The minimum price that a seller is willing to accept for his product and the maximum
price a buyer is willing to pay for the product are referred to as their:
a) bid prices.
b) reservation prices.
c) offer prices.
d) aspiration prices.
e) take it or leave it offers.
A regression analysis is assumed to be free of serial correlation when the
Durbin-Watson statistic for the regression is approximately equal to:
a) -2.
b) 2.
c) 1.
d) -1.
e) 0.
DigiWatch plans to open a new production facility to produce digital watches. Based on
previous experience, the firm estimates that the fixed costs of the plant will be $366,000
per year, and that average variable cost will be: AVC = 7.00 + .002Q.
(a) Compute the total cost and average cost for the first year of production at an output
of 6,000 watches.
(b) In the second year of production, DigiWatch revamped its assembly operations to
improve efficiency. The firm produced 8,000 watches at a total cost of $498,000. How
much did the revamp reduce average cost in the second year?
To identify the feasible region, one must graph:
a) all non-binding constraints.
b) the objective function contours.
c) all binding constraints.
d) the complete set of simultaneous equations.
e) the capacities of all relevant resources.
The total net benefit from a quantity-price contract is maximum when:
a) the marginal benefit to the buyer exceeds the seller’s marginal cost.
b) the seller’s marginal cost exceeds the buyer’s marginal benefit.
c) the marginal benefit to the buyer is at its maximum.
d) the marginal cost to the seller is at its minimum.
e) the marginal benefit to the buyer equals the seller’s marginal cost.
Which of the following is true of a profit-maximizing competitive firm in the short run?
a) The firm produces at the point where price is equal to marginal cost.
b) The firm produces at the point where average cost is at its minimum point.
c) The demand curve faced by each firm in the industry is downward sloping.
d) The firm always makes a zero economic profit.
e) The firm suffers a deadweight loss.
A profit-maximizing firm’s total cost is given by C = 50 + 25Q where Q is the quantity
produced. Given that the firm sells 40 units of the good at $55 each, what is the firm’s
contribution?
a) $2,200
b) $200
c) $1,200
d) $1,000
e) $2,100
The prospect for a mutually beneficial out-of-court settlement is affected by all of the
following except:
a) the disputants’ litigation costs.
b) differences in probability assessments of the two firms.
c) the expected value of litigation for the plaintiff.
d) legal costs incurred prior to beginning the settlement talks.
e) the expected value of litigation for the defendant.
Predatory pricing is a practice of deliberately pricing at a loss in order to bankrupt a
rival.
(a) Is predatory pricing rational?
(b) Should predatory pricing be illegal? Explain why or why not.
If a firm’s demand function is of the form P = a ‘“ bQ, what is its marginal revenue
equation?
a) MR = a ‘“ Q
b) MR = a ‘“ 2bQ
c) MR = a – 2Q
d) MR = a ‘“ 2b
e) MR = a + 2bQ
A middle manager is an avid runner and keeps an informal diary of her
daily 5-mile training runs. Most of the time, she spends 10 minutes or more
stretching before running, believing that this will help prevent minor
muscle injuries. In fact, she estimates that 64% of days over the last year,
she has stretched and avoided any muscle problems, that is, the relevant
joint probability is Pr(Stretch & Healthy) = .64.
(a) Is she correct in concluding that there is a positive association between
stretching and being injury free? Now suppose she does some additional
thinking and recalls many days when she hadn’t bothered to stretch and
fortunately still avoided any muscle pulls. Her guess is that Pr(No Stretch
& Healthy) = .20. Determine Pr(Stretch|Healthy). Does this indicate that
stretching reduces the risk of injury?
(b) Finally, the manager recalls a small number of instances when she
neglected to stretch and, indeed, suffered muscle pulls, leading to the
guesstimate: Pr(No Stretch and Muscle Pull) = .02. Write down the
appropriate two-by-two joint probability table. Does stretching reduce the
risk of injury?
Refer to Figure 11-1. If the external cost of producing the good is not taken into
account, what is the deadweight loss in the market?
a) $2
b) $4
c) $5
d) $10
e) $15
Given that a firm’s inverse demand function is P = 100 ‘“ 5Q and total cost is given by C
= 550 + 10Q, what is the firm’s profit-maximizing level of output?
a) 10 units
b) 15 units
c) 9 units
d) 8 units
e) 5 units
The following matrix shows the pricing strategies and resultant profits (in thousands of
dollars) for two profit-maximizing firms.
Table 9-1
Refer to Table 9-1. If the firms are able to enforce a collusive agreement, which of the
following is most likely?
a) Firm A will earn profit equal to $41,000.
b) Firm A will earn a higher profit than Firm B.
c) Firm A will set a high price while Firm B will set a low price.
d) Firm A and Firm B will earn set a low price.
e) Firm A and Firm B will earn profit equal to $35,000.
Which of the following firms faces a pure selling problem in pricing?
a) A firm that faces a very high fixed cost of production
b) A firm that incurs a small or negligible variable cost of production
c) A firm that faces a highly elastic demand curve
d) A firm that is undercut by competitors and priced out of the market
e) A firm that has a negligible share in the market
For a good that has a price elasticity of demand of -1.5 and a marginal cost of $50 per
unit, the profit-maximizing price should be approximately _____.
a) $200
b) $168
c) $150
d) $50
e) $134
The potential size of the winner’s curse increases as:
a) the degree of uncertainty about the value of the item increases.
b) the number of bidders declines.
c) buyers are better able to assess the true value of the item.
d) buyers become more risk averse.
e) the value of the item up for bid increases.
Suppose four bidders compete in a sealed-bid auction with private values independently
and uniformly distributed between $0 and $200.
(a) Compute the expected revenue in an English auction.
(b) Compute the expected revenue in a sealed-bid auction.
(c) Compare and comment on the results in parts (a) and (b).
Risk aversion describes a person’s tendency to:
a) avoid risk at all cost.
b) be conservative in assessing a certainty equivalent.
c) select the safest option.
d) attach lower marginal utility to higher monetary outcomes.
e) always pay for 100% insurance against risks.
Which of the following is an example of asymmetric information leading to a ‘lemons’
market?
a) A marketing manager is uncertainty about the volume of sales in the next quarter.
b) An employee does not know the rate of inflation in the coming year and so cannot
ascertain his real wage.
c) The seller of a used laptop knows more about its true condition than the buyer.
d) A firm’s manager has motives that sometimes conflict with the interests of
shareholders.
e) A trader, who has access to inside information, profits by trading on that information.
A firm’s short-run average cost is described by the equation: SAC = 2,000/Q + 60 + .
2Q. Determine the equation for the firm’s marginal cost. What is the MC of producing
the tenth unit of output?
An individual has a utility of money function U = 20 +.5M and considers two options:
Option 1: Invest $100,000 in a building plot, which will be sold for $150,000 if interest
rates decrease or for $80,000 the interest rates do not change.
Option 2: Invest the same $100,000 in bonds, which will be worth $135,000 if interest
rates decrease, and $100,000 if the interest rates remain the same.
The consensus among economic forecasters is that interest rates have an 80% chance of
decreasing and 20% chance of remaining constant.
Which investment option will this individual select?
A firm hires an economist to conduct market research and determine
demand for a new product. If the test is correct and the firm launches the
product, it earns a profit of $600,000. If the firm launches the product when
there is weak demand, it incurs a loss of $250,000.
What is the firm’s expected profit from an accurate and inaccurate test
respectively? What can you conclude about the quality of the market
research?
Ranger Construction is preparing to repair potholes, under contract to the local county
road repair agency. Based on past experience, Ranger has found that output can be
described by: Q = K.5L.5, where Q = pot holes filled, K = units of capital, and L = units
of labor. Ranger can hire labor at $12 per hour, and the cost of capital is $8 per unit.
Capacity limitations require that Ranger accepts no more than $96,000 worth of filling
this season. What is the optimal mix of inputs for Ranger? How many potholes should
Ranger agree to fill? Use the method of Lagrange multipliers to find the solution.
A firm’s production function is given by Q = 2K2+ 6L. Does this production function
exhibit constant returns to scale?