ECP6705 - Module 1
Accounting profits tend to _________ economic profits because they exclude _______.
exceed; implicit costs
In order to make sound decisions, firm managers must have well-defined __________.
goals
A binding price ceiling tends to create what type of condition in the market?
shortage
Managerial economics is valuable to:
both businesses and nonbusinesses.
In labor markets, an effective price floor creates ____________.
unemployment
The present value of a perpetual bond that pays the owner $400 at the end of each year when the interest rate is fixed at 4% is $
$10,000
The present value of a perpetual bond that pays the owner $500 at the end of each year when the interest rate is fixed at 5% is $___
$10,000
Jack Roper is a college student. He pays $17,000 per year in tuition and books, $600 per month for rent, $400 per month for food, and $125 per month for on-campus parking. He gave up a job that pays $45,000 per year to attend college. Given this, the implicit cost of his education equals
$45,000
Cross-price elasticity is given by which of the following expressions?
%ΔQxD/%ΔPY and δQxd/δPy × Py/Qx
Which of the following is considered an expression for income elasticity?
%ΔQxd/%ΔM and δQxd/δM × M/Qx
The present value of a perpetual bond that pays the owner $500 at the end of each year when the interest rate is fixed at 5% is $
10,000
Suppose a firm's benefit and cost structure is given by the following functions, respectively: B(Q) = 400(Q) - 5Q^2 C(Q) = 3Q^2 Net benefits are maximized at output level _____.
25
Suppose the government has imposed a price ceiling of $1 on a loaf of bread. If the nonpecuniary price is $2, the full economic price for a loaf of bread is $
3
Which of the following best characterizes "scarcity"?
An individual cannot make a choice without giving up another.
When you compare the improvement in your grade that results from an additional hour of study, you have engaged in which of the following?
Marginal analysis
What type of price control will the government impose if it considers the equilibrium price to be too high?
Price ceiling
What can be said about goods X and Y if the cross-price elasticity between X and Y is negative?
They are complements.
What can be said about goods X and Y if the cross-price elasticity between X and Y is positive?
They are substitutes.
Economic profits equal
Total Revenue - (Explicit + Implicit costs)
Which of the following does NOT comprise effective management? Understanding: Markets- The time value of money- The marginal rate of substitution- Incentives
Understanding the marginal rate of substitution
Which of the following principles are among the seven that comprise effective management?
Use marginal analysis Identify firm goals and constraints Recognize the important of profits
If elasticity is given by Ex,y = %ΔX/%ΔY, then elasticity is positive when:
a decrease in Y leads to a decrease in X. an increase in Y leads to an increase in X.
A strong incentive structure:
aligns worker self-interest with firms' interest. offers bonuses to managers based on firm performance.
Managerial economics provides useful insights into _____ facets of the business and nonbusiness world.
all
If elasticity is given by, EX,Y = %ΔX/%ΔY, then elasticity is negative when:
an increase in Y produces a decrease in X. a decrease in Y produces an increase in X.
If the price of a good rises, this will cause:
an upward movement along the demand curve
When a price floor is applied to a product and the government buys and discards the resulting surplus, the deadweight loss from the price floor _________.
becomes larger
A price ceiling is considered effective if it is set _________ the equilibrium price.
below
The statistical analysis of economic data is called
econometrics.
If ∣∣EQ,Px∣∣=∞, then demand is said to be perfectly _____.
elastic
The primary analytic tool used to evaluate the responsiveness of one variable to change in another variable is called ______.
elasticity
The slopes of the total benefits curve and the total cost curve are ___________ when net benefits are maximized.
equal
If demand is inelastic, a(n)_____ in price will lead to an increase in total revenue.
increase
The line that minimizes the squared deviations between the line and the actual data points is called the _____ _____ regression line.
least squares
In general, firm managers face constraints that affect his or her ability to _____.
maximize profits increase market share
In general, a firm manager is most interested in
maximizing profits.
A price ceiling is defined as the __________ legal price that can be charged in the market.
maximum
According to Adam Smith, by pursuing its self-interest (maximizing profits), a firm tends to
meet the needs of society.
A price floor is defined as the ________________ legal price that a firm can charge in a market.
minimum
Which of the following is an example of a price floor?
minimum wage
Demand tends to be ___________ elastic when consumers have more time to react to price changes.
more
The difference between the market price and the amount at which producers are willing and able to sell a good is called _______ surplus.
producer
According to the law of supply, as the price of a good decreases,
quantity supplied decreases.
According to the "Five Forces Framework," industry profits tend to be lower when which of the following exists?
Suppliers have the power to negotiate favorable terms for their inputs.
What is the effect of an increase in excise taxes?
Supply decreases
What happens to the supply of canned craft beer if brewers adopt a new technology that allows them to can more craft beer at a lower cost?
Supply increases
Suppose there is a drastic decrease in excise taxes levied against the suppliers of baseball equipment. What can we expect to see in the market for baseball bats?
Supply increases Equilibrium price decreases
Opportunity costs include __________ costs.
explicit and implicit
When a surplus exists, there is a tendency for price to _________ in order to equate quantity demanded and quantity supplied.
fall
True or false: In a least squares regression, the parameter estimates represent the greatest sum of squared errors between the line and the actual data.
false
True or false: When a price floor applies to a product, rather than labor, the deadweight loss will always be less.
false
The parameter estimate is statistically different from zero when the absolute value of the t-statistic is _____
greater or equal to 2
Suppose elasticity is given by EX,Y = %ΔX/%ΔY. The absolute value of elasticity will be ________ 1 when the change in X is large relative to the change in Y.
greater than
The economic cost of producing a good or service is generally _________ the accounting cost.
greater than
When a shortage exists, there is a tendency for price to ________ in order to equate quantity demanded and quantity supplied.
rise
Profit maximization by firms improves the total welfare of society by
signaling where scarce resources are most highly valued. inducing entry into the market.
What is the effect of a binding price floor on consumers?
Consumers pay more and purchase less
If the interest rate is 8%, the expected growth rate of a firm for the foreseeable future is 6%, and the firm's current profits are $60 million, then the value of the firm on the ex-dividend date is $___ million.
3,180
Suppose the government has imposed a price ceiling of $2 on a gallon of milk. If the nonpecuniary price is $3, the full economic price of a gallon of milk is $
5
Which of the following describes supply and demand analysis?
A forecasting tool A qualitative tool Use to predict pricing trends
Suppose there is an increase in the price of pork. If chicken is a substitute for pork, what can producers and consumers of chicken expect to see in the market for chicken?
An increase in the price of chicken An increase in the quantity of chicken purchased
Which of the following is true according to the law of demand?
As market price increases, quantity demanded decreases. As market price decreases, quantity demanded increases.
What type of analysis studies the movement from one equilibrium to another?
Comparative static analysis
Comparative static analysis assumes which of the following?
Goods are allocated by price No price floors No price ceilings
Net benefits are maximized at a level of output, (Q), where MB = MC. What is one reason why?
If MB > MC, increasing (Q) adds more to total benefit than total cost.
In the case of yes-or-no managerial decisions, which of the following refers to the additional costs derived from a decision?
Incremental costs
In the case of yes-or-no managerial decisions, which of the following refers to the additional revenues derived from a decision?
Incremental revenues
If ∣∣EQ,P∣∣< 1, then demand is said to be ________.
inelastic
If income elasticity of good X is negative, (EQx, M < 0), then good X is considered a(n) ___ good
inferior
According to the "Five Forces Framework," market entry can erode the sustainability of profits for existing firms. This is due to
intro of new products increased competition formation of new companies
If the price of a good or service is less than the equilibrium price, a _____ exists. As a result, the price tends to _____.
shortage; rise
The smaller the standard error of an estimated coefficient, the (smaller/larger) the variation in the estimate.
smaller
True or false: A new car is likely to have a more elastic demand than paper clips.
true
If ∣∣EQ,P∣∣= 1, then demand is said to be ________ elastic.
unitary
Total revenue is maximized at a point where demand is
unitary elastic.
When the t-statistic for a parameter estimate is large in absolute value, you can be confident that the true parameter is not
zero
Total revenue is maximized when marginal revenue equals ____ which is when the own price elasticity of demand is equal to _____
zero and -1, negative one, unit elastic, or unitary elastic
Consider the following relationship between marginal revenue and elasticity of demand: MR = P × {1+E/E}. If elasticity is unitary, marginal revenue is ___________ and total revenue is ____________.
zero; maximized
Suppose that demand is linear and given by: Qxd = αo - αxPx + αyPy + αMM + αHH Income elasticity is given by:
αM × MQx
Suppose that demand is linear and given by: Qxd = αo - αxPx + αyPy + αMM + αHH Own price elasticity is given by:
αx × Px/Qx
Suppose that demand is linear and given by: Qxd = α0 - αxPx + αyPy + αMM + αHH Cross-price elasticity is given by:
αy × Py/Qx
Suppose the demand for good X is log-linear and given by lnQxd = β0 + βxlnPx + βylnPy + βMlnM + βHlnH Income elasticity is
βM
Suppose the demand for good X is log-linear and given by lnQxd = β0 + βxlnPx + βylnPy + βMlnM + βHlnH Own price elasticity is
βx
Suppose the demand for good X is log-linear and given by lnQxd = β0 + βxlnPx + βylnPy + βMlnM + βHlnH Cross-price elasticity is
βy
Given a demand function, Qxd = f(Px, Py, M, H), define own price elasticity.
δQxd/δPx × Px/Qx
What is the ex-dividend present value of a firm's current and future earnings if the interest rate is 7%, the expected growth rate of the firm is 4%, and the firm's current profits are $75 million?
$2,525 million
"Roper Spring Water" is considering a new bottling line that costs $230,000, lasts 4 years, and yields cost savings of $55,000 in year 1, $65,000 in year 2, and $75,000 in years 3 and 4. If the interest rate is 7%, what is the present value of the cost savings of the line?
$226,615
Which of the following is the formula of price elasticity of demand for a good, X?
%ΔQDX/%ΔPX
"Roper Spring Water" is considering a new bottling line that costs $230,000, lasts 4 years, and yields cost savings of $55,000 in year 1, $65,000 in year 2, and $75,000 in years 3 and 4. If the interest rate is 7%, what is the net present value of the machine? Should Roper Spring Water buy the machine?
-$3,385; No
If the interest rate is 8%, the expected growth rate of the firm for the foreseeable future is 6%, and the firm's current profits are $60 million, the present value of the firm's current and future earnings is $
3,240
Suppose a firm produces two products, X and Y. The firm earns revenues from X equal to $50,000 and revenues from Y equal to $30,000. The own price elasticity of demand for X is -2 and the cross-price elasticity of demand between X and Y is -0.6. If the firm lowers the price of product X by 1%, the change in total revenues will be $
680
Suppose a firm produces two products, X and Y. The firm earns revenues from X equal to $70,000 and revenues from Y equal to $60,000. The own price elasticity of demand for X is -1.5 and the cross-price elasticity of demand between X and Y is -0.80. If the firm decreases the price of product X by 1%, the change in total revenues will be $
830
Which of the following shows a decrease in the quantity supplied?
A movement down along the supply curve
Which of the following events show an increase in supply?
A rightward shift of the supply curve
What is true of demand for a good that has many available substitutes?
Demand is relatively elastic.
What is true of demand for a good that has few close substitutes?
Demand is relatively inelastic.
Which relationship best describes the following statement: "Buyers are trying to 'rip-off' sellers and sellers are trying to gouge buyers."
Consumer-producer rivalry
An increase in demand is best characterized by which of the following?
Demand curve shifts to the right
If chicken and pork are substitutes, what happens to the demand for pork if the price of chicken increases substantially?
Demand for pork increases
What do economists use to describe the amount of good X that will be purchased at different prices of good X, at different prices of related goods, and at alternative income levels?
Demand function
Which of the following are roles of a firm manager?
Directs the efforts of others Establishes product price Selects and purchases production inputs
Which of the following expressions best describes full economic price?
Dollar price + Nonpecuniary price
Consider the following relationship between marginal revenue and elasticity of demand: MR = P × {1+E/E}. If demand is inelastic:
Marginal revenue is negative
Consider the following relationship between marginal revenue and elasticity of demand: MR = P × {1+E/E}. If demand is elastic:
Marginal revenue is positive.
The demand function indicates that the quantity of a good consumed depends on:
Effect of the demand shifters Price of the good Income of the buyers
Which of the following is among the five forces that impact the sustainability of industry profits, according to Michael Porter?
Entry Power of buyers Industry rivalry
Other things remaining constant, when demand for a good or service decreases, which of the following occur(s)?
Equilibrium price decreases Equilibrium quantity decreases
Which of the following occur(s) when the supply of a good or service increases but the demand remains the same?
Equilibrium price decreases Equilibrium quantity increases
Determine the effect in the market for chicken if the federal government subsidizes chicken production and, at the same time, the price of pork, a substitute, decreases.
Equilibrium price decreases. The effect on equilibrium quantity is uncertain.
Which of the following occur(s) when the supply of a good or service decreases and demand remains the same?
Equilibrium quantity decreases Equilibrium price increases
What can we predict about the market for craft beer if both demand and supply decrease simultaneously?
Equilibrium quantity decreases.
True or false: Wealthy people do not face scarcity.
False
If a new canning technology costs $300,000 in the last 6 years, and generates year-end, cost savings of $50,000 in each of the first 3 years and $60,000 in each of the last 3 years, should the firm buy the technology if the interest rate of 5.0%?
No. The manager would do better to invest the $300,000 at 5%. No. The net present value of the technology is negative.
If demand is perfectly inelastic, which of the following is correct?
Own-price elasticity equals zero.
Consider the following demand function: Qd = 900 - 15P. Solve for the inverse demand function.
P = 60 - 1/15Qd
Consider the following demand function: Q^d = 210 - 3P. Solve for the inverse demand function.
P = 70 - 1/3Qd
Demand is given by: Qd = 100 - 2P Supply is given by: Qs = 60 + 2P Determine the equilibrium price (P*) and quantity (Q*).
P*= $10; Q*= 80
Demand is given by: Qd = 20 - 3P Supply is given by: Qs = 2 + 3P Determine the equilibrium price (P*) and quantity (Q*).
P*= $3; Q*= 11
What is the present value of $100 in 8 years if the interest rate is 5%?
PV = $100(1 + 0.05)^8=$67.68
What is the present value of $500 in 15 years if the interest rate is 4.5%?
PV = $500(1 + 0.045)^15= $258.36
The law of demand analyzes the relationship between price and quantity demanded holding which of the following variables constant?
Prices of related goods Income
Firms that earn the business of scarce customers with a high-quality, lower-price product engage in
Producer-producer rivalry
Consider the following function: Qxs = 15Px - 300. Determine the inverse supply function.
Px = 20 + 1/15Qxs
Consider the following function: Qxs = 5Px - 200. Determine the inverse supply function.
Px = 40 + 1/5Qxs
Successful managers understand how to structure incentives in order to overcome which economic condition?
Self interest
Graphically, what area represents producer surplus?
The area above the supply curve and below the price.
Which area forms consumer surplus?
The area below the demand curve and above the price.
Which of the following is NOT among the five forces that impact the sustainability of industry profits, according to Michael Porter?
The power of prices
Which of the following does a market supply curve show?
The quantity that all producers are willing and able to produce at all prices.
What is the t-statistic of a parameter estimate?
The ratio of the value of the estimate to its standard error
Managerial economics is a very _______ discipline that describes methods for analyzing the resource-allocation decisions of __________.
broad; households and firms
Advertising elasticity measures
changes in consumption due to changes in advertising.
Cross advertising elasticity measures
changes in consumption of one good due to changes in advertising on another good.
If the price of good A increases and, as a result, the demand for good B decreases, then goods A and B are considered to be
complements
Suppose as a result of a 5% increase in the price of pizza, the demand for soft drinks decreases by 1.1%. In this example, soft drinks and pizza are ____________.
complements
When a firm manager uses a parameter estimate and its standard error to construct an upper and lower bound on the true value of the parameter, that manager is constructing a
confidence interval
A decision maker's ability to achieve a goal will be affected by the_______ she faces.
constraints
The availability of technology and input prices are often considered _________ that interfere with managerial goals.
constraints
The difference between what consumers are willing to pay for a good or service and the market price is known as _____.
consumer surplus
Responsiveness of demand for a good due to changes in the price of a related good is measured using
cross-price elasticity.
If ∣∣EQ,Px∣∣ > 1, an increase in the price of a good will _______ total revenue.
decrease
According to the law of demand, as market price increases, quantity demanded ____.
decreases
If ∣∣EQ,Px∣∣ < 1, an increase in the price of the good will _______ total revenue.
increase
According to the law of demand, as market price decreases, quantity demanded ____.
increases
Marginal analysis is the comparison of
incremental benefits with incremental costs.
Suppose elasticity is given by, EX,Y = %ΔX/%ΔY. The absolute value of elasticity will be ________ 1 when the change in X is small relative to the change in Y.
less than
As input prices rise, producers are willing to produce ______ goods and services at all prices. As a result, supply ______.
less; decreases
Demand tends to be ___________ elastic for goods that require a relatively small portion of consumers' budgets and ____________ elastic for goods that require a relatively large portion of consumers' budgets.
less; more
The ______ the P-value for an estimated coefficient, the more confident you are in the estimate.
lower
Consider the following linear demand function where Py is the price of related goods, M is income, and H is other factors: Qx^d = α0 + αxPx + αyPy + αMM + αHH According to the law of demand, the value of αx is _____.
negative
If income elasticity of good X is positive, (EQx, M > 0), then good X is considered a(n) good.
normal
Income elasticity tells us whether goods are
normal or inferior.
At a production level of 100 units, the firm's marginal benefit (MB) is $20 and its marginal cost (MC) is $22. The firm is:
not maximizing its net benefits
Elasticity measures the responsiveness of
one variable to changes in another.
In the following linear demand function, Qxd = α0 + αxPx + αyPy + αMM + αHH where Py is the price of related goods, M is income, and H is other factors, the value of αM is:
positive if good X is normal negative if good X is inferior
If the price of a good or service exceeds the equilibrium price, a _____ exists. As a result, price tends to _____.
surplus; fall
When consumers have more time to react to a price change of a good,
the demand for the good becomes relatively more elastic. the consumers are able to locate more substitutes.
Maximizing short-term profits also maximizes long-term profits when the growth rate in profit is less than the interest rate and:
the interest rate and growth rate are both constant
The following function, Qxs = f (Px, Pr, W, H), shows that the quantity produced in a market depends on the price of the good, Px, and
the price of other supply shifters such as taxes. the price of technology and technology-related goods. the price of inputs such as labor costs.
A measure of how much an estimated coefficient would vary in regressions based on the same underlying true demand relation, but with different observations is called __________.
the standard error
Managerial economics is best defined as
the study of how to allocate scarce resources to achieve managerial goals.
A function that describes the relationship between output and various prices of that output, prices of inputs, and values of other variables is called
the supply function.
Suppose a firm manager converts 65% of his available factory space in to an indoor playground for neighborhood children. The implicit cost of this decision is
the value of the next-best alternative for the space.
True or false: Econometrics is used to estimate demand functions.
true
True or false: If the growth rate in profits is less than the interest rate and both are constant, maximizing short-term profits is the same as maximizing long-term profits.
true
True or false: Supply and demand analysis enables managers to see the "big picture".
true
True or false: The law of demand analyzes the relationship between price and quantity demanded holding everything else constant that influences buyers decisions.
true
