A firm has a division that produces X, whose total costs are TC = 10 + Q2 (where Q is
the quantity of X). The marketing division adds its own total costs of 5 + 3Q. In the
competitive external market for X, the wholesale price is $10. The transfer price of X
should be:
a. $2.
b. $5.
c. $10.
d. $12.
e. $15.
If there are two large firms, each with one-quarter of the market, and 10 firms, each
with one-twentieth of the market, in an industry, the Herfindahl-Hirschman index will
be:
a. 250
b. 1,350
c. 1,500
d. 1,600
e. 1,850
A regression of the mean annual precipitation in inches as a function of number of days
per year with measurable precipitation across cities yielded rain = “2 + 0.8 (number of
rainy days), R2 = .75, and RMSE = 11. How do you interpret the intercept coefficient
estimate of “2?
a. There must be 2.5 rainy days before there is any measured rain.
b. If there are no rainy days in a year, meteorologists report a “2-inch rainfall for the
year.
c. The regression results hold for values of the independent variables that are similar to
values used to estimate the regression and not for extreme values, like 0 rainy days per
year.
d. Since the RMSE is 5.5 times the intercept coefficient, we can conclude that it is not
significantly different from 0.
e. The average annual rainfall will be 0.8 inch for every rainy day exceeding 2.
From whom would you prefer to buy a used car, everything else being equal?
a. A mechanic.
b. A used-car dealer.
c. A family that is moving to China.
d. A person who is buying a new car.
e. You would have no preference among these choices.
At equilibrium, the marginal rate of substitution describes:
a. the slope of the budget constraint.
b. the number of units of one good that a consumer is willing to trade for an additional
unit of another good, holding utility fixed.
c. the slope of the demand curve.
d. the number of units of one good that a consumer is willing to trade for an additional
unit of another good in order to increase utility by 1 unit.
e. a and b
Suppose duopolists in the market for spring water share a market demand curve given
by P = 50 ” 0.02Q, where P is the price per gallon and Q is thousands of gallons of
water per day. The marginal cost of producing water is near zero for both firms.
Optimal output for Cournot duopolists moving simultaneously is:
a. 0 gallons of water per day per firm.
b. 625 gallons of water per day per firm.
c. 833 gallons of water per day per firm.
d. 1,250 gallons of water per day per firm.
e. 2,500 gallons of water per day per firm.
The XYZ Steel Company produces its own coal for use in its production facility. The
demand for steel is given by Ps = 500 ” 2Qs and the total cost of producing steel is
given by TCs = 175Qs, where Qs is tons of steel per week. The price of coal in a
perfectly competitive market outside the firm is $250 per ton, and the total cost of
producing coal is given by TCc = 40 + 5Qc
2, where Qc is tons of coal per week. How
much coal should the XYZ Company produce?
a. 2 tons.
b. 25 tons.
c. 100 tons.
d. 200 tons.
e. 250 tons.
Price discrimination is defined as:
a. selling a product at the same price to each and every consumer.
b. selling a product at more than one price.
c. selling a product at its marginal cost plus a markup.
d. selling more than one version of a product.
e. producing goods and services for sale within the firm.
Murdock Glass sells stained glass panes. Its profit is given by p = “500 + 100X ” X2.
The profit-maximizing level of output is:
a. X = 50.
b. X = 100.
c. X = 200.
d. X = 300.
e. X = 600.
The transfer price of an upstream product should always equal the market price when:
a. there is an outside market for the upstream product.
b. the price elasticity of demand for the upstream product is greater than 1 (in absolute
value).
c. there is a perfectly competitive market for the downstream product.
d. the marginal cost of the downstream product is greater than 1.
e. the firm is a monopolist in its downstream market.
If price is below average total cost but above average variable cost, the break-even level
of output:
a. is greater than the profit-maximizing level of output.
b. is zero.
c. can”t be calculated since losses will be earned at each level of output including the
profit-maximizing level.
d. approaches infinity.
e. equals the profit-maximizing level of output.
If total cost is given by TC = a + bQ ” cQ2 + dQ3, then marginal cost is minimized at
units of output.
a. Q* = a/2d
b. Q* = b/2d
c. Q* = c/2d
d. Q* = b/3d
e. Q* = c/3d
Jamie is considering the purchase of a new car for $20,000. Her income is $60,000, and
her alternative is “all other things,” which sell for $1 each. If all other things are plotted
on the vertical axis and her marginal rate of substitution is , then she will buy
car(s).
a. 15,000; 0
b. 15,000; 1
c. 15,000; 2
d. 15,000; 3
e. 1/15,000; 3
A Nash equilibrium occurs when:
a. each player has a dominant strategy.
b. each player receives the same final payoff.
c. each player believes it is doing the best it can given the behavior of rivals.
d. there is no dominant strategy for any player.
e. payoffs are independent of the actions taken by rivals.
While a cartel is holding together, its individual members’ demand curves are likely to
be:
a. significantly elastic.
b. significantly inelastic.
c. close to unitary in elasticity.
d. kinked.
e. upward-sloping.
Game theory is useful for understanding oligopoly behavior because:
a. there are so many firms in an oligopoly that all are price takers.
b. firms must differentiate their products if they are to remain in business.
c. firms recognize that because there are only a few firms mutual interdependence is
important.
d. without it firms would not be able to maintain cartel agreements.
e. it allows firms to develop greater monopoly power.
The price elasticity of market demand primarily depends on the:
a. number of firms in an industry.
b. cost of producing an industry’s output.
c. availability of substitutes.
d. substitutability of inputs in producing a product.
e. supply curves of inputs.
Indifference curves cannot cross because:
a. consumers will always substitute 1 unit of a good for 1 unit of another good.
b. consumers prefer more to less.
c. a single consumption bundle would bring two different levels of utility.
d. all of the above.
e. b and c
Bathworks has exclusive rights to sell its perfumes. The demand for its perfumes faced
by Bathworks is given by Q = 250 ” 0.5P. Bathworks’s costs are given by TC = 50Q +
5Q2. Its maximum monopoly profit is:
a. $6,750.
b. $7,050.
c. $7,500.
d. $7,750.
e. $8,750.
A firm with no costs producing Q units and charging price P gets a return of r on total
assets of A if P equals:
a. rA.
b. (1 + r)A.
c. (1 + r)A/Q.
d. rA/Q.
e. rAQ.
A corner solution to a consumer choice problem suggests that:
a. the consumer is not rational.
b. one product is not purchased at all.
c. both products are preferred, but one at a lower rate than the other.
d. neither product is a normal good.
e. all of the above
Jamie is considering the purchase of a new Ferrari for $100,000. Her income is
$200,000, and her alternative is “all other things,” which sell for $1 each. If all other
things are plotted on the vertical axis and her marginal rate of substitution is ,
then she will buy Ferrari(s).
a. 200,000; 1
b. 200,000; 2
c. 1/200,000; 1
d. 1/200,000; 2
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 + 6(QLA
+ QSF). Demand for Gliberace’s stones in the two cities is given by QLA = 70 ” 2PLA
and QSF = 50 ” PSF. If Gliberace cannot price discriminate between the two cities, and
so charges the same price in each, how many stones will it sell in Los Angeles?
a. 12
b. 15
c. 18
d. 21
e. 24
The following diagram represents the market for paperback books. Which area
represents producer surplus?
a. A.
b. B.
c. C.
d. D.
e. None of the above.
Two firms (A and B) have marginal costs MCA and MCB, marginal revenues MRA and
MRB, and market marginal revenue MR. If both firms produce as a cartel, they should
produce so that:
a. MCA = MCB = MR.
b. MCA = MRA and MCB = MCB.
c. MCA + MCB = MR.
d. MCA + MCB = MRA + MRB, not necessarily MCA = MRA.
e. MCA = MCB = MRA + MRB.
The Frank Failing Company has an average variable cost of $8, average fixed cost of
$16, marginal cost of $12, and elasticity of demand “3. Frank should:
a. shut down.
b. charge $8.
c. charge $16.
d. charge $18.
e. charge $36.
When average total cost is at its minimum:
a. average variable cost is declining with increases in output.
b. average variable cost plus average fixed cost is declining with increases in output.
c. average total cost is equal to average variable cost.
d. marginal cost is equal to average variable cost.
e. marginal cost is equal to average total cost.
In the following table, the marginal product of labor at L = 10 is:
a. 0.25
b. 3.33
c. 7
d. 4
e. 3
By definition, a Nash equilibrium in a duopoly is the situation in which each player:
a. plays a dominant strategy.
b. plays the best strategy given the other’s strategies.
c. gets the highest possible payoff.
d. gets the highest payoff possible without lowering the opponent’s payoff.
e. is happy with the outcome.
For the Mickey Mice Company, the price elasticity of demand is “3, average cost is
$15, and marginal cost is $30. Mickey’s profit-maximizing price is:
a. $10.00.
b. $20.00.
c. $22.50.
d. $30.00.
e. $45.00.