi= (.25)(40,000) + .75vi
b) bi= (.2)(20,000) + .8vi
c) bi= (.5)(40,000) + .5vi
d) bi= (.25)(20,000) + .75vi
e) bi= (.75)(20,000) + .25vi
Serial correlation occurs when:
a) the value of the random error in one period depends on one or more independent
variables.
b) the random errors are correlated over time.
c) the values of two or more regression coefficients are correlated.
d) two or more independent variables tend to move together.
e) the size of the random error increases over time.
Which of the following statements is correct?
a) The sum of squared errors (SSE) embodies the variation in the dependent variable
accounted for by the regression equation.
b) The value of the R-squared statistic exceeds unity if the total sum of squares exceeds
the sum of squared errors.
c) The value of the R-squared statistic equals zero when all the observations in a data
set are equal to the mean observation.
d) The higher the value of the R-squared statistic, the higher is the goodness of fit of a
regression equation.
e) The value of the R-squared statistic is insensitive to the number of explanatory
variables in a regression equation.
In the long run, perfectly competitive firms are in equilibrium when:
a) long-run average cost is at its maximum.
b) price is equal to the long-run marginal cost.
c) price is less than the long-run average cost.
d) the long-run average cost curve slopes upward.
e) price exceeds long-run marginal cost.
Given buyer and seller walk-away prices of $40,000 and $60,000, respectively:
a) the buyer can enjoy a maximum surplus of $10,000.
b) the seller can earn a maximum profit of $10,000.
c) the size of the zone of agreement is $20,000.
d) a zone of agreement does not exist.
e) the size of the zone of agreement is $100,000.
In a perfectly competitive market, long-run average cost and long-run marginal cost are
constant and equal: LAC = LMC = $8 for a typical firm. However, one of the firms
discovers a technological innovation lowering its average cost and marginal cost to $7.
How will this affect the equilibrium price? If all firms can take advantage of the
innovation, what is the impact on the market price and industry profits?
In a medical study of 5,000 middle-aged men, it was found that (i) 10% suffered heart
disease, (ii) 20% got little or no exercise, and (iii) Of those suffering from heart disease,
60% had a history of little or no exercise. Based on this information, determine the risk
of heart disease for a middle-aged man who does not exercise.
An oligopoly firm faces the demand curve P = 50 '“ Q for Q < 10 units and P = 65 '“ 2Q
for Q > 10 units. What is the marginal cost range within which the firm can operate?
Discuss the differences between one-shot bargaining situations and repeated situations.
Will the situations produce different bargaining strategies? Explain why or why not.
In a Cournot duopoly, both firms face the market demand: P = 100 '“ QD, where P is
price and QD is total quantity demanded in the market. Firm 1's cost function is given
by C1 = .8Q1
2 and firm 2's cost function is given by C2 = 6Q2, where Q1 is firm 1's
output and Q2 is firm 2's output. Derive firm 1's optimal reaction function.
2 '“ Q2Q1
Carefully explain the condition that the firm should follow if it wishes to produce at
least cost in the long run.
