A convenient way to represent decisions, chance events, and possible outcomes in
choices under risk and uncertainty is known as a:
a) probability distribution.
b) decision table.
c) decision tree.
d) expected outcome tree.
e) risk table.
Moral hazard occurs when:
a) the principal purposely misleads the agent to obtain higher profits.
b) limited information causes uncertainty for the agent.
c) an agent pursues his own interests to the detriment of the principal.
d) self-selection is not possible
e) an agent has incomplete information when acting on behalf of the principal.
For a parking garage of fixed capacity, the owner sets different parking rates for cars
that are parked for less than 24 hours (short-term) and for those that are parked for more
than 24 hours (long-term). To maximize revenue, the operator should set prices and
target the number of places for each segment such that:
a) the marginal revenues from the segments are equal.
b) the total revenues from each of the segments are equal.
c) the average revenues from the segments are equal.
d) the long-term consumers pay a higher hourly price.
e) the price paid by both short-term and long-term consumers is equal.
The expected value of litigation for both firms A and B both is $500,000 in favor of
Firm A. The court costs for A and B are $60,000 and $100,000, respectively. Calculate
the collective benefit that can be obtained if both firms agree to an out-of-court
settlement.
a) $200,000
b) $160,000
c) $500,000
d) $40,000
e) $60,000
The following figure shows the demand curve ES, the average cost curve
AC, the marginal cost curve MC, and the marginal revenue curve MR for a
firm.
Figure 8-1
Refer to Figure 8-1. Under average-cost pricing, the equilibrium price and
output in the market are _____, respectively.
a) B and R
b) A and T
c) C and Q
d) D and P
e) A and Q
If the personal value of one of the buyers is drawn from a distribution with a higher
range of values than the other buyers, then which of the following statement is correct?
a) Expected revenue of the English auction will be equal to that of the sealed-bid
auction.
b) Expected revenue of the English auction will be greater than that of the sealed-bid
auction.
c) Expected revenue of the sealed-bid auction will be greater than that of the English
auction.
d) Expected revenue of the sealed-bid auction will be smaller than that of second-price
auction.
e) Expected revenue of the Vickrey auction will be greater than that of sealed-bid
auction.
The best competing bid distribution curve is useful for a bidding firm because it:
a) estimates the competitors’ reservation prices.
b) precisely measures the firm’s own winning chances for its various bids.
c) estimates the probability that a competitor will follow a particular bid strategy.
d) measures the risks associated with a particular bid.
e) measures the profit derived from the winner’s final bid.
A response bias occurs when:
a) responses do not reflect the true preferences and attitudes of respondents.
b) insufficient sample size tends to lower the variability of the responses.
c) the questions do not reflect the true intentions of the surveyor.
d) different versions of the question are targeted to different segments of respondents.
e) the large sample size makes it difficult for the surveyor to reconcile the various
responses.
A prisoner’s dilemma is a strategic situation in which:
a) some individuals enjoy the benefits of a good without incurring any of its costs.
b) there is a collective benefit from cooperation but the self-interest of individuals leads
to an inferior outcome.
c) players make sequential decisions.
d) a group of firms collude to set higher prices and maximize profits.
e) all players make their moves simultaneously, with no information about the other
players’ actions and in the process maximize individual returns.
Explain how the optimal usage of the variable input, labor, will change in response to
the following changes in the short-run:
(a) A drop in the price of the good or service that the firm sells
(b) A drop in the hourly wage
(c) A decline in the productive efficiency of labor
Joint probability refers to:
a) the decision maker’s prior probability.
b) the accuracy of new test information.
c) a long-run frequency.
d) the chance of two events both happening.
e) the chance that at least one of the two events will occur.
The initial price for an item is $5.00, and the quantity demanded is 400 units. When the
price is raised to $5.25, the quantity demanded falls to 350 units. The absolute value of
the point elasticity of demand is _____.
a) 2.25
b) 2.5
c) 3.5
d) 2.0
e) 1.5
Some employers permit telecommuting where employees work from home and contact
the office through electronic methods. Which of the following identifies a problem that
the employer may face?
a) Telecommuting could lead to the problem of self-selection.
b) The employer encounters new problems posed by moral hazard.
c) Telecommuting could contribute to an informal organizational structure.
d) The cost of hiring and retaining employees will increase.
e) Telecommuting can blur the boundaries of the firm.
The use of teams in an organization is:
a) an example of diffusion of responsibility.
b) is representative of centralized decision making.
c) representative of a hierarchical organizational structure.
d) can lead to difficulties in reaching a consensus.
e) an example of adverse selection.
Is it always worthwhile gathering more information about customer needs and
preferences?
a) Yes, the cost of gathering information is always negligible.
b) Yes, provided that this information is relevant to the firm’s decisions.
c) No, a good rule of thumb is not to spend on information more than 2% of what is at
stake in the decision.
d) No, the value of additional information must be compared to its additional cost.
e) Yes, gathering more information enables the firm to forecast demand more
accurately.
Assume that an investor invests $100,000 in a business venture. He earns an economic
profit of $5,000. If the rate of return on an investment of equal risk is 10%, then the rate
of return earned on the investment in the business venture is:
a) 25%
b) 15%
c) 10%
d) 5%
e) 20%
Which of the following is true of product differentiation?
a) Product differentiation increases information asymmetry in a market.
b) Product differentiation reduces price differentials among competing goods by
informing consumers about the features of a product.
c) Product differentiation can be based on perceived differences among products.
d) Product differentiation is the process of determining the optimal production of
various products by a multi-product firm.
e) Firms in a perfectly competitive market practice product differentiation to attract
consumers.
Carefully define the term “model” and explain how models are used in managerial
economics.
A furniture manufacturer produces three types of chairs. Model A requires 1.2 hours of
labor and .25 hour of machine time. Model B requires 1 hour of labor and .2 hour of
machine time. Model C requires .8 hours of labor and .15 hours of machine time. There
are 600 labor hours and 200 machine hours available per period. The manufacturer
seeks to maximize profit and has determined that profit contributions of each unit of A,
B, and C are $20, $15, and $12, respectively. Formulate as a linear program.
A firm is mulling over its optimal mix of print advertising. Magazine ads (M) cost
$2,500 each, reach an estimated 20,000 consumers, and generate about $7,500 revenue
per ad. Newspaper ads (N) cost $1,500 each, reach an estimated 15,000 consumers, and
generate about $6,000 revenue per ad. The advertising budget is $75,000 and
management wishes to reach at least 600,000 consumers in total. In addition, the firm
wants to have at least twice as many magazine ads as newspaper ads. Formulate the
firm’s linear programming problem.
Determine all possible equilibrium outcomes in the following non-zero-sum game.
In a private-value model with risk-neutral buyers, compare the expected revenues
generated by English and sealed-bid auctions.
Define limit pricing. Under what conditions is it an optimal strategy?
A firm produces 100 units of good A at a total cost of $1,500 and separately 200 units of
good B at a cost of $2,000. By combining the production of A and B, it is possible to
produce the same quantities of A and B respectively at a combined total cost of $2,800.
Compute the economies of scope experienced by this firm.
Delays and failure to reach an agreement are often viewed as inefficient, based on
irrational behavior, or mistakes. Is this always the case? Explain why or why not.
What factors are responsible for buyers and sellers holding different walk-away prices?
The production manager of a clothing manufacturer estimates that the total annual cost
of producing men’s suits is given by the equation: C = 5,000 + 4,100Q ‘“ 8Q2+ .004Q3.
If the market price of suits is constant, what is the shutdown level of output in the short
run? What is the minimum price the firm can accept?