BE 301 KU Exam 1 Multiple Choice

Managers undertake an investment only if

marginal benefits are greater than marginal costs

If a firm's average cost is rising then

marginal cost is greater than average cost

An example of a price floor is

minimum wages

If a firm is earning negative economic profits, it implies

more information is needed to conclude about accounting profits

after the first week of his MBA managerial economics class, one of your pharmaceutical sales reps accuses you of committing the sunk cost fallacy by refusing to allow him to reduce the price to make what he considers to be a really though sale. which of the following suggests the sales representative may be right?

most of the costs of drug development are sunk, not fixed.

You believe the demand for good peanut butter depends on the price of the product itself, Ppb, the price of a related product, in this case jelly, Pj, and Income, I. You estimate the demand function to be: Qdpb = a0 + a1Ppb + a2Pj + a3I The sign and magnitude of the coefficients (a1, a2, and a3) establishes the relationship between quantity of peanut butter demanded, Ppb, Pj, and I. From the Law of Demand you know that a1 will be:

negative

Opportunity costs arise due to

resource scarcity

A business owner makes 1,000 items a day. Each day he or she contributes eight hours to produce those items. If hired, elsewhere he or she could have earned $250 an hour. The item sells for $15 each. Production does not stop during weekends. If the explicit costs total $150,000 for 30 days, the economic profit for the month equals:

$240,000

james used $250k from his investment account that earned an annual 15% return to purchase a small hardware store. after one year, james sold the business for $320k. his accountant calculated his profits to be:

$70,000

Over the years, Lawrence Office Supply, Inc. has received equity capital totaling $20,000,000 (assume the company had no debt on its balance sheet). Last year, the firm produced after-tax income of $3,200,000. If the firm's equity investors expected a return on their capital of 12%, what were the firm's economic profits approximately?

$800,000

the government decided to reduce taxes on fastfood in order to increase revenue. as such, the government assumes that fastfood products have:

an elastic demand

In the "Morality of Profit," Tom Palmer makes the case that profits are not only rational, but also moral. In order for profits to be moral:

e. The have to emerge from voluntary exchange between a buyer and a seller

Holding other factors constant, a decrease in the tax for producing coffee causes

factors constant, a decrease in the tax for producing coffee causes d. the supply curve to shift to the right, causing the prices of coffee to fall

Suppose a recent and widely circulated medical article has reported new benefits of cycling for exercise. Simultaneously, the price of the parts needed to make bikes falls. If the change in supply is greater than the change in demand, the price will __________ and the quantity will __________.

fall, rise

Johnny's Brewery figures their marginal profit is $4.75 per gallon at the current level of production. Given this information, the brewery's profits could be increased by cutting back production.

false

Total costs increase from $1,500 to $1,800 when a firm increases output from 40 to 50 units. Which of the following is true if marginal cost is constant?

FC = $300

If your car breaks down and you fix it, then it breaks down again, then the decision to repair it a second time is entirely dependent on the price paid for the first repair.

False

A business owner makes 1,000 items a day. Each day he or she contributes eight hours to produce those items. If hired, elsewhere he or she could have earned $250 an hour. The item sells for $15 each. Production does not stop during weekends. If the explicit costs total $150,000 for 30 days, the firm's accounting profit for the month equals:

$300,000

james used $250k from his investment account that earned an annual 15% return to purchase a small hardware store. after one year, james sold the business for $320k. an ECONOMIST calculated his profits to be:

$32,500

A retailer has to pay $9 per hour to hire 13 workers. If the retailer only needs to hire 12 workers, a wage rate of $7 per hour is sufficient. What is the marginal cost of the 13th worker?

$33

suppose there is a single market maker in this market. what is optimal bid-ask spread?

$4 bid; $8 ask

A consumer values a car at $525,000 and a producer values the same care at $485,000. If sales tax is 8% and is levied on the seller, then the sellers bottom line price is

$523,800

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 there are no transactions costs, what is the equilibrium price in this market?

$6

A consumer values a car at $30,000 and it costs a producer $20,000 to make the same car. If the transaction is completed at $24,000, the transaction will generate

$6,000 worth of buyer surplus and $4,000 worth of seller surplus

You expect to sell 500 cell phones a month, which have a marginal cost of $50. If your fixed costs are $5,000 per month, what is the breakeven price?

$60

Mr. D's Barbecue of Pickwick, TN produces 10,000 dry-rubbed rib slabs per year. Annually Mr. D's fixed costs are $50,000. The average variable cost per slab is a constant $2. The average total cost per slab then is

$7

Last week, Samsung dropped the price of one of its phones (thru all carriers) from $375 to $350 in the KC area. In response, customer purchases rose from 12,000 phones to 15,500 phones. During the same period, iPhone prices remained the same, but purchases of iPhones dropped from 8,500 to 6,800. The price elasticity of demand for Samsung phones is:

-3.69

Following are the costs to produce Product A, Product B, and Products A and B together. Which of the following exhibits economies of scope?

1. 50, 75, 120 or 2. 100, 150, 240

Based on the numbers above, the cross price elasticity between iPhones and Samsung phones is:

3.22 indicating they are substitutes

You are considering opening a new business to produce and sell golf clubs. You estimate that your manufacturing equipment will cost $100,000, facility updates will cost $250,000 and, on average, it will cost you $60 in materials and $20 in labor to produce one club. If you expect you can sell clubs for $100 each, how many units would you have to sell to at least break even?

17,500

You are considering opening a new business to sell dartboards. You estimate that your manufacturing equipment will cost $100,000, facility updates will cost $250,000, and on average it will cost you $80 (in labor and material) to produce a board. If you can sell dartboards for $100 each, what is your breakeven quantity?

17,500

Say the average price of a new home in Lampard City is $160,000. The local government has just passed new licensing requirements for housing contractors. Based on possible shifts in demand or supply and assuming that the licensing changes don't affect the quality of new houses, which of the following is a reasonable prediction for the average price of a new home in the future?

170k

If the government imposes a price floor at $9 (i.e., price must be $9 or higher) in the above market, how many goods will be traded?

2

It costs a firm $80 per unit to produce product A and $50 per unit to produce B individually. If the firm can produce both products together at $140 per unit of product A and B, this exhibits signs of a) Economies of scale b) Economies of Scope c) Diseconomies of Scale d) Diseconomies of Scope

A

which of the following statements is true? a. the demand for puma shoes is more elastic than the demand for athletic shoes b. the demand for gas is more elastic in the short run than in the long run c. products with many complements tend to have very elastic demands d. the demand for cheerios is less elastic than the demand for cereal

A

Which of the following will increase the breakeven quantity?

A decrease in the price level

An individuals value for a good or service is the

Amount of money he or she is willing to pay

Once marginal cost rises above average cost,

Average costs will increase

the term "bottleneck" refers to: a. when increasing the variable inputs must share a fixed amount of complementary inputs b. fixity of some factor c. none of the above d. both a and b

D

Which of the following is NOT true if a firm shuts down and produces zero output in the short run?

Fixed costs will be less than zero

Taxes:

Impede the movement of assets to higher-valued uses. Reduce incentives to work Decreases the number of wealth creating transactions d.All of the above (answer)

The biggest advantage of capitalism (free market system) is that

It creates wealth by letting a person follow his or her own self-interest

What are some of the solutions for a hold-up problem?

Mergers Contracts Exchange of "hostages" d. All the above (answer)

Changes in prices of a good causes

Movement along the demand curve Movement along the supply curve

Efficiency implies opportunity,

Never

Government Regulation

Provides incentives to conduct business in an illegal black market

Which of the following is classified as a sunk cost?

Research costs to determine the implementation of a technology

A few months back, the U.S. President and Congress had been weighing the possibility of firing missiles at Syria in retaliation for Syria's use of chemical weapons. Aside form the moral, legal and political issues, some commentators have said that while the action would have an economic cost, the expenditures on the military action would add money to the economy and increase the demand for other goods. This argument is best described by:

The Broken Window Fallacy

Economic Value Added helps firms to avoid the hidden-cost fallacy

by taking all capital costs into account including the cost of equity

A frozen food company is currently producing 1,000 TV dinners. At this output level, price is $2.50 per unit and marginal revenue is $2.25. Average total cost is $2.10 and marginal cost is $2.40. What can you conclude from this information?

The current level of output produced and sold is too high and the company should consider scaling back production

If the firm for which you work pays you 51 cents for every mile you drive your own car on company business, should you use your own car or the company car? Which of the following costs are relevant to your decision? Select All That Apply

The price of gasoline The (technical) depreciation of your vehicle

A firm produces 500 units per week. It hires 20 full-time workers (40 hours/week) at an hourly wage of $15. Raw materials are ordered weekly, and they cost $10 for every unit produced. The weekly cost of the rent payment for the factory is $2,250. How do the overall costs break down?

Total variable cost is $17,000; total fixed cost is $2,250; total cost is $19,250

Wealth-creating transactions are more likely to occur

With private property rights With strong contract enforcement With black markets d. a and b

Economic profits are

[Total Sales Revenue] - [Market Value of all the Resources Employed in the Production Process]

A hedge fund manager generated a 15% return (after fees) last year. Funds indexed to the S&P 500 used as his benchmark earned 13%. Taking the opportunity cost of equity capital into account, what was the fund manager's total return?

a. 2 percent

Sarah's Machinery Company is deciding to dump their current technology A for a new technology B with small fixed costs but big marginal costs. The current technology has fixed costs of $500 and marginal costs of $50 whereas the new technology has fixed costs of $250 and marginal costs of $100At what quantity is Sarah Machinery indifferent between two technologies?

a. 5

Suppose your firm adopts a technology that allows you to increase your output by 15%. If the elasticity of demand -3, how should you adjust price if you want to sell all of your output?

a. 5% lower

Which of the following is (are) an explicit cost of going to college? Select all that apply.

a. Costs of books and supplies d. Tuition

The fixed-cost fallacy occurs when

a. a firm considers irrelevant costs. b. a firm ignores relevant costs. c. a firm considers overhead or depreciation costs to make short-run decisions. d. Both a and c (ANSWER)

Average costs curves initially fall

a. due to declining average fixed costs

Jim recently graduated from college. His income increased tremendously from $5,000 a year to $60,000 a year. Jim decided that instead of renting he will buy a house. This implies that

a. houses are normal goods for Jim

A company faces the following costs at the respective production levels in addition to its fixed costs of $50,000: ....... How would you describe the returns to scale for this company?

a. increasing

The price of peanuts increases. At the same time, we see the price of jelly rise. How does this affect the market for peanut butter?

a. the demand curve will shift to the left, the supply curve will shift to the left

the higher the interest rates

a. the more value individuals place on future dollars B. the more value individuals place on current dollars C. less investments will take place d. does not affect the investment strategy B &C ARE POSSIBLE ANSWERS (refer to #28)

As a golf club production company produces more clubs, the average total cost of each club produced decreases. This is because

a. total fixed costs are decreasing as more clubs are produced

All the following are examples of variable costs, except

accounting fees

Why are green peppers consistently cheaper than red peppers? (Hint: what does it take for green peppers to turn red?)

b. Red peppers are ripe green peppers and since sellers prefer money today to money tomorrow, if consumers really want red peppers they will have to sell for more. e. Given the additional time farmers have to wait to harvest red peppers, if both green pepper and red peppers sold for the same price, no seller would be willing to supply a red pepper.

what is the net present value of a project that requires $100 investment today and returns $50 at the end of the first year and $80 at the end of the second? assume a discount rate of 10%.

b. $11.57

As more firms enter an industry (the number of competitors increases), and holding all else equal, you can expect:

b. Economic profits to decrease

Which of the following goods has a negative income elasticity of demand?

b. Items from Dollar Stores

A basketball manufacturer is considering the purchase of a new machine that would double daily capacity from 100 to 200 balls per day. The machines will occupy 1,000 sq. ft. of currently unused space on the 20,000 sq. ft. factory floor. Which costs are irrelevant in this decision to purchase the machine?

b. Rental expense associated with the 20,000 square foot factory

Buyers consider Marlboro cigarettes and Budweiser beer to be complements. If Marlboro just increased its prices, what would you expect to occur in the Budweiser market?

b. demand would fall, and Budweiser would reduce price

Christine has purchased five bananas and is considering the purchase of a sixth. It is likely she will purchase the sixth banana if

b. the marginal benefit of the sixth banana exceeds the price

A bakery currently sells chocolate chip cookies at a price of $16 per dozen. The marginal cost per dozen is $8. The cookies are becoming more popular with customers, and so the bakery owner is considering raising the price to $20/dozen. What percentage of customers must be retained to ensure that the price increase is profitable?

c. 66%

In a transaction for a rare painting valued at $1,000,000, by an avid collector, and at $950,000 by the seller, what sales tax would result in an unrealized wealth-creating transaction? Select All That Apply

c. An 10% tax f. A tax of $55,000

Of the following costs listed, which is/are most likely variable costs of production for an athletic shoe manufacturer? Select all that apply

c. Cost of leather used to produce the shoes d. Direct labor costs at the manufacturing plant f. Inventory costs g. Electricity to run manufacturing equipment

Which of the following is an implicit cost to a firm that produces a good or service?

c. Sacrificed profits from producing an alternative good or service

An opportunity cost of receiving $1 in the future as opposed to getting that $1 today is:

c. The forgone interest that could be earned had you the money today

When demand for a product falls, which of the following events would you NOT necessarily expect to occur?

c. a decrease in the supply of the product

Microsoft found that instead of producing a DVD player and a gaming system separately, it is cheaper to incorporate DVD playing capabilities in its new version of the gaming system. Microsoft is taking advantage of

c. economies of scope

Jim has estimated elasticity of demand for gasoline to be -0.7 in the short run and -1.8 in the long run. A decrease in taxes on gasoline would

c. lower tax revenue in the short run but lower tax revenue in the long run

If the market for a certain product experiences an increase in supply and a decrease in demand, which of the following results is expected to occur?

c. the equilibrium price would fall, and the equilibrium quantity could rise or fall

A security system company's total production costs depend on the number of systems produced according to the following equation: Total Costs= $20,000,000 + $4,000 * quantity produced. Given these data, which of the following is a false statement?

c. there are diseconomies of scale

Using the same demand function above, if a 2 is negative, which of the following statements describes the relationship between peanut butter and jelly?

d. PB and J are complements

What might you reasonably expect of an industry in which firms tend to have economies of scale?

d. a small number of firms

According to the law of diminishing marginal returns, marginal returns

d. diminish eventually

It costs a firm $90 per unit to produce product A and $70 per unit to produce product B individually. If the firm can produce both products together at $175 per unit of product A and B, this exhibits signs of

d. diseconomies of scope

Which one of the following is true?

d. salt has a less elastic demand than ice cream

Which of the following is the reason for the existence of consumer surplus?

d. some consumers are willing to pay more than the price

An economist estimated the cross-price elasticity for peanut butter and jelly to be 1.5. Based on this information, we know the goods are

d. substitutes

To maximize the net benefit of performing an activity (such as studying for a test), you should continue to perform the activity (study) until the total benefit equals the total cost, thus guaranteeing the maximal net benefit from the activity.

false

now suppose that competition among several market makers forces the spread down to $2. how many goods are traded?

four

When economists speak of "marginal," they mean

incremental

Assume a firm has the following cost and revenue characteristics at its current level of output: price = $10.00, average variable cost = $8.00, and average fixed cost = $4.00. This firm is

incurring a loss per unit of $2.00, but should continue to operate in the short run

The U.S. government bought 112,000 acres of land in southeastern Colorado in 1968 for $17,500,000. The cost of using this land to- day exclusively for the reintroduction of the black-tailed prairie dog

is equal to the market value of the land

Suppose a new employer is also relocating to Lampard City and will be attracting many new people who will want to buy new houses. Assume that the change in licensing requirements mentioned in Question 7 occurs at the same time. What do you think will happen to the equilibrium quantity of new homes bought and sold in Lampard City?

not enough info

scarcity in economics suggests:

not having enough resources to produce all the goods and services that we want

A company is producing 15,000 units. At this output level, marginal revenue is $22 and the marginal cost is $18. The firm sells each unit for $48 and average total cost is $40. What can we conclude from this information?

the company needs to increase production

A firm is thinking of hiring an additional worker to their organization who they believe can increase total productivity by 100 units a week. The cost of hiring him or her is $1,500 per week. If the price of each unit is $12

the firm should not hire the worker since MB < MC

After graduating from college, Jim had three choices, listed in order of preference: (1) move to Florida from Philadelphia, (2) work in a car dealership in Philadelphia, or (3) play soccer for a minor league in Philadelphia. His opportunity cost of moving to Florida includes

the income he could have earned at the car dealership

A manager of a clothing firm is deciding whether to add another factory in addition to one already in production. The manager would compare

the incremental benefit expected from the second factory to the cost of the second factory

holding other factors constant, a decrease in the tax for producing coffee causes

the supply curve to shift to the right, causing the prices of coffee to fall

"Consumer Profit" as discussed in Tom Palmer's " The Morality of Profit," is a measure of consumer well-being because it reflects a positive difference between the value the consumer placed on the product (maximum willingness to pay) and what he/she actually had to pay to obtain it.

true

Based on your answer above, assume the businessman embarks on the project but did too little market research and failed to realize the market for golf clubs was already fairly saturated. As such, he can now expect to sell no more than 10,000 units. He also realizes his MR = $100 and his MC = $90 for every unit he could sell. Despite the fact the venture cannot be profitable, the businessman can minimize his losses by producing and selling clubs in the short run.

true