A firm will maximize profits and revenues at the same price when:
a) the marginal cost is negligible or zero.
b) the fixed costs are zero.
c) the marginal revenue is zero.
d) the demand for the good is unit elastic.
e) the demand for the good is highly elastic.
An investor estimates the expected return of option A to be $180,000 and its expected
utility to be 400. The expected return of option B is $120,000, and its expected utility is
450. The investor should:
a) select option A because it has the higher expected return.
b) select option B because it has the higher expected utility.
c) select option A because 180,000/120,000 > 450/400.
d) be indifferent between option A and option B.
e) There is not enough information to answer this question.
In multiple-issue negotiations where monetary compensation is available:
a) there is less opportunity for mutual gain than when a single issue is at stake.
b) a new issue should be adopted only if the benefit to one side exceeds the cost to the
other.
c) a new issue should be adopted only if both sides directly benefit.
d) a new issue should be adopted if it increases the benefit to any one of the parties,
even at the expense of the other.
e) efficiency cannot be attained by merely increasing the total value the parties derive
from the negotiation.
Which of the following is likely to take place if regulators split a natural monopoly into
two smaller firms?
a) The number of firms in the market will increase but the market price will be
unchanged.
b) The output in the industry will increase.
c) The cost of production in the industry will increase.
d) The market demand curve will become flatter.
e) The total industry profits will increase.
When a firm’s production function exhibits constant returns to scale:
a) the short-run average cost curve will be horizontal.
b) the long-run average cost curve will be U-shaped.
c) the long-run marginal cost curve will be upward sloping.
d) the short-run average variable cost curve will be downward sloping.
e) the long-run average cost curve will be horizontal.
A manager’s utility of money schedule is (monetary amounts are in $,000s):
Two investment opportunities have the following net present values (again in $000s):
(a) Select the optimal investment based on the expected-value criterion.
The accompanying figure shows the decision tree of an operations manager who is
considering a new production technique. ER represents his expected return (in thousand
$) from the new technique. If he does not adopt the technique his expected return would
be zero. The probabilities of the technique being a success or a failure are .7 and .3
respectively. Compute the expected return (in thousand $) from the adoption of the new
production technique.
a) $8,400
b) $1,000
c) ‘“$2,000
d) $7,200
e) $8,000
Which of the following correctly defines second-degree price discrimination?
a) The seller offers each individual customer a different price.
b) The seller sells differentiated goods at different prices.
c) The seller sets the price of the good equal to the marginal cost of production.
d) The seller offers different prices and customers choose the one that best suits them.
e) The seller sets different prices for different market segments.
Which of the following is true of economic models?
a) Models are too theoretical to be applicable in real world decisions.
b) Models are not useful because uncertainty prevents accurate forecasts.
c) Models are simplified descriptions of processes, relationships, or other phenomena.
d) Models describe real world situations in complete detail.
e) Models are not useful because they do not take into account complicating and less
important features of a problem.
Buyer A has offered $20,000 for a painting you are trying to sell. You are about to
approach Buyer B whose best offer, you believe, might be anywhere between $16,000
and $24,000, with all values in between being equally likely. After hearing B’s price,
you will pick the higher of the two offers. What is the price that you expect to get for
the painting?
a) $20,000
b) $21,000
c) $21,500
d) $22,000
e) There is not enough information to provide an answer.
It is uncertain (odds are 50-50) whether Firm X will enter a new market in the next
three months. Firm Y is thinking of entering the same market but won’t be ready to do
so for six months. Firm Y expects to earn $4 million if it is the sole market supplier but
will lose $6 million if it must share the market with Firm X. If Firm X employs an
optimal entry strategy, its overall expected profit (before Firm X has made its move is:
a) $0 (it should never enter).
b) $4 million (it should enter if Firm X does not).
c) $2 million (it should enter if Firm X does not).
d) $3 million.
e) $2 million (it should always enter).
The shadow price of a nonbinding constraint is:
a) negative in value
b) zero.
c) a value between zero and one.
d) proportionate to the amount of profit
e) equal to the profit per unit of the decision variable concerned.
The strategy of purchasing suppliers in order to have a reliable supply chain is known
as:
a) in-house production.
b) outsourcing.
c) benchmarking.
d) vertical integration.
e) product lifecycle management.
Which of the following correctly defines marginal revenue?
a) Marginal revenue is the price at which the firm sells the last unit of the good.
b) Marginal revenue is the change in revenue from a unit increase in the price of the
good.
c) Marginal revenue is the additional revenue from a unit increase in output
and sales.
d) Marginal revenue is the additional revenue earned from an increase in demand for
the good.
e) Marginal revenue is the difference between price and marginal cost for the last unit
sold.
An oligopoly firm faces a kinked demand curve with segments given by: P = 100 ‘“ Q
and P = 120 ‘“ 2Q, where P is the price and Q is the quantity demanded. The firm has a
constant marginal cost, MC of $45.
(a) Determine the firm’s profit-maximizing level of output and price.
(b) Calculate the (upper and lower) limits within which marginal cost may vary without
affecting either the profit-maximizing output or the price.
Other factors being unchanged, the supply curve for eggs will shift downward and to
the right if:
a) a virus spreads through poultry farms through the country and kills millions of
chickens.
b) new research establishes that cholesterol, found in egg yolks, is found to cause heart
disease.
c) the price of chicken feed falls.
d) the government introduces a new tax on poultry suppliers.
e) the average income level in the country falls due to a recession.
The probability of an outcome:
a) ranges between zero and one.
b) is an intuitive guess on the part of the decision maker.
c) measures the expected return from an outcome.
d) reflect the degree of the manager’s confidence.
e) measures the degree of variation around the mean value.
A product’s point price elasticity has been estimated at ‘“1.5. At the initial price of $20,
the quantity demanded was 10 units. If the firm cuts the price to $17.50, quantity
demanded and sold is expected to increase by _____.
a) 18.75%
b) 6.67%
c) 8.75%
d) 10.33%
e) 12.5%
Everything else remaining unchanged, an increase in demand will lead to:
a) a leftward shift of the supply curve and a consequent fall in price.
b) an upward movement along the demand curve.
c) a rightward shift of the demand curve.
d) an increase in output and a fall in price.
e) a downward movement along the demand curve.
What are the four major pitfalls of using consumer surveys to forecast demand?
Suppose that management increases the size of its plant. What is the most likely impact
on total and marginal products of the other inputs? How will this affect usage of the
variable inputs?
Compare and contrast adverse selection and moral hazard.
Statistical evidence suggests that concentrated industries have higher profits than
competitive industries. Is this necessarily harmful to consumer interests?
Define probability with an example.
What would happen to a firm’s price elasticity of demand if additional competitors enter
the market and achieve significant market shares? Explain briefly.
Explain with an example the potential benefit of competitive bidding versus bargaining
to secure a better price by a seller.
What are the possible actions that the government can take to reduce the concentration
of market power in the hands of a few firms in the market?
Seasons Four Equipment Corporation sells 200 riding lawn mowers per month at a sales
price of $1,800 each. Overall, mower demand is described by the price equation: P =
2,600 ‘“ 4Q, where P is the price of a mower and Q is the quantity of mowers
demanded. The firm’s estimated marginal cost is $1,000 per mower. The head of
marketing points out that mower demand is quite elastic at the current $1,800 price.
Therefore, he recommends cutting price in order to increase revenue and profit.
Compute the point price elasticity for mower. Is the marketing chief correct?
Explain the relationship between short-run average cost and long-run average cost.
Draw an appropriate graph to illustrate your explanation. Assume constant returns to
scale.