A good’s Demand Curve is QD = 25 – P, and its Supply Curve is QS = 10 + 2P.
a. When P = $20, what is the difference, if any, between QD and QS?
b. When P = $3, what is the difference, if any, between QD and QS?
c. What are the equilibrium values of P and Q?
The demand curve is: QD = 500 – 1/2 P.
a. Calculate the (point) price elasticity of demand when price is $100. Is demand elastic
or inelastic?
b. Calculate the (point) price elasticity of demand when price is $700. Is demand elastic
or inelastic?
c. Find the point at which point elasticity is equal to -1.
Transaction costs include
A) costs of negotiating contracts with other firms.
B) cost of enforcing contracts.
C) the existence of asset-specificity.
D) All of the above
Prices under an ideal cartel situation will be equal to
A) monopoly prices.
B) competitive prices.
C) prices under monopolistic competition.
D) marginal cost.
Which of the following is not true about the law of diminishing returns?
A) It is a short-run phenomenon.
B) It refers to diminishing marginal product.
C) It will have an impact on the firm’s marginal cost.
D) It divides Stage I and II of the production process.
E) All of the above are true.
Usually, the cost of capital for newly issued stock is ________ the cost of retained
earnings.
A) lower than
B) higher than
C) same as
D) either higher or lower than
The problem of autocorrelation refers to
A) independent variables in a regression equation whose values are closely related to
each other.
B) insufficient data to estimate regression coefficient values.
C) regression coefficient values which are not significantly different from zero.
D) regression equation variables which exhibit a similar pattern in their values over a
number of time periods.
Costs of production that change with the rate of output are
A) sunk costs.
B) opportunity costs.
C) fixed costs.
D) variable costs.
For each of the following changes, show the effect on the supply curve and state what
will happen to market equilibrium price and quantity in the short run.
a. The government requires pollution control filters that raise costs on goods.
b. Wages of workers in this industry fall.
c. There is an improvement in technology.
d. The price of the good falls.
e. Producers expect that the price of the good will fall in the future.
Gasoline and heating oil are examples of products which are
A) joint products in fixed proportions.
B) joint products in variable proportions.
C) joint products that are complements.
D) unrelated to each other.
The relationship between MC and AC can best be described as
A) when AC increases, MC starts to increase.
B) when MC increases, AC starts to increase.
C) when MC decreases, AC decreases.
D) when MC exceeds AC, AC increases.
When total revenue reaches its peak (elasticity equals 1), marginal revenue reaches
A) 1.
B) zero.
C) -1.
D) Cannot be determined from the information provided
Answer the questions based on the following information.
Number of Workers Units of Output
0 0
1 40
2 90
3 126
4 150
Average product is at a maximum when the number of workers that are hired is
A) 1.
B) 2.
C) 3.
D) 4.
An example of an activity that is likely to generate benefit (positive) externality is
A) a well manicured lawn of your neighbor.
B) growing wild flowers on city street islands.
C) fireworks on the 4th of July.
D) an educated workforce.
E) All of the above
In economic theory, if an additional worker adds less to the total output than previous
workers hired, it is because
A) there may be less that this person can do, given the fixed capacity of the firm.
B) he/she is less skilled than the previously hired workers.
C) everyone is getting in each other’s way.
D) the firm is experiencing diminishing returns to scale.
The principle marginal revenue equal-marginal-cost rule for maximizing profit
A) does not apply to firms in the monopoly or oligopolistic industries.
B) applies only for firm in perfect competition but not in monopolistic competition.
C) applies to new firms but not to existing firms in an industry.
D) applies to all the firms in all industries.
If a good’s demand function is Q = 30 – 3P, then calculate the price elasticity of demand
when
a. good price is $3 using the point elasticity formula
b. good price is $4 using the point elasticity formula
c. good price decreases from $4 to $3, using the arc elasticity formula
d. good price is $5, using the point elasticity formula
e. good price increases from $4 to $5, using the arc elasticity formula
Which of the following is not considered a rationale for the intervention of government
in the market process in the United States?
A) the redistribution of income
B) the reallocation of resources
C) the long-run planning of scarce resources
D) the short-run stabilization of prices
E) All of the above
In which of these markets would the firms be facing the least elastic demand curve?
A) perfect competition
B) pure monopoly
C) monopolistic competition
D) oligopoly
A firm has two plants, one in the United States and one in Mexico, and it cannot change
the size of the plants or the amount of capital equipment. The wage in Mexico is $5.
The wage in the U.S. is $20. Given current employment, the marginal product of the
last worker in Mexico is 100, and the marginal product of the last worker in the U.S. is
500.
a. Is the firm maximizing output relative to its labor cost? Show how you know.
b. If it is not, what should the firm do?
Which of the following is a test of the statistical significance of the entire regression
equation?
A) t-test
B) R2
C) F-test
D) Durbin-Watson test
By far, the most frequently encountered price discrimination is the
A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) fourth-degree price discrimination.
A monopolist has demand and cost curves given by:
QD = 10,000 – 20P
TC = 1,000 + 10Q + .05Q2
a. Find the monopolist’s profit-maximizing quantity and price.
b. Find the monopolist’s profit.
A firm that operates in Stage III of the short-run production function
A) has too much fixed capacity relative to its variable inputs.
B) has too little fixed capacity relative to its variable inputs.
C) has greatly overestimated the demand for its output.
D) should try to increase the amount of variable input used.
Which of the following is the best example of the “command” process?
A) United Airlines buys Northwest Airlines.
B) Striking auto workers force General Motors to shut down its factories.
C) Banks raise their fees on late payments by credit card holders.
D) The FCC requires local telephone companies to provide access to their local
networks before being able to offer long distance service.
The use of the same cost of capital (risk adjusted discount rate) for all capital projects in
a corporation
A) is usually the correct procedure.
B) is incorrect since different divisions of the corporation may be faced with different
levels of risk.
C) is incorrect since different capital projects, even in the same division, may be faced
with different levels of risk.
D) Both B and C
If a firm’s rent increases, it will affect its cost structure in which of the following ways?
A) AVC will increase.
B) MC will increase.
C) TFC will increase.
D) All of the above will increase.
In evaluating the required rate of return for equity financing of a capital project, the
Beta value is
A) the expected rate of growth in a firm’s profits.
B) the expected future value of a firm’s stock.
C) the volatility in the rate of return on a firm’s stock compared with the volatility in the
rate of return on a market portfolio of stocks.
D) None of the above
All of the following are non-price determinants of supply except
A) costs.
B) technology.
C) income.
D) future expectations.
Two goods are ________ if the quantity consumed of one increases when the price of
the other decreases.
A) normal
B) superior
C) complementary
D) substitute
If the demand elasticity for a product is -2, and a profit-maximizing firm sells the
product for $10, its marginal cost must be
A) $5.
B) $10.
C) $15.
D) $8.
If a firm finds itself operating in Stage I, it implies that
A) variable inputs are extremely expensive.
B) it overinvested in fixed capacity.
C) it underinvested in fixed capacity.
D) fixed inputs are extremely expensive.
What is multicollinearity? In general, how would you know if you had a problem with
multicollinearity, and how could you correct it?
Describe the structure-conduct-performance (S-C-P) paradigm.
Fred’s Widget Company has purchased $500,000 in equipment, which can be sold for a
salvage value of $300,000 at any time. The best interest rate on alternative investments
is 5%. What is the cost of using this machinery for one year? How would your answer
be different if the machinery had not yet been purchased?
A function of government is to regulate “natural monopolies.” Explain what is a natural
monopoly and why it requires government regulation.
Describe the factors in Michael Porter’s “Five Forces Model” that affect the ability of
any firm in an industry to earn a profit.
Consider a firm that has just built a plant, which cost $1,000. Each worker costs $5.00
per hour. Based on this information, fill in the table below.
The market for milk is in equilibrium. Recent health reports indicate that calcium is
absorbed better in natural forms such as milk, and at the same time, the cost of milking
equipment rises. Carefully analyze the probable effects on the market.
Restaurants cluster together. That is, on one corner, there may be four similar fast-food
restaurants. How can this be explained using a location game theory model?
List the major non-price determinants of demand.
What are the typical types of risk faced by a firm?
Suppose that macroeconomic forecasters predict that the economy will be expanding in
the near future. How might managers use this information?
What are the major ways that the risks of exchange rate changes can be hedged against?
In game theory analysis, what is a “dominant strategy”?
What are the ways a multinational corporation can reposition its funds to increase its
profits?
Explain the reasons firms might follow the Baumol model of maximizing revenue
subject to achieving a minimum level of profits.
The demand curve is given by:
QD = 5000 – 10P
Find the price and quantity at which total revenue is maximized and the maximum
revenue.