In perfect competition, if firms enter the market in the long run
A) total supply will increase causing market price to increase.
B) total supply will decrease causing market price to decrease.
C) total supply will decrease causing market price to increase.
D) total supply will increase causing market price to decrease.
In the long run
A) fixed costs tend to be greater than variable costs.
B) variable costs tend to be greater than fixed costs.
C) all costs are fixed costs.
D) all costs are variable costs.
If, at the end of the project life, a piece of equipment having a book value of $4,000 is
expected to bring $3,000 upon resale, and the income tax rate is 40%, how much will be
the cash flow?
A) $2,800
B) $3,000
C) $3,400
D) $4,000
A firm using two inputs, X and Y, is using them in the most efficient manner when
A) MPx = MPy.
B) Px = Py and MPx = MPy.
C) MPx/Py = MPy/Px.
D) MPx/MPy = Px/Py.
Which of the statements below best illustrates the use of the market process in
determining the allocation of scarce resources?
A) “Let’s make this product because this is what we know how to do best.”
B) “We should consider shifting to products where we can earn even more money.”
C) “Everyone is opening video stores, why don’t we?”
D) “We can’t stop making this product. This product gave our company its start.”
Financial risk occurs due to variations in returns which
A) is induced by leverage.
B) is due to the ups and downs of the economy.
C) is due to changes in government regulations.
D) is a result of changes in exchange rates.
Which of the following relationships implies that a firm’s short-run cost function is
linear?
A) MC = AC
B) MC = AVC
C) AC = AFC + AVC
D) MC > AC
Which of the following relationships is correct?
A) When marginal product starts to decrease, marginal cost starts to decrease.
B) When marginal cost starts to increase, average cost starts to increase.
C) When marginal cost starts to increase, average variable cost starts to increase.
D) When marginal product starts to decrease, marginal cost starts to increase.
The learning curve indicates that
A) economies of scale are taking effect.
B) repetition of various production tasks cause unit costs to decrease.
C) workers must learn new skills in order to improve.
D) it takes time to learn a new skill.
A normal profit is
A) revenues minus opportunity cost of zero.
B) revenues minus accounting cost of zero.
C) a zero accounting profit.
D) revenues minus accounting and opportunity cost of zero.
Second-degree price discrimination occurs when
A) different prices are charged for different blocks of services.
B) different groups of buyers are charged different prices based on their price
elasticities of demand.
C) a different price is charged for each amount of a product purchased.
D) None of the above
The guiding function of price is
A) the movement of price to clear the market of any shortages or surpluses.
B) the use of price as a signal to guide government on the use of market subsidies.
C) a long-run function resulting in the movement of resources into or out of markets.
D) the movement of price as a result of changes in the demand for a product.
Capital budgeting projects include all of the following except
A) the purchase of a six-month treasury bill.
B) the expansion of a plant.
C) the development of a new product.
D) the replacement of a piece of equipment.
Assuming the existence of economies of scale, if a firm finds that it can reduce its unit
cost by decreasing its scale of production, it means that
A) it has too much production capacity relative to its demand.
B) it should try to produce less.
C) the law of diminishing returns has not taken effect.
D) it has too much fixed overhead relative to its variable cost.
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.
________ functions are very useful in analyzing production functions, which exhibit
both increasing and decreasing marginal products.
A) Cobb-Douglas
B) Straight-line
C) Quadratic
D) Cubic
Based on annual data from 2000-2010, the Gadget Company estimates that sales are
growing according to a linear trend:
Q = 50,000 + 200t
where t is time and t = 0 in 2000.
a. Forecast sales for 2013.
b. Do you see any problems with this forecasting method?
Table 1
The following information is provided for Tony Romo’s income and expenditures.
Quantity Purchased per Month
Monthly Income Steaks Pizzas
$2,000 2 8
$3,000 4 6
In Table 1, Tony’s income elasticity of demand for steaks is
A) 1.0.
B) greater than 1.0.
C) less than 1.0.
D) zero.
In the short run, a change in the equilibrium price will
A) always lead to inflation.
B) cause a shift in the demand curve.
C) cause a shift in the supply curve.
D) cause a change in the quantity demanded or supplied.
If, at the end of the project life, a piece of equipment having a book value of $4,000 is
expected to bring $3,000 upon resale, and the income tax rate is 40%, how much will be
the cash flow?
A) $2,800
B) $3,000
C) $3,400
D) $4,000
The distinction between sunk and incremental costs is most helpful in answering which
question?
A) How many more people should be added to the production process?
B) What is the correct price to charge?
C) Should we begin to build a new factory?
D) Should we continue developing a new software application that we began last year?
If the price elasticity of supply of a good is elastic and the good price increases, then the
increase in the good’s supply should be
A) greater than the increase in price.
B) less than the increase in price.
C) the same as the increase in price.
D) Cannot be determined from this information
Demand in the refreshment beverage market has been changing due to
A) changes in income.
B) changes in taxes and subsidies.
C) changes in the number of buyers.
D) changes in tastes and preferences.
A good that is similar to another, and can be consumed in place of it, is called
A) a normal good.
B) an inferior good.
C) a complementary good.
D) a substitute good.
If a firm’s rent increases, it will affect its cost structure in which of the following ways?
A) AVC will increase.
B) MC will increase.
C) TFC will increase.
D) All of the above will increase.
Demand is given by QD = 6000 – 50P. Domestic supply is QS = 25P. Foreign producers
can supply any quantity at a price of $40.
a. If foreign producers can sell in the domestic market, what is the equilibrium price?
What is the equilibrium quantity? How much is sold by domestic and foreign
producers, respectively?
b. Under domestic government pressure, foreign producers voluntarily agree to restrict
their goods. What will happen to the price and quantity? What will happen to the
amount that domestic producers supply? What will happen to revenues of domestic and
foreign producers?
A good that is similar to another, and can be consumed in place of it, is called
A) a normal good.
B) an inferior good.
C) a complementary good.
D) a substitute good.
Which of the following is responsible for controlling the money supply?
A) the Congress
B) the Supreme Court
C) the Federal Reserve
D) the president
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 statements about the short-run production function is true?
A) MP always equals AP at the maximum point of MP.
B) MP always equals zero when TP is at its maximum point.
C) TP starts to decline at the point of diminishing returns.
D) When MP diminishes, AP is at its minimum point.
E) None of the above is true.
Given the production function Q = 21X + 9X2 – X3, where Q = Output, and X = Input
a. At what value of X does Stage II of the production function begin?
b. At what value of X does Stage III of the production function begin?
c. At what value of X does diminishing returns set in?
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?
Superstar actors typically get contracts that specify that they get a percentage of “the
gross,” the total revenues that the movie brings in. Why might actors want contracts
structured that way? Why might producers be willing to agree to that, and how does this
make the goals of actors and producers different?
Suppose that macroeconomic forecasters predict that the economy will be expanding in
the near future. How might managers use this information?
If the interest rate is 7% and the tax rate is 15%, what is the after -tax cost of capital for
the firm?
You deposit $10,000 in a savings account today. If the interest rate is 3%, what is the
value in 20 years?
What are the major sources of risk for the firm?
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
The firm is considering changing its price to $900. Predict the quantity demanded at
that price, all other things equal and provide a 95% confidence interval on your
estimate. (In doing this, explain the value of t-critical you will use in developing your
95% confidence interval.)
Unions have generally been far more successful in organizing and raising wages in
skilled trades such as carpentry than in unskilled trades. Use the laws of derived
demand to explain why.
Explain the reasons firms might follow the Baumol model of maximizing revenue
subject to achieving a minimum level of profits.
Describe the difference in market structure between monopoly and oligopoly.
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
How would you evaluate the quality of this equation overall? Do you have any
concerns? Explain.
Refer to the demand and supply equations. What are the equilibrium price and quantity?
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?
Consider a firm that has just built a plant, which cost $1,000. Each worker costs $5.00
per hour. Based on this information, fill in the table below.
Why is the identification problem more likely with time-series estimates of demand?