MGE302 Final Exam

Assume your company produces good X using only two inputs, capital (K) and labor (L). Also, assume L is measured on the vertical axis and K on the horizontal one. If the prices of inputs are PK=$30 and PL=15, and your company is behaving efficiently, what is the slope of the isoquant at the current input mix?

-2

A firm produces 10 widgets that they sell for $15 each. The average variable cost for the production of 10 widgets is $13/unit. The fixed cost for this firm equals $20. What is the value of this firm's profits?

0

A monopolist's demand curve is P = 10 - 2Q. Thus, the MR is

10 - 4Q

Bob owns an auto parts firm. He uses a combination of steel and aluminum to produce his auto parts. All of the following combinations will finish the task on time. Steel costs $15 per unit and the aluminum costs $50 per unit. What combination of steel and aluminum should he use?

15 units of steel and 7 units of aluminum

If a firm with monopoly pricing power in the market faces a demand curve of P = 2,000 - 2Q and marginal cost of MC = 1,100 + 2Q, then the firm will produce at a price of

$1,700

If a company has a cost curve of TC = 300 + 2Q + Q2 and it produces 300 units per day, then its average (total) cost is

$303

Refer to Figure 6.1. The monopolist earns a profit equal to

$330

Refer to Figure 5.2. On the graph that shows total costs, what is the level of variable costs when 6 units are produced?

$400

A firm's average total cost is minimized at $5/unit when it produces 10 units. What is the marginal cost when the firm produces 10 units?

$5/unit

If the demand for movie tickets is elastic, then

Ed > 1

Which of the following is a feature of a behavioral economic model?

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

Which of the following is true of a production function?

It specifies the maximum feasible output that can be produced for given amounts of inputs

A firm with market power in pricing faces a

downward-sloping demand curve

If a company has significant economies of scale in the long run—assuming a large market —the company will tend to

grow larger and have a declining average cost curve

In the Cournot equilibrium, the price that each firm accepts is

lower than the monopoly price, but higher than the competitive price

Assume that Janet is risk-averse. Which of the following bets is she more likely to accept, depending on the degree of risk aversion?

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

If a firm with monopoly pricing power in the market faces a demand curve of P = 2,000 - 2Q and marginal cost of MC = 1,100 + 2Q, then the firm will produce

150 units

If a competitive firm can sell its product at $1,600 per unit and the marginal cost of the firm is MC = 1,100 + 2Q, then the firm will produce

250 units

The demand and supply curves in the market for gasoline are illustrated in the graph below. The demand and supply curves in the market for gasoline are illustrated in the graph below.

A + B

Refer to Table 5.2, which gives cost information for the production of widgets. Some values are missing, however. Which of the following is true?

A=45, E=10

Which one of the following does not cause a shift in the demand curve for gasoline?

An increase in the price of gasoline

Assume D1 represents the current demand curve for skis. Which of the following would most likely cause D1 to shift to D2?

An increase in the price of snowboards

Assume the current market price of candles is such that there is a surplus (i.e., excess supply). Which of the following best describes the adjustment process in a competitive market?

As the price decreases, the quantity demanded increases while the quantity supplied decreases

The demand and supply curves in the market for gasoline are illustrated in the graph below. Starting at the equilibrium point, if the government imposes a price ceiling of $10, producer surplus will fall by an amount given by the area _____

B + E

Assume the demand function for basketballs is given by QD = 150 −3P + 0.1I, where P = price of a basketball, and I = average income of consumers. Also, assume the supply of basketballs is given by QS = 2P. If the market for basketballs is perfectly competitive, and the average income is equal to $1,500, what is the equilibrium price and quantity? What if a 20 percent income tax is introduced?

Before the tax, the equilibrium price was $60, and 120 basketballs were traded. Once the income tax is introduced, the price would decrease by $6, and only 108 basketballs would be traded

There is an increase in availability of alternative fuels through research and development. Which of the following correctly captures the effect of this change on the market for gasoline?

Both equilibrium quantity and price will decrease

Which of the following is true of the demand curves shown below?

Curves (2) and (3) have constant price elasticity. - I

Refer to Figure 6.2. The Nash equilibrium for the market is

Fly Air—no frills, Hi Air—no frills

Refer to Figure 5.1. Observe the three isoquants depicted and determine which of the following statements is true.

K and L are substitutes in cases (1) and (3). (Not the one that looks like an L)

For any company operating in a marketplace, the firm attempts to maximize the value of the company's worth by setting the output where

MR = MC

An independent trucker has to choose one of the four possible combinations of inputs listed below. The two inputs are drivers and machinery. If he buys expensive machinery, then he can hire fewer drivers to deliver the same output. The input combinations are Method 1: 20 drivers, 10 machines; Method 2: 50 drivers, 2 machines; Method 3: 100 drivers, 0 machines; Method 4: 10 drivers, 12 machines. Hiring a driver costs $10. Each machine costs $100. Which method should he use?

Method 2

Currently, a monopolist's MR = $5 and its MC = $10 and it serves 10 consumers. An 11th consumer walks in. Should the company provide service to the additional customer?

No, MR < MC, so it should not provide service to the additional customer

Assume that Pyrotex Inc. estimates the demand for its fireworks to be linear. If the current price charged by Pyrotex is such that the elasticity of demand is equal to 2.5, which of the following statements is true?

Not enough information is provided to determine whether Pyrotex is currently maximizing its profits

Under what market structure do we have strategic play?

Oligopoly

For a perfectly or purely competitive firm, profit maximization occurs at an output level where

P = MC

Let Qd = 10 - 2P and Qs = 3P be the demand and supply curves for Beer. The equilibrium combination (P* and Q*) in the market is ______.

P* = 2; Q* = 6

Under which market structure is a firm's MR curve horizontal?

Perfect Competition

Edt = - 5. This means that if

Pt increases by 1 percent, Qdt will decrease by 5 percent

Assume Pyrotex Inc. estimates the demand for its fireworks to be linear. If the current price charged by Pyrotex is such that the elasticity of demand is equal to 2.5, which of the following statements is true?

Pyrotex will increase its revenues by decreasing the price of fireworks

Assume SeatComfy Inc. estimates the demand for its table chairs to be Q = 5,000 -25P + 4I +10PA-15 PT, where P = the price of SeatComfy's chairs; PA = average price of competitors' chairs; PT = price of tables; and I = average income of SeatComfy's customers. Which of the following is true?

SeatComfy's chairs are normal goods; SeatComfy's chairs and tables are complements, while SeatComfy's and competitors' chairs are substitutes. SeatComfy's sales decrease by 25 units as price increases by $1

FarAwayDrive Inc. has recently increased the price from $4 to $6. In response to this increase in price, sales decreased from 2,200 to 1,800 units. If no other information concerning the demand is available, which of the following is true about the sensitivity of demand (using the ARC or midpoints formula) for FarAwayDrive's golf balls?

The ARC-elasticity (midpoints formula) of demand is ½ or .50

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?

The CEO's expected bonus is $90,000

Which of the following describes the difference between the demand faced by a firm and the demand faced by an industry?

The demand facing individual firms tend to be more price-elastic than those for the entire industry

Assume the demand function for scooters is given by QD = 20,000 - 10P + 0.2I, where P = price of a scooter, and I = average income of consumers. Also, assume the supply function of scooters is given by QS = 20P. If the market for scooters is perfectly competitive, and the average income of consumers is $20,000, what are the equilibrium price and quantity in this market?

The equilibrium price is $800, and 16,000 scooters are traded

Refer to Table 5.1 and determine which of the following answers is correct.

The missing values are MPL(L=2)=45, MPL(L=3)=29, APL(L=2)=35, and APL(L=4)=28

Which of the following is a limitation of demand estimation through price experimentation?

There is no uniform result as the demand will differ, depending on whether customers anticipate that a price change is permanent or temporary

Which of the following is an example of positive externalities?

Your neighbor's garden is always well taken care of

Marginal utility is the

additional utility obtained by consuming one additional unit of a good

Marginal costs

are the incremental costs associated with making a decision

Externalities exist when the actions of one agent

benefit or hurt another agent who is not part of the exchange relationship

A risk-averse agent

cares about expected payoff as well as the variability of a payoff

Marginal analysis refers to the

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

A competitive equilibrium price guarantees that

consumers who want to buy the product at the market price are satisfied

The prisoner's dilemma and the problem of the cartel are very similar. In both cases,

cooperation would improve the outcome, but it rarely happens

Sunk costs refer to

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

A production function of the form Q = 40 L.75 K.20exhibits ______ in the long run.

decreasing returns to scale

A necessary condition for market power to exist for a particular company in a market is that

effective barriers to entry must exist

Let Edt= -2. This implies that the demand for movie tickets is

elastic, because a 1 percent change in Pt changes Qdt by 2 percent

The omitted-variable problem in statistical analysis occurs when

excluded variables are correlated with explanatory variables that are included in the analysis

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

expected value

BaseBall Inc. is a leader in the industry for baseball bats. If new firms enter the industry and BaseBall Inc. experiences a fall in market share, we can say that the product of the company is in the ______ phase.

growth

The ______ model suggests that that the productivity of employees in a firm will increase if the firm offers lifetime employment and a high salary

happy-is-productive

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

he spends his entire available income

A working knowledge of both markets and firms is important for managers to be effective because it

helps them make appropriate strategic and operational decisions

The long-run price elasticity of demand for a product is generally ______ the short-run elasticity for the same product.

higher than

In a purely competitive market, a company views its demand curve as

horizontal (flat)

The shape of a perfectly elastic demand curve is

horizontal, Ed = infinity

The marginal product curve of input Y shows

how the quantity of output produced changes for each amount of input Y, holding all other inputs constant

A production function of the form Q = 150L.75 K.50exhibits ______ in the long run.

increasing returns to scale

If employees' activities follow the economists' view of behavior, managers will be most effective if they can

influence the costs and benefits of employee actions

The shutdown condition—the point where the company finds it no longer viable to produce and sell a product—for a competitive firm, in the short run, is where price is

less than average variable cost

In a perfectly competitive market, the price faced by a firm is equal to its

marginal revenue and average revenue

The ______ represents the additional revenue that comes from using one more unit of input

marginal revenue product

If a firm operating in a fairly competitive market earns a large economic profit, then, over time,

new firms will enter and prices will fall

A market where a few firms produce most of the output is called a(n)

oligopolistic market

At the midpoint of a linear demand curve, the elasticity of demand is

one

Diminishing marginal returns occur when

one input is increased and the others are held constant

In the Cournot equilibrium, each firm assumes that the other's ______ is/are being held constant

output or sales

The minimum wage is a

price floor

If the demand for product A displays high and positive cross-price elasticity with respect to the price of product B, then

products A and B are substitutes

The general rule for profit maximization in a firm is to

set marginal revenue equal to marginal cost

In a monopolistically competitive market, the seller maximizes profits by

setting price where MR = MC

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

she can buy, at most, 30 units of good X

A budget line

shows all the combinations of goods that require the same total expenditure

Assume the demand function for skin care products is given by Q = 1,000 - 20 P + 5I. If P=$25 and I=$1,000 currently, then

skin care products are normal goods

While very few markets are "purely competitive" according to the strict economics definition, market analysts often use competition as

the benchmark from which to judge other market settings

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

the budget line will shift inward

The opportunity cost of any business decision is

the cost of the next best alternative

Sales of shampoo by CleanHair, Inc., have recently decreased from 1,300 to 1,100 units in response to a price decrease from $7 to $5 by its main competitor. Assuming that everything else is being held constant, we can infer that

the cross-price ARC-elasticity (midpoints formula) between the two products is ½

Assume the market for ceiling fans is perfectly competitive and is currently in equilibrium. If the demand increases while the supply decreases, then we can be certain that

the equilibrium price will increase

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

the price of oranges has decreased

Price elasticity is defined as the change in quantity demanded relative to a change in

the price of the product

Refer to Figure 6.1. The area RSTU represents

the profit earned by the monopolist

Fast food is believed to be an inferior good. This means that

the quantity of fast food consumed decreases as income increases

If the price of a variable input increases, then

the total cost curve will shift up

The production and distribution of goods and services in an economy is said to be Pareto-efficient if

there exists no alternative that keeps all individuals at least as well off but makes even one person better off

The following diagram shows a market in equilibrium. If there was a $3.00 price floor,

there would be a surplus of 30 units.

In a Nash equilibrium, firms are clearly strategically interdependent, and

they are noncooperative in determining market outcomes

Under monopoly, there are

unexploited gains from trade

The shape of a perfectly inelastic demand curve is

vertical, Ed = 0