Firm X is currently selling a consumer good at a standard price, but is also
considering cutting its price. The main risk facing the firm concerns the
course of the economy in the near-term: whether the economy will grow at
a steady pace (G) or whether it will experience a recession (R). The table
below shows the firm’s possible profit results (in $ millions). Finally, the
firm judges that there is a 70% chance of growth and a 30% chance of a
recession.
(a) Firm X must make its decision now (before knowing the future course
of the economy). Which pricing policy maximizes its expected profit?
(b) Now suppose that Firm X can wait and decide its pricing decision after
it knows the course of the economy. Determine its best pricing decisions
and its overall expected profit.
(c) Firm X has hired a macroeconomic forecaster. The macro forecast is
either positive (+) or negative (‘“). In the past, the forecaster has made
positive forecasts prior to 4 of 7 periods of economic growth: Pr(+|G) =
4/7. In turn, he has made negative forecasts prior to 2 of 3 recessions:
Pr(‘“|R) = 2/3. Compute Pr(G|+) and Pr(G|’“).
(d) Suppose the forecasting report can be purchased for $.2 million. Should
Firm X buy the report? Explain your answer.
In a sealed-bid auction with private values drawn independently from a common
distribution, each buyer’s equilibrium bid is set equal to:
a) his reservation price.
b) the expected reservation price of the other bidders.
c) the expectation of the third-highest buyer value.
d) the expectation of the second-highest buyer value.
e) the expectation of the next-highest buyer value conditional on it being smaller than
the bidder’s value.
Using Bayes Theorem, Pr(ab) can be expressed as:
a) Pr(ba)/Pr(b) + Pr(a).
b) Pr(a&b)/Pr(b).
c) Pr(ba)/Pr(b).
d) Pr(a&b)/Pr(a).
e) Pr(ab)/Pr(a).
Which of the following is true of fixed-proportions production?
a) The inputs used in production have constant marginal products.
b) An increase in the price of an input will lead the firm to substitute away from it.
c) The inputs used in production display diminishing marginal returns.
d) The inputs used in production are perfect complements.
e) The marginal cost of the inputs used in production is fixed.
Linear programming is useful for solving optimization problems involving:
a) both linear and nonlinear constraints.
b) both linear and nonlinear objectives.
c) linear objectives and nonlinear constraints.
d) linear objectives and linear constraints.
e) a small number of decision variables.
With free trade, the market for a particular good or service is in equilibrium when:
a) domestic supply is at its maximum possible level.
b) there are no exports to the world market.
c) imports into the domestic market are zero.
d) the price in the world market is equal to the price in the domestic market.
e) the domestic demand for the good equals the domestic supply of the good.
The demand for a firm’s product is given by the equation: P = 36 ‘“ .2Q. The firm’s cost
equation is given by C = 200 + 20Q.
(a) Determine the firm’s optimal quantity and price.
(b) Suppose that the firm’s costs change to C = 100 + 24Q. Determine the new optimal
quantity and price. Explain why the results differ from the previous case.
Refer to Figure 11-1. In the absence of externalities, the quantity produced of the good
is:
a) 17 units.
b) 15 units.
c) 8 units.
d) 0 units.
e) 10 units.
The following matrix shows the pricing strategies and resultant profits (in thousands of
dollars) for two profit-maximizing firms.
Table 9-1
Refer to Table 9-1. If Firm B sets a high price, Firm A will:
a) earn a profit equal to $41,000.
b) earn a profit equal to $35,000.
c) earn a higher profit than Firm B.
d) earn the same profit as firm F which is equal to $30,000.
e) follow the low-price strategy.
A risky outcome’s expected value is:
a) the value of the most likely outcome.
b) the mid-point of the extreme (high and low) possible values.
c) the degree of dispersion of the possible outcomes.
d) the sum of the products of the probabilities of all outcomes and their values.
e) the equally-weighted average of all outcomes.
Suppose the equilibrium price of bread is $2 per loaf. What would be the efficiency
implications of a government policy that prevents the price of bread from rising above
$1?
a) The outcome would be inefficient since the marginal cost of producing bread is less
than the marginal benefit to the consumers.
b) The outcome would be inefficient since the marginal benefit to consumers is less
than the marginal cost of producing the bread.
c) The outcome would be efficient since the total benefit from consumption would be
equal to the total cost of producing bread.
d) The outcome would be efficient since the total net benefits would be maximized.
e) The outcome will be efficient since the policy lowers the price of an essential item
for consumers.
Crew Brew produces a popular brand of beer in its mini-brewery located on a small
river in Wisconsin. It uses a special formula, combined with the fresh water from the
local stream, to produce a drink popular with local folks and tourists who visit during
the summer fishing season, and autumn deer hunting season. Crew’s production
function is: Q = 50K + 50L, where Q = barrels of beer, K = units of capital, and L =
units of labor.
(a) Suppose that capital can be purchased for $8 per unit, and labor costs $6 per unit.
What is the optimal combination of inputs for the firm to employ?
(b) Suppose that the cost of inputs changes to $7 for a unit of capital, and $9 for a unit
of labor. What is the new optimal combination of inputs?
(c) Explain the context in which a firm may use inputs in the combination described
above.
Sensitivity analysis is used by a firm to:
a) analyze the impact of a change in the price of the good on the demand for the good.
b) examine the static effects of an economic decision on the firm’s profitability.
c) analyze the social costs and benefits of an economic decision.
d) examine the opportunity costs of an economic decision.
e) examine how an optimal decision is affected if key economic facts vary.
In a linear programming problem, multiple optimal solutions are possible if:
a) the contour of objective function touches one corner of the feasible region.
b) there are more than two nonbinding constraints.
c) the objective function is non-linear.
d) the slope of the objective function equals the slope of a binding constraint.
e) the feasible region is unbounded.
A firm can profitably introduce a new activity if and only if:
a) the activity’s direct benefit exceeds its opportunity cost.
b).the activity’s direct benefit equals its opportunity cost.
c) all the constraints become nonbinding.
d) the slope of the resource constraint equals the slope of the objective function.
e) the shadow price of any one of the resources becomes zero.
Output elasticity is the percentage change in output that results from a 1 percent
increase _____.
a) in all the inputs
b) in the price of an input
c) in the price of the final product
d) in the marginal revenue product of a variable input
e) in the marginal product of an input
The short-run is best defined as the time period in which:
a) all inputs to production can be varied
b) the amount of output cannot be varied
c) one or more inputs to production are fixed
d) the marginal cost of production is low
e) all inputs to production remain fixed
In a given market, demand is described by the equation QD = 1,800 ‘“ 10P and supply is
described by QS = 200 + 10P.
(a) Determine the equilibrium price and quantity.
(b) Determine the surplus or shortage that would exist if the price were $60.
The payoff table below depicts price competition between two electronics stores.
(Payoffs are weekly profits in thousands of dollars for each store.)
(a) The stores determine their strategies independently of one another. What are the
stores’ respective equilibrium strategies? Explain briefly.
(b) Suppose that each store adopts a price matching strategy such that each pledges to
instantly match any lower price by its rival. What will be the effect on the stores’ chosen
prices? Will consumers benefit from such policies? Explain briefly.
Suppose that the chance of having both a favorable survey and a successful product
launch is .3. In addition, the frequency of favorable market surveys for all new product
launches is .5. Then the chance of a successful product launch given a favorable survey
is:
a) .8
b) .5
c) .4
d) .6
e) .3
A firm’s production function shows:
a) the maximum level of output the firm can produce for any combination of inputs.
b) the least-cost combination of inputs that can be used to produce a given level of
output.
c) the average cost associated with the production of various levels of output.
d) the profit-maximizing level of output that can be produced with a given level of
inputs.
e) the marginal cost of producing an extra unit of output by employing an extra unit of
an input.
In a distributive bargain:
a) the parties negotiate over the share of total profit.
b) total profits are distributed equally among the participating parties.
c) the individual profits of the trading parties are maximized.
d) the disputants are engaged in a zero-sum negotiation.
e) equity is the main concern rather than efficiency.
What are the two difficulties that may make profit maximization an ambiguous guide to
decision making? Explain.
How can the decision making process be structured to analyze complicated decisions?
Explain why perfectly competitive firms cannot earn positive economic profits in the
long run.
How does decision making in the private, for-profit sector differ from decision making
in the public sector?
Briefly explain the concept of price leadership and why it occurs in oligopolistic
markets.