Refer to Figure 11-1. The external cost associated with producing the good is:
a) $5.
b) $7.
c) $8.
d) $12.
e) $2.
In each case below, find the profit-maximizing level of output. Verify that each output
level is a maximum by checking the second derivative.
(a) = ‘“50 + 200Q ‘“ 10Q2
(b) = ‘“100 + 300Q ‘“ 4Q3
In an LP problem, the goal is to maximize the objective function S + 3T, subject to the
binding constraints S + T ‚ 700 and S + 2T ‚ 1,000. The optimal solution is:
a) S = 400 and T = 300.
b) S = 200 and T = 600.
c) S = 700 and T = 0.
d) S = 0 and T = 500
e) S = 500 and T = 200
The model of the kinked demand curve in price competition implies that:
a) strong brand loyalty by consumers gives firms little incentive to reduce prices.
b) free entry in the market will eventually reduce economic profits to zero.
c) a firm’s competitors will match any price cuts by the firm but not price hikes.
d) firms will coordinate prices so as to maximize group profit.
e) firms in the market match the market price set by a single dominant firm.
A dealer, who buys items at antique auctions every week, notices a consistent pattern in
large antiques auctions. Items auctioned in the first 30 minutes and in the last 30
minutes tend to fetch lower than expected prices. Items in the middle of the auction
claim relatively high prices.
(a) If the dealer’s observation is correct, are antique buyers behaving rationally?
(b) What strategy do you suggest in response to this pattern?
An efficient quantity-price agreement is achieved by:
a) finding a point of tangency between buyer and seller profit contours.
b) supplying the maximum quantity that the buyer demands.
c) finding the buyer’s value-maximizing quantity.
d) minimizing the supplier’s average cost per unit.
e) finding a point where the seller’s marginal cost is equal to zero.
Refer to Figure 11-1. In the presence of externalities, what is the efficient price and
quantity combination in the market?
a) $5 and 10 units
b) $7 and 10 units
c) $7 and 15 units
d) $5 and 15 units
e) $8 and 8 units
A firm produces shampoo (S) and conditioner (C). The profit contribution of shampoo
is $3 per unit, while conditioner’s contribution is $6 per unit. What is the slope,
(„C/„S) of the firm’s objective function?
a) -18
b) -2
c) -6
d) -.5
e) 0
Due to an increase in the price of a competitor’s product, the demand for a firm’s
product increases sharply. How is this most likely to affect the firm’s marginal revenue
and marginal cost?
a) Marginal revenue will increase but marginal cost will decrease.
b) Both marginal revenue and marginal cost will not be affected.
c) Both marginal revenue and marginal cost will increase.
d) Marginal revenue will not change but marginal cost will increase.
e) Marginal revenue will increase but marginal cost will not change.
The quantity that is set by the dominant firm in an oligopolistic industry:
a) is based on the price set by other firms.
b) is at the level where its marginal revenue and marginal cost are equal.
c) is equal to the total industry output.
d) ensures that there is zero economic profit in the industry.
e) is equal to the output produced in a perfectly competitive industry.
Firm X is currently selling a consumer good and faces two related decisions, one with
respect to pricing and the other with respect to marketing. With respect to pricing, it can
maintain its ‘standard’ price or it can adopt a lower ‘discount’ price. With respect to
marketing, it can keep with its current advertising campaign or it can expand its
advertising. The main risk facing the firm concerns the course of the economy in the
near-term: whether the economy will continue healthy growth or whether it will
experience a recession. The table below shows the firm’s possible profit results (in $
millions) depending on its price and advertising actions. Finally, the firm judges that
there is an 80% chance of growth and a 20% chance of a recession.
(a) Firm X must make its decision now (before knowing the future course of the
economy). Which of the four alternatives maximizes its expected profit?
A movie producer is negotiating with an up-coming director to direct its next summer
action film. The director’s latest movie has been well-received and there is talk that he
might be nominated for an academy award. The producer believes the director is
currently worth a $500,000 fee but would be worth a $2 million fee if he is nominated
for an Oscar (these are the producer’s reservation prices). For his part, the director’s
current walk-away price is $300,000 but it would rise to $1.5 million with an Oscar
nomination. The producer thinks the chance of a nomination is 0.3; the director thinks it
is 0.6.
(a) Can the parties agree on a flat dollar fee? If so, what is the zone of agreement?
(b) Is negotiating a contingent fee a better option for the parties? Explain.
Profit maximization is an ambiguous guide to decision making in the private sector
because:
a) firms in the private sector usually do not aim at profit maximization.
b) the goal of profit maximization contradicts the goal of satisfying the firm’s
shareholders.
c) of the presence of risk and uncertainty.
d) profit-maximization ignores social costs and benefits.
e) None of the above answers is correct.
If the expected litigation value for each firm for a case is $275,000 and the court costs
for the firms are $55,000 and $30,000 respectively, then the size of the zone of a
mutually beneficial agreement is:
a) $220,000.
b) $85,000.
c) $25,000.
d) $75,000.
e) $245,000.
What is the dilemma in the prisoner’s dilemma? What is the key assumption about
behavior? Suggest one way to overcome the dilemma.
Which of the following leads to adverse selection in a market?
a) Signaling
b) Externalities
c) Uncertainty
d) Asymmetric information
e) Moral hazard
A discount appliance company is planning to advertise extensively before opening a
new store. It has allocated $240,000 for advertising. The objective of the company is to
maximize the total number of customers exposed to the firm’s ads. Formulate a linear
programming problem for the company given the information provide and find the
optimal solution.
Mathematically explain the relationship between marginal revenue and price elasticity.
Suppose the inverse demand curve of a firm is given by the equation: P = 2,500 ‘“ 10Q.
Compute the firm’s total revenue and marginal revenue, and determine the quantity that
maximizes total revenue.
What is regression analysis, and what are the major steps in using it?
Why do antitrust authorities prefer to use the Herfindahl-Hirschman Index for their
analyses instead of concentration ratios?
Construct a payoff table that depicts duopolists, each facing a kinked demand curve.
With a kinked demand curve, all firms maintain the current price (at the kink in
demand) unless conditions change drastically.