Most people believe that monopolies always have excessive profits, yet some
unregulated monopolies might have very low earnings.
(a) Why might a monopoly have little or no economic value? Explain.
(b) If you were given a chance to enter a perfectly competitive industry, or a
monopolistic industry, which would you choose? Explain
Unlike a pure monopoly firm, a monopolistically competitive firm:
a) makes a positive economic profit in the long-run.
b) faces downward sloping demand curve.
c) have no entry barriers to protect it from new entrants.
d) produces a standardized good or service.
e) produces at the level where marginal revenue equals marginal cost.
The U.S. Beanbag Federation is accepting bids for televising the national championship
playoffs. Competition is stiff, and the Federation expects bids to be higher this year than
last. Officials of the Federation have estimated that the advertising revenue that a
network might receive ranges from $500 million to $700 million (with all values in
between equally likely).
(a) If the three major networks bid, what is the expected value of the winning bid?
(b) Fox Network has expressed an interest in televising the playoffs. If Fox enters the
bidding, what is the new expected value of the winning bid?
(c) Explain why the addition of a new bidder raises the value of the expected winning
bid.
(d) How does an increase in the number of bidders affect the likelihood of the winning
bidder suffering the winner’s curse?
The following table lists the payoffs of two firms adopting three possible advertising
strategies:
Table 10-5
Refer to Table 10-5. Identify the true statement.
a) Neither player has a dominant strategy.
b) Only Firm 1 has a dominant strategy.
c) Only Firm 2 has a dominant strategy.
d) Both firms have dominant-strategies.
e) The only equilibrium has both players using mixed strategies.
Calculate the standard error of a regression equation if the sum of squared errors of the
observations is 625 and the degrees of freedom in the regression is 25.
a) 5
b) 10
c) 7.5
d) 2.5
e) 25
An increase in the demand for motorcycles has led to an increase in the demand for
motorcycle helmets. Based on this information, which of the following is likely to be
true?
a) Motorcycles and motorcycle helmets are considered to be substitute goods.
b) The increase in demand for helmets will be represented as a movement along the
demand curve for motorcycle helmets.
c) Helmets are considered to be inferior goods.
d) With an increase in the demand for motorcycles, the demand curve will shift inward
toward the origin.
e) In the demand equation for helmets, the coefficient associated with the price of
motorcycles will be negative
A new product should be introduced if its profit contribution:
a) exceeds the shadow price of each resource needed to produce it.
b) is less than the opportunity cost of producing it.
c) exceeds the total value of the resources used, valued at their respective shadow
prices.
d) is greater than zero.
e) is greater than the profit contributions of the other goods produced by the firm.
The following figure shows the domestic demand and supply curves for a good. With
free trade, the price of the good in the domestic market is P3. The government
introduces a 5% tariff in the market which raises the domestic price to P2.
Figure 7-1
Refer to Figure 7-1. With the imposition of the tariff, the change in consumer surplus is
equal to:
a) a loss measured by the area of P2GLP3.
b) a gain measured by the area of P2GJP3.
c) a loss measured by the area of P2HKP3.
d) a gain measured by the area of P1FJP3.
e) a loss measured by the area of P1FGP2.
The _____ is the upper boundary showing the combinations of buyer’s profit and
seller’s profit at all possible prices within the zone of agreement.
a) profit contour
b) payoff frontier
c) profit curve
d) contract curve
e) marginal benefit curve
(a) Firm K is a leading maker of light-weight, water-proof outerwear. During the winter
months, demand for its main line of water-proof coats is given by: P = 800 ‘“ 0.2Q,
where P denotes price in dollars and Q is quantity of units sold per month. The firm
produces coats in a single plant (which it leases by the year). The total monthly cost of
producing these coats is estimated to be: C = 150,000 + 400Q. Leasing the plant
accounts for almost all of the $150,000 fixed cost. What is the firm’s marginal cost?
Find the firm’s profit-maximizing output and price. If the firm’s other outerwear
products generate $50,000 in contribution, what is the firm’s total monthly profit?
(b) From time to time corporate customers place special orders for customized versions
of Firm K’s raincoat. Corporate orders generate an average contribution of $100 per
coat. Firm K tends to receive these orders at short notice usually during the winter when
its factory is operating with little unused capacity. Firm K has just received an
unexpected corporate order for up to 300 coats but has unused capacity to produce only
200. One manager recommends delivering 200 coats (The client would still be satisfied
with 200 coats). A second manager argues for cutting back production of standard coats
(by 100) to fill the full corporate order. Who is right? Explain carefully. In general, can
you suggest any other ways to free up capacity in the winter?
The standard error of the regression:
a) measures the explanatory power of the regression equation and lies between 0 and 1.
b) measures the explained variation in the dependent variable.
c) measures the unexplained variation in the dependent variable.
d) is equal to the sum of squared errors minus the total sum of squares.
e) is equal to the slope of the regression equation.
If the sum of the exponents of a Cobb-Douglas production function is equal to 1.2, the
production function exhibits:
a) increasing returns to scale.
b) constant returns to scale.
c) diminishing marginal returns.
d) declining productivity.
e) increasing average costs.
Which of the following correctly defines the minimum efficient scale for a firm?
a) The output level at which the firm earns an abnormal profit
b) The minimum point of the firm’s learning or experience curve
c) The lowest output at which minimum average cost can be achieved
d) The output level where average fixed cost is at its minimum point
e) The level of output produced when the firm is operating at full production capacity
Total trading gains available in a negotiation are high if:
a) the trading parties have strong negotiating skills.
b) the traded commodity has a large number of substitutes.
c) the traded commodity has multiple uses.
d) the seller’s value is significantly lower than the buyer’s value.
e) the final price of the traded commodity exceeds the buyer’s walk-away price.
Given the total cost equation for a firm, the marginal cost equation can be derived by:
a) dividing total cost by total output.
b) taking the first derivative of the cost function with respect to quantity.
c) dividing total variable cost by total output.
d) subtracting variable cost from the fixed cost at all levels of output.
e) multiplying the total cost equation by price.
Two mutually exclusive projects, expected to last indefinitely, are being compared.
Program A has annual profits and consumer surplus of $10 million and a one-time
capital expenditure of $50 million. Program B has consumer surplus of $15 million and
a one-time capital expenditure of $100 million. Using net present value as a criterion,
which alternative should be selected?
a) If the discount rate is 12%, Program B should be selected.
b) If the discount rate is less than 10%, Program B should be selected.
c) If the discount rate is 22%, neither program should be selected.
d) The programs have the same net present value regardless of the discount rate used.
e) Answers if the discount rate is less than 10%, Program B should be selected and if
the discount rate is 22%, neither program should be selected are both correct.
What is meant by economies of scope?
a) Economies of scope refers to the cost advantages from the joint production of
multiple goods.
b) Economies of scope refers to the profits that firms earn when they practice price
discrimination across market segments.
c) Economies of scope refers to efficiency that firms gain when they specialize in the
production of one good.
d) Economies of scope refers to the efficiency gains from specialization and division of
labor.
e) Economies of scope refers to the reduction in cost that accrues to a firm due to
cumulative production experience and learning.
Which of the following is incorrect?
a) An auction ensures that competition among buyers sets the final price’”the highest
price the market will bear.
b) An auction is less flexible than posted pricing.
c) An auction is less time-consuming than rounds of one-on-one negotiations.
d) An auction allows the seller to compare all buyer offers simultaneously and choose
the best one.
e) An auction preserves the seller’s monopoly position.
A good that has highly elastic demand is most likely to:
a) have a large number of substitutes.
b) be purchased by low-income consumers.
c) be sold at a high price level.
d) be produced by a single firm.
e) be a necessary good.
When taking risky decisions, a common pitfall that the managers face is:
a) seeing too many possibilities.
b) holding pessimistic beliefs.
c) gathering too much information.
d) relying on verbal expressions of probability.
e) relying on the rules of thumb.
When all trade is prohibited in good X, the equilibrium price in the home country is PX.
After free trade is instituted, the domestic country begins to import good X from the
rest of the world. As a result of free trade:
a) the domestic price of good X will fall.
b) the domestic price of good X will rise.
c) the domestic price of good X will exceed the price in foreign countries.
d) the domestic price of good X will be less than the price in foreign countries.
e) the domestic producers will gain surplus at the expense of domestic consumers.
A firm wants to launch a new luxury product only if demand for the product is strong.
The probability that demand is strong is estimated to be .6. With a perfect market
survey, what is the probability that the test will show that demand is strong?
a) .6
b) .4
c) .24
d) .5
e) .2
The economic profit on an investment is zero when:
a) the total revenue from the investment exceeds the costs of the investment.
b) the revenue from the investment just covers the fixed cost of the investment.
c) the accounting profit and economic profit are equal.
d) the investment earns a normal rate of return.
e) the sunk cost of the investment is zero.
A law firm will be paid $500 to send one of its lawyers to a client to take a routine
deposition. The firm can send a 2nd year lawyer whose usual billing rate is $150 per
hour and who is currently working on a lucrative tax deal, or it can send a 4th year
associate (billing rate $200 per hour) who is currently overseeing the selection and
hiring of law students as summer associates. Based on this information, the firm should
send:
a) the 2ndyear lawyer because his billable rate is lower.
b) the 4thyear lawyer because her billable rate is higher.
c) the 2ndyear lawyer because he is currently more productive.
d) either one since the firm receives the same $500 fee.
e) the 4thyear lawyer because her current work is less valuable to the firm.
Why does the strategy of tit-for-tat support cooperative equilibrium?
What is an externality? List the various types of externalities. Discuss why externalities
justify government intervention.
Define the concept of Nash equilibrium. Why is it important?
List and briefly explain the main entry deterrence policies that an oligopoly firm might
employ to prevent other firms from entering a market.
How does benefit-cost analysis handle the problem of valuing ‘˜priceless’ human life?
Assume that a firm employs labor and capital by paying $40 per unit of labor employed
and $200 per hour to rent a unit of capital. Given that the production function is given
by: Q = 10L ‘“ L2+ 60K ‘“1.5K2, where Q is total output, L is labor, and K is capital,
what is the firm’s optimal combination of capital and labor?
Discuss the role of communication in a cooperative agreement.
Provide two examples of events that can cause a shift in industry demand. Draw a graph
to illustrate your answer.
Why is backward induction important in competitive strategy?
In 2000, Amtrak, the intercity passenger train service in the U.S., discontinued its
customer satisfaction guarantee program (a full price refund if the rail trip was not to
the customer’s satisfaction). Instead of 1 passenger in 1,000 claiming the guarantee, the
rate was 4 in 1,000; many claims were due to delays caused by weather or due to
congested tracks used by other freight rail companies. Critically assess the pros and
cons of Amtrak’s guarantee program.