Econ midterm #2

TC

FC+VC

principal agent problem

a problem caused by an agent pursuing his own interests rather than the interests of the principal who hired them.

seperation of ownership from control

a situation in a corporation in which the top management, rather than the shareholders, controls day-to-day operations.

law of diminishing returns

at some point, adding more of a variable input such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline.

constant returns to scale

at some point, growing larger does not allow more economies of scale. its long run average cost remains unchanged as it increases output.

If a corporate bond with face value of $8,000 has an interest rate of 4 percent paid once a year for a term of 30 years, what is the size of the coupon payment? A. $320 B. $2,000 C. $8,000 D. $9,600

A

ATC

AFC+AVC

Quantity of Lanterns Fixed Cost (dollars) Variable Cost (dollars) Total Cost (dollars) Average Total Cost (dollars) 75 200 170 370 4.93 80 200 230 430 5.36 90 200 7.67 100 200 810 115 200 11.8 117 200 1264 1464 12.5 120 200 1480 Table 8-7 shows cost data for Lotus Lanterns, a producer of whimsical night lights. Refer to Table 8-7. What is the variable cost of production when the firm produces 115 lanterns? A. $1,556 B. $1,157 C. $956 D. $10.05

B

what is the primary difference between a sole proprietorship and a partnership? A) partnerships can issue stocks and bonds while proprietorships cannot. B) Partnerships have more owners than do proprietorships. C) Proprietorships have unlimited liability while partnerships have limited liability. D) There is no real difference between the two types of firms.

B

Average fixed cost is equal to A. fixed cost multiplied by the quantity of output produced. B. average total cost plus average variable cost. C. fixed cost divided by the quantity of output produced. D. the amount of total cost that does not change as output changes in the short run.

C

If the total cost of producing 20 units of output is $1,000 and the average variable cost is $35, what is the firms average fixed cost at the level of output? A) $65 B) $50 C) $15 D) impossible to determine without additional information

C

NASDAQ is an example of A) Primary market B) Centralized exchange C) Secondary market D) Foreign exchange market

C

Number of Workers Apples per Day (bushels) 1 50 2 120 3 180 4 230 5 270 6 300 Table 8-2 summarizes production at the Crunchy Apple Orchard for the month of April. Refer to Table 8-2. What is the marginal product of the 4th worker? A. 230 bushels B. 57.4 bushels C. 50 bushels D. 12.4 bushels

C

Over the past twenty years, the number of small family farms has fallen significantly and in their place there are fewer, but larger, farms owned by corporations. Which of the following best explains this trend? A. diminishing returns to labor in farming B. declining productivity C. economies of scale in farming D. diseconomies of scale in farming

C

Quantity of Lanterns Fixed Cost (dollars) Variable Cost (dollars) Total Cost (dollars) Average Total Cost (dollars) 75 200 170 370 4.93 80 200 230 430 5.36 90 200 7.67 100 200 810 115 200 11.8 117 200 1264 1464 12.5 120 200 1480 Table 8-7 shows cost data for Lotus Lanterns, a producer of whimsical night lights. Refer to Table 8-7. What is the average total cost of production when the firm produces 120 lanterns? A. $1,680 B. $72 C. $14 D. $12.3

C

Vipsana's Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per day. Calculate Vipsana's total cost per day when she produces 50 gyros using two workers? A. $100 B. $124.40 C. $220 D. $340

C

When Electronic Arts, the company behind the games Zuma and Plants vs. Zombies, sold stock to the public for the first time in September 1989, funds were being raised in a ________ market, and when those newly issued shares are resold to other buyers, the sales take place in a ________ market. A. secondary; primary B. primary; primary C. primary; secondary D. secondary; secondary

C

When groups of mortgages are bundled together by financial institutions and sold to investors, these institutions are said to be ________ mortgage loans. A. securitizing B. liquidating C. underwriting D. harvesting

C

If, for a perfectly competitive firm, price exceeds the marginal cost of production, the firm should: A) keep output constant and enjoy the above normal profit. B) lower the price C) reduce its output D) increase its output

D

In many corporations, the managers of the corporation run the corporation, although the shareholders own the corporation. In this situation, A. there are no inside directors on the board of directors. B. there are no outside directors on the board of directors. C. there is no corporate governance. D. there is separation of ownership from control.

D

Mutual funds sell shares to investors and use the funds to A. purchase newly issued shares of a particular company's stock. B. pay dividends. C. purchase Treasury bonds. D. invest in a portfolio of financial assets.

D

Quantity (sets) Long-Run Average Cost 100 $40 200 35 300 30 400 30 500 35 Elegant Settings manufactures stainless steel cutlery. Table 8-8 shows the company's cost data. Refer to Table 8-8. Elegant Settings experiences A. economies of scale up to an output level of 400. B. diminishing returns up to an output level of 400. C. increasing returns beyond an output level of 400. D. economies of scale at an output of 300 or less and diseconomies of scale at an output level above 400.

D

Red Stone Creamery currently hires 5 workers. When it added a 6th worker, its output actually fell. Which of the following statements is true? A. The sixth worker is not as skilled as the fifth worker. B. The total output becomes negative. C. The average product of the sixth worker is negative. D. The marginal product of the sixth worker must be negative.

D

monopolistic competition

meaning they all sell something something similar, but there is something that makes them different. type of product: differentiated ease of entry: high number of firms: many strategic behavior: no

average variable cost

variable cost divided by the quantity of output produced.

price elasticity of demand

we can measure how sensitive or responsive consumers are to the changes in price.

diseconomies of scale

when firms get so large they experience this. a situation in which a firms long run average costs rise as the firm increases output.

dividends

when the corporation makes profits, these are either reinvested in the firm- causing capital gain, or increase in value of the stock- OR PAID OUT TO THE FIRMS SHAREHOLDERS.

A characteristic of the long run is A. all inputs can be varied. B. there are both fixed and variable inputs. C. plant capacity cannot be increased or decreased. D. there are fixed inputs.

A

Based on your answer to the previous question, calculate elasticity demand A) 0.8 B) 1.0 C) 1.2 D) 2

A

For a perfectly competitive firm, which of the following is not true at profit maximization? A) Market price is greater than marginal cost. B) Total revenue minus total cost is maximized. C) Marginal revenue equals marginal cost. D) Price equals marginal cost.

A

If Urban Outfitters borrows $25 million from a bank to finance the construction of a new store, this is an example of A. indirect finance. B. a stock market transaction. C. a bond market transaction. D. direct finance.

A

Suppose the price of gasoline increases by 40%, causing quantity demanded to fall by 20%. The price elasticity of demand would be equal to A) 0.5 B) 800 C) 2 D) 20

A

The price of a seller's product in perfect competition is determined by A. market demand and market supply. B. the individual demander. C. the individual seller. D. a few of the sellers.

A

Which of the following is a characteristic of an oligopolistic market structure? A. There are few dominant sellers. B. It is easy for new firms to enter the industry. C. Each firm sells a unique product. D. Each firm need not react to the actions of rivals.

A

Who selects the board of directors of a corporation? A. stockholders B. upper management C. bondholders D. all of the above

A

Corporations

A legal form of business that provides owners with protection from losing more than their investment should the business fall.

If, for a perfectly competitive firm, price exceeds the marginal cost of production, the firm should A. lower the price. B. increase its output. C. reduce its output. D. keep output constant and enjoy the above normal profit.

B

Number of Workers Apples per Day (bushels) 1 50 2 120 3 180 4 230 5 270 6 300 Table 8-2 summarizes production at the Crunchy Apple Orchard for the month of April. Refer to Table 8-2. Diminishing marginala returns set in starting with ______ worker. A. 1st B. 2nd C. 3rd D. 4th

B

Quantity Total Cost (dollars) Variable Cost (dollars) 0 $1,000 $0 100 1,360 360 200 1,560 560 300 1,960 960 400 2,760 1,760 500 4,000 3,000 600 5,800 4,800 Table 9-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases. Assume that output can only be increased in batches of 100 units. Refer to Table 9-1. If the market price of each camera case is $8 and the firm maximizes profit, what is the amount of the firm's profit or loss? A. loss of $1,000 B. profit of $440 C. $0 (it breaks even) D. loss of $440

B

Suppose Sparky's increases price of ice cream from $3.5 to $4.0 and finds that weekly quantity demanded falls from 4000 to 3800. Sparky's customers are A)Elastic B) inelastic C) Perfectly elastic D) unit elastic

B

Suppose price of ice cream increased from $4 to $5 and quantity demanded fell from 100 to 80. Then percentage changes in price and quantity demanded are respectively. A) 20% and 20% B) 25% and 20% C) 1% and 20% D) 4 % and 5%

B

Suppose price of pizza increase from $10 to $12 and quantity demanded fell as a result from 1000 to 900. Then elasticity of demand is A) 0.1 B) 0.5 C) 1 D) 1.2

B

Which of the following is an advantage of starting a new business as a sole proprietorship? A. greater ability to raise funds B. ease in setting up C. double taxation D. limited liability

B

Ali's Gyro house sells gyros. the cost of ingredients to make a gyro is $2.00. Ali pays his employees $60 per day. He also incurs a fixed cost of $120 per day. Calculate Ali's variable cost per day when he produces 50 gyros using two workers A) $100 B) $124.40 C) $220 D) $240

C

An individual seller in perfect competition will not sell at a price lower than the market price because A. the seller would start a price war. B. demand for the product will exceed supply. C. the seller can sell any quantity she wants at the prevailing market price. D. demand is perfectly inelastic.

C

As a form of business, a partnership A. has only one owner. B. cannot issue stock. C. has limited liability. D. has the most government rules and regulations affecting it.

C

If a firm in the long-run can produce 5,000 DVDs at an average cost of $2.00 and 15,000 DVDs at an average cost of $1.50, this is evidence of A) diminishing returns B)diseconomies of scale C)economies of scale D) the law of supply

C

If a firm produces 20 units of output and incurs a total cost of $1,000 and a variable cost is $700, calculate the firm's average fixed cost of production if it expands output to 25 units. A. $300 B. $15 C. $12 D. It is impossible to determine without additional information.

C

If the market price is $25 in a perfectly competitive market, the marginal revenue from selling the fifth unit is A. $5. B. $12.50. C. $25. D. $125.

C

Which of the following costs will not change as output changes? A. average variable cost B. marginal cost C. total fixed cost D. total variable cost E. average fixed cost

C

Which of the following equations is correct? A. AVC + ATC = AFC B. AVC - ATC = AFC C. AFC + AVC = ATC D. ATC + AVC = AFC

C

Which of the following is a characteristic of an oligopolistic market structure? A) Each firm sells a unique product. B) Each firm need not react to the actions of rivals. C) There are few dominant sellers. D) It is easy for new firms to enter the industry.

C

which of the following goods would have the most inelastic demand? A) luxury cars B) big screen TVs C) bread D) ski vacations

C

which of the following is a characteristic of an oligopolistic market structure? A) it is easy for new firms to enter the industry. B) Each firm sells a unique product C) there are a few dominate sellers. D) Each firm need not to react to the actions of rivals.

C

MC

CHANGE IN TOTAL COST/CHANGE IN OUTPUT

For an ice cream shop, which of the following would be fixed in the short-run? A)Labor costs B) cost of electricity C) cost of milk D) rental cost for the shop

D

Southwest Airlines wants to raise $20 million to finance the renovation of their corporate offices, and the company wishes to raise the funds through direct finance. Which of the following methods could it use? A) it could issue $20 million in stocks. B) It could sell $20 million in bonds. C) It could borrow $20 million from a bank. D) It could choose either A or B.

D

Sylvia wants to expand her taxidermy business and is going to use profits from the business to do so. This is an example of using ________ for her expansion. A. direct finance B. indirect finance C. dividends D. retained earnings

D

The CEO of Dynadyne corporation has been more concerned with enhancing his lifestyle by having the company pay for expensive corporate retreats than he has been with increasing the value of the company's stock. In this situation, the CEO is ________ and the stockholders are ________. A. the principal; the agents B. an agent; also agents C. a principal; also principals D. the agent; the principals

D

the four market structures

Perfectly competitive market, monopolistically competitive markets, oligopolies, and monopolies.

Recruit additional owners

Such an arrangement would increase the firm's financial capital. Disadvantage: existing owners would have to share profits.

ATC

TC/Q

AFC

TFC/Q

AVC

TVC/Q

coupon payments

a bond includes a series of these. interest paid on the bond. These are intermediate payments that will be made to the bond-holder.

bonds

a financial security that represents a promise to repay a fixed amount of funds.

stocks

a financial security that represents partial ownership of a firm.

indirect finance

a flow of funds from savers to borrowers through financial intermediates such as banks. intermediaries raise funds from savers to lend to firms (and other borrowers)

limited liability

a legal provision shielding owners of the corporation from losing more than they have invested in the firm. It makes raising funds easier for a firm and also makes investing in firms easier for individuals.

short run

a period of time during which at least one of a firm's inputs is fixed.

asset

anything of value owned by a person or a firm.

variable costs

costs that change as output changes.

fixed costs

costs that remain constant as output changes.

sole proprietorships

firms owned by a single individual and not organized as a corporation.

Partnerships

firms owned jointly by two or more persons and not organized as a corporation.

Average fixed cost

fixed cost divided by the quantity of output produced.

borrow

from financial institutions, or from friends or family. Need collateral.

elastic

if its price elasticity of demand is larger than 1 (in absolute value).

inelastic

if its price elasticity of demand is smaller than 1 (in demand).

Marginal revenue

is the change in total revenue from selling one more unit of a product.

monopoly

meaning characterized by a single seller, selling a unique product. all market power market. type of product: unique ease of entry: entry blocked number of firms: one strategic behavior: no

oligopoly

meaning few firms dominate. all market power type of product: identical or differentiated ease of entry: low number of firms: few or several. strategic behavior: yes- they're actions affect their profits.

perfectly competitive market

meaning they all sell identical products. there are many buyers and sellers, no barriers to new firms entering the market. type of product: identical ease of entry: high number of firms: many strategic behavior: no

elasticity of demand

measures percentage change in quantity demanded as a result of a percentage change in price.

retained earning

profits reinvested in the firm, instead of paid to firm owners. cheapest, but not available for start-ups.

Marginal production of labor

the additional output a firm produces as a result of hiring one more worker.

total cost

the cost of all the inputs a firm uses in production.

interest rates

the cost of borrowing funds, usually expressed as a percentage of the amount borrowed.

Long run

the firm can vary all of its inputs, adopt new technology and increase or decrease the size of its physical change.

economies of sale

the firms long-run average costs falling as it increases the quantity of output it produces. being larger means more efficient.

direct finances

the flow of funds from savers to firms through financial markets, such as the new york stock exchange.

total revenue

the total amount of funds received by a seller of a good or service, calculated by multiplying the price per unit by the number of units sold.

corporate governance

the way in which a corporation is structured and the effect that structure has on the corporation's behavior.

how to find profit

total revenue- total cost

The River Rouge plant was built by the Ford Motor Company in the 1920s to produce the company's Model A car. Which of the following is evidence that the River Rouge plant suffered from diseconomies of scale? A. Despite an expensive advertising campaign the Model A did not earn the company a profit. B. Model A cars made at the River Rouge plant failed to earn a profit because the price of steel used to manufacture the Model A rose when workers in the steel industry went on strike. C. Model A cars made at the River Rouge plant failed to earn a profit. Ford reduced the average cost of the Model A by cutting its employees' wages. D. Model A cars made at the River Rouge plant failed to earn Ford a profit. Ford eventually constructed smaller plants to make the Model A at a lower average cost.

D

When an investor buys a corporate bond, the ________ is a loan to the corporation. A. coupon payment B. interest on the bond C. bond's dividend payments D. principal of the bond

D

When the average total cost is $16 and the total cost is $800, then the number of units the firm is producing is A. impossible to determine with the information given. B. 12,800. C. 784. D. 50.

D

Which of the following is not a characteristic of a monopolistically competitive market structure? A. There are low barriers to entry of new firms. B. All sellers sell products that are differentiated. C. There is a large number of independently acting small sellers. D. Each firm acts strategically in response to other firms.

D

firm as price takers: A) can rise their prices as a result f a successful advertising campaign. B) must lower their prices to increase sales C) are able to sell a fixed quantity of output at the market price. D) are able to sell all their output at the market price

D