When a firm sets a price relatively low in order to increase the market share, it is
referred as
A) price skimming.
B) limit pricing.
C) penetration pricing.
D) predatory pricing.
Assuming mustard and burgers are complements, a decline in the price of burgers will
A) decrease the demand for burgers.
B) decrease in the quantity demanded of burgers.
C) increase the demand for mustard.
D) decrease the demand for mustard.
Average fixed cost
A) does not change as total output increases or decreases.
B) varies directly with total output.
C) falls continuously as total output expands.
D) rises as the output is expanded.
Mutual interdependence occurs when
A) all firms in an industry are affected by the same macro economic conditions, such as
a recession, inflation, interest rates, exchange rates, etc.
B) the actions of firms are independent of each other.
C) the actions of one firm in an industry are easily recognized and perhaps copied by
others.
D) monopolists recognize that they must face eventual competition in the long run.
The perfect substitution of two inputs implies that
A) two inputs can be substituted at a ratio of 1 to 1.
B) one input can be substituted for another up to some point.
C) two inputs can be substituted at some constant ratio.
D) one input can be substituted for another.
If the demand for a good is price inelastic and the good price is increased, then the
marginal revenue (MR) received by the seller will
A) not change.
B) decrease.
C) increase.
D) Cannot be determined from this information
Increasing returns to scale result when
A) in the long-run, an increase in inputs will lead to an increase in the average products
of inputs.
B) in the long run, an increase in inputs will lead to an equivalent increase in output.
C) labor becomes more skilled.
D) All of the above
Changes in the short-run total costs result from changes in only
A) variable costs.
B) fixed costs.
C) zero.
D) total fixed costs.
In the long run if there is a shortage in the market for a product, the guiding (allocation)
function of price can be expected to cause
A) an increasing shift in the demand for the product.
B) a decreasing shift in the demand for the product.
C) an increasing shift in the supply of the product.
D) a decreasing shift in the supply of the product.
When the R2 of a regression equation is very high, it indicates that
A) all the coefficients are statistically significant.
B) the intercept term has no economic meaning.
C) a high proportion of the variation in the dependent variable can be accounted for by
the variation in the independent variables.
D) there is a good chance of serial correlation and so the equation must be discarded.
The main difference between the price-quantity graph of a perfectly competitive firm
and a monopoly is
A) that the competitive firm’s demand curve is horizontal, while that of the monopoly is
downward sloping.
B) that a monopoly always earns an economic profit while a competitive company
always earns only normal profit.
C) that a monopoly maximizes its profit when marginal revenue is greater than
marginal cost.
D) that a monopoly does not incur increasing marginal cost.
If the income elasticity of a particular good is negative 0.2, it would be considered
A) a superior good.
B) a normal good.
C) an inferior good.
D) an elastic good.
Scarcity is a condition that exists when
A) there is a fixed supply of resources relative to the demand for the product.
B) there is a large demand for a product.
C) resources are not able to meet the entire demand for a product.
D) All of the above
The XYZ Company has estimated expected cash flows for 1996 to be as follows:
Calculate:
a. expected value
b. standard deviation
c. coefficient of variation
d. the probability that the cash flow will be less than $100,000
The major advantage of using cross-sectional analysis for long-run costs studies
includes
A) the inclusion in the sample of different plants of different sizes.
B) the avoidance of having to adjust for inflationary trends.
C) the avoidance of having to account for interregional cost differences.
D) All of the above
E) A and B above
Which of the following is correct? The supply curve will shift when
A) income, preferences, or the number of suppliers change.
B) income, preferences, or the number of buyers change.
C) income, preferences, or production technology changes.
D) the number of sellers and the number of buyers change.
E) production technology and input prices change.
A cartel is defined to be
A) any oligopolistic industry with fewer than 4 firms.
B) a form of oligopoly in which firms agree to sell at different prices like in
monopolistic competition.
C) a form of oligopoly in which firms formally agree to establish a common strategy,
often a common price, in effect acting like a monopoly.
D) a form of oligopoly in which firms agree to compete with each other on an equal
basis.
The “Law of Diminishing Returns” states that
A) additional inputs will reduce output.
B) additional inputs will decrease average productivity.
C) the supply of inputs is becoming scarce.
D) additional inputs will lead to less additional output.
Managerial economics is best defined as
A) the study of economics by managers.
B) the study of the aggregate economic activity.
C) the study of how managers make decisions about the use of scarce resources.
D) All of the above are good definitions.
A feature of perfect competition is
A) use of non-price competition by firms.
B) mutual interdependence among firms.
C) unique products.
D) standardized products.
One of the series included among the lagging indicators is
A) the change in sensitive material prices.
B) the index of industrial production.
C) employees on non-agricultural payrolls.
D) average duration of unemployment.
A dummy variable is also called
A) an approximate variable.
B) a discrete variable.
C) a zero-sum variable.
D) an improper variable.
Market price is $50. The firm’s marginal cost curve is given by MC = 10 + 2Q.
a. Find the profit-maximizing output for the firm.
b. At this output, is the firm making a profit? Explain your answer.
Which of the following is not a drawback of forecasting using the compound growth
rate method?
A) only considers first and last observations
B) considers only equal absolute changes
C) disregards fluctuations between the original and terminal observations
D) does not consider any trends in the data
For each of the following cost functions, find MC, AC, and AVC.
a. TC = 20,000 + 10 Q
b. TC = 18,000 + Q + 0.2 Q2
Isocost curves represent
A) least cost combinations of inputs.
B) combinations of inputs that can be purchased given their prices for the same total
cost.
C) a producers cost function.
D) None of the above
Demand is given by QD = 6000 – 50P. Domestic supply is QS = 25P. Foreign producers
can supply any quantity at a price of $40.
a. If foreign producers can sell in the domestic market, what is the equilibrium price?
What is the equilibrium quantity? How much is sold by domestic and foreign
producers, respectively?
b. Under domestic government pressure, foreign producers voluntarily agree to restrict
their goods. What will happen to the price and quantity? What will happen to the
amount that domestic producers supply? What will happen to revenues of domestic and
foreign producers?
The marginal cost will intersect the average variable cost curve
A) when the average variable cost curve is rising.
B) where average variable cost curve equals price.
C) at the minimum point of the average variable cost curve.
D) The two will never intersect.
A project whose acceptance eliminates another project from consideration is called
A) independent.
B) mutually exclusive.
C) replacement.
D) complementary.
The demand curve is given by:
QD = 5000 – 10 P
Find equations for:
a. Total revenue
b. Marginal revenue
A firm’s “normal profit” is best characterized by the
A) average of a firm’s profits over the past five years.
B) amount of profit necessary to keep the price of a firm’s stock from changing.
C) amount of profit a firm could earn in its next best alternative activity.
D) the average amount of profit earned in the firm’s industry.
Briefly describe the conditions under which cartels will be formed.
Superstar actors typically get contracts that specify that they get a percentage of “the
gross,” the total revenues that the movie brings in. Why might actors want contracts
structured that way? Why might producers be willing to agree to that, and how does this
make the goals of actors and producers different?
What are the major risks facing multinational corporations?
A firm experiences increasing returns to scale; that is, doubling all its inputs more than
doubles its output. What can be inferred about the firm’s short-run costs?
Refer to the demand and supply equations. At a price of $35, there will be ________.
A perfectly competitive firm has the cost function TC = 1000 + 2Q + 0.1 Q2. What is
the lowest price at which this firm can break even?
Project A and Project B both have expected values of $5,000. Project A has a standard
deviation of $1,000, while Project B has a standard deviation of $3,000. Comment on
the desirability of these projects.
Project A and Project B both have expected values of $5,000. Project A has a standard
deviation of $1,000, while Project B has a standard deviation of $3,000. Comment on
the desirability of these projects.
Why do cartels tend to break up?
A two-period project has the following probabilities and cash flows:
Probability Cash flow
Period 1: .25 500
.50 600
.25 700
Period 2: .30 300
.50 500
.20 700
The discount rate is 7%, and the initial investment is $1,000. How much is the expected
NPV of this project?
You buy a lottery ticket for $1. If you win, you receive $3 million. The odds of your
numbers coming up are 1:10,000,000. What is the expected value of this gamble?
What additional sources of risk come from international investments?
Describe the structure-conduct-performance (S-C-P) paradigm.
A monopolist sells to two consumer groups, students and non-students.
Demand for students: Q = 500 – 1/2P
Demand for non-students: Q = 750 – 2P
MC = 20
Find the profit-maximizing price/quantity combination in each market if the groups can
be separated.
What is “adverse selection”?
You have opened your own word-processing service. You bought a personal computer,
and paid $5,000 for it. However, due to the cost changes in the computer industry, the
current price of an equivalent machine is $2,500. You could sell any used machine for
$1,000. If you were not word processing, you could earn $20,000 per year at an
alternative job. Assume that the interest rate is 10%. You can also hire an assistant who
can do everything that you can do for $20,000 per year (you would still continue to do
word processing).
One person using one computer can produce 11,000 typed pages per year, and the price
per page for your service is $2.
You are considering three options: 1. expand your business by hiring an assistant; 2.
leave your business the way it is; 3. shut down. Based on the costs and revenues above,
which should you do? Explain and show any relevant calculations.
How could a manager use the information contained in this regression equation?
The following questions refer to this regression equation, (standard errors in
parentheses.)
Q = 8,400 – 10 P + 5 A + 4 Px + 0.05 I, (1,732) (2.29) (1.36) (1.75) 0.15)
R2 = 0.65
N = 120
F = 35.25
Standard error of estimate = 34.3
Q = Quantity demanded
P = Price = 1,000
A = Advertising expenditures, in thousands = 40
PX = price of competitor’s good = 800
I = average monthly income = 4,000
Calculate the elasticity for each variable and briefly comment on what information this
gives you in each case.
Two projects have the following NPVs and standard deviations:
Project A Project B
NPV 200 300
Standard deviation 75 100
Which of the two projects is more risky?