Joes search costs are $5 per search. He wants to buy a video player for his wife for
Christmas, and the lowest price hes found so far is $300. Joe thinks 80 percent of the
stores charge $300 for video players and 20 percent charge $200. Joes optimal decision
is to:
A. continue to search for a lower price since the expected benefit of an additional
search is $20, which exceeds his per-unit search costs.
B. stop searching and purchase a video player for $200.
C. continue to search for a lower price since the expected benefit of an additional search
is $80, which exceeds his per-unit search costs.
D. None of the statements is correct.
The activity known as shirking is LEAST likely to occur when:
A. workers are not monitored.
B. the earnings of a worker are closely tied to the workers output.
C. all workers are paid the same wage rate.
D. firm ownership is separated from the managerial control.
The domestic demand and supply for sugar are Qd = 60,000 – 400P and QSD = 20,000 +
500P. The foreign supply is QSF = 20,000 + 100P. What is the domestic quantity
supplied at the domestic market price?
A. 22,000
B. 10,000
C. 52,000
D. 30,000
Which of the following are price-setting oligopoly models?
A. Stackelberg.
B. Cournot.
C. Bertrand.
D. Cournot and Stackelberg.
To circumvent the problem of double marginalization:
A. transfer prices must be set that maximize the overall value of the firm rather than the
profits of the upstream division.
B. firms should engage in two-part pricing, unless it is possible to engage in either
first-or second-degree price discrimination.
C. firms should vertically integrate.
D. None of the answers are correct.
A workers total earnings for one day is $100. He received a $20 fixed payment and
consumes 14 hours of leisure. What is the hourly wage rate?
A. $10
B. $6
C. $4
D. $8
Suppose the inverse market demand is given by P = 75 – 0.5Q. If the incumbent
continues to produce 20 units of output, which of the following equations best
summarizes the potential entrants residual demand curve?
A. P = 65 – 2Q
B. P = 20 – 0.5Q
C. P = 150 – 2Q
D. P = 65 – 0.5Q
The import tariffs that President Bush placed on imported steel likely had what effect?
A. Domestic steel producers were helped, but domestic steel consumers were hurt.
B. Both domestic steel consumers and foreign steel producers were helped.
C. Both domestic steel producers and domestic steel consumers were helped.
D. Foreign steel producers were helped, but domestic steel consumers were hurt.
Suppose option A has a lower expected value than option B. Which of the following
statements is, in general, true?
A. A risk-averse person prefers option B to option A.
B. A risk-neutral person is indifferent between options A and B.
C. A risk-averse person prefers option A to option B.
D. Insufficient information to determine.
When relationship-specific exchange occurs in complex contractual environments, the
best way to purchase inputs is through:
A. spot markets.
B. vertical integration.
C. short-term agency agreements.
D. long-term contracts.
Consider an incumbent that successfully links the pre-entry price and post-entry profit
to prevent entry. The incumbents monopoly profit is $10 million. If a rival successfully
enters the market, the incumbents profits will fall to $4 million. If the incumbent lowers
output to 25,000 units, its rival will stay out of the market, resulting in an infinite
stream of profits of $8 million annually. Due to a recent loan default, the current interest
rate is whopping 210 percent. Is limit pricing profitable for the incumbent?
A. Yes, since $19.05 million is greater than $2 million.
B. No, since $1.905 million is less than $2 million.
C. No since $4 million is less than $4.2 million.
D. Linking the pre-entry price to the post-entry profit is sufficient to guarantee the
profitability of limit pricing.
A monopolist claims his profit-maximizing markup factor is 10. What is the price
elasticity of demand for the firms product?
A. -1.5
B. -2.0
C. -2.5
D. None of the answers are correct.
The marginal rate of substitution (MRS) determines the rate at which a consumer is
willing to substitute between two goods in order to achieve:
A. a higher level of satisfaction.
B. a lower level of satisfaction.
C. the same level of satisfaction.
D. None of the statements is correct.
Which of the following is an implicit cost of going to college?
A. Tuition
B. Cost of books and supplies
C. Room and board
D. Foregone wages
Suppose a worker is paid according to the following pay scheme: For every unit
produced, the worker gets $8. Assume a worker can produce three units per hour.a.
Express the workers earnings as a function of hours worked.b. Graph the equation for
earnings.c. Graphically depict equilibrium, and show the earnings and hours worked by
the employee.d. Do you think that from the firms point of view, this scheme is better,
worse, or the same as paying the worker a wage of $24 per hour? Explain carefully.
The following provides information for a one-shot game. What are secure
strategies for firm A and firm B respectively?
A. (low price, low price)
B. (high price, low price)
C. (high price, high price)
D. Neither firm has a secure strategy.
The possibility of the endless cyclical preference is eliminated by the property of:
A. completeness.
B. more and better.
C. diminishing marginal rate of substitution.
D. transitivity.
Fli-By-Nite Airlines has 1,000 customers. These customers are of two types. Day
customers are willing to pay $700 for a flight that has a daytime departure and arrival
but only $200 for a flight on the red-eye. Night customers will pay $500 for a flight that
has a daytime departure and $300 for a flight on the red-eye. You are the manager for
Fli-By-Nite and are unable to determine whether any given individual is a day customer
or a night customer. Can you think of a self-selection mechanism that would permit you
to identify day and night customers?
Compare and contrast the output levels and profits for the Cournot, Stackelberg, and
Bertrand models. Use the following cost and demand conditions for your comparison,
and suppose there are two firms: P = 1,500 – 10Q. Each firm has a marginal cost of $20
and fixed costs of zero.
A consumer has a choice of spending $13,000 on a Honda or $9,000 on a Saturn. She is
observed buying the Saturn. Does this mean the consumer prefers the Saturn? Explain
your answer.
The government decides that a specific scarce good should be provided for everyone
who wants it at a price of zero and passes a law making it illegal to buy or sell the good.
However, people can give the good away. This good is highly desirable for some of the
population. What effect will this law have on the market? What would happen in this
market if the law were removed?
Based on your knowledge of one-shot and repeated games, would you expect tipping
behavior to differ depending on whether a person is eating in a hometown diner or in a
restaurant located in Timbuktu? Explain.
OPEC was an effective cartel for many years, but recently it has been unable to
maintain a high price for oil. What factors do you think are contributing to the demise
of OPEC?
In the early 1990s, there was considerable uncertainty in the computer industry about
whether the dominant operating system for future personal computers would be IBMs
OS/2 or Microsofts Windows. Ultimately, Windows emerged as the dominant system
despite the fact that several trade publications viewed OS/2 as the superior system. Why
do you think this outcome prevailed?
You are the manager of a Fortune 500 hotel chain and must decide where to locate a
new hotel. Based on tax considerations, your accounting department suggests that
Atlantic City is the best choice, followed closely by Las Vegas. In particular, your
current year tax savings from locating in Atlantic City are $4 million, but they are only
$3 million in Las Vegas. Your marketing department, on the other hand, has provided
you with sales estimates that suggest that the present value of the gross (of taxes)
operating profits from locating in Atlantic City are only $10 million, but they are $14
million for Las Vegas. It will cost $14 million to build the hotel in either location.
Ignoring all other considerations, where should you build the hotel? What are your
firms economic profits if you locate the hotel in Atlantic City?
A host of best-selling books advance the thesis that increases in conglomerate mergers
and concentration of U.S. industry are responsible for “obscene profits.” Do you agree?
Explain, using the Lerner index.