MGE301 Chapter 2

The ______ of an uncertain payoff is defined as the weighted average of all possible outcomes, where the probability of each outcome is used as the weights. a) expected value b) standard deviation c) variance d) skewness

a) expected value

If employees' activities follow the economists' view of behavior, managers will be most effective if they can a) influence the costs and benefits of employee actions. b) improve employee satisfaction with the job. c) communicate goals and objectives effectively to their employees. d) fire inefficient employees.

a) influence the costs and benefits of employee actions.

Assume Joseph spends his entire income on X and Y, and his indifference curves have the usual convex shape. If Joseph maximizes his utility, then a) he spends his entire available income. b) there are other bundles that are preferred at the current price ratio. c) the slope of his indifference curve is greater than the slope of his budget line. d) the slope of his indifference curve is smaller than the slope of his budget line.

a) he spends his entire available income.

Which of the following is a feature of a behavioral economic model? a) It focuses on cognitive, emotional, and social factors that affect individual decisions. b) It considers incentives an unimportant tool to study human behavior. c) It suggests that individuals always behave rationally. d) It is based on marginal analysis in decision making.

a) It focuses on cognitive, emotional, and social factors that affect individual decisions.

ABC Corp. has a bonus plan in place for its CEO, linking her pay to annual earnings. ABC will pay her $180,000 if earnings are high, $90,000 if they are normal, and $0 if they are low. Each event is estimated to have equal probability. Assume the CEO is indifferent between this bonus plan and receiving $75,000 with certainty. Which of the following is true? a) The CEO's expected bonus is $90,000. b) The CEO is not willing to give up $15,000 in expected bonuses in order to avoid the risky scheme. c) $85,000 is the CEO's certainty equivalent for the current bonus plan. d) The CEO has no clue about risk management.

a) The CEO's expected bonus is $90,000.

Marginal costs a) are the incremental costs associated with making a decision. b) are the expenditures already made that can't be recovered. c) are not relevant when making an economic decision. d) are costs that are usually classified under "miscellaneous."

a) are the incremental costs associated with making a decision.

Sunk costs refer to a) costs that were incurred in the past and cannot be recovered and thus should not affect current decisions. b) all the costs that a firm must incur in the process of production. c) the costs that change proportionately with a change in the output. d) the quantities of a good that are given up to obtain one unit of another good.

a) costs that were incurred in the past and cannot be recovered and thus should not affect current decisions.

Assume that the quantity of X is measured on the horizontal axis, and the quantity of Y is measured on the vertical axis. Assume that the price of X is $3 and the price of Y is $6. If Amanda has $90 to spend on X and Y, then a) she can buy, at most, 30 units of good X. b) her budget line has a slope of -2. c)her budget line has a slope of −3. d) she can buy, at most, 15 units of good X.

a) she can buy, at most, 30 units of good X.

A risk-averse agent a) only cares about expected payoff. b) cares about expected payoff as well as the variability of a payoff. c) only cares about the variability of a payoff. d) does not care about expected payoff.

b) cares about expected payoff as well as the variability of a payoff.

The ______ model suggests that that the productivity of employees in a firm will increase if the firm offers lifetime employment and a high salary. a) only-money-matters b) happy-is-productive c) product-of-the-environment d) good-citizen

b) happy-is-productive

A budget line a) shows all the combinations of goods that yield the same utility. b) shows all the combinations of goods that require the same total expenditure. b) has a slope that depends on consumers' income. d) usually slopes upward.

b) shows all the combinations of goods that require the same total expenditure.

Assume that the quantity of apples is measured on the horizontal axis and the quantity of oranges is measured on the vertical axis. If the budget line rotates upward while keeping the same horizontal intercept, it implies that a) the price of apples has decreased. b) the price of oranges has decreased. c) the available income has increased. d) the price of oranges has increased.

b) the price of oranges has decreased.

Marginal utility is the a) total happiness obtained from a consumption bundle. b) additional utility obtained by a fall in the price of a good. c) additional utility obtained by consuming one additional unit of a good. d) total amount spent to purchase one additional unit of a good.

c) additional utility obtained by consuming one additional unit of a good.

Marginal analysis refers to the a) relationship between the cause and effect of an economic event. b) study of trade relations based on absolute cost differences. c) comparison of benefits and costs of choosing a little more or a little less of a good. d) calculation of opportunity costs of an economic activity.

c) comparison of benefits and costs of choosing a little more or a little less of a good.

Assume that the quantity of CDs is measured on the horizontal axis, while the quantity of movie tickets is measured on the vertical axis. If available income decreases, then a) the horizontal intercept of the budget line decreases, while the vertical intercept remains unchanged. b) the vertical intercept of the budget line decreases, while the horizontal intercept remains unchanged. c) the budget line will shift inward. d) the budget line will shift outward.

c) the budget line will shift inward

Assume that Janet is risk-averse. Which of the following bets is she more likely to accept, depending on the degree of risk aversion? rev: a) win $40 one-fourth of the time, win $10 one-half of the time and lose $40 on-fourth of the time. b) win $40 one-fourth of the time, breakeven one-half of the time and lose $40 on-fourth of the time. c) win $20 one-fourth of the time, win $10 one-half of the time and lose $10 on-fourth of the time. d) win $20 one-fourth of the time, win $10 one-fourth of the time and lose $20 on-fourth of the time.

c) win $20 one-fourth of the time, win $10 one-half of the time and lose $10 on-fourth of the time.