An individual is uncertain whether to bet on a football game. He believes that the
probability of his team winning is 40%. If his team wins, he will receive $180. If his
team loses, he’ll pay $120. If the decision is based on the expected value criterion, then
the individual will:
a) not take the bet if he is risk loving.
b) be indifferent to the bet if he is risk-neutral.
c) take the bet only if he is risk averse.
d) not take the bet if he is risk averse.
e) Answers b and d are both correct.
A firm’s demand curve is given by Q = 800 ‘“ 2P, where P = price and Q = quantity.
Therefore, its inverse demand equation is:
a) MR = 800 ‘“ 4P
b) P = 800 ‘“ 2Q
c) P = 400 ‘“ .5Q
d) P = 800 ‘“ .5Q
e) 800 = Q + 2P
According to the theory of the firm, the management’s ultimate objective is to:
a) maximize short-term profit, even if this sacrifices long-term profit.
b) maximize the value of the firm.
c) increase production to the highest possible level.
d) increase the market share of the firm.
e) diversify into as many product lines as the firm can.
Which of the following is an example of a negative externality?
a) Due to heavy rains, the coffee crop in Brazil was damaged.
b) Ruth could not sleep because her neighbors were bursting firecrackers on the 4th of
July.
c) Meg had to miss a movie with her friends because she had to study for an exam.
d) Jim was late to work because the train ran late.
e) Sara can’t afford a planned trip because airline fares spiked before she booked her
flights.
A cosmetics company is conducting a second-year review of one of its newest products.
The marketing department expects that the firm will continue to earn profits from the
sale of the product in the third year as it did in the past two years. Senior management,
however, feels that the profit projections would vary based on other factors such as the
price of the competitor’s products, the actual level of sales, and the possibility of cost
reductions. In other words, the senior management is undertaking _____.
a) a sensitivity analysis
b) an enumeration study
c) a benefit-cost analysis
d) a contingent valuation study
e) a strategic analysis
Assume that Insite Corporation produces advanced analytic software for computer
simulations called Model-It. Based on an analysis of product sales over a two-year
period, Insite’s marketing department estimates the demand for Model-It to be QM=
1,200 ‘“ 8PM+ 4PS, where QMdenotes units sold of Model-It software, PMdenotes
Model-It’s price, and PSdenotes the price of a best-selling statistical software package
(with both prices in dollars).
(a) Currently, PM= $200 and PS= $300. What is the predicted demand for Model-It
software?
(b) The price PShas been unchanged (at $300) during the last 6 months. Given this
information, derive the equation for Model-It’s demand curve (with QMas the left-side
variable). Also determine its inverse demand curve (with PMas the left-side variable).
(c) An industry analyst comments that demand for Model-It is not very sensitive to
changes in the price of the statistical software package PS. (This package does perform
some of the same operations as Model-It, but not as quickly or conveniently.) Carefully
assess this contention. Is his contention correct?
(d) Suppose the marginal cost of producing Model-It is negligible. However, the
company incurred significant costs in developing the product for market (estimated to
be about $350,000). Using Model-It’s estimated demand curve, determine the optimal
price and output for Model-It.
With declining probabilities of success, the optimal-stopping strategy is to:
a) continue to invest until the venture becomes successful.
b) continue investing till sunk cost of investment is equal to zero.
c) not invest in the project at all.
d) discontinue investing when the expected profit is zero.
e) invest once in pursuit of commercial success and then discontinue investing.
Which of the following is true in the long run under monopolistic competition?
a) P = MC.
b) P = AC.
c) P > AC > MC.
d) Price > AC = MC.
e) MR > MC.
In a metropolitan area, one out of ten drivers on the road on Saturday after midnight is
intoxicated. Half of all accidents during this time period involve drunk drivers. Finally,
the overall accident rate on Saturday after midnight is 3 accidents per 100 cars on the
road. For a drunk driver, the risk of accident is:
a) .10.
b) .15.
c) .50.
d) .03
e) .05
A particular good was withdrawn from the market after bids were opened. This implies
that:
a) the highest bid in the auction did not exceed the seller’s minimum reserve price.
b) the lowest bid in the auction did not exceed the seller’s maximum price.
c) the government chose to intervene.
d) the personal value of the seller was met.
e) the seller intended to negotiate a sale to a favored buyer.
A monopolist faces the price equation: P = 1,000 ‘“ .5Q, and total cost: C = 50,000 +
100Q + .4Q2.
(a) Determine the price and output that maximize total revenue, and the level of profit.
(b) Determine the price and output that maximize profit, and the level of profit.
(c) Compare the goals of revenue-maximization versus profit-maximization, and
comment on the appropriate goal of the firm.
A small machine shop produces steel shafts and metal plates. The production process
depends on labor, milling machine hours, and lathe machine hours. The firm tries to
identify how many metal shafts and plates should be produced per week in order to
maximize profit. Which, among the following, are the decision variables?
a) Profit contributions of shafts and plates
b) Maximum weekly labor hours available
c) Milling and lathe machine hours available per week
d) Quantities of shafts and plates produced per week
e) The total profit earned by the shop
The optimal solution in a linear programming problem:
a) is determined by solving all constraints as equalities.
b) always exists.
c) typically occurs in the interior of the feasible region.
d) occurs at a corner of the feasible region.
e) always involves at least one nonbinding constraint.
Some years ago, Time Warner (TW) and Disney were engaged in lengthy negotiations
to strike a deal so that TW’s cable television service would continue to carry Disney
programming and Disney’s ABC network channels. Without an agreement, TW would
lose ABC and Disney shows in 3.5 million homes across seven major markets. Disney
was demanding as much as $300 million from TW for the right to carry the channels. It
also wanted TW to feature its new channels (including Toon Disney) and for TW to
make the Disney channel part of its basic cable package. If its demands were not met,
Disney threatened to pull its programming immediately, during the crucial ratings
sweeps period when audience levels are measured and future advertising rates are set.
Losing ABC and Disney would anger TW’s cable customers who might decide to
switch to rival satellite television to get the channels. TW wanted the current agreement
extended for six months, by which time the AOL Time Warner merger would be
completed (securing the company’s position as a multimedia giant).
(a) Describe the relevant factors that would influence the ‘balance of power’ in the
negotiation between Disney and TW. Is each side’s negotiation strategy utilizing what
power it has? Explain briefly.
(b) Imagine that the negotiations were to end in failure. Provide at least two reasons (in
general) why this kind of outcome could occur.
(c) Disney is worried that in the near future when interactive television is a reality, TW
could hinder Disney and others from offering interactive programming over its cable
lines while favoring its (TW’s) own programming. Disney is pressing TW to commit to
treat others’ channels and programming the same as their own. TW says Disney’s
demand is too broad for discussion and that it is impossible to negotiate the terms of
businesses that don’t yet exist. What are the pros and cons of considering these issues in
the current negotiations?
Some years ago, the three leading aluminum producers in the U.S. changed prices nine
times by exactly the same amount each time and usually within one to three days of the
initial price increase. This is an example of _____.
a) sequential pricing
b) price leadership
c) price discrimination
d) tacit collusion
e) price fixing
The following table shows the total output per hour produced in a factory at various
levels of employment of labor. The firm sells each unit of output at $2 and each worker
is paid a wage of $12.
Table 5-1
Refer to Table 5-1. What is the marginal revenue product of the 2nd worker?
a) $36
b) $24
c) $22
d) $20
e) 0
Figure 8-1
Refer to Figure 8-1. The efficient level of output in the market is:
a) R ‘“ P.
b) R.
c) Q.
d) P.
e) T.
Which of the following is true of full-cost pricing?
a) Full-cost pricing uses the marginal cost of a product as its base.
b) Since fixed costs do not affect optimal price and quantity, full-cost pricing is
error-prone.
c) Firms that use full-cost pricing are producing at the optimum level of output.
d) Full-cost pricing is based on the markup of price over average variable cost.
e) Full-cost pricing takes into account the price elasticity of demand for the product.
Compare and contrast a monopolistically competitive firm and a perfectly competitive
firm.
What role does uncertainty play in forecasting? Explain.
Value maximization is the main objective of top management. Briefly describe the
alternative objectives.
Fisherburg is a growing industrial and tourism community with a population of 50,000
and a regional labor force pool of 40,000. A multinational corporation operates an aging
paper producing plant in the community. The plant employs almost 1,500 workers and
there is some concern that the current recession will force the plant to cut back
production. There is even some risk that the plant will close permanently.
During the past year a group of resort owners, riverfront homeowners, and outdoor
sports enthusiasts have formed a committee to address river pollution. Their petition for
placing a ‘˜clean river’ amendment on the ballot in the upcoming local election will soon
be considered by the city council. The council president is concerned about the impact
of such a ballot issue, and has requested you, an economic consultant, to prepare an
objective economic evaluation of potential problems the community faces.
The current manager of a small bicycle shop estimates the demand curve for a child’s
starter bike to be: P = 80 ‘“ 2Q. Costs are given by: C = 200 + 20Q. The former owner
of the shop (now retired) urges the manager to keep prices low so as to increase sales
and maximize revenue. (The shop pays the former owner 5% of each dollar of earned
revenue). If current management follows the former owner’s goal, what sales output and
price should it set? What strategy would you recommend to maximize profits?