Managerial Economics - Exam 1 Review
If the price of good X becomes lower, then the level of consumer surplus becomes
higher.
As the interest rate increases, the opportunity cost of waiting to receive a future amount
increases.
If the price of a good Y falls, then the marginal rate of substitution between X and Y
increases.
When marginal revenue is negative, demand is
inelastic.
Demand is perfectly elastic when the absolute value of the own price elasticity of demand is
infinite.
The minimum wage
is an example of a price floor.
If the cross-price elasticity between ketchup and hamburgers is −2.5, a 2 percent increase in the price of ketchup will lead to a
5 percent drop in quantity demanded of hamburgers.
If the interest rate is 7 percent, $500 received at the end of nine years is worth how much today?
500/(1+.07)^9
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
The absolute value of the slope of the isoquant is the
marginal rate of technical substitution.
Suppose the equilibrium price in the market is $24 and the price elasticity of demand for the linear demand function at the market equilibrium is −1.5. Then we know that the
marginal revenue is $8.
To an economist, maximizing profit is
maximizing the value of the firm.
When the price of one good decreases, the associated substitution effect is represented by a
move along a given indifference curve holding real income constant.
In a competitive market, the market demand is Qd = 400 − 5P and the market supply is Qs = 10P − 80. A price ceiling of $32 will result in
neither a shortage nor a surplus.
The market demand for cheese is Qd = 30 − 2P and the market supply is Qs = 4P. The government imposes a price floor of $4 in the market for cheese. This will
not change the equilibrium price of cheese.
When there are economies of scope between products, selling off an unprofitable subsidiary could lead to
only a minor reduction in costs.
New firms have incentive to enter an industry when there is(are)
positive economic profits.
The value of the firm is the
present discounted value of all future profits.
Which of the following factors would not affect the own price elasticity of a good?
price of an input
Demand shifters do not include the
price of the good.
If a shortage exists in a market, the natural tendency is for
price to increase.
Suppose the cost function is C(Q) = 50 + Q − 10Q2 + 2Q3. What is the variable cost of producing 10 units?
$1,010
A firm is producing 200 units of copper wires at a total cost of $4000. Its per unit variable cost is $10. What are the firms average fixed costs?
$10
Suppose that production for good X is characterized by the following production function, Q = K0.5L0.5, where K is the fixed input in the short run. If the per-unit rental rate of capital, r, is $15 and the per-unit wage, w, is $5, then the average fixed cost of using 16 units of capital and 25 units of labor is
$12
Suppose the market supply for good X is given by QXS = −100 + 5PX. If the equilibrium price of X is $100 per unit, then the producer surplus is
$16,000
The total earnings of a worker are represented by E = 150 + $12(24 − L), where E is earnings and L is the number of hours of leisure. How much will the worker earn if he takes 16 hours of leisure per day?
$246
Suppose the growth rate of the firm's profit is 7 percent, the interest rate is 9 percent, and the current profits of the firm are $60 million. What is the value of the firm?
$3,270 million
Consider a market characterized by the following demand and supply conditions: PX = 50 − 5QX and PX = 32 + QX. The equilibrium price and quantity are, respectively,
$35 and 3 units.
Consider a market characterized by the following inverse demand and supply functions: PX = 10 − 2QX and PX = 2 + 2QX. Compute the surplus producers receive when an $8 per unit price floor is imposed on the market.
$5
Suppose that Linda receives a fixed payment of $20 and consumes 14 hours of leisure. If her total earnings for the entire day is $100, we know her hourly wage rate must be (there are 24 hours in a day)
$8
Consider a market characterized by the following demand and supply conditions: PX = 15 − 2QX and PX = 3 + 2QX. The equilibrium price and quantity are, respectively,
$9 and 3 units.
Suppose demand is given by Qxd = 50 − 4Px + 6Py + Ax, where Px = $4, Py = $2, and Ax = $50. What is the own price elasticity of demand for good x?
-0.16
Suppose the equilibrium price in the market is $100 and the marginal revenue associated with the linear (inverse) demand function is $50. Then we know that the own price elasticity of demand is
-2
Suppose a consumer with an income of $100 is faced with Px = $1 and Py = $0.50. What is the market rate of substitution between good X (horizontal axis) and good Y (vertical axis)?
-2.0
[Appendix material: calculus required] Given the benefit function B(Y) = 400Y − 2Y2, the marginal benefit is
400 - 4Y.
Suppose that three consumers are in the market for good X. Consumer 1's (inverse) demand is PX = 20 − QX; Consumer 2's (inverse) demand is PX = 60 − 2QX; and Consumer 3's (inverse) demand is PX = 40 − 3QX. When PX = $10, the market will demand for good X will be
45 units.
Suppose the production function is given by Q = 2K + 5L. What is the marginal product of labor when 15 units of capital and 10 units of labor are employed?
5
Given that Q = 2K + L, what is the absolute value of the MRTS between capital and labor?
1/2
Given a cost function C(Q) = 200 + 14Q + 8Q2, what is the marginal cost function?
14 + 16Q
[Appendix material: calculus required] Suppose total benefits and total costs are given by B(Y) = 600Y − 12Y2 and C(Y) = 20Y2. What is the maximum level of net benefits?
2,812.5
For a cost function C = 100 + 10Q + Q2, the average fixed cost of producing 10 units of output is
20
Given that income is $300, the price of good Y is $15, and the price of good X is $20, what is the vertical intercept of the budget line?
20
Suppose that three consumers are in the market for good X. Consumer 1's (inverse) demand is PX = 40 − 5QX; Consumer 2's (inverse) demand is PX = 10 − QX; and Consumer 3's (inverse) demand is PX = 30 − 2QX. When PX = $5, the market will demand
24.5 units
Which is more preferred, a cash gift or an in-kind gift?
A cash gift is preferred.
Which of the following is incorrect?
Managers should only be interested in accounting profits.
The manager can be 95 percent confident that the true value of the underlying parameters in a regression is not zero if the absolute value of the t-statistic is
greater than 2.
Economies of scope exist when
C(Q1) + C(Q2) > C(Q1, Q2)
Isoquants that are convex shaped represent
Cobb Douglas production functions where the inputs can be partly substituted for each other.
Which of the following is an incorrect statement about the own price elasticity of demand?
Demand tends to be more elastic if there are few substitutes available.
Suppose the income elasticity for transportation is 1.8. Which of the following is an incorrect statement?
Expenditures on transportation will fall less rapidly than income falls.
Which of the following is an implicit cost to a firm that produces a good or service?
Foregone rent is using building for production site.
Which of the following pairs of goods are probably complements?
hamburgers and hamburger buns
Suppose supply decreases and demand increases. What effect will this have on the quantity?
It may rise or fall.
Suppose there is a simultaneous increase in demand and decrease in supply, what effect will this have on the equilibrium price?
It will rise.
Suppose the utility function for a firm manager is U = π + bQ, where Q is output, π is profit, and b is a negative constant. How would the firm's output compare with what it would be if the manager's objective was to maximize profit?
It would be greater than the profit-maximizing output.
Which of the following is a linear demand function?
Qxd = α0 + αXPX + αYPY + αMM + αHH.
Suppose that consumers' preferences are well behaved in that properties 4-1 to 4-4 (completeness, more is better, diminishing marginal rate of substitution, and transitivity) are satisfied. Furthermore, assume that X is a normal good, Y is an inferior good, and the price of good Y decreases. Then, which of the following effects is known with certainty?
The income and substitution effects will have competing effects, leading to an indeterminate impact on the consumption of good Y.
Suppose that consumers' preferences are well behaved in that properties 4-1 to 4-4 (completeness, more is better, diminishing marginal rate of substitution, and transitivity) are satisfied. Furthermore, assume that both X and Y are normal goods and that the price of good Y increases. Then, which of the following effects is known with certainty?
There will be an indeterminate effect on the consumption of good X.
It is profitable to hire labor so long as the
VMPL is greater than or equal to wage.
Which of the following leads to a decrease in demand for mechanical pencils (a normal good)?
a decrease in price of mechanical pencils
If you sell an inferior good, offering to sell gift certificates to those looking for a gift may result in
a greater quantity sold than if the customer resorts to giving a cash gift.
Producer surplus is measured as the area
above the supply curve and below the market price.
The demand for which of the following commodities is likely to be most inelastic?
beverages
The firm manager with indifference curves that are convex from the origin (output on the horizontal axis and profit on the vertical axis) views
both profits and outputs to be "goods."
If bundles A, B, and C lie on the same indifference curve, then
bundle C is preferred to bundle B by the consumer.
If the cross-price elasticity between goods A and B is negative, we know the goods are
complements.
Suppose the demand for good x is ln Qxd = 21 − 0.8 ln Px − 1.6 ln Py + 6.2 ln M + 0.4 ln Ax. Then we know goods x and y are
complements.
Negotiation between the buyer and seller of a new ski boat is an example of
consumer-producer rivalry.
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.
The price elasticity of demand is −2.0 for a certain firm's product. If the firm raises price, the firm manager can expect total revenue to
decrease.
Along the same indifference curve, MRS is ________ as more of good X is obtained.
decreasing
Which of the following would not shift the demand for good A?
drop in price of good A
The statistical analysis of economic phenomena is defined as
econometrics.
As more firms enter an industry,
economic profits decrease.
Two firms producing identical products may merge due to the existence of
economies of scale.
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
Economics
exists because of scarcity
Scarce resources are ultimately allocated toward the production of goods most wanted by society because
firms attempt to maximize profits.
Which of the following are signals to the owners of scarce resources about the best uses of those resources?
profits of businesses
What are the advantages to a firm of selling gift certificates?
reduced strain on the refund department and greater quantity sold if your good is a normal good
Consumer-consumer rivalry
reduces the negotiating power of consumers in the marketplace.
Constant returns to scale exist when long-run average costs
remain constant as output is increased.
Which of the following is used to determine the statistical significance of a regression coefficient?
t-statistic
If sugar and tea are complements, then we can be certain that an increase in the price of sugar will lead to a decrease in the demand for
tea and sugar
When the price of sugar was "low," U.S. consumers spent a total of $3 billion annually on sugar consumption. When the price doubled, consumer expenditures remained at $3 billion annually. This data indicates that
the demand curve for sugar is perfectly inelastic.
When the price of corn was "low," consumers in the United States spent a total of $8 billion annually on its consumption. When the price halved, consumer expenditures actually decreased to $6 billion annually. This indicates that
the demand for corn is inelastic.
Other things being held constant, the lower the price of a good,
the higher the supply.
The slope of the budget line represents
the market rate of substitution.
What is the main role of economic profits?
to signal where resources are most highly valued
Accounting profits are
total revenues minus total cost.
Which combination of the following properties rules out indifference curves that intersect one another?
transitivity and more-is-better
An excise tax of $1.00 per gallon of gasoline placed on the suppliers of gasoline would shift the supply curve
up by $1.00.
Which of the following "costs" could a firm that wants to remain in business avoid if it halted current production?
variable costs
Costs that change as output changes are
variable costs.
