Suppose we estimate that the demand elasticity for fine leather jackets is ‘“.7 at their
current prices. Then we know that:
a. a 1% increase in price reduces quantity sold by .7%.
b. no one wants to buy leather jackets.
c. demand for leather jackets is elastic.
d. a cut in the prices will increase total revenue.
e. leather jackets are luxury items.
Income tax payments are an example of ____.
a. implicit costs
b. explicit costs
c. normal return on investment
d. shareholder wealth
e. none of the above
Consolidated Salt Company sells table salt to both retail grocery chains and commercial
users (e.g., bakeries, snack food makers, etc.). The demand function for each of these
markets is:
Retail grocery chains: P1= 180 – 8Q1
Commercial users: P2= 100 – 4Q2
where P1and P2are the prices charged and Q1and Q2are the quantities sold in the
respective markets. Consolidated’s total cost function (which includes a “normal” return
to the owners) for salt is:
TC = 50 + 20(Q1+ Q2
(a) Determine Consolidated’s total profit function.
(b) Assuming that Consolidated is effectively able to charge different prices in the two
markets, what are the profit-maximizing price and output levels for the product in the
two markets? What is Consolidated’s total profit under this condition?
(c) Assuming that Consolidated is required to charge the same price in each market,
what are the profit-maximizing price and output levels? What is Consolidated’s total
profit under this condition?
Smoothing techniques are a form of ____ techniques which assume that there is an
underlying pattern to be found in the historical values of a variable that is being
forecast.
a. opinion polling
b. barometric forecasting
c. econometric forecasting
d. time-series forecasting
e. none of the above
Contracts are distinguished from tactical alliances by which of the following
characteristics:
a. involve sequential responses
b. require third-party enforcement
c. raise shareholder value
d. elicit diminished reactions from competitors
In the linear breakeven model, the relevant range of output is that range where the
linearity assumptions of the model are assumed to hold.
a. true
b. false
In the case of pure monopoly:
a. one firm is the sole producer of a good or service which has no close substitutes
b. the firm’s profit is maximized at the price and output combination where marginal
cost equals marginal revenue
c. the demand curve is always elastic
d. a and b only
e. a, b, and c
The concept of market conduct includes such things as ____.
a. pricing behavior of the firm or group of firms
b. product policy of the firm or group of firms
c. the degree of seller and buyer concentration in the market
d. a and b only
e. a, b, and c
Variations in a time-series forecast can be caused by:
a. cyclical variations
b. secular trends
c. seasonal effects
d. a and b only
e. a, b, and c
When retail bicycle dealers advertise and perform warranty repairs but do not deliver
the personal selling message that Schwinn has designed as part of the marketing plan
but cannot observe at less than prohibitive cost, the manufacturer has encountered a
problem of ____.
a. reliance relationships
b. uncertainty
c. moral hazard
d. creative ingenuity
e. insurance reliance
The effect of changes in the level of interest rates on security returns is an example of
____.
a. systematic risk
b. unsystematic risk
c. nondiversifiable risk
d. a and c only
e. b and c only
Of the following, which is not an economic rationale for public utility regulation?
a. production process exhibiting increasing returns to scale
b. constant cost industry
c. avoidance of duplication of facilities
d. protection of consumers from price discrimination
e. none of the above
The Saturn Corporation (once a division of GM) was permanently closed in 2009. What
went wrong with Saturn?
a. Saturn’s cars sold at prices higher than rivals Honda or Toyota, so they could not sell
many cars.
b. Saturn sold cars below the prices of Honda or Toyota, earning a low 3% rate of
return.
c. Saturn found that young buyers of Saturn automobiles were very loyal to Saturn and
GM.
d. Saturn implemented a change management view that helped make first time Saturn
purchasers trade up to Buick or Cadillac.
e. all of the above
The following demand function has been estimated for Fantasy pinball machines: QD=
3,500 – 40P + 17.5Px+ 670U + .0090A + 6,500N where P = monthly rental price of
Fantasy pinball machines
Px= monthly rental price of Old Chicago pinball machines (their largest
competitor)
U = current unemployment rate in the 10 largest metropolitan areas
A = advertising expenditures for Fantasy pinball machines
N = fraction of the U.S. population between ages 10 and 30 (a) What is the point
price elasticity of demand for Fantasy pinball machines when P = $150, Px= $100, U = .
12, A = $200,000 and N = .35?
(b) What is the point cross elasticity of demand with respect to Old Chicago pinball
machines for the values of the independent variables given in part (a)?
Credible promises and hostage mechanisms can support a continuous stream of
cooperative exchanges except when
a. the promisor is better off fulfilling than ignoring his promise
b. neither party has a prior dominant strategy
c. the hostage can be revoked for just causes
d. the hostage is more valuable than any given exchange
e. the hostage is difficult to replace
Offshore Petroleum’s fixed costs are $2,500,000 and its debt repayment requirements
are $1,000,000. Selling price per barrel of oil is $18 and variable costs per barrel are
$10. (a) Determine the breakeven output (in dollars).
(b) Determine the number of barrels of oil that offshore must produce and sell in order
to earn a target (operating) profit of $1,500,000.
(c) Determine the degree of operating leverage at an output of 400,000 barrels.
(d) Assuming that sales of oil are normally distributed with a mean of 362,500 barrels
and a standard deviation of 100,000 barrels, determine the probability that Offshore will
incur an operating loss.
The second derivative of the function (d2Y/dX2 ) is negative at the optimal solution of
X=22. Therefore, we know that the solution X=22, where the first derivative equals
zero’¦
a. must be a minimum.
b. must be a maximum.
c. may be either a maximum or a minimum.
d. would be nothing, because the second derivative is negative.
All of the following are mechanisms which reduce the adverse selection problem except
____.
a. warranties from established enterprises with non-redeployable assets
b. high interest rates
c. large collateral requirements
d. brand names and product-specific promotions and retail displays
e. higher prices in repeat customer transactions
Exhibit 13-1
Consider the information below when answering the following question(s):
(Note: Payoffs in the upper right corner go to Pizza Spinners and payoffs in the lower
left go to Harry’s).
If the city-pair route from Orlando to New Orleans is served by only two air carriers,
Northwest and Delta, and if the payoffs from discounting or maintaining high prices are
as below, what behavior would you predict for Delta in a one-play game and why?
Consider an investment with the following payoffs and probabilities:
Determine the expected return for this investment.
•a. 1,300
b. 1,500
c. 1,700
d. 2,000
e. 3,000
Vacation tours to Europe invariably package visits to disparate regions: cities,
mountains, and the seaside. Bundling, a type of second degree price discrimination, is
most profitable when:a. the preference rankings of vacationers travelling together are
negatively correlated.
b. a preference for cities is always higher than preferences for mountain vistas.
c. preference rankings of vacationers travelling together are positively correlated.
d. preference for the seaside is always higher than preferences for city excursions.
e. no one wants to take a European vacation package to cities, mountains, and the
seaside.
Unique Creations has a monopoly position in magnometers. If the marginal cost for a
magnometer is $50 and the price elasticity for magnometers is -4, what is the optimal
monopoly price?
•Hint: P (1 +1/E) = MC.
•
•a. $37.50
•b. $41.25
•c. $66.67
•d. $75.00
•e. $82.50
Exhibit 15A-1
Suppose GM and Nucor Steel seek to develop jointly a new sheet metal and auto body
stamping machine, and each party knows the payoffs in the following table of
equi-probable outcomes but cannot independently verify one another’s costs. Both GM
and Nucor can cancel the project and both will then earn $0 if the cost revelations give
early warning of losses.
Note: The figures in parentheses represent costs associated with the Low and High cost
realizations, and all figures are in millions. The joint profit payoffs are the difference
between $180 and the sum of the cost realizations.
Part C: What is the expected net profit under the simple profit sharing contract, and
why would the partners adopt an incentive-compatible revelation mechanism (i.e., an
optimal incentives contract)?
Piedmont Power Company’s common stock has a beta, ß, estimated to be .8 The
risk-free rate is 8 percent and the expected market return is 14 percent. Compute
Peidmont’s cost of equity capital.
Cooperative agreements between manufacturers and retailers concerning retail
promotion and manufacturer advertising are often the key to the success of new
products. Analyze the following sequential product promotion game, and then predict 1)
whether the product will be updated by the manufacturer (Man), 2) whether the retail
distributor (RET) will promote the product, and 3) whether the manufacturer will
advertise the product. No explanation necessary.
Differentiate the following TC function: TC = 150 + 200 Q – 4 Q2 + .6 Q3
dTC/dQ = 200 – 8Q + 1.8 Q2
a. dTC/dQ =-8 + 1.8 Q2
b. dTC/dQ = 200
c. dTC/dQ = 200 – 4Q + .6Q2
d. dTC/dQ = 1.8 Q2