Output elasticity can be defined as the:
a. percentage change in output divided by the (equal) percentage change in all inputs.
b. change in output divided by the change in all inputs.
c. change in inputs divided by the change in output.
d. change in output divided by the change in one input.
e. percentage change in output divided by the (average) percentage change in all inputs.
Total revenue decreases as output increases whenever:
a. marginal revenue is less than average revenue.
b. marginal revenue is greater than average revenue.
c. average revenue is decreasing.
d. marginal revenue is negative.
e. average revenue is negative.
Framjam Sports Equipment produces basketballs at its factory in Kentucky and soccer
balls at its factory in Illinois. At its current annual rate of production, the cost of
producing basketballs is $80,000 and the cost of producing soccer balls is $45,000. If
the firm consolidates production at a single location, the annual cost of production will
be $100,000. What is the degree of economies of scope in this case?
a. 5
b. 4
c. 0.75.
d. 0.25.
e. None of the above.
Trope Oil Company is considering drilling an exploratory well. The symbol P is the
chance of a successful well, R is the revenue from a successful well, L is the price
previously paid for the land, and C is the cost of drilling. The well will either be
successful or dry. A company that is risk-neutral should drill if:
a. PR > C.
b. PR > C + L.
c. P(R ” C) > 0.
d. P(R ” C ” L) > 0.
e. P(R ” C) > L.
The demand for fashion watches is Q = 9 ” 0.7P + 2I. Assume that per capita income I
is $13. When the price of fashion watches is P = $30, the price elasticity of demand is:
a. “0.66.
b. “1.0.
c. “2.0.
d. “0.5.
e. “1.5.
The second derivative of the total profit function is:
a. average profit.
b. marginal profit.
c. the slope of the average profit function.
d. the slope of the marginal profit function.
e. the slope of the total profit function.
Potential entrant E threatens to enter incumbent I‘s market and I threatens to lower price
to P should E enter. It is crucial for E to believe I‘s threat that:
a. P > I‘s average total cost.
b. P > I‘s average variable cost.
c. P is low enough to discourage E.
d. I could conceivably charge P without E‘s threat.
e. I‘s profit with P and no entry are better than expected profits with entry.
Incentive-compatible employment contracts exist when:
a. the firm and workers have the same objective.
b. owners and managers have the same level of income.
c. incentives of owners and managers are compatible with, though not necessarily the
same as, one another.
d. owners and managers have the same objectives as consumers of the products they
produce.
e. base pay for managers is equal to the profit share they realize.
In the accompanying figure, the equilibrium price and quantity are:
a. Pa and Qa.
b. Pb and Qb.
c. Pc and Qc.
d. Pa and Qc.
e. Pc and Qa.
Slim’s Shoe Repair has determined that its total cost of resoling shoes is TC = Q2 +
16Q1/2. At 16 units of output, Slim’s marginal cost is:
a. $324.
b. $64.
c. $256.
d. $34.
e. $2.
Hedge Fun is a landscaping firm that specializes in topiary. It contracts with the owners
of 125 local homes and provides its service at an annual fee of $1,300. Its average
variable cost is $800, and its annual fixed cost is $28,000. What is the break-even level
of output?
a. 125
b. 87
c. 63
d. 56
e. None of the above.
If effort is unobservable and revenues are riskless, firms can design
incentive-compatible compensation schemes by offering workers:
a. profit shares.
b. increased nonmonetary benefits.
c. increased fixed salary.
d. decreased effort requirements.
e. increased future compensation in the form of retirement pay.
Radio City promises if you can find a lower advertised price for anything you bought at
Radio City, anywhere in town within 30 days, it will return the difference plus 20%. A
sophisticated game theoretic analysis suggests Radio City may be:
a. losing money in the long run.
b. colluding with other stores.
c. using a commitment to threaten competitors.
d. preempting competitors.
e. using price leadership.
Fred has a utility function U = 10P 0.5 and also has an investment opportunity that will
pay 25 with probability 0.4 and 100 with probability 0.6. What is the expected utility of
this opportunity?
a. 70
b. 75
c. 80
d. 83.7
e. None of the above.
A representative firm with long-run total cost given by TC = 20 + 20q + 5q2 operates in
a competitive industry where the short-run market demand and supply curves are given
by QD = 1,400 ” 40P and QS = “400 + 20P. If it continues to operate in the long run, its
profit-maximizing level of output is:
a. 1 unit.
b. 2 units.
c. 4 units.
d. 5 units.
e. 6 units.
If total cost is given by TC = 10Q ” 5Q2 + 0.1Q3, then average cost is minimized at
units of output.
a. 0.5.
b. 0.01
c. 50
d. 25
e. 0.1
Nancy has $100 to spend on books and compact disks. Books cost $10 and compact
disks cost $20. The slope of Nancy’s budget constraint (where the quantity of books is
on the horizontal axis) is:
a. “0.5.
b. “2.
c. “5.
d. “10.
e. none of the above.
Lot’s Wife Manufacturing produces rear-view video systems for buses. The firm’s cost
function is TC = 2,000 + 120Q. If the systems sell for $145, what is the break-even rate
of production?
a. 200.
b. 120.
c. 80.
d. 55.
e. None of the above.
The Two Stage Photo Company has a division for each stage of photo processing. There
is no external market for the first stage’s output. For a fixed quantity of photo
processing, the transfer price should depend on:
a. whatever management wants.
b. marginal costs at stage 1 only.
c. marginal costs at each stage.
d. average costs at stage 1 only.
e. average costs at each stage.
Teal Taxi Company has a regulated taxi monopoly in Colortown. It faces a demand for
rides given by P = 3 ” 0.02Q. It has total costs (exclusive of the required rate of return
on its invested capital) of TC = “110 + 0.1Q + 0.01Q2. If the commission that regulates
Teal Taxi determines that $100 is sufficient to compensate equity holders for their
invested capital, what are the regulated price and output?
a. P = 0, Q = 150.
b. P = .5, Q = 125.
c. P = 1, Q = 100.
d. P = 1.5, Q = 75.
e. P = 2, Q = 50.
The reservation prices, in dollars, for three classes of demanders (A, B, and C) for two
restaurants (1 and 2) are given in the following table. What is the maximum revenue
that can be generated by setting a bundled price for the two restaurants?
a. $49.
b. $45.
c. $36.
d. $34.
e. $30.
Points along an indifference curve represent bundles of goods that:
a. cost the same amount to buy.
b. consumers don”t like very much.
c. decline in marginal utility.
d. deliver equal utility.
e. cannot be compared.
There are 12,000 fans attending a basketball tournament featuring three regional
powerhouses in Charlotte, North Carolina. There are 4,000 of each of three types of
fans, identified by the school for which they cheer. The fans value a ticket to see a game
according to which teams are competing as shown in the following table. The stadium
holds 12,000, and the marginal cost of seating another viewer is zero. What is the
change in the maximum profits that organizers can earn for the tourney if they sell the
three games as a package instead of as individual games?
a. $20,000.
b. $120,000.
c. $160,000.
d. $200,000.
e. $220,000.
If player 1 has a dominant strategy, then player 2:
a. must also have a dominant strategy.
b. may or may not have a dominant strategy, but will always lead to a Nash equilibrium.
c. may or may not have a dominant strategy.
d. will not be able to reach an optimal solution to the game.
e. will block this dominant strategy and force player 1 to another strategy.
Fred consumes quantities of butter and margarine; his utility function is given by U =
5M + 2B. If Fred has $10 to spend on butter and margarine, and if butter costs $2 per
pound and margarine costs $1 per pound, what is his optimal bundle of butter and
margarine?
a. 3 butter and 4 margarine.
b. 5 butter and 0 margarine.
c. 0 butter and 10 margarine.
d. 2 butter and 6 margarine.
e. None of the above.
The antitrust law aimed at preventing unfair competitive practices, including those not
yet dreamed up by creative entrepreneurs, was the:
a. Sherman Act.
b. Clayton Act.
c. Federal Trade Commission Act.
d. Robinson-Patman Act.
e. Celler-Kefauver Act.
For constants a and b, 0 < b, b 1, and expected profit E(p), the expected utility
function of a person who is risk-neutral can be written as E(U) = :
a. a + bE(p).
b. a ” bE(p).
c. a + bp.
d. a + [E(p)]b.
e. a + [E(p)] “b.
If the annual interest rate is 25%, the present discounted value of $100 to be received in
one year is:
a. $75.
b. $80.
c. $100.
d. $120.
e. $125.
If average variable cost is increasing with increases in output, total fixed cost will:
a. increase with increases in output.
b. decrease with increases in output.
c. remain unchanged with increases in output.
d. increase initially and then decrease with increases in output.
e. decrease initially and then increase with increases in output.
The formula for the point price elasticity can be written as:
a. h = (DQ / DP)(P / Q).
b. h = (DP / DQ)(P / Q).
c. h = (DQ / DP)(Q / P).
d. h = (DP / DQ)(Q / P).
e. none of the above.
Gliberace’s Fashion Accessories of Las Vegas produces gemstone-encrusted formal
wear for sale in Los Angeles and San Francisco subject to total cost TC = 100 + 5(QLA
+ QSF). Demand for Gliberace’s stones in the two cities is given by QLA = 70 ” 2PLA
and QSF = 55 ” PSF . If Gliberace price discriminates between the two cities, how many
stones will it sell in Los Angeles?
a. 30
b. 36
c. 38
d. 43
e. 48
The accompanying table describes Ben’s preferences over cake and ice cream. The
utility from consumption of one good is independent of the consumption of the other.
The price of cake is $10 per unit, and the price of ice cream is $4 per unit.
If Ben has $50 to spend, the optimal combination of these goods is:
a. 4 units of cake and 1 unit of ice cream.
b. 3 units of cake and 5 units of ice cream.
c. 3 units of cake and 1 unit of ice cream.
d. 5 units of cake.
e. none of the above.
The inability to isolate a demand curve from observed prices and quantities alone is
known as the:
a. economist’s problem.
b. inference problem.
c. regression problem.
d. identification problem.
e. timing problem.
In recent years, auction sites, such as ebay, have flooded the Internet. Sellers expect to
gain by using the Internet for conducting auctions because:
a. more bidders means that price discrimination is an option.
b. with more bidders, each submits a bid closer to his or her reservation price to
increase the probability of a win.
c. with more bidders, sellers expect to realize greater profits.
d. consumer surplus will increase.
e. b and c
Producer surplus is defined as:
a. the difference between the price the consumer actually pays for a product and the
consumer’s reservation price.
b. the profit that the firm earns on each unit of a product sold.
c. the profit that the firm earns after taxes.
d. the difference between the price received by the producer and the producer’s
reservation price.
e. the difference between the price paid by the consumer and the price received by the
consumer.