Suppose that production for good X is characterized by the following production
function, Q = 4K0.5L0.5, where K is the fixed input in the short run. If the per-unit rental
rate of capital, r, is $12 and the per-unit wage, w, is $20, then the average total cost of
using 25 units of capital and 49 units of labor is:
A. $6.25.
B. $9.14.
C. $10.07.
D. There is insufficient information to determine the average total costs.
The unregulated monopoly in the figure below will earn profit of:
A. $16.
B. $8.
C. $4.
D. $0.
If we reduce performance-based rewards to CEOs, the profits of firms will:
A. rise.
B. fall.
C. remain constant.
D. None of the answers are correct.
Given that the income for a franchise restaurant manager is directly tied to profits,
while the income for the manager of a company-owned restaurant is paid a flat fee, we
might expect profits to be:
A. lower in franchise restaurants.
B. higher in franchise restaurants.
C. equal in both types of restaurants.
D. Profit comparisons cannot be made based on the given information.
The derivative, dAC(Q)/dQ = (1/Q2) {Q(dC/dQ) – C(Q)}, illustrates that when:
A. MC(Q) < AC(Q), average costs increase as output increases.
B. MC(Q) < AC(Q), average costs decrease as output increases.
C. MC(Q) > AC(Q), average costs decrease as output increases.
D. None of the answers are correct.
An industry consists of five firms with equal annual sales. What is the industrys HHI?
A. 2,000
B. 2,500
C. 10,000
D. There is not sufficient information to compute the industry HHI.
Suppose that there are two types of cars, good and bad. The qualities of cars are not
observable but are known to the sellers. Risk-neutral buyers and sellers have their own
valuation of these two types of cars as follows:
When a buyer does not observe the quality, what is the highest price she will offer for a
used car if she ignores adverse selection?
A. $2,500
B. $3,000
C. $4,000
D. $4,500
Which of the following cost functions exhibits cost complementarity?
A. -4Q1Q2 + 8Q1.
B. -4Q2 + 8Q1.
C. 6Q1Q2 – Q1.
D. 4Q2Q1 + 8Q1.
A potential problem with piece-rate plans is that:
A. workers will have a tendency to under-produce the good.
B. workers have no incentive to work hard.
C. workers may put little emphasis on the quality of the good.
D. it is difficult for managers to enforce.
Changes in the price of an input cause:
A. isoquants to become steeper.
B. slope changes in the isocost line.
C. parallel shifts of the isocost lines.
D. changes in both the isoquants and isocosts of equal magnitude.
Which of the following is an outside incentive that forces managers to put forth
maximal effort?
A. Revenue-sharing contracts
B. Performance bonuses
C. Threat of takeovers
D. Flat fees
When firm 1 enjoys a first-mover advantage in a Stackelberg duopoly, it will produce:
A. more output and charge a lower price than firm 2
B. more output and charge the same price as firm 2
C. less output and charge the same price as firm 2
D. less output and charge a higher price than firm 2
Suppose you are the marketing manager for Fruit of the Loom. An individuals inverse
demand for Fruit of the Loom womens underwear is estimated to be P = 25 – 3Q (in
cents). If the cost to Fruit of the Loom to produce an item of womens underwear is
C(Q) = 1 + 4Q (in cents), compute the price Fruit of the Loom should charge for a
package of womens underwear.
A. $1.09
B. $1.02
C. $108.50
D. $136.50
Which of the following pieces of legislation is NOT aimed at curbing the negative
effects of asymmetric information?
A. Robison-Patman Act
B. Securities and Exchange Act
C. Lanham Act
D. Truth in Lending Simplification Act
An increase in the likelihood of a dismissal:
A. raises productivity at an increasing rate.
B. raises productivity at a decreasing rate.
C. decreases productivity at a decreasing rate.
D. decreases productivity at an increasing rate.
A monopoly has two production plants with cost functions C1 = 50 + 0.1Q1
2 and C2 =
30 + 0.05Q2
2. The demand it faces is Q = 500 – 10P. What is the profit-maximizing
level of output?
A. Q1 = 62.5; Q2 = 125.
B. Q1 = 125; Q2 = 62.5.
C. Q1 = Q2 = 125.
D. Q1 = Q2 = 62.5.
In the long run, monopolistically competitive firms:
A. charge prices equal to marginal cost.
B. have excess capacity.
C. produce at the minimum of average total cost.
D. have excess capacity and produce at the minimum of average total cost.
Suppose market demand and supply are given by Qd = 100 – 2P and QS = 5 + 3P. If a
price ceiling of $15 is imposed, what will be the resulting full economic price?
A. $19.
B. $21.
C. $6.
D. $25.
Consider an antique auction where bidders have independent private values. There are
two bidders, each of whom perceives that valuations are uniformly distributed between
$100 and $1,000. One of the bidders is Sue, who knows her own valuation is $200.
What is Sues optimal bidding strategy in a second-price, sealed-bid auction?
A. Submit a bid of $150.
B. Submit a bid of $200.
C. Submit a bid that is less than $150.
D. Yell “mine” when the bid reaches $150.
Consider the following information for a simultaneous move game: If you advertise and
your rival advertises, you each will earn $5 million in profits. If neither of you
advertises, you will each earn $10 million in profits. However, if one of you advertises
and the other does not, the firm that advertises will earn $15 million and the
non-advertising firm will earn $1 million. If you and your rival plan to be in business
for 10 years, then the Nash equilibrium is:
A. for each firm to advertise every year.
B. for neither firm to advertise in early years, but to advertise in later years.
C. for each firm to not advertise in any year.
D. for each firm to advertise in early years, but not advertise in later years.