Which of the following cost relationships is not true?
A) AFC = AC – MC
B) TVC = TC – TFC
C) The change in TVC/the change in Q = MC
D) The change in TC/ the change in Q = MC
Porter’s “Five Forces Model” is based on
A) the laws of supply and demand.
B) the law of diminishing returns.
C) the Structure-Conduct-Performance model.
D) the key factors affecting demand.
The cross-price elasticity of demand for coffee and tea is likely to be
A) greater than zero.
B) less than zero.
C) zero.
D) infinity.
The initial price of a cup of coffee is $1, and at that price, 400 cups are demanded. If the
price falls to $0.90, the quantity demanded will increase to 500.
a. Calculate the (arc) price elasticity of demand for coffee.
b. Based on your answer, is the demand for coffee elastic or inelastic?
c. Based on your answer to a., if the price of coffee is increased by 10%, what will
happen to the revenues from coffee? Carefully explain how you know.
Which of the following instances will total revenue or receipts decline?
A) Price rises and demand is inelastic.
B) Price falls and demand is elastic.
C) Price rises and demand is elastic.
D) Price falls and demand is unit elastic.
Which of the following best describes the “guiding function” of price?
A) In response to a surplus or shortage in two markets, price serves as a “guiding
function” by decreasing in one market and increasing in the other market in the short
run.
B) The guiding function of price is the movement of resources into or out of markets in
response to a change in the equilibrium price of a good or service.
C) The guiding function of price occurs when the market price changes to eliminate the
imbalance between supply and demand caused by a shortage or surplus at the original
price.
D) The guiding function usually occurs in the short run while the rationing function
usually occurs in the long run.
The law of diminishing returns begins first to affect a firm’s short-run cost structure
when
A) average variable cost begins to increase.
B) marginal cost begins to increase.
C) average cost begins to increase.
D) average fixed cost begins to decrease.
Which of the following is a Leading Economic Indicator?
A) commercial and industrial loans outstanding
B) industrial production
C) average weekly duration of unemployment
D) None of the above
Goals which are concerned with creating and maintaining employee and customer
satisfaction and social responsibility are referred to as ________ objectives.
A) social
B) noneconomic
C) welfare
D) public relations
In economic analysis, any amount of profit earned above zero is considered “above
normal” because
A) normally firms are supposed to earn zero profit.
B) this would indicate that the firm’s revenue exceeded both its accounting and
opportunity cost.
C) this would indicate that the firm was at least earning a profit equal to its opportunity
cost.
D) this would indicate that the firm’s revenue exceeded its accounting cost.
When a firm prices its goods below the marginal cost to drive away competitors, it is
referred as
A) price skimming.
B) limit pricing.
C) penetration pricing.
D) predatory pricing.
If an industry could be organized either perfectly competitively or as monopoly, a
monopoly would
A) produce less output.
B) produce where P > MC.
C) charge higher prices.
D) All of the above
Which of the following is a measure of the explanatory power of the regression model?
A) t-test
B) R2
C) F-test
D) Durbin-Watson test
The F-test is used to determine if
A) a regression coefficient is significant.
B) multicollinearity exists.
C) a regression equation significantly accounts for the variation in the value of a
dependent variable.
D) an identification problem is present.
For the regression equation Q = 100 – 10X + 0.25X2, which of the following statements
is true?
A) X2 is the more important variable because it is positive.
B) When X decreases by one unit, Q decreases by 10 units.
C) When X increases by 10 units, Q decreases by 1 unit.
D) The change in Q associated with a one unit increase in X depends on the initial level
of X.
The elasticity of demand for a product is likely to be greater
A) the smaller the number of substitute products available.
B) the smaller the proportion of one’s income spent on the product.
C) the larger the number of substitute products available.
D) if the product is an imported good rather than a domestically produced good.
A motive for FDI includes
A) the extraction of natural resources.
B) a multinational corporation attempting to jump over trade restrictions.
C) high transportation costs.
D) All of the above
To an economist, total costs include
A) explicit, but not implicit costs.
B) implicit, but not explicit costs.
C) explicit and implicit costs.
D) neither explicit nor implicit costs.
Which of the following is true about a monopoly?
A) Its demand curve is generally less elastic than in more competitive markets.
B) It will always earn economic profit.
C) It will always produce the same as a perfectly competitive firm.
D) It will always be subject to government regulation.
E) None of the above is true.
The switch to the use of ethanol in gasoline is driven primarily by its relatively lower
price. Assuming a competitive market, what effect would this change have on the
equilibrium price and output for gasoline?
A) Price rises, output falls.
B) Price falls, output rises.
C) Price rises, output rises.
D) Price falls, output falls.
The Herfindahl-Hirschman (HH) Index is used to
A) measure the degree of nonprice competition.
B) measure the degree of market concentration in an industry.
C) measure the extent of price leadership.
D) None of the above
Which of the following cost relationships is not true?
A) AFC = AC – MC
B) TVC = TC – TFC
C) The change in TVC/the change in Q = MC
D) The change in TC/ the change in Q = MC
A source of business risk is a change in
A) technology.
B) consumer preferences.
C) input prices.
D) All of the above
Probabilities, which are based on past data or experience, are called
A) a priori.
B) objective.
C) uncertain.
D) statistical.
A company’s capital structure is made up of 40% debt and 60% common equity (both at
market values). The interest rate on bonds similar to those issued by the company is
8%. The cost of equity is estimated to be 15%. The income tax rate is 40%. The
company’s weighted cost of capital is
A) 11.5%.
B) 12.2%.
C) 10.9%.
D) 8.9%.
Demand and supply in the wheat market are given by:
QD = 2000 – 1000 P and QS = -500 + 1000 P
where Q is millions of bushels and P is price per bushel.
a. Find the equilibrium price and quantity.
b. Suppose that the government wishes to support farm income and thus sets a price
floor of $1.50/bushel. Find the size of the farm surplus.
c. What is the cost of this program to the government?
All of the following are non-price determinants of supply except
A) costs.
B) technology.
C) income.
D) future expectations.
Opportunity cost is best defined as
A) the amount given up when choosing one activity over all other alternatives.
B) the amount given up when choosing one activity over the next best alternative.
C) the opportunity to earn a profit that is greater than the one currently being made.
D) the amount that is given up when choosing an activity that is not as good as the next
best alternative.
The net present value of a project is calculated as
A) the future value of all cash inflows minus the present value of all outflows.
B) the sum of all cash inflows minus the sum of all cash outflows.
C) the present value of all cash inflows minus the present value of all cash outflows.
D) None of the above
Which of the following correctly completes this statement? The monopolist’s marginal
revenue
A) will be greater than price.
B) will be less than price.
C) will be equal to price.
D) will be greater than total revenues.
Economists consider which of the following costs to be irrelevant to a short-run
business decision?
A) opportunity cost
B) out-of-pocket cost
C) historical cost
D) replacement cost
The delay between when a problem is recognized and when policy action is taken is
referred to as the
A) recognition lag.
B) action lag.
C) effectiveness lag.
D) policy lag.
In the long run if there is a shortage in the market for a product, the guiding (allocation)
function of price can be expected to cause
A) an increasing shift in the demand for the product.
B) a decreasing shift in the demand for the product.
C) an increasing shift in the supply of the product.
D) a decreasing shift in the supply of the product.
An increase in net working capital required at the beginning of an expansion project
must be considered to be
A) a cash inflow.
B) a reallocation of assets.
C) a cash outflow.
D) None of the above
Which of the following combination of inputs is most closely reflective of decreasing
marginal rate of technical substitution (MRTS)?
A) oil and natural gas
B) sugar and high fructose corn syrup
C) computers and clerks
D) keyboards and computers
Savings accounts pay very low rates of interest. The average return on the stock market
is about 10-12%, in the long run. Why would anyone put money into a savings account?
Some charge that third-degree price discrimination is unfair or that it reduces social
welfare. Why does charging one group a lower price hurt anyone?
Explain what is meant by the “weighted cost of capital” and how it is used in capital
budgeting.
The following questions refer to this regression equation, (standard errors in
parentheses.)
Q = 8,400 – 10 P + 5 A + 4 Px + 0.05 I, (1,732) (2.29) (1.36) (1.75) 0.15)
R2 = 0.65
N = 120
F = 35.25
Standard error of estimate = 34.3
Q = Quantity demanded
P = Price = 1,000
A = Advertising expenditures, in thousands = 40
PX = price of competitor’s good = 800
I = average monthly income = 4,000
Calculate t-statistics for each variable and explain what this tells you.
You are given risky cash flow data for a three-year project:
The initial cash outflow is $6,000; the risk-free interest rate is 6%, and the risk-adjusted
discount rate is 10%.
Calculate the NPV by both the risk-adjusted discount rate method and the certainty
equivalent method in such a way that the NPV will be the same using either method.
An aircraft company has signed a contract to sell a plane for $20 million. The firm
buying the plane will pay for it in 5 annual payments (at year end) of $4 million. If the
firm’s cost of capital is 6%, what is the net present value of this payment?
Q = K1/2L1/2
w = $2, r = $2
The firm would like to know the minimum cost of producing 2000 units of output. Find
the combination of inputs that minimizes the cost of producing 2000 units, the total
cost, and identify the expansion path.
Based on the table above, if the wage rate is $500 and the price of output is $5, how many
workers should the firm hire?
Explain the difference between Cross-Section and Time-Series Regression Analysis.
What additional complexities arise when multinational corporations consider capital
projects on a global basis?
Describe the process by which the competitive market establishes a price at which all
firms are just earning normal profits.
Q = K1/2L1/2
w = $2, r = $2
The firm would like to know the maximum output that can be produced for $8,000.
Find the combination of inputs that maximizes output for a cost of $8,000, the amount
of output that can be produced, and identify the expansion path.
When one automaker begins offering low cost financing or rebates, others tend to do
the same. What two oligopoly models might offer an explanation of this behavior?
An aircraft company has signed a contract to deliver a plane 3 years from now. The
price they will receive at the end of 3 years is $20 million. If the firm’s cost of capital is
6%, what is the present value of this payment?
What is “market signaling”?
What factors lead to competitive advantage for a firm?
An aircraft company has signed a contract to deliver a plane 3 years from now. The
price they will receive at the end of 3 years is $20 million. If the firm’s cost of capital is
6%, what is the present value of this payment?
In game theory analysis, what is a “dominant strategy”?
What is “market signaling”?