The production of a good with positive externalities will increase when:
a) the government provides a subsidy for the good.
b) the marginal internal cost of the good is higher than the marginal total cost.
c) there is a price ceiling of zero in the market.
d) the producer sells the good for a very high price markup.
e) there are a large number of buyers and sellers in the market.
Under imperfect information, bargainers:
a) may miss some efficient agreements due to self-interested strategic behavior.
b) can never reach an efficient agreement.
c) typically have sufficient incentives to fulfill the terms of the agreement.
d) will have an interest in revealing their true values at the outset of negotiations.
e) typically start with moderate and compatible demands.
When there is perfect information confirming an event, the revised probability of the
event will be:
a) 0.
b) the same as the prior probability.
c) 1.0.
d) 100% greater than the prior probability.
e) smaller than the prior probability.
A movie studio faces uncertainty about the cost of producing a film. Its cost can be $40
or $60 million with probabilities .6 and .4 respectively. The box office revenue from the
film is also uncertain, either $60 million or $40 with probabilities .3 and .7 respectively.
The film’s expected profit is
a) $10 million
b) $12 million.
c) $4 million.
d) $16 million.
e) None of these answers is correct.
In each case, determine the total possible trading gain (i.e., the sum of the agents’
profits).
(a) The seller’s and buyer’s reservation prices are $275,000 and $375,000, respectively.
(b) The seller’s and buyer’s reservation prices are $800,000 and $545,000, respectively.
A firm’s expected profit without information is $50,000, while its expected value with
test information is $75,000. If the cost of the test is $40,000, then the expected value of
information is:
a) $85,000.
b) $35,000.
c) $25,000.
d) $10,000.
e) $40,000.
A factory produces product A according to the production function QA= 100XA, where
XAdenotes the amount of input and QAis the quantity produced. It also produces
product B according to the production function QB= 200XB– XB2, where XBdenotes the
amount of input and QBis the quantity produced. The total available amount of input X
is 100 units. The firm’s profit-maximizing allocation of input X is:
a) XA= 60 and XB= 40.
b) XA= 50 and XB= 50.
c) XA= 0 and XB= 100.
d) XA= 100 and XB= 0.
e) XA= 30 and XB= 70.
(a) In a sealed-bid auction, there are three firms bidding. Each firm’s bid lies within the
range $25 million to $35 million, with all values in between equally likely. If the first
firm bids $30 million, what is the probability that its bid is the highest?
(b) If the firm bids $33 million instead, what is the probability that its bid is the
highest?
Which of the following is an example of a good with positive network externalities?
a) A high-end car that has a long waiting list of prospective buyers
b) A shaving cream that is sold along with a pair of free razor blades
c) An online dating service that only allows registered users to use the service
d) An all-you-can-eat buffet at a restaurant
e) A movie screening that requires customers to buy tickets to watch the movie
When deciding among mutually exclusive projects, a public manager should choose:
a) all projects that have benefit-cost ratios greater than one.
b) all the projects that have positive net benefits.
c) the project with the greatest benefit-cost ratio.
d) the project with the greatest positive net benefit.
e) the project with the lowest total cost.
Which of the following is true of subjective probability?
a) It is a measure of the historical frequency of an uncertain event.
b) It is a measure of the frequency of a certain event.
c) It represents the decision maker’s best assessment, based on current information, of
the likelihood of an uncertain event.
d) It represents an intuitive and ad hoc assessment.
e) It measures the degree of variation around the mean.
Assume that the minimum efficient scale for a typical firm in an industry is 2 million
units. The estimated output for the whole industry is 6 million units. Therefore, one can
conclude that:
a) the industry is a natural monopoly.
b) the output produced in the industry is less than the perfectly competitive output.
c) the industry experiences increasing returns to scale.
d) the industry is likely to support 3 firms, each producing at minimum efficient scale.
e) the price in the industry is higher than the perfectly competitive price.
In the long run, monopolistically competitive firms:
a) earn zero economic profit.
b) face perfectly elastic demand curves.
c) tend to standardize their products.
d) produce output at minimum marginal cost.
e) merge and form a few dominant firms to maximize profit.
Which of the following is true in a competitive procurement?
a) A lower price increases a supplier’s chance of being selected but reduces its potential
profit upon winning.
b) A lower price reduces a bidder’s chance of winning as well as its potential profit.
c) A higher price increases a bidder’s chance of winning as well as its potential profit.
d) A lower price reduces a supplier’s chance of being selected but increases its potential
profit.
e) A lower price increases a supplier’s chance of being selected as well as raises its
potential profit.
The Federal Communications Commission (FCC) is trying to decide how to allocate an
unused part of the radio spectrum for personal communication services (PCS) which are
advanced cellular communication services. The monthly demand for the service in a
major city is given by Q = 1000 ‘“ 10P where Q is the number of subscribers (in
thousands) and P is the monthly service price (in $). A typical firm can provide PCS
service at the cost: MC = AC = $20 per subscriber per month.
(a) The FCC is considering licensing the exclusive right to use the spectrum to a single
firm. What price should the firm set, and what is the resulting total number of
subscribers? Suppose the FCC charges the firm to license the spectrum. What is the
maximum monetary amount that the FCC could expect to receive for exclusive
spectrum rights?
(b) An alternative FCC policy is to allow multiple firms to share the spectrum in order
to promote competition in the PCS market. If competition among multiple firms
approximates perfect competition, what will be the price and total number of
subscribers?
(c) Would it be more efficient for the FCC to license the spectrum to a single firm or
allow multiple firms to share the spectrum?
The size of the zone of agreement measures:
a) the difference between the buyer’s marginal benefit and the price.
b) the average of the trading parties’ walk-away prices.
c) the difference between the seller’s marginal cost and the price.
d) the difference between the buyer’s and seller’s walk-away values.
e) the excess of producer’s surplus over consumer’s surplus.
The following table shows the total output per hour produced in a factory at various
levels of employment of labor. The firm sells each unit of output at $2 and each worker
is paid a wage of $12.
Table 5-1
Refer to Table 5-1. How many workers should the firm employ in order to maximize
profit?
a) 7
b) 6
c) 5
d) 4
e) 3
Which of the following is true of the R-squared statistic?
a) It measures the slope of the regression equation.
b) It measures the proportion of the variation of the dependent variable left unexplained
by the multiple-regression equation.
c) It measures the total variation in the dependent variable induced by changes in the
explanatory variables.
d) It is the standard error of the coefficient associated with an independent variable.
e) It measures the proportion of the variation of the dependent variable explained by the
multiple-regression equation.
An auction which is characterized by descending bids is known as a(n):
a) English auction.
b) Dutch auction.
c) French auction.
d) sealed-bid auction.
e) second-price auction.
Which of the following is an example of asymmetric information?
a) A buyer who makes a large raise in bid at an auction to discourage other bidders.
b) A doctor who performs a large number of in-office tests and is paid per test.
c) An elderly couple who elect a generous medical insurance policy.
d) A board of directors that is trying to refine the compensation system for its CEO.
e) A pitcher (about to sign with a new team) who is aware of a nagging elbow pain.
KopyKat is a firm that specializes in printing business cards and résumé’s, using
the latest laser technology. The manager has estimated that weekly demand can be
approximated by P = 25 ‘“ .001Q, where P is price and Q is output per week. The firm’s
cost function is C = 25,000 + 13Q + .002Q2, where C is total cost.
(a) Determine the firm’s profit maximizing price and output.
(b) The night supervisor believes that extending KopyKat’s hours by two hours in the
evening would substantially increase volume. The manager is willing to stay open for
two hours over the next three months as an experiment. What results would lead the
manager to decide if the store can remain open later in the evening on a permanent
basis?
(c) A former employee decides to sue KopyKat, alleging employment discrimination.
Although management claims innocence, they agree to settle out of court. The
settlement requires KopyKat to pay the employee $10,000 per month for the next year.
Determine the optimal price and output for the firm under these new conditions.
Computing the F-statistic allows one to:
a) measure the forecasting accuracy of the regression equation.
b) determine which variable contributes the most explanatory power to the regression.
c) measure the degrees of freedom in the regression.
d) predict the increased explanation of any additional variables that might be included.
e) test the overall statistical significance of the regression equation.
In a bargaining setting with perfect information:
a) backward induction determines the equilibrium outcome.
b) there may be many possible equilibrium outcomes.
c) the equilibrium outcome calls for a 50-50 split of the ‘pie.’
d) the situation represents a constant-sum game.
e) there is a dominant strategy equilibrium.
The city council of Anderson is evaluating several projects. A consensus has been
reached to appropriate funds for the two projects with the highest net present value. The
discount rate is 8% and the benefits from the projects are expected to continue
indefinitely. Based on the information given in the table, which projects should be
funded?
What are the problems that a manager may face while evaluating the performance of
employees who work together as a team?
Suppose that a firm is selling a good with a marginal cost of $35. Management
estimates demand elasticity to be ‘“2. What is the appropriate price to set in order to
maximize profit?
Many natural monopolies are regulated. Explain the rationale for such regulation.
A monopolist faces the demand curve P = 100 ‘“ 2Q, where P = price and Q is quantity
demanded. If the monopolist has a total cost of C = 50 + 20Q, determine its
profit-maximizing price and output.
Distinguish between the degree of concentration for U.S. sales and the degree of
concentration for U.S. production. Give at least two examples of U.S. industries that
have significantly different production and sales ratios.
Outline the major steps required to construct a benefit-cost analysis for a government
project.
A company is thinking about significantly expanding its production capacity. What
variables would it consider in making this decision? What might be useful sources of
information for estimating the potential profit impact of the expansion?