Econ for Managers
A farm equipment manufacturer has already spent $3 million in research and development to design a new model of tractor. To produce the tractors, the company will have to contract to rent a factory for a year at a cost of $20 million, and will then spend an additional $10,000 per tractor in materials and wages. The company estimates that it can sell 2,000 tractors per year at a certain price, and concludes that it should produce the tractors. What is the lowest price the company could be using in this calculation?
$20,000term-38 The company needs to earn enough on each tractor to cover the fixed costs of operating for a year. $20 million spread over 2,000 tractors is $10,000 per tractor, so adding in the variable costs, the company needs to sell each tractor for $20,000
A monopolistic seller of rare oriental rugs discovers that 60% of the population is willing to pay $1,000 for a rug. The remaining 40% of the population is willing to pay $2000. Each rug costs $600 to produce. How much should the monopolist charge for each rug?
$2000 Charging $2000 would lead to 40% of the population purchasing at $1400 profit each. If there are 100 customers, that would be total profits of $56,000.
Exotic Getaway Inc. is selling vacation packages to Bahamas. The company's CEO thinks that the consumers' willingness to pay for the packages is $4,000 each, but she is not quite sure. The company has a month to sell the tickets. What price should she set?
$5,000 The company can price the tickets at $5,000 to see if they will sell. If they do not, there is plenty of time to decrease the price before the month is up.
A monopolist bakery is currently selling its cupcakes for $10 and the quantity demanded is 50. If the monopolist lowers its price to $9, it will have a quantity demanded of 80. Which of the following could be the marginal cost of producing a cupcake if the monopolist is maximizing profits at a price of $10?
$8 If the marginal cost of producing a cupcake is $8, then the monopolist would make gross margin of $9*80 - $8*80 = $80 selling at $9. This is less than the gross margin made selling at $10, which are $10*50 - $8*50 = $100. Thus selling at $10 is better for the monopolist.
The share price of a company is $20 at the beginning of the month, and $10 at the end of the month. Assuming that the company did not issue new stock during the month, which of the following statements is true? (Select all that apply)
-The WTP for the company's stock fell by an average of 50% amongst all interested buyers. -The overall valuation of the company fell over the course of the month. -Some investors may be willing to pay more than $10 for the stock.
Suppose that Alex, Maria, and Raj are the only 3 buyers of chocolate ice cream in the market. Based on the chart below showing each buyer's willingness to pay for each additional cone, what is the price elasticity of demand for a change in price from $3 to $4 dollars?
3/4 We can determine the total market demand at $3 by adding together the total number of cones at which Alex, Maria, and Raj's WTP is $3 or higher. We can see that Alex will buy 3 cones at $3 or higher, Maria will also buy 3, and Raj will buy 2, which adds up to a total of 8 cones demanded at $3. Repeating the same process for $4 (or higher), we get 2 cones for Alex, 2 cones for Maria, and 2 cones for Raj, which adds up to a total of 6 cones demanded at $4. Once we have these quantities for demand at the new and old prices, we can plug them into the equation for price elasticity of demand = absolute value of [(6-8)/8]/[(4-3)/3] = 3/4.
In which of the following situations would the use of a focus group be preferable to a survey?
A coffeehouse is interested in seeing why customers do not like its new French roast. This analysis would benefit from more in-depth qualitative information.
Which of the following statements regarding complements is true? Select all that apply.
A consumer is willing to pay more to purchase two complementary goods together. The cross-price elasticity of demand for two goods that are complements will be negative. A consumer is less likely to purchase a good if a complement for that good is not available.
A car collector wishes to sell a rare Porsche. There are two prospective buyers, and each buyer knows the willingness to pay of the other. The first buyer's valuation is $200K, and the second buyer's valuation is $300K. Which of the following methods would generate the greatest revenue?
A fixed price of $250k. At this price, the higher-WTP customer will purchase the car for $250k. This is the only option that allows the seller to earn substantially more than $200k.
Which of the following is likely to increase unemployment the most?
A law implements a minimum wage above the market equilibrium wage and the labor supply is elastic. An elastic supply of labor means that an increase in wages will result in a larger increase in the number of hours employees want to work. This would make a price floor (minimum wage) more likely to lead to a surplus of labor and unemployment.
Your toy company is looking into launching a new line of dolls and action figures but is unsure if kids these days still actually play with them. As part of your market research, you send out a survey to 1000 households that have purchased toys in the last five years. You also decide to run two focus groups: one group of children ages 4-16 and one group of parents. Which of the following questions asked in a survey or focus group would be unbiased and allow you to gain reliable information? Select all that apply.
A survey question asking households, "What fraction/percentage of income do you estimate that your family spends on entertainment in a given month?" An anonymous survey question asking children, "what's your favorite toy and why do you like to play with it?
Which of the following events would, all else equal, cause a rightward shift of the demand curve for yachts? Select all that apply.
An increase in household income The elimination of a regulation, which had prevented boats from sailing on a particular series of lakes
A budding tech startup has created a unique compression algorithm that consumers can use to reduce the size of their computer files. The company was previously charging $40 a month for their "unlimited plan" that allows users to compress as many files as they want. The company decides that it is not making enough revenue, however, and increases the price for their "unlimited plan" from $40 to $60. They notice that the amount of users that subscribe to the unlimited plan decreases from 5,000 to 4,500 once the price change comes into effect. Based on this information, which of the following must be true?
At the original price the demand is relatively inelastic The price elasticity of demand at the original price point would be equal to the absolute value of [((4500-5000)/(5000)) / ((60-40)/(40))] = 0.2, relatively inelastic. The company can make more revenue by charging a higher price.
Suppose that a seller of yachts has a single consumer who may be interested in purchasing several boats. Suppose the seller knows the consumer's willingness to pay for each additional boat. If the firm decides to use a two-part tariff, where would the firm optimally set the price per unit?
At the seller's marginal cost. An optimal two-part tariff prices each unit at marginal cost, and charges a lump sum fee on top.
Which of the following regarding fixed costs is/are true? Select all that apply.
Companies that incur fixed costs primarily at the level of an individual store are likely to face difficulties scaling their businesses. Fixed costs do not always imply that the bigger firm will experience cost advantages.
You want to gauge consumers' reactions to a new line of high-end men's suits. Which of the following is the most promising approach?
Conducting a survey at a high-end shopping center on Tuesday evening. This is the scenario that will ensure you are interviewing the most relevant consumers. Of these options, this survey will reach the most representative sample of the potential customers you are targeting.
A gas station has noticed a recent increase in demand for gasoline. What could have caused this shift?
Construction of a new bridge has been completed, opening up better routes for commuters. The new bridge is a complement to gasoline.
Two products have a cross-price elasticity of demand of approximately 0. Which of the following pairs of products could be the ones in question?
Dishwashers and houseplants. If the CPED is 0, the two goods are neither complements nor substitutes.
Which of the following statements is true?
Elasticity does not depend on units whereas slope does. If demand is linear, slope will vary across different points on the demand curve whereas the elasticity will be the same at all points on the curve. A linear demand curve has a constant slope, but each point on the curve has a different elasticity. Elasticity does not depend on units whereas slope does. A demand curve's slope might change if the unit's demand is measured in change. The data needed to know the demand curve's entire slope are more likely to be available than the data needed to calculate elasticity at a given price. Elasticity at a point on the demand curve can be approximated if you know how quantity demanded changes with a small price change. Price elasticity of demand and slope are two names for the same concept. Slope measures how much quantity changes as price changes, but elasticity gives a unit-less measure of how significant that change is.
Which of the following developments will cause an increase in the value created by a firm? Select all that apply.
Employees at the firm are willing to take a pay cut to work for the company. Consumer preferences change and average WTP for the company's products increases.
An apparel company recently introduced a new dress, which sold out within days. Which of the following strategies could management use to determine the best price for the dress?
Gradually increase the price of the dress until profits begin to fall The dress probably sold out because it was priced too low.
Consider the following statements: I. An increase in the rate of income tax decreases the opportunity cost of being unemployed. II. The introduction of e-learning, which enables students to earn a degree by watching lectures at their own pace and from any location, decreases the opportunity cost of earning a college degree.
I and II are both true. The opportunity cost of being unemployed decreases because the increase in the rate of income tax decreases disposable income from being employed. The introduction of e-learning allows students greater flexibility to work while taking classes, which decreases the opportunity cost of earning a degree.
Which of the following statements is true?
If a company that faces a downward-sloping demand curve charges the same price to all its customers, there are usually some customers who are paying less than their willingness to pay. The demand curve is an upward-sloping line which relates price and quantity demanded. The demand curve is a downward sloping line, which relates price and quantity demanded. The negative slope results from the inverse relationship between price and quantity demanded—as one goes up, the other goes down. If a company that faces a downward-sloping demand curve charges the same price to all its customers, there are usually some customers who are paying less than their willingness to pay. Unless the company sells only one unit to the customer with the highest WTP, at any price it charges there will always be people who were willing to pay even more and are paying less than their WTP at the given price. The quantity that corresponds to a particular price on the demand curve tells us the number of people who have that price as their willingness to pay. The quantity that corresponds to a particular price tells us the number of people who have that price or higher as their WTP. All of the above. See explanations above.
Which of the following regarding supply curves is NOT true?
In the short run, a steep fall in prices will force the least efficient producers to exit the industry. In the short run, a firm is only able to make decisions on its volume of production. Entry/exit decisions are long run considerations. Thus the least efficient producers will stop producing but will not be able to exit the industry in the short term.
As previously mentioned by Professor Elon Kohlberg, studies from Angrist et al. and others have found a negative correlation between class size and student performance in reading and math, at least in some specific contexts. Consider running a similar experiment to determine the impact of class size on performance in science and history classes in the United States. Which of the following variables would be necessary to account for in the experiment to draw a reasonable conclusion? Select all that apply.
Income Age Grade Level Native language Presence of a learning disability Gender Race
You are earning $40,000 per year as a branch manager at Dunkin Donuts. You are planning on leaving your job and going back to college; upon learning this, your branch manager offers you a 10% increase in salary to stay. Knowing this, how does the opportunity cost of going to college change?
It increases because you are foregoing more money for college. The rise in salary increases the opportunity cost of going to college because you are foregoing a higher cost that you could have been earned by not going to college.
A museum curator is bidding in a sealed first-price auction on a painting. The curator should place a bid:
Less than the museum's willingness to pay for the painting The curator hopes to capture some value for the museum, and can only accomplish this if the price paid is less than the museum's WTP. A bid below WTP will also protect the museum against the winner's curse.
A traveler's willingness to pay for a room in a hotel in a remote location is $200. The traveler's willingness to pay for internet access is $10. If the traveler views hotel rooms and internet access as complementary products, what is most likely the traveler's willingness to pay for a room in a hotel that offers free internet access?
More than $210 Since the two goods are complementary, the traveler's WTP for a bundle of the two should be higher than the sum of WTP for the two individual products.
The tiny town of Nemo has three neighborhoods located on a straight line: Neighborhood 1, Neighborhood 2, and Neighborhood 3, with Neighborhood 2 located equidistant between Neighborhood 1 and Neighborhood 3. There is one daycare center, located on Neighborhood 1. There are 10 families residing in each neighborhood, and each family has one child. Each family is willing to pay $70/day for daycare, and prefers daycare closest to its own neighborhood (though at current distances, families will purchase daycare services even if it's two neighborhoods away). Families are indifferent between any two daycares in the same neighborhood. Suppose that daycare costs $30/day per child to provide. A new daycare center is thinking of opening in Nemo. If both daycares will keep their price at $70/day, which neighborhood should the new daycare open in?
Neighborhood 2 Being located in Neighborhood 2 would attract all residents of Neighborhoods 2 and 3, and none of the residents of Neighborhood 1, for a surplus of: 20 * ($70 - $30) = $800/day.
A farm equipment manufacturer has developed new machinery that makes the harvest of soybeans significantly cheaper. A few years later the region experiences a severe drought, making it more expensive to water the crops. Assuming there have been no other changes to the market, how have the equilibrium price and quantity of soybeans changed since before the new machinery was introduced?
Neither the effect on quantity nor the effect on price can be determined The new machinery should increase the supply of soybeans, but the drought would decrease it. Without knowing the relative magnitude of the two changes, we cannot determine the impact on price or quantity.
Which of the following conditions could cause an industry to have a small number of firms? Select all that apply.
Network effects If a product exhibits network effects, the dominant suppliers in the industry grow more and more successful as existing customers draw in new customers. This leads to industries with a few large competitors rather than many small ones. and High fixed costs High fixed costs can act as a barrier to entry. New firms will be less willing to enter an industry if they will have to incur large fixed costs in order to compete with incumbent firms.
A chocolatier produces truffles and sells each 1 pound box of truffles for $20. However, the chocolatier knows that some consumers would be willing to pay more than the cost of the chocolate, but less than $20 per pound, and wishes to sell truffles to these consumers as well. Which of the following price discrimination methods relies on the chocolatier knowing which types of consumers are likely to have a lower willingness to pay?
Offering a discount to students and seniors This method relies on the chocolatier knowing that students and seniors are the consumers who have a lower WTP.
A pair of products has a cross-price elasticity of demand of -0.8 and each of the products has an advertising elasticity of demand of about 0.4. Which of the following pairs of products do these metrics most likely describe?
Peanut butter and jelly These products greatly complement each other and would have a negative cross-price elasticity of demand. Both of these products are also typically advertised, but less so than alcohols like wine. Wine and wine openers (These products complement each other and would have a negative cross-price elasticity of demand. However, because wine is heavily advertised, it would have a much lower AED than 0.4.)
A supermarket would like to test whether a new brand of soda pop sells significantly more/fewer units than the brand currently on the shelves. Which of the following experiments would best help the store test this hypothesis?
Place the new brand of soda in the same shelf location as the current brand, at the same price, remove the original brand, and see if there is a significantly different amount of sales from the 3-month average sales of the original soda.
A telephone company offers two services: landlines and Internet. There are two types of customer demographics. One customer demographic only values the Internet service, with a WTP of $60/month. The other customer demographic values the Internet service less, at $35/month, but values the landline telephone service at $30/month. The two customer demographics are each comprised of 100 persons. Internet and landlines each cost $20/month to supply to each customer who purchases them (so the cost to supply both products to a customer is $40/month). Which pricing scheme should the telephone company adopt?
Price Internet at $60/month, and landlines at $30/month. Price Internet at $60/month, and landlines at $30/month. 100 customers would purchase only Internet, creating profits of $4000. The other 100 customers would only purchase landlines, creating profits of $1000. Total profits would be $5000 per month. Price Internet at $35/month, and landlines at $30/month. All 200 customers would purchase Internet, creating profits of $3000, and 100 customers would also purchase landlines, creating profits of $1000. Total profits would be $4000 per month. Bundle the two goods at a combined price of $65/month. Only 100 customers would purchase the bundle, leading to profits of $2500 per month. Bundle the two goods at a combined price of $60/month. All of the customers would purchase the bundle, leading to profits of $4000 per month.
A movie theater substantially decreases the price of its popcorn during the same week that a heavily advertised new movie is being released. How will the equilibrium price and quantity of movie tickets change?
Price and quantity will both increase The decreased popcorn prices and the new movie will both increase demand, leading to higher prices and higher quantity.
Which of the following statements regarding price elasticity of demand is true? Select all that apply.
Price elasticity of demand is a better measure of price sensitivity than slope. Price elasticity of demand tends to increase as price increases. Price elasticity of demand for a particular product will tend to increase as more substitute goods become available.
A new restaurant has introduced a wildly popular macaroni and cheese dish made with goat cheese. However, at approximately the same time, an outbreak of disease has decreased the local goat population (without impacting the safety of goat cheese). How do the price and quantity of goat cheese change?
Price increases and the effect on quantity cannot be determined Demand has increased due to the new dish, but supply has decreased due to the goat disease. Price will definitely increase, but the effect on quantity depends on the magnitude of the impact of these two events.
Which of the following is NOT a factor that directly impacts a consumer's WTP for a good?
Prices of the inputs used to produce the good
A price ceiling is set at 10% below the market equilibrium price. Which of the following must result from the price ceiling? Select all that apply.
Producer surplus decreases Total surplus decreases (Total surplus is WTP - WTS for each item sold. Under the price ceiling, the WTP and the WTS are not changing, but the number of items sold has decreased. Thus, total surplus has decreased) Deadweight loss increases
The price of electricity decreases, making it cheaper to operate subways, and concurrently, gasoline prices skyrocket. Assuming that prices can be freely set by the subway operator, how do the equilibrium price and quantity of subway tickets change?
Quantity increases and the effect on price cannot be determined Demand for subway tickets increases due to the higher gas prices, and supply increases due to the lower electricity costs. Quantity will certainly increase, but the effect on price depends on the magnitude of the effects of these two changes.
In what way does randomization help an experimenter to overcome the "missing variables" problem? Select all that apply.
Randomization helps to account for systematic differences across groups of interest. Randomization helps to ensure that the impact measured in a treatment vs. control group is due solely to the variable that is manipulated in the experiment. Randomization helps to eliminate the adverse effects of sample selection/selection bias.
A certain product has a negative income elasticity of demand. What might this product be?
Rice A negative income elasticity of demand implies that a consumer will buy less of a good as his or her income increases. This could be the case for cheaper foods such as rice. A consumer with a higher income might be able to afford more expensive foods and switch to, say, quinoa, fish or steak instead.
Which of the following regarding economies of scale is true?
Scale economies can be either positive or negative, or both, based on a firm's size. A firm or industry can exhibit both economies and diseconomies (negative economies) of scale depending on its level of output. Economies of scale tend to benefit firms/industries most as they increase output from low levels, while diseconomies of scale occur as they continue to increase production from high to even higher levels.
Which of the following is true about "volume businesses?"
Such businesses typically have very high minimum efficient scales of operation.
In order to test a new customer loyalty program, a store sends an email to its current customers in one of its existing markets, inviting them to opt into the new program. After several months, management observes that participants in the new program are much more frequent shoppers than the average customer. The management can conclude:
That the experiment was poorly designed By focusing on one region and selecting participants by allowing anyone to opt in, the store has created a potentially biased sample.
After running an advertising campaign for its line of dishwashers, an appliance store notices that consumer WTP for its dishwashers seems to have increased. However, the store has not captured any market share from its competitors. Which of the following might explain this outcome?
The advertising campaign focused on the advantages of owning a dishwasher, but did not mention the store's specific brand of dishwasher. The campaign increased WTP for dishwashers in general, but without specifically promoting the store. Other dishwasher sellers have probably profited from the campaign in the same way.
A bakery famous for its cupcakes opens its doors at 9 a.m. and allows each customer to purchase up to 2 cupcakes until the day's supply of cupcakes runs out. Customers begin lining up around 8 a.m. each day and the cupcakes usually run out around 9:30, leaving dozens of unserved customers disappointed. Which of the following statements about this market are true? Select all that apply.
The cupcakes are being sold below their equilibrium price. If the cupcakes were being sold at or above their equilibrium price, there would not be dozens of disappointed customers left over when the bakery runs out of cupcakes. The bakery is not using price as the only means of allocating cupcakes to its customers. The bakery is using a queue to allocate its cupcakes.
An entrepreneur is considering starting a business baking and selling cupcakes. The entrepreneur estimates that average total costs per cupcake would be $1.00, and variable costs per cupcake would be $0.50. An incumbent bakery in the neighborhood sells cupcakes at $3 per cupcake. The entrepreneur estimates that this bakery spends $1.50 in total costs on each cupcake, $0.75 of which is variable costs. Should the entrepreneur start the new cupcake business?
The entrepreneur should start the new business ONLY if customers are willing to pay at least $0.25 more for the new cupcakes than for the incumbent's cupcakes. If customers have a higher WTP for the new cupcakes (by at least $0.25) the entrepreneur will be able to charge enough to cover total costs, even if the incumbent engages in a price war.
Suppose that when a monopolistic car manufacturer raised its prices, it lost half of its customer base, but reported higher profits than before. Which of the following can be concluded?
The firm was originally pricing where marginal revenue was lower than marginal cost. The fact that the manufacturer could increase its revenues by raising prices and narrowing the client base indicated that the WTP of the high-type consumers was sufficiently higher than the WTP of the low-type consumers to make it inefficient to serve the low-type consumers.
A dairy farmer is a monopolist in the milk industry and is currently selling milk at the profit maximizing price. As a result of a terrible storm, the dairy farmer sees an increase in cost of feed for the cows. At the same time, the dairy farm receives an insurance check which effectively lowers the fixed costs of the farm. What effect will this cost change have on the optimal price of milk the farmer sets?
The increase in variable costs will increase the optimal price that should be set by the farmer. If variable (marginal) costs increase, marginal revenue will now be lower than marginal cost. Thus the monopolist must increase the price it charges until marginal revenue is equal to marginal cost.
In which of the following scenarios would both the price and quantity sold of paperback books decrease?
The price of e-books, a substitute for paperback books, decreases. A decrease in the price of e-books, a substitute good, would shift demand for paperback books to the left, resulting in a lower price and a lower quantity demanded.
In which of the following situations is an auction especially effective? Select all that apply.
The seller is time-sensitive The seller does not know the WTP of its potential customers. Buyers' valuation of the auction item is within a narrow range.
A local government implements a price ceiling of $4/gallon on milk. If the equilibrium price is $3 what will be the effect on the market for milk?
There will be no effect on the market for milk. A price ceiling limits how high a price can be charged. Setting a price ceiling above the equilibrium price will have no impact on the market, since the equilibrium price already conforms to the law.
Which of the following statements is true of active secondary markets?
They can undo some of the intended effects of a price ceiling A secondary market can allow consumers with low WTP to resell the product to consumers with high WTP, undermining a price ceiling.
An increase in the popularity of corn ethanol as a fuel increases the demand for corn around the world, causing the price to rise. What is the reason behind the higher price?
To meet higher demand, the industry relies more on less cost efficient producers of corn. As more corn is demanded, the additional corn will be produced by less efficient suppliers, and prices will increase to cover their costs.
Which of the following are fixed costs incurred by a supermarket, and which are variable? Fixed COST OF PHYSICAL CHECKOUT COUNTERS COST TO CONSTRUCT PARKING LOT CASHIER SALARIES BUILDING INSURANCE
Variable HOURLY WAGES FOR BUTCHERS AND BAKERS DELIVERY COSTS FOR ONLINE ORDERS
Which of the following are fixed costs incurred by a theme park, and which are variable? Fixed MAINTENANCE OF RIDES AND ATTRACTIONS COST TO BUILD A NEW FUN HOUSE SALARIES OF LAWYERS ADVERTISING COSTS
Variable HOURLY WAGES FOR CLOWNS AND CARTOON CHARACTERS COSTS OF FOOD AND DRINK
A factory currently manufactures and sells 1000 boats per year. Each boat costs $8,000 to produce. $7,000 of the per-boat costs are for materials and other variable costs, while the per-boat fixed costs (incurred on yearly rent, administrative, and other fixed costs) are $1,000. If boat orders decrease to 800 boats per year, how do per-unit costs change?
Variable costs are unchanged at $7,000 per boat and fixed costs rise to $1,250 per boat The $1,000,000 in fixed costs is now spread across only 800 boats. This results in $1,250 in fixed costs per boat. Variable costs are unchanged.
A startup company is currently selling each unit of its product for $10.00 less than its total costs per unit. If the startup has an opportunity to expand its customer base by 10% through a marketing campaign, should the company consider the campaign?
Yes, if the additional customers would lower the average cost enough to make the firm profitable.
The price of a product increases. Therefore, consumer surplus:
unable to tell decreases Consumer surplus can increase if the price increase is due to an increase in demand. increases Consumer surplus can decrease if the price increase is due to a decrease in supply. stays the same Consumer surplus will either increase if the price increase is due to an increase in demand or decrease if the price increase is due to a decrease in supply. unable to tell Correct!