micro Econ exam 3 (chapter 8 and 11)

Dane decides to give up a job earning ​$100,000 per year as a corporate lawyer and converts the duplex that he owns into a UFO museum.​ (He had been renting out the duplex for ​$20,000 a​ year.) His direct expenses include ​$50,000 per year paid to his assistants and ​$20,000 per year for utilities. Fans flock to the museum to see his collection of extraterrestrial​ paraphernalia, which he easily could sell on eBay for ​$1,000,000. Over the course of the year the museum brings in revenues of ​$100,000. a. How much is​ Dane's economic profitfor the​ year? b. Is he earning an accounting profit?

a. -90,000 - interest forgone on the 1,000,000 extraterrestrial gear b. yes, he is earning an accounting profit

Which of the graphs above represents a typical average total cost​ curve?

b

Suppose you originally invested in a firm when it was large and profitablelarge and profitable. Now the firm has downsized and is small anddownsized and is small and unprofitableunprofitable. Would you be better off now if you had bought the​ firm's stock or the​ firm's bonds ​?

bonds

In his​ autobiography, T. Boone​ Pickens, a​ geologist, entrepreneur, and oil company​ executive, wrote: ​It's unusual to find a large corporation​ that's efficient ... When you get an inside​ look, it's easy to see how inefficient big business really is. Most corporate bureaucracies have more people than they have work. ​Source: T. Boone​ Pickens, The Luckiest Man in the World​, ​Washington, DC: Beard​ Books, 2000, p. 275. Pickens was describing

diseconomies of​ scale, because he is referring to the inefficieny of a large scale business operation.

Sales​ personnel, whether selling​ life-insurance, automobiles, or​ pharmaceuticals, typically get paid on commission instead of a straight hourly wage. The​ principal-agent problem between the owner of the business and its sales force is

reduced when workers are paid on commission because it gives them an incentive to work harder.`

The three major types of firms in the United States are called

sole​ proprietorships, partnerships, and corporations.

The principal-agent problem arises almost everywhere in the business worldlong dash—but it also crops up even closer to​ home, such as the case of the college classroom. In this​ case, who is the principal and who is the​ agent? The principal is the ____________ and the agent is the _______________.

student, professor

If the marginal product of labor is falling​, is the marginal cost of production rising or​ falling? Briefly explain. If the additional output from each new worker is falling

the marginal cost of that output is rising because the only additional cost to producing more output is the additional wages paid to hire more workers.

In​ 2010, Congress attempted to overhaul regulation of the U.S. financial system with the passage of

the​ Dodd-Frank Act.

One of the causes of the​ 2007-2009 financial crisis was a dramatic decrease in the value of​ mortgage-backed securities when housing prices began to fall. What does it mean when a financial firm securitizes a​ mortgage?

To securitize a mortgage is to bundle mortgages together and sell them to investors.

Use the information in the graph to the right to find the values for the following at an output level of 40. 1. marginal cost? 2. total cost? 3. variable cost? 4. fixed cost?

1. 14 2. 1800 3. 1280 4. 520

Suppose Charles owns a​ lawn-mowing company. Assume that without​ workers, no yards are mowed. When he hires one​ worker, he is able to mow 2 yards per day. With two​ workers, he can mow 5 yards per​ day, and with three​ workers, he can mow 10 yards per day. 1. marginal product of the first worker 2. marginal product of the second worker 3. the marginal product of the third worker 4. the marginal product of labor potentially increase due to......

1. 2 2. 3 3. 5 4. division of labor

Suppose a pizza parlor has the following production​ costs: ​$5.00 in labor per​ pizza, ​$2.00 in ingredients per​ pizza, ​$0.60 in electricity per​ pizza, ​$3,000 in restaurant rent per​ month, and ​$250 in insurance per month.Assume the pizza parlor produces 4,000 pizzas per month. 1. What is the variable cost of production​ (per month)? The variable cost of production is ​____________. ​(Enter your response as an​ integer.) 2. What is the fixed cost of production​ (per month)? The fixed cost of production is ​______________

1. 30,400 2. 3250

Use the information in the graph to the right to find the values for the following at an output level of 45. 1. marginal cost? 2. total cost? 3. variable cost? 4. fixed cost?

1. 33 2. 2610 3. 2025 4. 585

Suppose the total cost of producing 10,000 tennis balls is $60,000​, and the fixed cost is $5,000. 1. What is the variable​ cost? ​2. When output is 10,000​, what is the average variable​ cost? 3. When output is 10,000​, what is the average fixed​ cost 4. Assuming that the cost curves have the usual​ shape, the dollar difference between average total costs and average variable costs _____________as output increases.

1. 55000 2. 5.5 3. 0.50 4. decrease

A county government hires lawyers to defend itself in lawsuits. The local government provides its legal staff with an office building. The table below shows how many cases can be handled with different numbers of lawyers over the course of a year. Suppose each lawyer is paid ​$80,000 per year and the office building is rented for ​$200,000 per year. If the county decides to hire 5 lawyers to handle 21 ​lawsuits, what will be the average fixed cost of each​ case? What will be the average variable cost of each​ case? 1. average fixed cost of each case 2. average variable cost

1. 9524 2. 19047.62

The stock and bond markets provide information to businesses through changes in prices. 1. A decrease in the price of a​ firm's stock would tell managers which of the​ following? 2. A decrease in the price of a​ firm's bonds would tell managers which of the​ following?

1. Investors expect the firm to have lower profits in the future. 2. The cost of external funds has increased.

Suppose that Jill Johnson has to choose between building a smaller restaurant and a larger restaurant. In the​ graph, the relationship between costs and output for the smaller restaurant is represented by the curve ATC1​, and the relationship between costs and output for the larger restaurant is represented by the curve ATC 2 1. If Jill expects to produce 200200 pizzas per​ week, should she build a smaller restaurant or a larger​ restaurant? Briefly explain. 2.If Jill expects to produce 1,300 pizzas per​ week, should she build a smaller restaurant or a larger​ restaurant? Briefly explain. 3.A student​ asks, "If the average cost of producing pizzas is lower in the larger restaurant when Jill produces​ 1,100 pizzas per​ week, why​ isn't it also lower when Jill produces 500 per​ week?" Give a brief answer to the​ student's question.

1. Jill should build a smaller restaurant because average total costs will be lower than for a larger restaurant. 2. Jill should build a larger restaurant because average total costs will be lower than for a smaller restaurant. 3. The larger restaurant has higher fixed costs than the smaller restaurant.

1.What do we mean by the separation of ownership from control in large​ corporations? 2.How is the separation of ownership from control related to the​ principal-agent problem?

1. Shareholders own the​ corporation, but it is controlled by managers. 2. The agents​ (managers) may pursue their own interests rather than the interests of the principals​ (shareholders).

The graph to the right illustrates the average product of labor. Use the​ three-point curved line drawing tool to graph the marginal product of labor. Properly label this curve. Carefully follow the instructions​ above, and only draw the required objects. 1. Why do the marginal product of labor and the average product of labor curves have the shapes illustrated in the​ graph?

1. both A and B ---- the marginal product of labor initially increases due to division of labor and then decreases due to the diminishing returns. ------ whenever the marginal product of labor is greater than the average product of labor, it pulls the average product of labor up

In the United​ States, there are three legal categories of​ firms: sole​ proprietorships, partnerships, and corporations. 1. Which of the following is an advantage for corporations? 2. Which of the following is a disadvantage for​ corporations?

1. corporations have greater ability to raise funds 2. corporations are costly to organize

At one​ point, Time Warner and the Walt Disney Company discussed merging their news operations. Time Warner owns the Cable News Network​ (CNN), and Disney owns ABC News. After analyzing the​ situation, the companies decided that a combined news operation would have higher average costs than either CNN or ABC News had separately. ​Source: Martin Peers and Joe​ Flint, "AOL Calls Off​ CNN-ABC Deal, Seeing Operating​ Difficulties," Wall Street Journal​, February​ 14, 2003. Use a​ long-run average cost curve graph to illustrate why the companies did not merge their news operations. Use the​ three-point curved line drawing tool to graph a​ long-run average cost curve that illustrates the​ long-run average cost of production experienced by these companies. Properly label this curve. Carefully follow the instructions​ above, and only draw the required objects. 1. Time Warner and Walt Disney did not merge their news companies because doing so would have resulted in

1. diseconomies of scale

1. a firms 2. All of the following statements are​ true, except

1. explicit cost is its monetary cost whereas its implicit cost is its nonmonetary opportunity cost. 2. a firm maximizes profit when total cost equals total revenue.

1. Any cost that remains unchanged as output changes represents a​ firm's 2. Any cost that changes as output changes represents a​ firm's 3. Which of the following is most likely to be a fixed cost for a​ farmer? 4. Which of the following is most likely to a variable cost for a business​ firm?

1. fixed cost 2. variable cost 3. insurance premiums on property 4. cost of shipping products

1. What is a production​ function? A​ firm's production function is best described as 2.What does the​ short-run production function hold​ constant? A​ short-run production function holds constant

1. illustrating the relationship between inputs and the maximum amounts of output that the firm can produce with these inputs. 2. the amount of capital.

In the United​ States, there are three legal categories of​ firms: sole​ proprietorships, partnerships, and corporations. 1. Which of the following is an advantage for partnerships​? 2. Which of the following is a disadvantage for​ corporations?

1. partnerships have the ability to share work 2. corporations are costly to organize

An asset is ________________, and a liability is ______________________. An example of an asset would be ___________________, while an example of a liability would be __________________________________.

1. something that the company owns​ 2. anything that the company owes 3.plant and equipment​ 4. a bond that the company has issued

1. Economies of scale occur 2. For which of the following​ reason(s) may firms experience economies of​ scale?

1. when a​ firm's long-run average costs decrease with output. 2. ALL OF ABOVE ------Both managers and workers may become more specialized and hence more productive as output expands. ------​Firm's production may increase with a smaller proportional increase in at least one input. -----Large firms may be able to purchase inputs at lower costs than smaller​ competitors; they can also borrow money at a lower interest rate.

Paolo and Alfredo are twins who both want to open pizza restaurants. Because their parents always liked Alfredo​ best, they buy two pizza ovens and give both to him.​ Unfortunately, Paolo must buy his own pizza ovens. 1. Does Alfredo have a lower cost of producing pizza than Paolo does because Alfredo received his pizza ovens as a gift while Paolo had to pay for​ his? 2. Assuming that Paolo buys identical​ ovens, and that otherwise the two pizza restaurants are exactly the same and have exactly the same​ revenues, which of the following is​ true?

1. ​No, Alfredo's cost is equal to​ Paulo's cost because the opportunity cost of the ovens is the same as what Paulo must pay. 2. Alfredo has higher accounting profits than​ Paolo, but their economic profits are the same.

1. The​ Sarbanes-Oxley Act 2. The​ Sarbanes-Oxley Act was passed

1.requires that CEOs of corporations certify the accuracy of financial statements. 2. to promote management accountability in corporations.

Mr. Jernigan owns a piece of land on which he grows corn. Corn production annually requires ​$4,000 in​ seed, ​$7,000 in​ fertilizer, and ​$6,000 in pesticides. Mr. Jernigan uses his own labor to grow the corn and therefore hires no workers. If Mr. Jernigan did not use his time to grow​ corn, he would instead be able to sell​ insurance, earning ​$40,000 per year. Suppose another farmer has just offered to pay Mr. Jernigan rent of ​$20,000 per year for use of the land. If Mr. Jernigan refuses to rent the land to another​ farmer, then what will be his accounting costs from farming corn himself on his​ land? What will be his economic​ costs? Mr.​ Jernigan's accounting costs will be ______________ per​ year, and his economic costs will be ​_______________ per year. ​(Enter numeric responses using​ integers.)

17000 77000

Santiago Delgado owns a copier store. He leases two copy machines for which he pays​ $20 each per day. He cannot increase the number of machines he leases without giving the office machine company six​ weeks' notice. He can hire as many workers as he​ wants, at a cost of​ $40 per day per worker. These are the only two inputs he uses to produce copies. 1. Fill in the remaining columns in the table below. ​(Enter your responses for​ FC, VC, and TC as integers and round your responses for ATC and MC to two decimal​ places.) 2. The average total cost curve and the marginal cost curve are...... 3. The average total cost curve and the marginal cost curve are related in that.....

2. u shaped 3. the MC curve passes through the minimum point of the ATC curve.

Refer to the table below. What is the marginal cost of producing the 200th​ pizza?

3.25

Suppose Ford Motor Company issues bonds with a face value of ​$10,000 and an annual coupon payment of ​$500. What is the interest rate Ford is paying on the borrowed​ funds? The interest rate is ________ percent. ​(Enter your response as a whole​ number.)

5

An article in the Wall Street Journal described the Chinese automobile industry as​ "a hodgepodge of​ companies," most of which produce fewer than​ 100,000 cars per year. Ford Chief Executive Alan Mulally commented on the situation by​ saying, "If you​ don't have​ scale, you just​ won't be able to be​ competitive." ​Source: Colum​ Murphy, "Chinese Car Makers Struggle to Lure​ Buyers," Wall Street Journal​, April​ 19, 2014. a.Mulally meant that Chinese firms b.We can predict​ that, as the Chinese automobile industry develops over the next 10​ years, there should be

A. that​ aren't producing at minimum efficient scale will have higher costs than their competitors. b. fewer firms in the industry and the remaining firms will likely be larger.

Which of the following is true of the management structure of corporations in the United​ States?

Both a and b. a. members of management who are inside directors serve on the board of directors b. large corporations are legally owned by shareholder who do usually not directly manage the firm

Ronald Dickson and Louis Banks have come up with a new idea to leverage social media for improving business productivity. The​ would-be founders are debating the form of ownership that their company should take. Ronald is in favor of​ partnership, while Louis favors the corporate form of business. Which of the​ following, if​ true, would strengthen the argument in favor of​ partnership?

In order to make the idea​ work, they would need complete control over operations.

Suppose Jill Johnson operates her pizza restaurant in a building she owns in the center of the city. Similar buildings in the neighborhood rent for​ $4,000 per month. Jill is considering selling her building and renting space in the suburbs for​ $3,000 per month. Jill decides not to make the move. She​ reasons, "I would like to have a restaurant in the​ suburbs, but I pay no rent for my restaurant​ now, and I​ don't want to see my costs rise by​ $3,000 per​ month." What do you think of​ Jill's reasoning?

Jill is incorrectly ignoring the opportunity cost of using the building she owns.

A student looks at the data in the table to the right and draws this​ conclusion: ​"The marginal product of labor is increasing for the first 3 workers​ hired, and then it declines for the next 3 workers. I guess each of the first 3 workers must have been hard workers. Then Jill must have had to settle for increasingly poor​ workers." Do you agree with the​ student's analysis? Briefly explain.

No. Marginal product initially increases due to division of labor and then decreases due to the law of diminishing returns.

Older oil wells that produce fewer than 10 barrels of oil a day are called​ "stripper" wells. Suppose that you and a partner own a stripper well that can produce eight barrels of oil per day and you estimate that the marginal cost of producing another barrel of oil is​ $80. In making your​ calculation, you take into account the cost of​ labor, materials and other inputs that increase when you produce more oil. Your partner looks over your calculation of marginal cost and​ says: "You forgot about that bank loan we received two years ago. If we take into account the amount we pay on that​ loan, its adds​ $10 per barrel to our marginal cost of​ production." Which of the following statements is most​ true?

The bank loan should not be included in marginal cost because it cannot be avoided by not producing another barrel.

Investors use the bond ratings from​ Moody's, S&P, and Fitch to determine which bonds they will buy and the prices they are willing to pay for them. The rating services charge the firms and governments that issue​ bonds, rather than​ investors, for their services. Critics argue that the rating agencies may give higher ratings than are justified in order to continue to sell their services to bond issuing firms. ​Moody's, S&P and Fitch​ don't sell their services directly to investors because they argue that

doing so creates a​ "free rider" problem.

A hospital provides​ emergency-room medical care for local residents. Suppose the hospital currently provides this care for​ 15,000 patients per year at a total cost of ​$75,000,000. If the hospital​ expands, it can provide​ emergency-room medical care for​ 20,000 patients per year at a total cost of ​$10,000,000. If the hospital​ expands, will it be experiencing economies of​ scale, diseconomies of​ scale, or constant returns to​ scale? If the hospital​ expands, it will be experiencing___________________

economies of scale

Paolo currently has​ $100,000 invested in bonds that earn him 10 percent interest per year. He wants to open a pizza restaurant and is considering either selling the bonds and using the​ $100,000 to start his restaurant or borrowing the​ $100,000 from the​ bank, which would charge him an annual rate of interest of 7 percent. He finally decides to sell the bonds and not take out the bank loan. He​ reasons, "Because I already have the​ $100,000 invested in the​ bonds, I​ don't have to pay anything to use the money. If I take out a bank​ loan, I will have to pay interest so my costs of producing pizza will be higher if I take out the loan than if I sell the​ bonds." ​Paolo's reasoning is

incorrect because the​ bank's rate of interest is less than the amount that he is earning on his savings.

Suppose a business earned a positive accounting​ profit, but a negative economic​ profit, then

it will be very unlikely for the firm to remain in business in the long run.

Sally looks at her college transcript and says to​ you, ​"How is this​ possible? My grade point average​ (GPA) for this​ semester's courses is higher than my GPA for last​ semester's courses, but my cumulative GPA still went down from last semester to this​ semester." Explain to Sally how this is possible.

​Sally's GPA for this semester is lower than her cumulative GPA.