Economics Final

How to minimum wage laws impact the labor market for employers and employees?

minimum wage = price floor Employee: workers willing to work for less than minimum wage cannot sell their labor to firms willing to hire them Employer: outsources to locations with less strict minimum wage, creating a labor shortage

Suppose new information reports new benefits of bicycling exercise. Simultaneously, manufacturing automation has reduced the cost of making bikes. If the change in supply is greater than the change in demand, the quantity will ________ and the price will ________ fall, rise rise, fall rise, rise fall, fall

rise, fall

You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton? $0 $10 $40 $50

$10

Consumer A values Good 1 at $10,000 and Good 2 at $4,000. Consumer B values Good 1 at $8,000 and Good 2 at $6,000. Variable costs are zero. What is the total profit to the monopolist from selling the goods separately if she cannot tell the two customer types apart? $24,000 $20,000 $16,000 $14,000

$24,000

An umbrella salesperson estimates a profit tomorrow of $12,000 if it rains, a profit of $2,000 if it snows, and a loss of $1000 if it is dry. The forecast is for a 30% chance of rain, 20% chance of snow, and 50% chance of dry weather. What is the expected profit? $2,000 $3,500 $4,333 $4,500

$3,500

Consumer A values Good 1 at $10,000 and Good 2 at $4,000. Consumer B values Good 1 at $8,000 and Good 2 at $6,000. Variable costs are zero. If the monopolist could only sell goods separately, what price would the monopolist charge to maximize profit for Good 1? $10,000 $8,000 $9,000 $4,000

$8,000

Loan applications usually involve a lot of questions and require a lot of information from applicants. This is in order to avoid moral hazard adverse selection the prisoner's dilemma collusion

adverse selection

It costs a firm $120 per unit to produce product A and $110 per unit to produce product B individually. If the firm can produce both products together at $250 per unit of product A&B, this exhibits signs of economies of scale economies of scope diseconomies of scale diseconomies of scope

diseconomies of scope

Average cost curves initially fall due to rising marginal costs due to declining accounting costs due to declining average fixed costs due to declining total costs

due to declining average fixed costs

If you are willing to sell your used car for $12,500 and someone offers you $16,000 for it, this transaction will generate: $3500 worth of seller surplus and $3500 of buyer surplus $3500 worth of buyer surplus and $0 seller surplus $3500 worth of seller surplus and an unknown amount of buyer surplus There is no surplus created

$3500 worth of seller surplus and an unknown amount of buyer surplus

A sign maker is deciding whether to invest in new technology that will increase the speed and resolution of his signs. This technology requires an initial investment of $1200, but he expects it will increase cash flows by $800 the first year (t=1) and $1000 the following year (t=2). If the interest rate is 10%, then the net present value of these $826.44 $1553.72 $727.27 $353.72

$353.72

A business owner produces 2500 units during a typical eight hour day. The items sell for $10 each, and production does not stop on the weekend. If hired elsewhere, he would earn $150 per hour. If the explicit costs total $300,000 for 30 days, the economic profit for the month equals: $414,000 $450,000 $36,000 $750,000

$414,000

A business owner produces 2500 units during a typical eight hour day. The items sell for $10 each, and production does not stop on the weekend. If hired elsewhere, he would earn $150 per hour. If the explicit costs total $300,000 for 30 days, the accounting profit for the month equals: $414,000 $450,000 $36,000 $750,000

$450,000

A firm's fixed costs are $9000. It costs the firm $10 for each additional unit it produces and it charges $16 for each unit. What is the firm's contribution margin? $6 $10 $16 $26

$6

Suppose there are nine sellers and nine buyers, each willing to buy or sell one unit of a good, with values [$10, $9, $8, $7, $6, $5, $4, $3, $2]. Assuming no transactions costs and a competitive market, what is the equilibrium price in this market? $8 $7 $6 $5

$6

An insurance company offers doctors malpractice insurance. Malpractice claims cost (on average over the lifetime of the policy) $10,000 for careful doctors and $60,000 for reckless doctors. Doctors are risk-neutral and know whether they are careful or reckless, but the insurance company only knows that 20% of doctors are reckless. How much does the insurance company have to charge for malpractice insurance to break even? $10,000 $20,000 $40,000 $60,000

$60,000

How might consumers in communist economic systems really be paying for these goods?

-with their time while waiting in line for scarce goods -with quality because producers use low-quality materials to sell under the price ceiling

Your business idea (which may or may not involve a trip to the casino) will generate $3,000,000 of profit if it is successful, but will lose $1,000,000 if it is not successful. What is the minimum probability of success above which the expected value of the investment is positive? 1/3 1/4 1/2 2/3

1/4

A firm's fixed costs are $9000. It costs the firm $10 for each additional unit it produces and it charges $16 for each unit. The breakeven quantity is? 562.5 900 1500 346.15

1500

If your income goes down by 20% and, in response, your quantity demanded of designer shoes goes down by 40%, the income elasticity of demand would be 2 0.2 4 0.5

2

A simultaneous game of chicken has ___ and a sequential game of chicken has ___. 1 equilibrium; 1 equilibrium 1 equilibrium; 2 equilibria 2 equilibria; 1 equilibrium 2 equilibria; 2 equilibria

2 equilibria; 1 equilibrium

When the demand for a product falls, which of the following events would you NOT necessarily expect to occur? A decrease in the quantity of the product supplied A decrease in its price A decrease in the supply of the product A leftward shift of the demand curve

A decrease in the supply of the product

Which of the following is an example of moral hazard? A really hungry person attends the all-you-can-eat buffet. A driver takes more risks in a rental car than in his own car. A rich businessperson purchases a first class ticket to Paris. A person with a high risk job chooses to buy insurance.

A driver takes more risks in a rental car than in his own car.

A firm in a perfectly competitive market is known as A price searcher A price taker A monopoly None of the above

A price taker

Economic Profit=

Accounting profit - opportunity costs

Which of these is required for a direct price discrimination strategy to be successful? Ability to identify members in different value groups Ability to charge low value users a lower price Ability to prevent different value groups from selling to each other All of the above

All of the above

Demand becomes more elastic In the long run As price increases When products have close substitutes All of these options

All of these options

The source of any managerial problem can be linked to the answer of which of the following questions? Who is making the bad decision? Does the decision maker have enough information to make a good decision? Does the decision maker have the incentive to make a good decision? All of these options

All of these options

Once marginal cost rises above the average cost Average costs will increase Average costs are unaffected Average costs will decrease None of the above

Average costs will increase

Movie theatres often offer senior discounts. The movie theatres are Assuming seniors have an inelastic demand curve Practicing price discrimination Assuming seniors have an elastic demand curve Both B & C

Both B & C

Consumer A values Good 1 at $10,000 and Good 2 at $4,000. Consumer B values Good 1 at $8,000 and Good 2 at $6,000. Variable costs are zero. What is the best pricing strategy for the monopolist? At this price, what are the monopolist's total profits? Bundle the goods at $10,000; Profits = $20,000 Bundle the goods at $18,000; Profits = $36,000 Bundle the goods at $14,000; Profits = $28,000 Bundle the goods at $8,000; Profits = $16,000

Bundle the goods at $14,000; Profits = $28,000

Assume that the price elasticity of demand for concerts is -0.60 during all weekend shows, but for all weekday shows the price elasticity of demand is -2.6. For the venue to maximize its total revenue is should Charge the same price for both shows, holding other things constant Charge a higher price for the weekday shows and lower price for the weekend shows, holding other things constant Charge a lower price for the weekday shows and higher price for the weekend shows, holding other things constant Insufficient information to determine

Charge a lower price for the weekday shows and higher price for the weekend shows, holding other things constant

The difference between the price a buyer is willing to pay and the price of an item (what he actually pays) is known as the: Market surplus Net profit Seller surplus Buyer surplus

Buyer surplus

As a holiday incentive, a car dealership offers its salespeople an extra $2,000 bonus for every car they sell in December. Which of the following would you expect to happen to negotiated prices of cars in December according to the nonstrategic view of bargaining? Car prices will rise by about $1,500. Car prices should stay the same since the bonus goes to the salespeople. Car prices will decline by about $1,000. Car prices will decline by about $2,000.

Car prices will decline by about $1,000. (split the profit)

A video game electronics company decides to dramatically increase the price of their consoles. Holding other factors constant, what happens to the demand for their games? Demand for games shifts to the right because consoles and games are substitute goods Demand for games shifts to the left because consoles and games are complementary goods Demand for games shifts to the left because consoles and games are substitute goods Demand for games shifts to the right because consoles and games are complementary goods

Demand for games shifts to the left because consoles and games are complementary goods

A price elasticity of demand of -1.6 implies Demand is perfectly elastic Demand is inelastic Demand is unitary elastic Demand is elastic

Demand is elastic infinity=perfectly elastic abs<0=inelastic 1=unitary elastic 1<abs<inf=elastic

What would happen to the demand for store label goods if the income of the population fell due to tough economic times? Demand will rise because store label goods are considered inferior goods Demand will fall because store label goods are considered inferior goods Demand will rise because more companies will make store labeled goods Demand for store label goods will not change

Demand will rise because store label goods are considered inferior goods

Which of these does NOT characterize a "good" industry to enter according to Porter's "Five Forces" analysis? Low buyer power High consumer surplus Low threat from substitutes High barriers to entry

High consumer surplus

Which of the following is likely due to moral hazard? Houses covered by fire insurance are less likely to have smoke alarms. Rental houses are generally smaller than owner occupied houses. Houses in high crime areas are more likely to have home security systems. People who love working in teams are more likely to opt for an MBA.

Houses covered by fire insurance are less likely to have smoke alarms.

Which of the following statements about bidding in an auction is true? In a Dutch auction, you should buzz in as soon as the price on the clock hits your value. In a first-price sealed-bid auction, your bid should be equal to your value. In a second-price sealed-bid auction, your bid should be equal to your value. In an English auction, your first bid should always be equal to your value.

In a second-price sealed-bid auction, your bid should be equal to your value.

You are a restaurant owner buying vegetables from a local farmer. You recently found out that another one of the farmer's clients, a competing restaurant, has shut down. What would that do to your bargaining power? Increase your bargaining power Decrease your bargaining power Not affect your bargaining power None of these choices

Increase your bargaining power

Which of these is NOT a potential effect of arbitrage? Eliminating price discrimination Allowing those engaging in arbitrage to buy low in one market and sell high in another Forcing a seller to go back to uniform pricing Increasing revenue for the seller

Increasing revenue for the seller

A price ceiling: Is a government-set price above market equilibrium price Is the equivalent of an implicit tax on producers and an implicit subsidy to consumers Will create a surplus Causes an increase in consumer and producer surplus

Is the equivalent of an implicit tax on producers and an implicit subsidy to consumers

In economic terms, if a good is inferior It has no complements As income increases, demand for the product increases It has negative income elasticity No one will buy it

It has negative income elasticity

Which of the following is NOT a use of the rational-actor paradigm? It teaches us to understand how to make people behave ethically It helps us to understand why people make the decisions they make It is a tool for analyzing behavior It teaches us to anticipate opportunistic behavior

It teaches us to understand how to make people behave ethically

Which of the following is likely to be part of a successful strategy for repeated prisoner's dilemmas? You should not start by cooperating, but instead wait until others show that they're trustworthy. Since people sometimes make mistakes, you shouldn't be quick to respond to provocations. Make sure that when you do respond, the punishment is very severe. Ignore how much money others are making and focus on your own profits.

Make sure that when you do respond, the punishment is very severe.

Which of these is a characteristic of a competitive industry? High barriers to entry Many complements Many substitutes Little or no information on the rival's products

Many substitutes

The following are the costs to produce Product A, Product B, and Products A & B together. Which of the following exhibits economies of scale? 50, 75, 120 50, 25, 125 50, 75, 130 None of the above

None of the above

When a company sells razor blades that only work for their own razors at a premium, they are demonstrating Price discounts Volume discounts Metering Package tie-in

Metering

What is the main difference between a competitive firm and a monopolistic firm? The number of customers served by the firm Monopoly firms are more efficient and therefore have lower costs Monopoly firms can generally earn positive profits over a longer period of time Monopoly firms enjoy government protection from competition

Monopoly firms can generally earn positive profits over a longer period of time

Two roommates, John and Joe, are playing a simultaneous game of cleaning the apartment. If neither of them cleans, the apartment gets filthy and both get a utility of 2. If John cleans and Joe doesn't, John gets a utility of 1 and Joe gets a utility of 4. If Joe cleans and John doesn't, Joe gets a utility of 1 and John gets a utility of 4. If both clean up the apartment, each gets a utility of 3. What is the Nash equilibrium of this game? Both of them clean the apartment John cleans, Joe doesn't Joe cleans, John doesn't Neither of them cleans the apartment

Neither of them cleans the apartment

A manager will buy the company after 5 years for a price that is 4.5 times the earnings. His salary is 75% of the first $150,000 of profit and then 10% of any profit over that amount. Are the owners' and manager's incentives aligned?

No. - Manager has less incentive to make more than $150,000 of profit because as profit gets higher, it's more difficult to make, yet his salary decreases - The more earnings the manager raises, the more he will need to pay to buy the company, so to keep the price lower, he will have incentive to keep the earnings lower.

To minimize the chance of collusion in an auction, you should run many small auctions rather than one big one. use open auctions (like English) instead of sealed bid auctions. announce the winners of the auction and the amount of the winning bid rather than keeping this information secret. None of the above

None of the above

Which of these is a good strategy to use when pricing for an individual customer Bargain over the price of the individual unit Tell them about your price discrimination model Offer a bundle containing a number of units Offer your low value product regardless of the individual customer type

Offer a bundle containing a number of units

The view that explains that individual firms may exhibit sustained performance advantages because of superior "tangible and intangible assets used to conceive of and implement their strategies" is known as the Resource Based View External View Asset Model View Differentiation

Resource Based View

Which of the following would cause an insurance company to suffer from adverse selection? Customers know how much they are willing to pay for insurance but the company does not. Customers take more risk after they buy insurance than before they buy insurance. Customers are risk averse. Safe customers are less likely to buy insurance than risky customers.

Safe customers are less likely to buy insurance than risky customers.

A new pharmaceutical drug, while under its patent, should have a demand curve that is Perfectly horizontal Steeper than most products Perfectly vertical Flatter than most products

Steeper than most products

A manager requires widgets in order to produce her final product. Currently, they are made internally. She invests $200,000 in a new process that will reduce costs per widget from $3.75 to $3.00. In two years, she is approached by another company willing to produce widgets for $2.75. In deciding whether to contract with the company: The decision should be based on the accounting profit of the company The $200,000 should be considered as a sunk cost and is irrelevant to the decision She should compare the time it would take to pay off the process with the proposed cost savings of working with the new company She is at risk of falling under the hidden cost fallacy

The $200,000 should be considered as a sunk cost and is irrelevant to the decision

According to the Net Present Value (NPV) rule, managers choose to invest if The NPV of the project is equal to zero The NPV of the project is greater than zero The NPV of the project is less than zero The NPV of the project is equal to the cost of capital

The NPV of the project is greater than zero

As a baseball bat production company produces more bats, the average total cost of each bat produced decreases. This is because Total fixed costs are decreasing as more clubs are produced Average variable cost is decreasing as more clubs are produced There are economies of scale Total variable cost is decreasing as more clubs are produced

There are economies of scale

What would typically happen to revenues if a perfectly competitive firm raised its price They would decrease They would increase but profit would decrease They would increase and profit would increase No way to determine with this information

They would decrease

A firm hires 15 full time workers (40 hrs/week) at an hourly wage of $20 in order to produce 1200 units/week. The weekly cost for rent on the factory is $2250 and the firm pays a manager $1000/week to oversee the operations. Raw materials are ordered weekly and cost $5 for every unit produced. How do the overall costs breakdown (weekly)? Total variable cost is $12000, total fixed cost is $2250, Total cost is $14250 Total variable cost is $6000, total fixed cost is $3250, Total cost is $9250 Total variable cost is $19000, total fixed cost is $2250, Total cost is $21250 Total variable cost is $18000, total fixed cost is $3250, Total cost is $21250

Total variable cost is $18000, total fixed cost is $3250, Total cost is $21250

United and EconoAir are both considering serving the new Shelbyville airport, a small private airport. United and EconoAir are the only two potential entrants. United's profit is $10 million if it is the only entrant, $5 million if it is one of two entrants, and $0 if it does not enter. EconoAir's profit is $0 if it does not enter, $5 million if it is the only entrant, and -$5 million (a loss of $5 million) if it is one of two entrants. If United and EconoAir make their decisions simultaneously, the equilibrium is Both enter United enters, EconoAir does not enter United does not enter, EconoAir does Neither enters

United enters, EconoAir does not enter

Which of the following is true about how we handle risk, behaviorally. We are more likely to take risks with gains and to avoid risks with losses. We prefer risky choices to uncertain ones. We are always willing to pay the expected value for a gamble. This is not the right answer. Don't pick it. Really. You won't get credit. Look up. One of those answers is right.

We prefer risky choices to uncertain ones.

A sign maker is deciding whether to invest in new technology that will increase the speed and resolution of his signs. This technology requires an initial investment of $1200, but he expects it will increase cash flows by $800 the first year (t=1) and $1000 the following year (t=2). If the cost of capital falls to 8%, should the sign maker invest? Yes, because the NPV = 0 No, because the NPV<0 because of the lower cost of capital Yes, because the NPV>0 No way to determine NPV

Yes, because the NPV>0

Which of these is a legally acceptable reason to price discriminate? You are able to identify different-value users You are offering the discount in order to meet a competitor's price You are willing to risk an arbitrage situation The different user groups have different price elasticities for your good

You are offering the discount in order to meet a competitor's price

Surplus=

buyer's value - seller's bottom line (after tax)

Economies of scope

cost of producing 2 products jointly is less than producing them separately

A hold up problem is

created when two companies refuse to work with each other fearing they will give the other company more bargaining power. Solutions include: Mergers Avoid making investments that are relationship specific Contracts

Fast food restaurants of a particular franchise are generally located far away from each other in order to decrease rivalry decrease supplier power decrease buyer power limit the effect of substitutes

decrease rivalry

Which of these is NOT a strategy firms follow to remain ahead of competitive forces cost reduction product differentiation increased rivalry reduction in competitive intensity

increased rivalry

A Nash equilibrium is a unique prediction about the outcome of a strategic interaction. guarantees that both players are maximizing the sum of their payoffs. is where marginal revenue is exactly equal to marginal costs. is where each player maximizes her payoff given the choice of the other player.

is where each player maximizes her payoff given the choice of the other player.

What is fixed cost fallacy

overhead will be incurred regardless of whether you get rid of the product line

When a resource or capability is valuable and rare, a firm may gain a sustainable competitive advantage competitive parity cost advantage temporary competitive advantage

temporary competitive advantage

Consider a non-strategic game between a firm and its union. The value to the firm of getting the workers back to work is $5 million. The union's agreement value to get back to work is $5 million. The firm can hire nonunion workers ("scabs") so the firm's disagreement value is $1 million. Union members can find temporary employment elsewhere, making the union's disagreement value $2 million. The union would have a better bargaining position in the negotiations if the firm can hire individual workers at a lower wage. the union has low-wage workers who cannot afford to be off work. the union has a strike fund to pay workers during work stoppage actions. None of these choices

the union has a strike fund to pay workers during work stoppage actions.

Why are property rights important in creating wealth?

they create an incentive because the owners can keep the value they create