A price cut would increase the firm’s profits by $2 million if demand is weak but would
decrease profit by $3 million if demand proves to be strong. The firm’s best assessment
is a .3 probability that demand will be weak. The expected value of perfect information
from market research is:
a) $0.
b) $.6 million.
c) $.9 million.
d) $1.4 million.
e) $2.1 million.
The minimum efficient scale is important in determining:
a) the optimum level of input usage by a firm.
b) the allocation of output between the multiple plants owned by a firm.
c) whether the firm’s production function exhibits increasing, constant, or decreasing
returns to scale.
c) the output elasticity of firms in the market.
e) how many firms can profitably operate in a particular market.
The average fixed cost for a firm
a) is constant at all levels of output.
b) is increasing over all levels of output.
c) first increases at an increasing rate and then declines.
d) first decreases and then increases as output increases.
e) is decreasing over all levels of output.
The combination of decision variables optimizing a linear programming problem,
occurs at:
a) a point where the objective function contour touches the feasible region.
b) a point in the interior of the feasible region.
c) a point outside the feasible region.
d) a point where the constraint functions intersects the objective function.
e) a point which satisfies at least one nonbinding constraint.
The following figure shows the domestic demand and supply curves for a good. With
free trade, the price of the good in the domestic market is P3. The government
introduces a 5% tariff in the market which raises the domestic price to P2.
Figure 7-1
Refer to Figure 7-1. With the imposition of the tariff, the level of imports to the
domestic market is:
a) CD.
b) AE.
c) 0.
d) AC.
e) BD.
Stake Gold Mines has the option to purchase a parcel of land adjacent to its
current mining operations in a Western state. The seller’s best and final
price is $3 million. If the land has commercial mineral deposits, Stake
Gold estimates its value at $5 million. If there are no deposits, the
estimated value is $2 million. A preliminary look at the land leads Stake
Gold to believe that the chance of mineral deposits is 50:50.
(a) Given this information, should Stake Gold purchase the land? For a fee
of $200,000, the seller has agreed to let Stake Gold collect extensive
mineral samples on the site. Based on past experience, if there are minerals
present, the samples will provide a favorable indication 80% of the time. If
no minerals are present, the samples will (falsely) give a favorable reading
40% of the time. Determine Pr(M|F) and Pr(M|U). (Here, M denotes
mineral deposits, NM denotes no mineral deposits, F denotes favorable
samples, and U denotes unfavorable samples.)
(b) Should Stake Gold pay $200,000 for the right to collect samples?
In an LP problem, the feasible region contains values of the decision variables that:
a) optimize the value of the objective function.
b) are finite in magnitude.
c) satisfy all the nonbinding constraints
d) satisfy all binding constraints.
e) are nonnegative.
Unlike perfectly competitive markets, monopolistically competitive markets:
a) have significant barriers to entry.
b) face declining average costs at all levels of output.
c) have fewer firms.
d) produce differentiated products.
e) Answers face declining average costs at all levels of output and produce
differentiated products are both correct.
There are three suppliers competing in a competitive procurement, each with
independently-drawn costs. Each firm’s cost is in the range, $300,000’“$400,000, with
all costs in this range considered equally likely. Here, ÂÂÂÂÂÂb1= sealed bid amount
of firm 1 and c1= firm 1’s costs (Both in $ thousand). Then, firm 1’s optimum
equilibrium strategy is:
a) b1= c1.
b) b1= (.5)(300,000) + .5c1.
c) b1= (.5)(400,000) + .5c1.
d) b1= (1/3)(300,000) + (2/3)c1.
e) b1= (1/3)(400,000) + (2/3)c1.
Which of the following is true of an English auction with private values?
a) The bid value can exceed the reservation price of the buyer who wins.
b) A typical buyer shades his/her bid below the true private value.
c) A buyer’s optimal bid strategy depends on the bidding behavior of other buyers.
d) The final price is approximately equal to the second highest buyer value.
e) None of these answers is correct.
Which of the following is a method used to overcome the problem of asymmetric
information?
a) Creating an informal organizational structure
b) Pooling risks
c) Self-selection
d) Signaling
e) Outsourcing
Janet’s Silk Printing company is located in a small university town. The major portion
of their business is custom printed sweatshirts for university bookstores. As a sideline
they also retail printed sweatshirts locally. The local demand for sweatshirts is: Q = 200
‘“ 5P. The average and marginal cost per printed sweatshirt is $8.
(a) Calculate output, price, and profit under the monopoly conditions they enjoy locally.
(b) To test other markets they contemplate opening retail outlets in several university
towns where there will be numerous competitors. Calculate price and output under
these perfectly competitive conditions.
(c) Compare the competitive and the monopoly price and output situations. Calculate
the deadweight loss due to their monopoly position and explain its meaning.
Accounting profit differs from economic profit because:
a) accounting cost does not include sunk cost.
b) economic cost includes all relevant opportunity costs.
c) accounting cost includes the implicit costs of production.
d) accounting cost does not include fixed cost.
e) economic cost does not include the explicit costs of production.
Demand for DVD rentals at a video store is described by the equation: Q = 4,000 ‘“
500P, where Q denotes the number of DVDs rented per week and P is the rental price in
dollars.
(a) Determine the point price elasticity of demand at P = $3.
(b) What is the new point price elasticity if price is raised to P = $4.50? Comment on
the change in elasticity.
Assume that a firm is producing at its profit-maximizing level of output. A decrease in
fixed cost implies that:
a) marginal revenue will increase but marginal cost will decrease.
b) marginal revenue will not change but marginal cost will decrease.
c) neither average total cost nor marginal cost will change.
d) neither marginal revenue nor marginal cost will change.
e) both marginal revenue and marginal cost will decrease.
The test result B has no value in predicting outcome A if:
a) Pr(A|B) = 1.
b) Pr(A&B) = Pr(A)Pr(B).
c) Pr(A|B) = Pr(B|A).
d) Pr(A) > Pr(A|B).
e) Pr(A|B) = 0.
There are five risk-neutral bidders, each having a private value that is independently
drawn from the range $60 thousand to $120 thousand with all values in between equally
likely. The respective expected revenues (in $ thousands) from the English and
sealed-bid auctions are:
a) E(PE) = $100 and E(PS) = $110.
b) E(PE) = E(PS) = $96.
c) E(PE) = E(PS) = $100.
d) E(PE) = $96 and E(PS) = $108.
e) E(PE) = E(PS) = $110.
A regression analysis is said to suffer from multicollinearity when:
a) the dependent and independent variables move in the same direction.
b) two or more explanatory variables tend to move together.
c) the degrees of freedom in the regression is equal to zero.
d) the explanatory variables vary independently of one another.
e) the correlation coefficient between the predicted and the explanatory variables is
equal to zero.
When there is multiple possible outcomes from a decision, the result is:
a) a small margin of error in firm forecasts.
b) greater possible losses.
c) a significant degree of uncertainty.
d) lower overall risk.
e) greater expected returns.
The following figure shows the long-run average cost curve of a firm.
Figure 6-1
Refer to Figure 6-1. What is the quantity that the firm will produce if it is operating at
minimum efficient scale?
a) E
b) A
c) C
d) D
e) B
Which of the following is true of pure monopolies?
a) Monopolies earn positive economic profits in the long run.
b) Monopolies produce output that is greater than the competitive level.
c) Monopolies produce products that have a negligible marginal cost but a high fixed
cost.
d) Monopolies reduce welfare by engaging in excessive product differentiation.
e) Answers monopolies earn positive economic profits in the long run and monopolies
reduce welfare by engaging in excessive product differentiation are both correct.
A firm produces output at two plants that are at different locations but are otherwise
identical. The firm’s cost function is C(q) = 5.3√q, where q is the quantity produced at
the plant. To satisfy demand at the current market price, the firm needs to produce a
total of 202,500 units of output. How should the firm divide production between the
two plants in order to minimize the cost of production? Is it more profitable to produce
all 202,500 units at one plant?
What is the law of demand? How do managers use it in decision-making?
Carefully define probabilistic and deterministic models, and explain how they differ.
Three college students consider the option of forming a lawn care and
landscaping business during their summer vacation. They estimate the
following costs:
Their projected revenue depends on the number of lawns serviced. The
price per job is $30. The going wage for a typical unskilled college student
is about $2,400 for the summer months. Derive an equation for total
accounting profit and total economic profit. Should the students launch the
business if they expect to service about 200 lawn jobs during the summer?
How do bargaining strategies differ between multiple-issue negotiations and
single-issue negotiations?
Five oligopoly firms have market shares of 40%, 20%, 18%, 12%, and 10%. Compute
the four-firm concentration ratio and the Herfindahl-Hirschman index for the industry.