Managerial Economics Exam 2 Review

If Mary prefers bananas to plums and plums to peaches, but is indifferent between bananas and oranges, she

prefers oranges to peaches.

The estimated demand for a good is Q̂ = 25 − 5P + 0.32M + 12PR where Q is the quantity demanded of the good, P is the price of the good, M is income, and PR is the price of related good R. If income decreases by $1,000, all else constant, quantity demanded will ________ by _________ units. A. decrease; 320 units B. increase; 3.2 unit C. decrease; 1200 units D. increase; 500 units E. decrease; 500 units

A. decrease; 320 units

When marginal revenue is positive, A. demand is elastic. B. marginal revenue is greater than price. C. decreasing price will decrease total revenue. D. both "marginal revenue is greater than price" and "decreasing price will decrease total revenue". E. All of the choices are correct.

A. demand is elastic.

If average product is increasing, then marginal product A. must be greater than average product. B. must be less than average product. C. must be increasing. D. cannot be decreasing. E. both "must be greater than average product" and "must be increasing".

A. must be greater than average product.

Which of the following is NOT a characteristic of a typical indifference curve? a.The curve shows all combinations of goods that give the consumer the same level of utility. b.As a consumer has less of a good, he is less willing to exchange less of it for one more unit of another good. c.The marginal rate of substitution is measured by the slope of the tangent to the curve. d.The curve will shift out if income increases.

A: shows all combinations of goods that give a consumer the same level of utility.

Which of the following assumptions is (are) NOT made in consumer behavior theory? A. Consumers can rank all bundles of goods. B. Consumers can measure the utility they get from all bundles of goods. C. Consumers have complete information. D. Both "Consumers can rank all bundles of goods" and "Consumers can measure the utility they get from all bundles of goods". E. None of the choices are assumptions made in consumer behavior theory.

B. Consumers can measure the utility they get from all bundles of goods.

A short-run production function assumes that A. the level of output is fixed. B. at least one input is a fixed input. C. all inputs are fixed inputs. D. both "the level of output is fixed" and "at least one input is a fixed input". E. both "at least one input is a fixed input" and "all inputs are fixed inputs".

B. at least one input is a fixed input.

If the demand for umbrellas is price inelastic, A. changes in price do not affect the number of umbrellas demanded. B. if more umbrellas are sold as the result of a price decrease, total expenditures by consumers on umbrellas will decrease. C. the percentage change in price is less than the percentage change in quantity demanded. D. the percentage change in quantity demanded is greater than the percentage change in price. E. None of the choices are correct.

B. if more umbrellas are sold as the result of a price decrease, total expenditures by consumers on umbrellas will decrease.

The estimated demand for a good is Q̂ = 25 − 5P + 0.32M + 12PR where Q is the quantity demanded of the good, P is the price of the good, M is income, and PR is the price of related good R. If the price of the good falls by $4, the quantity demanded will ________ by ________ units. A. increase; 5 units B. increase; 20 units C. increase; 50 units D. increase; 48 units E. decrease; 12 units

B. increase; 20 units

The estimated demand for a good is Q̂ = 25 − 5P + 0.32M + 12PR where Q is the quantity demanded of the good, P is the price of the good, M is income, and PR is the price of related good R. The coefficient on P A. does not have the expected sign. B. is negative as expected. C. should have the same sign as the coefficient on PR. D. should not be greater than one (in absolute value). E. both "is negative as expected" and "should not be greater than one (in absolute value)".

B. is negative as expected.

Which of the following will NOT affect the elasticity of demand for a product? A. the number of substituteshow long consumers have to adapt to price changes B. the cost of producing the product C. the percentage of the consumer's budget spent on the product D. All of the choices will affect the elasticity of demand for a product.

B. the cost of producing the product

A production function measures the relation between A. input prices and output prices. B. the quantity of inputs and the quantity of output. C. input prices and the quantity of output.the quantity of inputs and input prices. D. None of the choices are correct.

B. the quantity of inputs and the quantity of output.

Marginal revenue A.by one unit.is always greater than zero. B. measures the slope of the total revenue curve. C. both "is the change in total revenue when output increases by one unit" and "measures the slope of the total revenue curve". D. All of the choices are correct.

C. both "is the change in total revenue when output increases by one unit" and "measures the slope of the total revenue curve".

A utility function A. shows the relation between prices and a consumer's utility. B. shows the relation between income and a consumer's utility. C. shows the relation between the amount of goods consumed and a consumer's utility. D. All of the choices are correct.

C. shows the relation between the amount of goods consumed and a consumer's utility.

The Interior Department recently announced that it will increase the entrance fees at Yellowstone National Park in order to increase park revenues. The Interior Department must believe that A. park goers are very responsive to price changes. B. the demand for park services is elastic. C. the percentage increase in fees will be greater than the percentage decrease in the number of park visitors. D. demand is unitary elastic, and thus the number of visitors will NOT decrease.

C. the percentage increase in fees will be greater than the percentage decrease in the number of park visitors.

Which of the following statements is false? A. A firm plans in the long run and operates in the short run. B. In the short run, a firm can change some but not all of its inputs. C. In the long run all inputs are variable. D. In the short run all inputs are fixed.

D. In the short run all inputs are fixed.

Along an indifference curve... A. the MRS is constant. B. the ratio of the marginal utilities is constant. C. the price ratio is constant. D. None of the choices are correct.

D. None of the choices are correct.

The rate at which a consumer is able to substitute one good for another is determined by... A. the indifference map. B. the marginal rate of substitution. C. the consumer's income. D. the budget line.

D. The Budget Line

For a short-run production function in which output is determined by the number of workers utilized (capital stock held constant), which of the following is false? A. In general, when there are few workers the marginal product of labor will be increasing. B. When the marginal product of labor is negative, total product is falling. C. To determine the marginal product of labor, the capital stock must be held constant. D. When diminishing returns set in, adding one more worker decreases output. E. None of the choices are correct.

D. When diminishing returns set in, adding one more worker decreases output.

The estimated demand for a good is Q̂ = 25 − 5P + 0.32M + 12PR where Q is the quantity demanded of the good, P is the price of the good, M is income, and PR is the price of related good R. The good is A. an inferior good since the coefficient on PR is positive. B. a normal good since the coefficient on PR is positive. C. an inferior good since the coefficient on M is greater than one. D. a normal good since the coefficient on M is positive. E. None of the choices are correct.

D. a normal good since the coefficient on M is positive.

Demand equations derived from actual market data are A. empirical demand functions. B. never estimated using consumer interviews. C. generally estimated using regression analysis. D. both "empirical demand functions" and "generally estimated using regression analysis". E. All of the choices are correct.

D. both "empirical demand functions" and "generally estimated using regression analysis".

The cross-price elasticity of demand between goods X and Y A. measures the responsiveness of the quantity of X demanded to changes in the price of Y. B. is the percentage change in the price of Y divided by the percentage change in the quantity of X demanded. C. is greater than zero if X and Y are substitutes. D. both "measures the responsiveness of the quantity of X demanded to changes in the price of Y" and "is greater than zero if X and Y are substitutes". E. All of the choices are correct.

D. both "measures the responsiveness of the quantity of X demanded to changes in the price of Y" and "is greater than zero if X and Y are substitutes".

A representative sample A. eliminates the problem of response bias. B. reflects the characteristics of the population. C. is frequently a random sample. D. both "reflects the characteristics of the population" and "is frequently a random sample". E. All of the choices are correct.

D. both "reflects the characteristics of the population" and "is frequently a random sample".

Suppose that 2 units of X and 8 units of Y give a consumer the same satisfaction as 4 units of X and 2 units of Y. Then A. the consumer is willing to give up 3 units of Y to obtain 1 more unit of X. B. the consumer is willing to give up 1 unit of Y to obtain 3 more units of X. C. the marginal rate of substitution of Y for X is 3. D. both "the consumer is willing to give up 3 units of Y to obtain 1 more unit of X" and "the marginal rate of substitution of Y for X is 3". E. both "the consumer is willing to give up 1 unit of Y to obtain 3 more units of X" and "the marginal rate of substitution of Y for X is 3".

D. both "the consumer is willing to give up 3 units of Y to obtain 1 more unit of X" and "the marginal rate of substitution of Y for X is 3".

One problem with consumer interviews is that A. the sample may not be a representative sample. B. response bias. C. interviews allow for rapid turnaround. D. both "the sample may not be a representative sample" and "response bias". E. All of the choices are correct.

D. both "the sample may not be a representative sample" and "response bias".

The slope of an indifference curve A. shows the change in utility from an additional unit of the good. B. shows the rate at which the consumer is able to substitute goods in the market. C. is equal to the price ratio at all points. D. is the rate at which the consumer is willing to exchange one good for another, utility held constant. E. All of the choices are correct.

D. is the rate at which the consumer is willing to exchange one good for another, utility held constant.

The estimated demand for a good is Q̂ = 25 − 5P + 0.32M + 12PR where Q is the quantity demanded of the good, P is the price of the good, M is income, and PR is the price of related good R. This good and the related good R are A. complements since the coefficient on M is positive. B. substitutes since the coefficient on M is positive. C. complements since the coefficient on PR is positive. D. substitutes since the coefficient on PR is positive.

D. substitutes since the coefficient on PR is positive.

The marginal product of labor A. measures how output changes as the wage rate changes. B. is less than the average product of labor when the average product of labor is decreasing. C. is negative when adding another unit of labor decreases output. D. both "measures how output changes as the wage rate changes" and "is less than the average product of labor when the average product of labor is decreasing". E. both "is less than the average product of labor when the average product of labor is decreasing" and "is negative when adding another unit of labor decreases output".

E. both "is less than the average product of labor when the average product of labor is decreasing" and "is negative when adding another unit of labor decreases output".

Alexandra consumes only caviar and champagne, but she does have a limited income of $400. Her current consumption choice is 5 ounces of caviar, at a price of $50 per ounce, and 6 bottles of champagne, at $25 each. The last ounce of caviar added 100 units to Alexandra's total utility, while the last bottle of champagne added 75 units. If Alexandra chooses 4 ounces of caviar and 8 bottles of champagne instead her total utility will A. increase by 150 units. B. decrease by 150 units. C. increase by 100 units. D. decrease by 100 units. E. increase by 50 units.

E. increase by 50 units.