Suppose that demand for and supply of a commodity in a market are shown on a graph
with price on the vertical axis and quantity on the horizontal axis. The y-intercept of the
demand curve is equal to $30. The equilibrium price and quantity are $20 and 300 units
respectively. What is the total consumer surplus in the market?
a) $2,000
b) $1,300
c) $9,000
d) $3,000
e) $1,500
A firm produces three products A, B, and C. Long-run projected sales per year are
10,000 units of A, 12,000 units of B, and 8,000 units of C.
(a) Determine whether the firm should remain in business under the following
conditions:
Good A sells at $5 per unit, and average variable cost (AVC) is $3.5. Good B sells at
$7.5 per unit, and AVC is $5. Good C sells at $10 per unit, and AVC is $7.50. Total
fixed cost is $60,000 per year.
(b) If the firm allocates fixed cost using standard accounting practices, what is the total
accounting profit for each good?
An out-of-court settlement in a dispute is mutually beneficial if the:
a) difference between the parties’ court costs is greater than the difference between their
expected values from litigation.
b) sum of the parties’ court costs is smaller than the difference between their expected
values from litigation.
c) sum of the parties’ court costs is greater than the difference between their expected
values from litigation.
d) sum of the parties’ court costs is greater than the sum of their expected values from
litigation.
e) difference between the parties’ court costs is smaller than the difference between their
expected values from litigation.
Which of the following is true of a firm’s fixed costs?
a) A firm should shut down if it cannot cover its fixed costs.
b) Fixed costs are incurred regardless of the firm’s level of output.
c) Fixed costs are the same as a firm’s total costs.
d) Fixed costs are reduced to zero if the firm produces no output.
e) Accounting profit equals economic profit when fixed costs fall to zero.
In the absence of regulation, which of the following is true of a good or service that
generates a positive externality?
a) The supply of the good will be less than the socially optimal level of output.
b) The firm captures the benefit from the positive externality in the form of increased
profits.
c) The market price of the good will be equal to its marginal external cost.
d) The market price of the good will be less than the socially optimal price.
e) The firm will produce an output such that marginal total cost equals price.
A firm’s demand equation is given by: Q = 60 ‘“ 60P + 2Y, where Q is quantity, P is
price, and Y is income. If price increases by $2 and income increases by $80, then
quantity demanded will:
a) increase by 160 units.
b) increase by 80 units.
c) decrease by 120 units.
d) increase by 40 units.
e) decrease by 60 units.
INSITE Corporation produces advanced analytic software for computer simulations
called ‘Model It’. Based on a regression analysis of product sales in the first year after
launch, INSITE’s marketing department estimates the demand for ‘Model It’ to be:
QM= 1,200 – 8PM+ 4PSwith adjusted R2= 0.65, and with all of the above coefficients
statistically significant. Here, QMdenotes units sold of ‘Model It’ software, PMdenotes
‘Model It’s’ price, and PSdenotes the price of a best-selling statistical software package
(with both prices in dollars).
(a) Currently, PM= $200 and PS= $300. What is the predicted demand for ‘Model It’
software? The price PShas been unchanged (at $300) during the last 6 months. Given
this information, write down the equation for ‘Model It’s’ demand curve (with QMas the
left-side variable). Also determine its inverse demand curve (with PMas the left-side
variable).
(b) An industry analyst comments that demand for ‘Model It’ is not very sensitive to
changes in the price of the statistical software package PS. (This package does perform
some of the same operations as ‘Model It,’ but not as quickly or conveniently.) Carefully
assess this contention. Do you agree or disagree?
(c) As is true for many information goods, the marginal cost of producing Model It is
negligible. However, the company incurred significant costs in developing the product
for market (estimated to be about $350,000). Given the estimated demand of part (a),
determine the optimal price and quantity for ‘Model It’.
(d) A marketing department analyst realizes that a potentially important determinant of
demand for ‘Model It’ software is the price of computer workstations. The analyst
reruns the regression model and now includes the price of workstations along with the
other variables. The new model differs from the original regression of part (a) in the
following ways: The adjusted R2increases from 0.65 to 0.78. The coefficient of
PMchanges from -8 to -10, while the coefficient of PSis essentially unchanged. The new
regression coefficient for PW(the workstation price) has a negative sign. Finally, all
three price coefficients are highly significant.
Is the new regression equation an improvement over the original? In the new
regression, QMis observed to be more sensitive to changes in PMthan in the original
regression. Explain why this might be the case?
Gold Tracker monitors the price of precious metals and has developed a forecasting
model for the sales of gold: Q = 4,000 − 0.01P + 1.5C − 1.25X + 1.0S, where Q =
weekly sales of gold (in millions of ounces), P is the price of gold (dollars per ounce), C
is the most recent one-month report of the consumer price index of inflation (in
percent), X is an index of the exchange rate of the U.S. dollar compared to seven other
currencies, and S is the market price of an ounce of silver (dollars per ounce).
(a) Recently, the price of gold has been $380 per ounce, inflation was measured at 0.2%
for the month, the dollar has been trading at 99.7 on the foreign exchange index, and
silver has been steady at $9.50 per ounce. What is the expected quantity of gold traded
per week?
(b) Forecast sales of gold for the next two weeks if gold’s price is expected to rise by
1% per week, inflation is expected to remain constant, the dollar is expected to fall by
5% per week, and the price of silver is expected to rise by 2% per week.
A coffee shop decides that it will increase its market share to 55% by the end of the year
by lowering the price of a cup of coffee. The price cut will certainly result in an
increase in the firm’s share but will lower its profits. Which of the following best
explains the firm’s decision?
a) Satisficing behavior.
b) Price discrimination.
c) Social responsibility.
d) A sensitivity analysis.
e) Revenue maximization.
Suppose the government plans to build a dam at one of several locations in the country.
The government should build the dam in the location where:
a) it can get the highest revenue from levying taxes on the water generated.
b) the cost of building the dam is the lowest.
c) the marginal external cost of building the dam is the lowest.
d) the net benefit of building the dam is the greatest.
e) the marginal benefit from the dam just covers the marginal internal cost.
Demand for a good is given by: QD = 100 ‘“ P and supply by QS = .5P ‘“ 20, where P is
the market price of the good. In equilibrium, price and output under perfect competition
will be:
a) $60 and 10 units respectively.
b) $80 and 20 units respectively.
c) $70 and 30 units respectively.
d) $100 and 30 units respectively.
e) $120 and 35 units respectively.
If the regulator institutes average-cost pricing in a natural monopoly
market, then:
a) the firm makes zero economic profit.
b) the firm has an incentive to produce at minimum cost.
c) the marginal benefit to the consumer is less than marginal cost to the
firm.
d) firms in the market will produce at the efficient level.
e) consumer surplus in the market is maximized.
A firm must decide whether to launch a new product before knowing whether sales
demand will be strong or weak. In addition, depending on how demand unfolds, the
firm has the flexibility to set either a high price or a low price. The best order in which
to draw the firm’s decision tree is:
a) launch, set price, and observe demand.
b) observe demand, launch, and set price.
c) launch, observe demand, and set price.
d) set price, observe demand, and launch.
e) set price, launch, and observe demand.
Which of the following identifies the optimal usage of inputs by a profit-maximizing
firm?
a) Marginal product of labor = marginal product of capital = 0
b) Marginal product of labor/price of labor = marginal product of capital/price of capital
c) Marginal revenue product of labor = marginal revenue product of capital
d) Marginal cost of labor = marginal cost of capital
e) Marginal product of labor/marginal product of capital = price of capital/price of labor
If the income elasticity of demand for a good is greater than one, it implies that:
a) as consumers’ incomes increase, the quantity demanded of the good falls.
b) sales of the good are highly sensitive to changes in consumers’ income.
c) the quantity demanded of the good increases during a recession.
d) an increase in consumers’ income will lead to a proportionate increase in sales of the
good.
e) sales of the good are highly sensitive to changes in the prices of other goods.
The equation Q = a + bt + ct2represents:
a) a quadratic trend.
b) a linear trend.
c) a smooth downward trend.
d) a harmonic trend.
e) an exponential trend.
When a chemical firm is required to internalize the external cost of pollution:
a) the price of the chemical produced will increase.
b) both the quantity produced and price will fall.
c) the quantity produced will increase.
d) both the price and the producer’s profit will increase.
e) the quantity will remain the same but the price will increase.
The slope of an isocost line shows:
a) the ratio of the marginal revenue product of the inputs.
b) the ratio of marginal product of the inputs.
c) the marginal rate of technical substitution.
d) the ratio of the input prices.
e) the output elasticity of production.
The price of fresh fish rose and the quantity sold fell. Other things remaining the same,
which of the following is consistent with this observation?
a) The number of consumers that have a preference for fish increased.
b) The price of meat, which is a substitute for fish, rose.
c) The fishermen learned to fish more efficiently.
d) The cost of fishing increased.
e) The supply of fresh fish increased.
If short-run average cost is increasing then:
a) average fixed cost must be increasing.
b) marginal cost must be decreasing.
c) marginal cost must be greater than short-run average cost.
d) the production function displays decreasing returns to scale.
e) average variable cost must be decreasing.
An economic variable’s trend over time indicates:
a) a general tendency for an event to occur.
b) a steady movement in the variable.
c) an irregular pattern in the movement of an economic variable.
d) a fixed path along which the variable must move.
e) a periodic variation in an economic variable.
A monopolist produces and sells 400 units at a price of $40 per unit. The monopolist’s
marginal cost is equal to $15 and average cost is equal to $23. The monopolist’s profit
is:
a) $6,800.
b) $8,000.
c) $10,000.
d) $16,000.
e) None of these are correct.
Which of the following correctly explains a probabilistic model?
a) A probabilistic model gives a description of real world economic phenomena.
b) A probabilistic model shows the possibility of a range of outcomes.
c) A probabilistic model examines the changes in economic variables over a period of
time.
d) A probabilistic model is based on value judgments.
e) A probabilistic model is used to explain long-run economic phenomena
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 deadweight loss in the market
is equal to:
a) the area of FGH.
b) the area of JGL + HMK.
c) the area of HMK.
d) the area of FJK.
e) the area of JABL + MKED.
An investor seeks to create a portfolio from three types of securities: Treasury Bills (T),
Corporate Paper (C), and Junk Bonds (J). The table lists the expected rates of return for
the asset types and their average risk (on a 1’“5 scale, where ‘˜5’ denotes maximum
risk). The investor seeks portfolio allocations (T + C + J = 1) that will maximize the
expected return on her portfolio, while maintaining an overall risk of no more than ‘˜3’.
(a) Formulate the investor’s linear programming problem.
‘All fixed costs are sunk costs and all sunk costs are fixed costs.’ Examine the validity
of this statement.
What is the role of information in a strategic game?
According to the saleswoman, the used car you are thinking of buying was owned by an
elderly lady who only drove it to church and always traded in for a new vehicle every
two years. Is this car likely to be a good buy?
Why is identification a problem in demand estimation? What management errors might
occur if a demand relationship is not properly identified?
The U.S. Department of Justice (DOJ) merger guidelines call for the DOJ to examine
proposed mergers, and approve or disapprove them. Mergers which are disapproved,
and which are nonetheless consummated, face potential court challenge. The guidelines
are based on the post-merger HHI. If the HHI after the merger is less than 1,000, the
DOJ hardly ever disapproves the proposed merger. If the HHI after the merger is above
1,800, and has increased by more than 100 points, the DOJ is very likely to contest the
proposed merger. Is this a reasonable stance on merger activity by the antitrust
authorities?
A furniture manufacturer produces two types of tables. Table A sells for $430 and Table
B for $300 per unit. Both types require 10 hours of labor. The hardwood requirement of
Table A is $120 of per unit and that of Table B is $ per unit. The cost of labor is $10 an
hour, and 400 labor hours are available per week. The firm’s available supply of
hardwood is $3,600 per week. Formulate, graph and solve the firm’s linear
programming problem.
Describe how a decision-maker’s attitude toward risk affects her strategy for acquiring
information.