A monopolist maximizes profit by producing:
a) on the inelastic portion of the demand curve
b) at the level where average cost is minimized
c) at the point where the cost of producing the last unit of output equals price.
d) at the output level where marginal revenue equals marginal cost
e) at the level where the deadweight loss is minimized.
Firms do not have the economic incentive to advertise when:
a) there are a small number of firms in the market.
b) the goods that are produced are imperfect substitutes.
c) there are entry barriers in the market.
d) there is information asymmetry in the market.
e) products are standardized.
The following table shows the payoffs for Firm 1 and Firm 2 in a zero-sum game:
Table 10-6
Refer to Table 10-6. The equilibrium strategies for Firm 1 and 2 are:.
a) R1 versus C2.
b) (.5R1, .5R2) versus (.5C1, .5C2).
c) (.75R1, .25R2) versus (.5C1, .5C2).
d) (.5R1, .5R2) versus (.75C1, .25C2).
e) The game is a constant-sum game.
Which of the following can be used to correct for seasonality in time-series modeling?
a) Error terms
b) Binomial coefficients
c) Dummy variables
d) Stochastic constants
e) Confidence intervals
Consider the following risky prospect:
The expected utility is equal to:
a) $30,000.
b) 18.
c) 20.
d) 24.
e) $34,000.
Which of the following correctly defines marginal cost?
a) Marginal cost is the addition made to fixed cost when an extra unit is produced.
b) Marginal cost is the additional cost of producing an extra unit of output.
c) Marginal cost is the additional cost of increasing the scale of production in the long
run.
d) Marginal cost is the difference between price and marginal revenue for the last unit
sold.
e) Marginal cost is the same as the firm’s variable cost at all levels of output.
When the demand for a product is said to be perfectly inelastic, it implies that:
a) the sales of the product are very sensitive to changes in price.
b) the demand curve for the product is relatively flat.
c) the profit per-unit increases with an increase in price.
d) with a change in price, change in quantity demanded is zero.
e) as price increases, the quantity demanded increases.
An equation’s root mean squared error is:
a) a measure of how closely its predictions match actual outcomes.
b) a measure of how closely the equation explains past data.
c) inversely proportional to the difference between the actual value and the predicted
value.
d) derived from the R2statistic.
e) equal to the square root of the sum of squared errors.
Which of the following is true of a zero-sum game?
a) The value of the game is equal to zero.
b) Each player always has a dominant strategy.
c) Each player’s gain comes at the expense of the other.
d) There are only two players.
e) One player’s payoff is independent of the other player’s actions.
How does decision making under profit-maximization compare with benefit-cost
analysis?
a) Benefit-cost analysis is more comprehensive than profit-maximization since it
includes the value of consumer surplus.
b) Even in the presence of externalities, profit-maximization leads to efficient
outcomes, while benefit-cost analysis does not.
c) Profit maximization internalizes the cost of externalities unlike benefit-cost analysis.
d) A public program should be implemented on the basis of profit-maximization
principles and not benefit-cost analysis.
e) Under profit-maximization, the benefits and costs from a program are usually
overstated.
Which of the following is not one of the steps in managerial decision making?
a) Predicting the consequences of a decision.
b) Exploring the alternatives to the decision.
c) Defining the problem and the objectives of the decision.
d) Negotiating a consensus to implement the decision.
e) Performing sensitivity analysis.
War Game, Inc. produces games that simulate historical battles. The market is small but
loyal, and War Game is the largest manufacturer. It is thinking about introducing a new
game in honor of the sixtieth anniversary of the end of World War II. Based on
historical data regarding sales, War Game management forecasts demand for this game
to be P = 50 ‘“ .002Q, where Q denotes unit sales per year, and P denotes price in
dollars. The cost of manufacturing (based on royalty payments to the designer of the
game, and the costs of printing and distributing) is C = 140,000 + 10Q.
(a) If the goal of War Game is to maximize profit, calculate the optimal output and
price.
(b) If instead the company’s goal is to maximize sales revenue, what is its optimal price
and quantity?
A player involved in a one-shot game will:
a) cooperate with its rivals due to the threat of punishment.
b) follow punitive strategies.
c) take actions aimed at creating a reputation with his rivals.
d) act to maximize its immediate payoff.
e) follow a tit-for-tat strategy.
The Dodge City Bank is planning its loans for the next several years, and is using a
model of loan demand developed from past experience. Fred Smith is responsible for
developing the mortgage loan component of total loan demand. Fred estimates the
following equation using 14 years of data:
Q = 50 − .2P − .2D + .3Y + .15H, R2= 0.844
(17) (.13) (.16) (.08) (.06)
Here, Q denotes mortgage loan demand (in million dollars), P denotes the prime interest
rate, D is the discount rate, Y is per capita income (in thousand dollars), and H is an
index of average city housing prices (in thousand dollars). The standard error of the
regression is 22, and standard errors of the coefficients are shown in parentheses. (At
95% confidence level, the relevant t-statistic is 1.83 for 9 degrees of freedom.)
(a) Fred thinks that the discount rate will be 6% in the next year, the prime rate will be
7.75%, per capita income in Dodge City will be $21,000, and housing prices will be
$165,000. How many loans can Dodge City Bank expect to make in the next year?
(b) Fully evaluate these regression results, including computation of t-statistics,
adjusted R2,
and the F-statistic.
(c) Can there be multicollinearity in this model? If so, how should Fred adjust his
forecast for this fact?
Which of the following is true of the long run?
a) The average fixed cost is higher in the long run than in the short run.
b) All inputs costs are variable in the long run.
c) The firm produces at a higher cost in the long run than in the short run.
d) All inputs to production are kept fixed in the long run.
e) Answers the average fixed cost is higher in the long run than in the short run and all
inputs costs are variable in the long run are both correct.
Recently, the major firms in the United States cigarette industry joined with the
government in a settlement of liability claims. Under the tentative agreement, the
industry would curb advertising and pay the equivalent of about $15 billion per year
(for smoking-related state Medicaid expenses) in exchange for protection against
smoker lawsuits.
(a) Before the settlement, a leading cigarette manufacturer estimated its marginal cost at
$1.00 per pack and its elasticity of demand at ‘“2. What is its optimal price? The firm’s
share of the industry payment (based on its historic market share) will raise its average
total cost per pack by $0.60. What effect will this have on its optimal price?
(b) A marketing manager suggests that the firm should offer price discounts to the
company’s long-term, older, most-loyal (addicted) customers. Do you agree? Explain
carefully.
(c) In the past, anti-smoking information campaigns were fairly successful in reducing
smoking. What price reaction (if any) would the cigarette companies have to such
programs? Explain carefully.
The key assumption used in game theory is that each player:
a) pursues his own self-interest, taking into account its rival’s behavior.
b) is not affected by other players’ actions.
c) seeks to outperform its competitors.
d) seeks to maximize the players’ collective profits.
e) maximizes its expected utility independent of the rival’s actions.
In a linear programming problem, the goal to be maximized (or minimized) is referred
to as the:
a) max-min function.
b) constraint function.
c) objective function.
d) production function.
e) algebraic function.
Calculate the degrees of freedom in a regression equation if the number of observations
is 6 and the number of coefficients in the equation is 2.
a) 12
b) 4
c) 8
d) 3
e) 0.33
The optimal response to an uncertain negotiation is risk sharing if:
a) both parties are risk lovers.
b) both parties are risk averse.
c) one party is risk averse and the other is risk neutral.
d) one party is a risk lover and the other is risk neutral.
e) both parties are risk neutral.
A company is about to launch a new product and is considering one of two
prices: high or low. However, the company is uncertain about the market
response to the product – whether demand will be strong or weak.
According to the firm’s marketing department, the probability of strong
demand is .6 and of weak demand is .4. The following table lists the firm’s
economic profit (in millions of dollars) at the two prices under strong and
weak demand:
(a) Suppose the company is risk neutral and must commit to a price before
knowing what the market response will be. Should it launch the product? If
so, at what price?
(b) The company is considering spending $10 million to test market the
product on a national scale. In the process, it will learn the exact market
response (strong or weak demand) before having to decide on a final
launch and pricing strategy. Should it go ahead with the market test?
(c) Suppose instead that the company can hire a marketing consultant to
undertake a limited market survey in the Midwest. The company
anticipates that the consultant will come back with one of two possible
demand forecasts: favorable (F) or unfavorable (U). In the past, the
consultant’s forecast accuracy has been as follows: Pr(F|S) = .8 and
Pr(U|W) = .6. Compute the revised probabilities, Pr(S|F) and Pr(S|U).
The Herfindahl-Hirschman Index _____.
a) takes into account the market share of all the firms in the market
b) is equal to 10,000 for a market with an infinite number of small firms
c) is equal to 0 for a market that is an effective monopoly
d) is smaller the more unequal the market shares of a group of firms
e) is negatively correlated with the concentration ratio
The study of behavioral economics shows that decision makers:
a) are not limited by cognitive constraints.
b) are incapable of learning from their mistakes.
c) are prone to biases, mistakes, and pitfalls.
d) are guided solely by monetary incentives.
e) make decisions in a highly calculative and rational manner.
A dominant strategy:
a) guarantees a player a higher payoff than its competitor.
b) calls for a contingent course of action.
c) is the best response to any strategy that the other player might select.
d) minimizes the other player’s payoff.
e) sometimes means using a mixed strategy.
What are the two main categories of forecasting models? How do they differ?
Carefully define and describe a natural monopoly.
A firm produces according to the following production function: Q = K.25L.75. The
price of K is $4 per unit, and the price of L is $6 per unit. What is the optimal
capital/labor ratio?
Describe the different types of entry barriers and their importance to the study of
monopoly.
Briefly summarize how bargaining can be simultaneously cooperative and competitive.