ECO 6655

Suppose market demand and supply are given by Qd = 100 − 2P and QS = 5 + 3P. The equilibrium price is?

$19

Suppose you are a manager of a factory. You purchase five (5) new machines at one million dollars each. If you can resell two of the machines for $500,000 and three of the machines for $200,000, what are the sunk costs of purchasing the machines?

$3.4 million

A firm will have constant profits of $100,000 per year for the next four years, and the interest rate is 6 percent. Assuming these profits are realized at the end of each year, what is the present value of these future profits?

$346,510.56

Suppose that initially the price is $50 in a perfectly competitive market. Firms are making zero economic profits. Then the market demand shrinks permanently, some firms leave the industry, and the industry returns to a long-run equilibrium. What will be the new equilibrium price, assuming cost conditions in the industry remain constant?

$50

If a firm manager has a base salary of $50,000 and also gets 2 percent of all profits, how much will his/her income be if revenues are $8,000,000 and profits are $2,000,000?

$90,000

A monopoly has produced a product with a patent for the last few years. The patent is going to expire. What will happen after the patent expires?

Some firms will enter the industry

An oligopolist has a marginal revenue curve that jumps down at 500 units of output. What kind of oligopoly does the firm most likely belong to?

Sweezy

Which curve(s) does the marginal cost curve intersect at the (their) minimum point?

average total cost curve and average variable cost curve

A new firm enters a market that is initially serviced by a Cournot duopoly charging a price of $20. What will the new market price be should the three firms coexist after the entry?

below $20

The Sweezy model of oligopoly reveals that

changes in marginal cost may not affect prices.

Transaction costs refer to

costs of exchange unrelated to production costs.

The elasticity that shows the responsiveness of the demand for a good due to changes in the price of a related good is the

cross-price elasticity

Assume that the price elasticity of demand is −2 for a certain firm's product. If the firm raises price, the firm's managers can expect total revenue to

decrease.

What is implied when the total cost of producing Q1 and Q2 together is less than the total cost of producing Q1 and Q2 separately?

economies of scope

If supply increases, then the

equilibrium price goes down

It is profitable to hire units of labor as long as the value of marginal product

exceeds wage

A long-term contract

exists when a firm is legally bound to purchase inputs from a particular supplier.

Scarce resources are ultimately allocated toward the production of goods most wanted by society because

firms attempt to maximize profits

If firms are in Cournot equilibrium,

firms could increase profits by jointly reducing output.

You are an efficiency expert hired by a manufacturing firm that uses K and L as inputs. The firm produces and sells a given output. If w = $40, r = $100, MPL = 20, and MPK = 40, the firm

should use more L and less K to cost minimize

The causal view of an industry is that

market structure causes firms to behave in a certain way

When economies of scale are large, firms can reduce their average total cost by

merging into even larger firms.

When firm 1 enjoys a first-mover advantage in a Stackelberg duopoly, it will produce

more output and charge the same price as firm 2

If firms compete in a Cournot fashion, then each firm views the

output of rivals as given.

The value of marginal product of an input is the value of the

output produced by the last unit of an input.

If a shortage exists in a market, the natural tendency is for

price to increase.

The recipe that defines the maximum amount of output that can be produced with K units of capital and L units of labor is the

production function

Lemonade, a good with many close substitutes, should have an own price elasticity that is

relatively elastic

By instituting performance-based rewards to CEOs, the profits of firms should

rise

By making managerial compensation depend on the performance of the firm's profits, the firm owner's profits

rise.

In the Wealth of Nations, Adam Smith argues that

self-interest leads to the efficient allocation of resources.

For a steel factory, a decrease in the cost of electricity to the plant will cause the supply curve to

shift to the right.

Which of the following is used to determine the statistical significance of a regression coefficient? t-statistic F-statistic R-square adjusted R-square

t-statistic

Consider a monopoly where the inverse demand for its product is given by P = 50 − 2Q. Total costs for this monopolist are estimated to be C(Q) = 100 + 2Q + Q2. At the profit-maximizing combination of output and price, monopoly profit is

$92

An industry consists of 20 firms, each with an equal market share. What is the four-firm concentration ratio of this industry?

0.2

An industry consists of six firms with annual sales of $300, $500, $400, $700, $600, and $600. What is the industry's C4?

0.77

Which of the following is true of a perfectly contestable market? P = MC. P > MC. P < ATC. P > MC and P < ATC.

P=MC

What is the marginal cost of producing the fifth unit? Number Units Produced Total Benefit Total Costs 0 0 0 1 100 50 2 180 110 3 250 180 4 290 270 5 310 380

110

For the cost function C(Q) = 100 + 2Q + 3Q2, the marginal cost of producing 2 units of output is

14

You are the manager of a firm that sells its product in a competitive market at a price of 200. Your firm's cost function is C = 40 + 5Q2. The profit-maximizing output for your firm is?

20

Suppose the production function is given by Q = K1/2L1/2 and that Q = 30 and K = 25. How much labor is employed by the firm?

36

Consider a market characterized by two firms that set the same price in the market, P = $10. Total market demand is QT = 100 − 2P, of which the two firms share equally. Based on this information, we can conclude that the HHI equals

5,000.

The demand for good X is estimated to be Qxd = 10,000 − 4PX + 5PY + 2M + AX where PX is the price of X, PY is the price of good Y, M is income, and AX is the amount of advertising on X. Suppose the present price of good X is $50, PY = $100, M = $25,000, and AX = 1,000 units. What is the quantity demanded of good X?

61,300

Suppose that the demand in a particular industry is given by Qd = 100 − 2P. When the market price in the industry is $10 per unit, total demand in the industry is __________ . Furthermore, assume that each of the four largest firms in the industry sell 15 units. Based on this information, the four-firm concentration ratio is __________

80 units; 0.75

Suppose demand is given by Qxd = 50 − 4Px + 6Py + Ax, where Px = $4, Py = $2, and Ax = $50. What is the quantity demanded of good x?

96

Which of the following is true? Accounting costs generally understate economic costs. Accounting profits generally understate economic profits. In the absence of any opportunity costs, accounting profits are less than economic profits. Accounting costs generally overstate economic costs.

Accounting costs generally understate economic costs

From a consumer's point of view, which type of oligopoly is most desirable?

Bertrand

Consider a market consisting of two firms where the inverse demand curve is given by P = 500 − 2Q1 − 2Q2. Each firm has a marginal cost of $50. Based on this information, we can conclude that consumer surplus in the different equilibrium oligopoly models will follow which of the following orderings?

CSBertrand > CSStackelberg > CSCournot > CSCollusion

The production function Q = L.5K.5 is called

Cobb Douglas

In perfect competition, which is not true? Firms are price-setters. Firms produce homogenous goods. There is perfect information. There are a large number of firms.

Firms are price-setters.

Which is the correct statement about the relationship between government and the market? Government should intervene on the consumers' behalf. Government should intervene on the producers' behalf. Government should not intervene on any party's behalf. Government often plays a role in disciplining the market process.

Government often plays a role in disciplining the market process.

Which of the following is true? A monopolist produces on the inelastic portion of its demand. A monopolist always earns an economic profit. The more inelastic the demand, the closer marginal revenue is to price. In the short run, a monopoly will shut down if P < AVC.

In the short run, a monopoly will shut down if P < AVC

Which of the following features is common to both perfectly competitive markets and monopolistically competitive market Firms produce homogeneous goods. Prices are equal to marginal costs in the long run. Long-run profits are zero. Prices are above marginal costs in the long run.

Long-run profits are zero

A monopoly has two production plants with cost functions C1 = 50 + 0.1Q12 and C2 = 30 + 0.05Q22. The demand it faces is Q = 500 − 10P. What is the condition for profit maximization?

MC1(Q1) = MC2(Q2) = MR(Q1 + Q2).

Let the demand function for a product be Q = 100 − 2P. The inverse demand function of this demand function is

P = 50 − 0.5Q.

Which of the following is true under monopoly? Profits are always negative P > MC P = MR MC = P

P > MC

An increase in firm 2's marginal cost will cause

a downward shift in firm 2's reaction function, resulting in a new Cournot equilibrium where firm 1 is producing a higher quantity and firm 2 is producing a lower quantity.

A negative side of long-term contracts is

a loss of flexibility.

A change in income will not lead to

a movement along the demand curve.

An increase in the price of steak will probably lead to

an increase in demand for chicken.

An income elasticity less than zero tells us that the good is

an inferior good

Which of the following is an implicit cost to a firm that produces a good or service? labor costs costs of operating production machinery foregone profits of producing a different good or service costs of renting or buying land for a production site

foregone profits of producing a different good or service

Trade will take place

if the maximum that a consumer is willing and able to pay is greater than the minimum price the producer is willing and able to accept for a good.

Holding all else constant, higher prices will

increase the Lerner index.

As we move down along a linear demand curve, the price elasticity of demand becomes more

inelastic

Competitive market equilibrium

is determined by the intersection of the market demand and supply curves

Suppose the demand for good X is given by Qdx = 10 + axPx + ayPy + aMM. From the law of demand, we know that ax will be

less than zero.

A firm might choose to produce its own inputs if

long-term contracts are costly to write.

In the 1960s, each firm in the computer industry was able to make extremely large profit margins, some as high as 50 to 60 percent. The margin decreased to 20 to 40 percent in the 1970s and to 10 to 20 percent in the 1980s. We conclude that

the industry evolved from oligopolistic to a more competitive industry in the two decades.

The lower the standard error,

the more confident the manager can be that the parameter estimates reflect the true values.

Changes in the price of good A lead to a change in demand of good A. supply of good B. the quantity demanded of good A. the quantity demanded of good B.

the quantity demanded of good A

The higher the interest rate

the smaller the present value of a future amount

Consumer surplus is

the value consumers get from a good but do not pay for

Which of the following is an outside incentive that forces managers to put forth maximal effort?

threat of takeovers

Economic profits are

total revenue minus total opportunity cost

An electronics company takes over one of its original suppliers in a merger. This is an example of

vertical integration.

A price elasticity of zero corresponds to a demand curve that is

vertical.

Long-term contracts become shorter

when specialized investment becomes less important.

A potential problem with piece-rate plans is that

workers may stress quantity instead of quality.

Which of the following correctly measures the profit of a monopoly? π = TR − TC. π = (P − ATC)Q. π = (P − AVC)Q. π = TR − TC and π = (P − ATC)Q.

π = TR − TC and π = (P − ATC)Q.