In order for isoquants to have a diminishing marginal rate of substitution, they must be:
A. L-shaped.
B. straight lines.
C. vertical.
D. None of the statements is correct.
You are the manager of a monopoly that faces a demand curve described by P = 63 –
5Q. Your costs are C = 10 + 3Q. The profit-maximizing output for your firm is:
A. 3
B. 4
C. 5
D. 6
You operate in a duopoly in which you and a rival must simultaneously decide what
price to advertise in the weekly newspaper. If you each charge a low price, you each
earn zero profits. If you each charge a high price, you each earn profits of $3. If you
charge different prices, the one charging the higher price loses $5 and the one charging
the lower price makes $5.
a. Find the Nash equilibrium for a one-shot version of this game.
b. Now suppose the game is infinitely repeated. If the interest rate is 10 percent, can
you do better than you could in a one-shot play of the game? Explain.
c. Explain how “history” affects the ability of firms in this game to achieve an outcome
superior to that of the one-shot version of the game.
Which of the following is a public good?
A. National defense
B. Telephones
C. Electricity
D. All of the statements associated with this question are public goods.
The additional cost incurred by using an additional unit of the managerial control
variable is defined as the:
A. total cost.
B. net cost.
C. net benefit.
D. marginal cost.
Delta Software earned $10 million this year. Suppose the growth rate of Deltas profits
and the interest rate are both constant and Delta will be in business forever. Determine
the value of Delta Software when:a. The interest rate is 10 percent and profits grow by
4 percent per year.b. The interest rate is 10 percent and profits grow by 0 percent per
year.c. The interest rate is 10 percent and profits decline by 4 percent per year.d. The
interest rate is 10 percent and profits grow by 12 percent per year. (This part of the
question is tricky.)
At a very basic level, food and shelter constitute the two most important goods needed
to sustain human life. Accordingly, assume that a poor person must allocate his income
solely between food and shelter.a. Show that if shelter is an inferior good, food must be
a normal good.b. If food is a normal good, is shelter necessarily an inferior good?
Explain, and show your answer graphically.
Which of the following may transform an industry from oligopoly to monopolistic
competition?
A. Entry
B. Takeover
C. Exit
D. Acquisition
Effective limit pricing between one incumbent firm and one potential entrant involves:
A. the incumbent linking the pre-entry price to post-entry profits only.
B. the incumbent reducing price below the monopoly price to prevent entry only.
C. the incumbent linking the pre-entry price to post-entry profits and the incumbent
reducing price below the monopoly price to prevent entry.
D. None of the statements are correct.
If firms expect prices to be higher in the future and the product is not perishable, then
A. the current supply curve shifts to the left.
B. the current supply curve shifts to the right.
C. producers produce more output to hold back for the future.
D. none of the statements associated with this question are correct.
An excise tariff imposed on foreign competitors will:
A. increase domestic firms profits at all levels of demand.
B. increase domestic firms profits only when demand is high.
C. increase domestic firms profits only when demand is low.
D. have no impact on domestic firms profits when demand for domestic goods is high.
Consider an incumbent that is a monopoly currently earning $2 million annually. Given
the declining costs of raw materials, the incumbent believes a new firm may enter the
market. If successful, a new entrant would reduce the incumbents profits to $1.2 million
annually. To keep potential entrants out of the market, the incumbent lowers its price to
the point where it is earning $1.6 million annually for the indefinite future. If the
interest rate is 10 percent, does it make sense for the incumbent to limit price to prevent
entry?
A. No, since $4 million > $400,000.
B. Yes, since $4 million > $400,000.
C. No, since $2 million > $200,000.
D. Yes, since $2 million > $200,000.
Clark Industries currently spends 5 percent of its sales on advertising. Suppose that the
elasticity of advertising for Clark is 0.25. Determine the optimal profit margin over
price (P – MC)/P.
A. 15 percent.
B. 20 percent.
C. 25 percent.
D. None of the answers is correct.
You are the manager of a firm operating in a differentiated-product oligopoly. Show
graphically your optimal response to an increase in marginal cost ifa. You believe rivals
will follow price reductions but not price increases.b. You believe rivals will hold
output constant if you decrease output.c. You believe rivals will follow price increases
but not price decreases.
Keds-the traditional maker of white canvas tennis shoes-was near oblivion in the early
1980s because competitors like Nike, Reebok, Adidas, and Brooks took away many of
its customers. If you were at the helm of Keds, what would you have done to turn the
company around?
Individuals who choose to attend school have made a decision to invest in human
capital. Use the terminology of net present value analysis to explain why you are
attending school.
A bond pays $100 at the end of each year for five years, plus an additional $1,000 when
the bond matures at the end of five years. What is the most you would be willing to pay
for this bond if your opportunity cost of funds is 6 percent?
Monsanto, the maker of Nutrasweet, owned the patent to aspartame, the official name
of the sweetener. In 1987 Monsantos patent expired in Europe, allowing other firms to
produce aspartame under other brand names. What impact do you think this had on the
market for aspartame and Monsantos profits?
Zelda Manufacturing has a rather unique product that sells for $15 per unit, and the
marginal cost is $7.50. Determine the Lerner index for Zelda Manufacturing. Does this
index indicate market power?
You are the manager of a firm that plans to expand the human resource base of its
operation by hiring additional business school graduates over the next few years. You
recently read an article in The Wall Street Journal that reports that enrollments in
business schools have declined as students are moving into the “hard sciences.” That
same article reports that the shakeup of upper management is over at U.S. firms, and
that over the next decade there will be a nationwide surge in the demand for MBAs.
How will these events affect your firms ability to expand its own base of MBAs?
Congress is considering legislation that will provide additional investment tax credits to
businesses. Effectively, an investment tax credit reduces the cost to firms of using
capital in production. Would you expect labor unions to lobby for or against such a bill?
(Hint: What impact would such a plan have on the capital-to-labor ratio at the typical
firm?)
When MCI announced a price discount plan designed to induce small firms to use its
services, the price of its stock immediately declined. Why do you think the stock market
reacted negatively to MCIs plan to attract new customers?