What does the law of diminishing marginal returns state?
a) When all inputs to production are increased in equal proportions, output will
eventually decrease.
b) When one input is increased, with all other inputs unchanged, the marginal product
of the input will eventually decline.
c) When one input is held constant, and all other inputs are increased, output will
eventually decrease.
d) When one input is increased, and all other inputs are held constant, output will
increase at an increasing rate.
e) When all inputs to production are increased in equal proportions, the addition to
output will increase at an increasing rate.
You have taken over your parents’ small dry-cleaning shop, and are interested in
forecasting demand for your services. Your parents never quite got around to trying to
measure demand, but they have kept extensive price and sales records. Using this data,
you employ multiple regression techniques and estimate the following logarithmic
equation:
Log(Q) = .95 − .6Log(P) + .9Log(Y) + .25Log(Pc),
where Q is the number of shirts laundered per week, P is the price in dollars of a
laundered shirt, Y is the per capita income in the local area, and Pc is the price charged
by another dry cleaner two blocks away. The number of observations is 39 (i.e., nine
months of weekly data). The equation’s R2is 0.85, the standard error of the estimate is
200, and the standard errors for the rightside variables are .45, .15, .39, and .18
respectively.
(a) Interpret the demand equation and discuss the associated regression statistics.
(b) If you were to raise the price per shirt, what would happen to total revenue?
(c) Evaluate the impact of the other dry cleaner’s price on your sales. (At the 95%
confidence level, the relevant t-statistic is about 2.04 for 35 degrees of freedom).
(d) Were your parents maximizing profit? If not, suggest an appropriate course of action
to
increase profitability.
Demand for flower bouquets in a suburban town is described by: QD = 50 ‘“ 5P + 2Y,
where Q is quantity, P is price per unit, and Y is an index of consumer income.
Similarly, supply is described by: QS = ‘“5 + 10P.
(a) If Y = 100, what is equilibrium price and output?
(b) If Y rises to 122.5, what is the new equilibrium price and output?
If the price of a product consistently exceeds its average cost, one can definitely
conclude that the firm:
a) is earning a normal rate of return.
b) is maximizing its long-run profit.
c) is producing at its most efficient level of output.
d) is earning a positive economic profit.
e) is producing at the minimum efficient scale.
When the long-run average cost is at its minimum, the long-run marginal cost:
a) is also at its lowest value.
b) is decreasing.
c) is greater than long-run average cost.
d) is at its highest value.
e) is equal to long-run average cost.
The demand for a product is given by Q = 600 ‘“ 30P. At P = $15, the firm sells:
a) 100 units.
b) 150 units.
c) 300 units.
d) 450 units.
e) 600 units.
Suppose the yearly interest rate is given by r and the annual benefit flow B from a
project is expected to continue indefinitely. Its present value is:
a) B/r.
b) B/(1+r).
c) (1+r)/B.
d) rB.
e) B/(1+r)2
The demand curve faced by individual firms under monopolistic competition is:
a) perfectly elastic.
b) perfectly inelastic.
c) downward-sloping.
d) upward-sloping.
e) the same as the market demand curve.
The following matrix displays the advertising rates and the resultant profits (in
thousands of dollars) for two rival newspapers in a major city.
(a) Assume that the newspapers set their advertising rates independently. Determine the
optimal strategy for each firm. Explain briefly.
(b) If the newspaper firms were to merge and both newspapers were managed as a
single business, how would this affect advertising pricing? Explain.
A firm produces tires by utilizing machine-hours and labor-hours. It has the
choice of producing through three separate processes using different
combinations of inputs. The optimization can be done by undertaking a
process singly or in combination. The combination matrix is provided
below:
The firm can rent a machine at a price $10 and hire a labor at a wage $15.
The firm needs to produce a minimum target of 50 tires per day.
(a) Formulate and solve a linear programming problem which will
minimize the firm’s daily cost (C).
(b) Find out the number of binding constraints in this problem.
In a perfectly competitive market, an individual firm faces a demand curve that:
a) is downward sloping.
b) lies above the marginal revenue curve.
c) is horizontal at the equilibrium price.
d) is perfectly inelastic.
e) is upward sloping.
Firm Z is a U.S. based firm that sells farm equipment and faces demand given by P =
3,000 ‘“ Q, where P denotes price in dollars and Q is quantity of units sold per month.
In its East coast factory, the firm’s fixed costs are $250,000 per month, and its marginal
cost of manufacturing the equipment is $1,000 per unit.
(a) Find the firm’s profit-maximizing output and price. What is its profit?
(b) Over the last year, the US dollar has appreciated (gained value) versus the Japanese
yen with the result that Japanese imports of farm equipment to the US have increased.
Firm Z’s marketing department judges that it now would have to cut price by $500 per
unit in order to sell the same profit-maximizing quantity as estimated earlier (The price
equation will shift inward toward the origin). Is the price-cut consistent with a
profit-maximizing strategy? Explain.
(c) Suppose that a new market for the firm’s product emerges in South America. Firm Z
has begun selling the equipment in several test markets there and has found the
elasticity of demand to be EP= ‘“3 for a wide range of prices (between $1,500 and
$2,500). The cost of shipping to South America is $200 per unit. One manager argues
that the foreign price should be set at $200 above the earlier profit-maximizing price to
cover the transportation cost. Do you agree that this is the optimal foreign price? Justify
your answer.
(d) Suppose that the firm has produced the optimal level of output in part (a). But
before this quantity is sold, demand unexpectedly falls to: P = 2,800 – 2Q, (equivalently
Q = 1,400 – 0.5P). One manager recommends cutting price to sell the entire inventory;
another favors maintaining the price in part (a) (selling less than the total inventory). Do
you agree with either manager? What optimal price would you set?
Which of the following is true of a sequential game with perfect information?
a) To obtain a complete solution to a sequential game, there should be perfect
information.
b) A sequential game with infinite moves can be solved backward to obtain a complete
solution.
c) The equilibrium in a sequential game is always a second-best solution.
d) A sequential game does not have a stable equilibrium.
e) The outcome in a sequential game is inferior to the optimal outcome.
A firm that produces and sells toys has a factory located in New Town built on a 50,000
square feet plot of land. The following table gives information about the costs of
production and output of the firm.
Table 6-1
Refer to Table 6-1. What is the average fixed cost of producing a toy?
a) $38
b) $20
c) $40
d) $51
e) $30
Max Whitley, manager of Whitley Construction, builds new homes in a booming
community in the Midwest. Although sales have slowed because of a national
recession, it now looks as if the recession is about to end. Max wants to be ready with
material, labor, and foremen to meet the demand for housing. Last year, Max built and
sold 40 starter homes which is the most popular model. Max thinks that his sales will
increase to 50 units over the current year. The going market price for this model (which
Max and his numerous competitors have charged) has been $275,000. In addition,
Whitley Construction’s marginal cost of building this model averages $245,000.
(a) Based on these facts, recommend a course of action for Max.
(b) Suppose that the economic boom raises the cost of labor and raw materials, so that
the additional cost of a starter house rises to $265,000. What is Max’s most profitable
course of action? Explain.
According to the satisficing model of management behavior, the goal of a firm is to:
a) satisfy customers, employees, and shareholders.
b) maximize the gain to society and not just to shareholders.
c) achieve a satisfactory level of performance against a benchmark.
d) maximize sales revenue and not necessarily the value of the firm.
e) maximize its market share even at the cost of profit.
Which of the following is a characteristic of a firm that is a natural monopoly?
a) The firm’s average costs decline over all levels of output.
b) The firm’s elasticity of supply is very low.
c) The firm does not incur any sunk costs.
d) The firm faces a horizontal demand curve.
e) The firm makes zero economic profit.
If a firm were to stop production of its only product, the firm’s total cost will be equal to
a) zero.
b) its total fixed cost
c) its total variable cost.
d) its opportunity cost.
e) its average cost.
A game tree diagram is used to represent:
a) a non-zero-sum game.
b) a Nash equilibrium.
c) a simultaneous game.
d) a dominant strategy equilibrium.
e) a sequential game.
In a linear programming problem, there are 3 binding constraints. Constraint A has
slope -1.5, constraint B has slope -0.5, and constraint C has slope -0.2. The objective
function’s slope is -1.2. Where would the optimal solution lie?
a) At the intersection of constraints A and B
b) At the intersection of constraints B and C
c) At the intersection of constraint A and the horizontal axis
d) At the intersection of constraint C and the vertical axis
e) Anywhere along constraint A
Which of the following is a source of market failure?
a) Unexpected shifts in demand and supply
b) Monopoly power
c) Diseconomies of scale
d) Destructive price wars between firms
e) Perfect information in markets
Which of the following, if true, would be the best example of the Bertrand model of
oligopoly?
a) The automobile market where the market price is set by the price leader
b) The electricity market where there are significant barriers to entry
c) The cigarette market where there are a small number of large firms
d) The breakfast cereal market where the product is highly differentiated
e) A competitive auction where the good that is auctioned goes to the lowest bidder
The demand curve faced by an individual firm in a competitive market, implies that the
firm:
a) can influence the market price.
b) takes the market price as given.
c) can raise the market price of the good by lowering its sales.
d) can increase its profits by raising the price of the good it sells.
e) should reduce its price in order to increase sales.
A monopoly earns positive economic profits in the long run because:
a) there are barriers to entry in the market.
b) demand in a monopoly market is perfectly inelastic.
c) it faces a kinked demand curve.
d) it operates with constant returns to scale.
e) it operates with an optimal plant size.
Mexico is capable of producing 20 auto tires or 16 microcircuits per labor hour. Brazil
is capable of producing 24 auto tires or 24 microcircuits per labor hour. Based on this
information, we can conclude that:
a) Brazil has an absolute advantage in both goods.
b) Brazil will export both goods to Mexico.
c) Mexico has a comparative advantage in tires.
d) Answers Brazil has an absolute advantage in both goods and Mexico has a
comparative advantage in tires are both correct.
e) Answers Brazil has an absolute advantage in both goods, Brazil will export both
goods to Mexico, and Mexico has a comparative advantage in tires are all correct.
Describe how reputation and warranties alleviate the problem of adverse selection.
What are the major mechanisms to address the principal-agent problems of large,
publicly held corporations? How are they intended to correct the problems? How
effective are they?
Discuss the advantages of auctions as a type of transaction compared with posted prices
and negotiated transactions.
Provide two examples of events that can cause a shift in industry supply. Draw a graph
to illustrate your answer.
What are shadow prices and why are they important? Explain.