Econ 661 Test 1
In the production process, the manager must do which of the following?
- establish the correct level of inputs -ensure that the firm operates on the production function
Time Value of Money
$1 today is worth more than $1 tomorrow
Jack Roper is a college student. He pays $17,000 per year in tuition and books, $600 per month for rent, $400 per month for food, and $125 per month for on-campus parking. He gave up a job that pays $45,000 per year to attend college. Given this, the implicit cost of his education equals
$45,000
Suppose a firm produces 1000 units of a good. If fixed costs (FC) equal $2500 and variable costs (VC) equal $3700 at that output level, average total cost (ATC) of each unit is equal to $
$6.20
Which of the following is the formula of price elasticity of demand for a good, X?
%ΔQDX/%ΔPX
Which of the following will cause a decrease in the supply of "farm-to-fork" vegetables?
- An increase in the price of fertilizer used on these farms - An increase in government regulations on agriculture - A reduction in the number of "farm-to-fork" vegetable producers
Suppose a firm produces two products, X and Y. The firm earns revenues from X equal to $50,000 and revenues from Y equal to $30,000. The own price elasticity of demand for X is -2 and the cross-price elasticity of demand between X and Y is -0.6. If the firm lowers the price of product X by 1%, the change in total revenues will be $
680
If a worker's marginal product of labor (MPL) equals 115 and the firm sells its product for $6.00, what is the value marginal product of labor (VMPL)? VMPL =$
690
Which of the following shows a decrease in the quantity supplied?
A movement down along the supply curve.
Which of the following correctly depicts an increase in demand?
A rightward shift of the demand curve.
Which of the following statements is correct?
Average fixed costs decline continuously as output expands.
Suppose a cost function is given by C(Q) = 3Q + 4Q^2. If output equals 12, the value of marginal cost equals
MC(Q) = a + 2bQ + 3cQ^2 = 3 + 2(4)(12) = 99
Suppose a firm produces two products, X and Y. The firm earns revenues from X equal to $70,000 and revenues from Y equal to $60,000. The own price elasticity of demand for X is -1.5 and the cross-price elasticity of demand between X and Y is -0.80. If the firm decreases the price of product X by 1%, the change in total revenues will be $
Change in R = [Rx (1 + Eqxpx) + Ry(Eqypx)] * change in P = 830
Determine the effect in the market for chicken if the federal government subsidizes chicken production and, at the same time, the price of pork, a substitute, decreases.
Demand will decrease and supply will increase. - equilibrium price decreases - equilibrium quantity uncertain
Economic Profits
Difference between total revenue and total opportunity costs of producing the firm's goods or services.
Present Value Formula
FV/(1+i)^n FV - Opportunity Cost of Waiting
Industry profits tend to be higher when which of the following is present? (substitutes)
Few close substitures
Which of the following is a scheme used by managers to ensure maximum worker effort?
Incentive structures
If a cost function is given by, C(Q) = f + aQ + bQ^2 + cQ^3, then the marginal cost is given by which of the following?
MC(Q) = dC/dQ (derivative of the cost function) MC(Q) = a + 2bQ + 3cQ^2
When you compare the improvement in your grade that results from an additional hour of study, you have engaged in which of the following?
Marginal Analysis
At a production level of 100 units, the firm's marginal benefit (MB) is $20 and its marginal cost (MC) is $22. The firm is:
Not maximizing its net benefits.
If interest increases, what happens to PV?
Opportunity Cost of Waiting increases and PV decreases
If demand is perfectly elastic, which of the following is correct?
Own-price elasticity is infinite in absolute value.
Consumer-consumer rivalry
Reduces negotiating power of consumers in marketplace because arises due to scarcity. Will outbid each other for right to own product. (EX. Auction)
Multiple Regression?
Regressions of a dependent variable on multiple explanatory variables.
NPV is and formula
The PV of income stream generated by project minus current costs. NPV = PV - C(0) If positive, project profitable.
Which area forms consumer surplus?
The area below the demand curve and above the price.
Opportunity Cost
The explicit cost of a resources plus the implicit cost of giving up its best alternative use.
Which of the following conditions leads to a greater likelihood of sustaining industry profits?
The industry is highly concentrated.
PV(ex-dividend Firm) & Formula
This is value of firm after its profits have been paid out as dividends PV(ex-dividend Firm) = PV(Firm) - Profit(0) or PV(ex-dividend Firm) = Profit(0) * (1+g)/(i-g)
True or false: A new car is likely to have a more elastic demand than paper clips.
True
True or false: Econometrics is used to estimate demand functions.
True
Assume that each unit of labor costs $500. If a worker's marginal product of labor (MPL) equals 115 and the firm sells its product for $6.00, the value of the additional output exceeds the cost of hiring the worker by
Value Marginal Product (VMP) = P x Marginal Product Marginal Product = change in Q/ change in L or K - $190
Least Squares Regression line for equation Y = a + bX + e is
Y = a + bX (a&b with hats) e is a random variable (error term)
parameter estimates
a and b with hat Represent values of a and b that result in the smallest sum of squared errors between a line and the actual data
If the price of a good rises, this will cause:
an upward movement along the demand curve
C(Q)/Q, defines
average total cost
A price ceiling is considered effective if it is set _________ the equilibrium price.
below
What type of analysis studies the movement from one equilibrium to another?
comparative static analysis
The sum of all variable and fixed costs is the firm's _____.
cost function
Responsiveness of demand for a good due to changes in the price of a related good is measured using
cross-price elasticity
Which of the following types of functions is C(Q) = f + aQ + bQ^2 + cQ^3?
cubic cost function
According to the law of demand, as market price increases, quantity demanded ____.
decreases
When a firm experiences economies of scale, increasing the size of the operation _____ the minimum average cost
decreases
When a firm experiences economies of scale, increasing the size of the operation ________ the minimum average cost
decreases
Suppose a firm expands its output and experiences lower long-run average cost. What is this condition called?
economies of scale
If |EQ,Px|=∞, then demand is said to be perfectly _____.
elastic
If |EQ,P|> 1, then demand is said to be ________.
elastic
What is the economic condition where there is neither a surplus nor a shortage?
equilibrium
Accounting profits tend to _________ economic profits because they exclude _______.
exceed; implicit costs
A cost that does not change with output is called a _________ cost
fixed
If income elasticity of good X is negative, (EQx, M < 0), then good X is considered a(n) ___ good.
inferior
A line that represents the combinations of inputs that will cost the producer the same amount of money is called a(n)_____.
isocost line
What is the analytical tool that defines a combination of inputs that yields the same output?
isoquant
When the price of labor rises, firms have a tendency to use
less labor and more capital
Suppose elasticity is given by, EX,Y = %ΔX/%ΔY. The absolute value of elasticity will be ________ 1 when the change in X is small relative to the change in Y.
less than
As input prices rise, producers are willing to produce ______ goods and services at all prices. As a result, supply ______.
less; decreases
Demand tends to be ___________ elastic for goods that require a relatively small portion of consumers' budgets and ____________ elastic for goods that require a relatively large portion of consumers' budgets.
less; more
If MPL/w > MPK/r, the firm should use (less/more) capital and (less/more) labor to minimize costs.
less; more
The _________ the P-value for an estimated coefficient, the more confident you are in the estimate.
lower (Less than 5% or 0.05)
If |EQ,Px|= 1, total revenue is _____.
maximized
In general, a firm manager is most interested in
maximizing profits.
A price ceiling is defined as the __________ legal price that can be charged in the market.
maximum
If income elasticity of good X is positive, (EQx, M > 0), then good X is considered a(n) ___ good.
normal
Income elasticity tells us whether goods are
normal or inferior
Elasticity measures the responsiveness of
one variable to changes in another.
In a linear production function, inputs are
perfect substitutes
The deviations between actual points and approximate, regression line line by econometrician is...
point letter with hat
The difference between the market price and the amount at which producers are willing and able to sell a good is called _______ surplus.
producer
According to the law of supply, as the price of a good decreases,
quantity supplied decreases.
According to the law of supply, as the prices of a good increases,
quantity supplied increases
t-statistic
ratio of the value of the parameter estimate to its standard error find it by a(hat)/a(hat) standard error) When equal or greater than 2, know that corresponding parameter estimate is statistically different than zero.
A cost that is incurred and unrecoverable is called a _________ cost.
sunk
If the price of a good or service exceeds the equilibrium price, a _____ exists. As a result, price tends to _____.
surplus; fall
The minimum possible cost of producing each output level with fixed and variable factors is given by
the short-run cost function
A measure of how much an estimated coefficient would vary in regressions based on the same underlying true demand relation, but with different observations is called __________.
the standard error
Managerial economics is best defined as
the study of how to allocate scarce resources to achieve managerial goals.
In labor markets, an effective price floor creates ____________.
unemployment
In the long run, all costs are
variable
In the long run, all costs are _______?
variable
What is the marginal product of capital (MPK) for the following linear production function? Q = F(K,L) = αK + βL
α
Suppose that demand is linear and given by: Qxd = αo - αxPx + αyPy + αMM + αHH Income elasticity is given by:
αM × M/Qx
Suppose that demand is linear and given by: Qxd = α0 - αxPx + αyPy + αMM + αHH Cross-price elasticity is given by:
αy × Py/Qx
What is the marginal product of labor (MPL) for the following linear production function? Q = F(K,L) = αK + βL
β
Suppose the demand for good X is log-linear and given by lnQxd = β0 + βxlnPx + βylnPy + βMlnM + βHlnH Income elasticity is
βM
Suppose the demand for good X is log-linear and given by lnQxd = β0 + βxlnPx + βylnPy + βMlnM + βHlnH Own price elasticity is
βx
Suppose the demand for good X is log-linear and given by lnQxd = β0 + βxlnPx + βylnPy + βMlnM + βHlnH Cross-price elasticity is
βy
Given a demand function, Qxd = f(Px, Py, M, H), define own price elasticity.
δQxd/δPx × Px/Qx
The law of demand analyzes the relationship between price and quantity demanded holding which of the following variables constant?
- income - price of related goods
In general, firm managers face constraints that affect his or her ability to _____.
- increase market share - maximize profits
Profit maximization by firms improves the total welfare of society by
- inducing entry into the market - signaling where scarce resources are most highly valued
When inputs are somewhat substitutable,
- isoquants are somewhere in between Leontief and linear. - the rate at which the manager can substitute among inputs changes along an isoquant.
Which of the following are considered expressions for income elasticity?
(δQxd/δM × M/Qx) (%ΔQxd/%ΔM)
Suppose there is an increase in the price of pork. If chicken is a substitute for pork, what can producers and consumers of chicken expect to see in the market for chicken?
- An increase in the quantity of chicken purchased - An increase in the price of chicken
Which of the following is true according to the law of demand?
- As market price decreases, quantity demanded increases. - As market price increases, quantity demanded decreases.
Which of the following occur(s) when the supply of a good or service increases but the demand remains the same?
- Equilibrium quantity increases - Equilibrium price decreases
The marginal rate of technical substitution between labor and capital is
- MPL/MPK - the absolute value of the slope of the isoquant - the rate at which labor and capital can be substituted for each other
If elasticity is given by, EX,Y = %ΔX/%ΔY, then elasticity is positive when:
- a decrease in Y leads to a decrease in X - an increase in Y leads to an increase in X
Which of the following describes supply and demand analysis?
- a qualitative tool - a forecasting tool - use to predict pricing trends
If elasticity is given by, EX,Y = %ΔX/%ΔY, then elasticity is negative when:
- an increase in Y produces a decrease in X. - a decrease in Y produces an increase in X.
What are the roles of a firm manager?
- direct the efforts of others, including those who delegate tasks within an organization such as a firm, family, or club - purchases the inputs to be used in the production of goods and services such as the output of a firm, food for the needy, or shelter for the homeless - are in charge of making other decisions, such as product price or quality
Which of the following occur(s) when the supply of a good or service decreases and demand remains the same?
- equilibrium quantity decreases - equilibrium price increases
Other things remaining constant, when demand for a good or service increases, which of the following occur(s)?
- equilibrium quantity increases - equilibrium price decreases
Comparative static analysis assumes which of the following?
- goods are allocated by price - no price ceilings - no price floors
A production function can include many inputs. Which of the following are the most commonly used inputs?
- labor - capital
In the following linear demand function, Qxd = α0 + αxPx + αyPy + αMM + αHH where Py is the price of related goods, M is income, and H is other factors, the value of αy is
- positive if goods X and Y are substitutes - negative if goods X and Y are complements
Suppose there is a drastic decrease in excise taxes levied against the suppliers of baseball equipment. What can we expect to see in the market for baseball bats?
- supply increases - equilibrium price decreases
When consumers have more time to react to a price change of a good,
- the consumers are able to locate more substitutes. - the demand for the good becomes relatively more elastic.
The demand function indicates that the quantity of a good consumed depends on:
- the effect of the demand shifters - the price of the good - the income of buyers
The following function, Qxs = f (Px, Pr, W, H), shows that the quantity produced in a market depends on the price of the good, Px, and:
- the price of technologically related goods - the price of inputs such as labor costs - the value of other variables that affect supply such as taxes
Discrete Marginal Analysis Chart
1. Q (given) 2. Total Benefits: B(Q) 3. Total Costs: C(Q) 4. Net Benefits: N(Q) = B(Q) - C(Q) 5. Marginal Benefit: MB(Q) = change in B(Q) 6. Marginal Cost: MC(Q) = change in C(Q) 7. Marginal Net Benefits: MNB(Q) = change in N(Q) or MB(Q) - MC(Q)
If 15 workers produce 180 cars per day, what is the average product of labor (APL)? APL =
12
Suppose the linear production function for a firm is given by:Q = F(K,L,) = 3K + 2L.If the firm employs 3 machines and 5 workers, output is equal to ___
19
Demand is given by: Qd = 20 - 3P Supply is given by: Qs = 2 + 3P If the government sets a price floor of $4 in this market and then agrees to buy up any surplus that exists, then the cost to the government will be equal to $
20-3P = 2+3P p=3 q=11 qd = 8 qs = 14 Surplus = 6 6*4 = 24
Demand is given by: Qd = 20 - 3P Supply is given by: Qs = 2 + 3P If the government imposes a $2.50 price ceiling on this market, then the full economic price paid by the consumers is equal to $
20-3P=2+3P 18=6P P= $3, Q= 11 Qd = 12.5 Qs = 9.5 (plug into Qdemanded) shortage of 3 units 9.5 = 20 - 3P Pfull economic price = $3.50
Standard Error
A measure of how much each estimated coefficient would vary in regression based on same underlying true relationship, but with different observations. The smaller the standard error, the smaller the variation in estimate of given data from different samples of data. Use this to create upper & lower bounds of true value of estimated coefficient by 95% (confidence intervals)
Which of the following events show an increase in supply?
A rightward shift of the supply curve
What is the average product of capital (APk) if 12 machines produce a total of 96,000 units of output?
APk = Q/k 8,000
Constraints
Affects the ability to achieve a goal. Ex: Available technology and prices of inputs used in production.
Which of the following best characterizes "scarcity"?
An individual cannot make a choice without giving up another.
Resources
Anything used to produce a good or service. (Time is one of the scarcest resources.)
According to the "Five Forces Framework," industry profits tend to be lower when which of the following exists?
Buyers have power to negotiate favorable terms for products. Suppliers have the power to negotiate favorable terms for their inputs.
What are the five forces that impact the sustainability of industry profits?
By Michael Porter - entry - power of input suppliers - power of buyers - industry rivalry - substitutes and complements
Which of the following represents an isocost line?
C = wL + rK
Given the cost function, C(Q) = f + aQ + bQ^2 + cQ^3, which of the following equations defines the Marginal Cost (MC) function?
C(Q) = a + 2bQ + 3cQ^2
Suppose a firm expands its output and still incurs the same level of long-run average cost. What is this condition called?
Constant returns to scale
If chicken and pork are substitutes, what happens to the demand for pork if the price of chicken increases substantially?
Demand for pork increases
What is true of demand for a good that has many available substitutes?
Demand is relatively elastic.
What can we predict about the market for craft beer if both demand and supply decrease simultaneously?
Equilibrium quantity decreases Equilibrium price uncertain
True or false: In a least squares regression, the parameter estimates represent the greatest sum of squared errors between the line and the actual data.
False
True or false: Wealthy people do not face scarcity.
False
True or false: When a price floor applies to a product, rather than labor, the deadweight loss will always be less.
False
What is another name for the Leontief production function?
Fixed proportions production function
A firm that always employs two workers for each unit of capital follows which type of production function?
Leontief
Total Revenue Test
If demand is elastic, an increase (decrease) in price will lead to a decrease (increase) in total revenue. If demand is inelastic, an increase (decrease) in price will lead to an increase (decrease) in total revenue. Finally, total revenue is maximized at the point where demand is unitary elastic.
In the case of yes-or-no managerial decisions, which of the following refers to the additional costs derived from a decision?
Incremental Costs
In the case of yes-or-no managerial decisions, which of the following refers to the additional revenues derived from a decision?
Incremental Revenues
The Leontief production function implies that isoquants are what shape?
L-shaped
The line that minimizes the squared deviations between the line and the actual data points is called the ______.
Least squares regression line
What maximizes N(Q) or net benefits?
MB(Q) = MC(Q) It increases managerial control variable (Q) to a point when MNB(Q) = 0 and nothing more can be gained.
What is the term given to the ratio of the marginal products of labor and capital?
Marginal Rate of Technical Substitution
Which of the following describes the rate at which labor and capital can be substituted for each other?
Marginal Rate of Technical Substitution
Consider the following relationship between marginal revenue and elasticity of demand: MR = P × {1+E/E}. If demand is unitary elastic:
Marginal Revenue equals zero
Consider the following relationship between marginal revenue and elasticity of demand: MR = P × {1+E/E}. If demand is inelastic:
Marginal revenue is negative
If a new canning technology costs $300,000 in the last 6 years, and generates year-end, cost savings of $50,000 in each of the first 3 years and $60,000 in each of the last 3 years, should the firm buy the technology if the interest rate of 5.0%?
NPV = CF (Inflow-Outflow)/(1+i)^n... - No. Manager would do better to invest the 300K at 5%. - No. The NPV of the technology is negative.
Suppose a firm's benefit and cost structure is given by the following functions, respectively: B(Q) = 400(Q) - 5Q^2 C(Q) = 3Q^2 Net benefits are maximized at output level _____.
Net Benefits maxed at MC=MB not C=B. 25
Consumer-producer rivalry
Occurs because of competing interests of consumers and producers. They provide a checks and balances on market product. (If too high, consumer won't buy. Producer won't sell for too low.)
Demand is given by: Qd = 20 - 3P Supply is given by: Qs = 2 + 3P Determine the equilibrium price (P*) and quantity (Q*).
P = $3; Q = 11
Consider the following demand function: Qd = 210 - 3P. Solve for the inverse demand function.
P = -1/3Qd + 70
Consider the following function: Qxs = 5Px - 200. Determine the inverse supply function.
P = 1/5Qxs + 40
What is the ex-dividend present value of a firm's current and future earnings if the interest rate is 7%, the expected growth rate of the firm is 4%, and the firm's current profits are $75 million?
P(firm) - Profits(0) P(firm) = Profits(0) * (1 + i)/(i-g) 2,600 million
What is the present value of $500 in 15 years if the interest rate is 4.5%?
PV = CF/(1+ i)^n $258.36
What is the present value of $100 in 8 years if the interest rate is 5%?
PV = CF/(1+i)^n $67.68
When interest = 0?
PV = FV
PV(firm) formula
PV(firm) = Profit(0) * (1+i)/(i-g)
If current CF is 0 & all future cash flows identical (like perpetual bonds and preferred stocks)...
PV(perpetuity) = CF/i
The present value of a perpetual bond that pays the owner $400 at the end of each year when the interest rate is fixed at 4% is $
PV(perpetuity) = CF/i $400/.04 = $10,000
What type of price control will the government impose if it considers the equilibrium price to be too high?
Price ceiling
Producer-Producer Rivalry
Producers compete because consumers are scarce. Must provide best-quality product at lowest price to earn right to serve customers.
If the interest rate is 8%, the expected growth rate of the firm for the foreseeable future is 6%, and the firm's current profits are $60 million, the present value of the firm's current and future earnings is $___ million.
Profits(0) * (1+i)/(i-g) 3,240
Continuous Control Variable
Q can be fractional unlike Q and is infinitely divisible. Slope of B(Q) is: change in B/change in Q Slope of C(Q) is: change in C/change in Q Slope of N(Q) at max is = MNB(Q). Slopes of B(Q) curve and C(Q) curve are equal when N(Q) are maximized.
Equilibrium price and quantity with simultaneous shifts in demand and supply
S (inc), D (inc): P (ambiguous), Q (inc) S (inc), D (dec): P (dec), Q (ambiguous) S (dec), D (inc): P (inc), Q (ambiguous) S (dec), D (dec): P (ambiguous), Q (dec)
Graphically, what area represents producer surplus?
The area above the supply curve and below the price.
A binding price ceiling tends to create what type of condition in the market?
Shortage
What happens if G > I
Since profits grow faster than the interest rate, the value of the firm would be infinite.
How do strategic business decisions differ from routine business practices or tactics?
Strategic decisions differ from routine business practices or tactics because, in contrast to routine business practices, strategic decisions seek to shape or alter the conditions under which a firm competes with its rivals in ways that will increase and/or protect the firm's long-run profit. While routine business practices are necessary for keeping organizations moving toward their goal of profit-maximization, strategic decisions are generally optional actions managers can take as circumstances permit.
Indicate which of the following events occur(s) in the market for dark chocolate when the government imposes a strict tariff on imported cocoa AND researchers release a credible study identifying huge health benefits to moderate, dark-chocolate consumption.
Supply decreases, Demand increases - equilibrium price increase - equilibrium quantity uncertain
What happens to the supply of canned craft beer if brewers adopt a new technology that allows them to can more craft beer at a lower cost?
Supply increases
In product markets, an effective price floor creates which of the following conditions?
Surplus
What can we predict about the market for red wine if both demand and supply increase simultaneously?
The effect on equilibrium price is uncertain.
Suppose capital, K, is on the vertical axis and labor, L, is on the horizontal axis in a graph. Which of the following would be true if the price of labor, w, increased?
The isocost line rotates clockwise
Least Squares Regression
The line that minimizes the sum of squared deviations between the line and the actual data points.
P-values
The lower the p-value, the more confident you are in parameter estimate. Rule of thumb, anything 5% (0.05) or smaller means that the coefficients are statistically significant.
Which of the following does a market supply curve show?
The quantity that all producers are willing and able to produce at all prices
Economics
The science of making decisions in the presence of scarce resources.
What can be said about goods X and Y if the cross-price elasticity between X and Y is negative?
They are complements.
What can be said about goods X and Y if the cross-price elasticity between X and Y is positive?
They are substitutes.
Economic profits equal
Total Revenue - (Explicit + Implicit Costs)
Accounting profits
Total amount of money taken in from sales. Same as total revenue. (Price * Quantity Sold)
True or false: If the growth rate in profits is less than the interest rate and both are constant, maximizing short-term profits is the same as maximizing long-term profits.
True
True or false: Supply and demand analysis enables managers to see the "big picture".
True
True or false: The law of demand analyzes the relationship between price and quantity demanded holding everything else constant that influences buyers decisions.
True
How to calculate intervals
a(hat) plus and minus 2*a(hat) standard error b(hat) plus and minus 2*b(hat) standard error
Managerial economics provides useful insights into _____ facets of the business and nonbusiness world.
all
Where does the marginal cost (MC) curve intersect the average variable cost (AVC) curve?
at minimum AVC
Suppose as a result of a 5% increase in the price of pizza, the demand for soft drinks decreases by 1.1%. In this example, soft drinks and pizza are ____________.
complements
When a price floor is applied to a product and the government buys and discards the resulting surplus, the deadweight loss from the price floor _________.
becomes larger
In a production function, the input that refers to machinery is called
capital
Cross advertising elasticity measures
changes in consumption of one good due to changes in advertising on another good.
When a firm manager uses a parameter estimate and its standard error to construct an upper and lower bound on the true value of the parameter, that manager is constructing a ________
confidence interval
The availability of technology and input prices are often considered _________ that interfere with managerial goals.
constraints
The difference between what consumers are willing to pay for a good or service and the market price is known as _____.
consumer surplus
If |EQ,Px| > 1, an increase in the price of a good will _______ total revenue.
decrease
What do economists use to describe the amount of good X that will be purchased at different prices of good X, at different prices of related goods, and at alternative income levels?
demand function
The statistical analysis of economic data is called _______
econometrics
The primary analytic tool used to evaluate the responsiveness of one variable to change in another variable is called ______.
elasticity
Insert one word OR the mathematical operator into the following expression to demonstrate the cost-minimizing input rule. MPL/MPK ___ w/r
equal
The slopes of the total benefits curve and the total cost curve are ___________ when net benefits are maximized.
equal
When average total cost (ATC) is at its minimum, marginal cost (MC) __________ average total cost (ATC).
equals
Identify seven economic forces that promote a firm's long-run profitability:
few close substitutes, strong entry barriers, weak rivalry within markets, low market power of input suppliers, low market power of consumers, abundant complementary products, and limited harmful government intervention.
In order to make sound decisions, firm managers must have well-defined __________.
goals
The parameter estimate is statistically different from zero when the absolute value of the t-statistic is _____.
greater or equal to 2.
Suppose elasticity is given by, EX,Y = %ΔX/%ΔY. The absolute value of elasticity will be ________ 1 when the change in X is large relative to the change in Y.
greater than
The economic cost of producing a good or service is generally _________ the accounting cost.
greater than
If demand is inelastic, a(n) ___ in price will lead to an increase in total revenue.
increase
If |EQ,Px|< 1, an increase in the price of the good will _______ total revenue.
increase
Increases in population or population density tend to __________ the demand for goods and services, all things equal.
increase
According to the law of demand, as market price decreases, quantity demanded ____.
increases
An increase in consumer income _________ the demand for normal goods and ________ the demand for inferior goods.
increases; decreases
Marginal analysis is the comparison of
incremental benefits with incremental costs
If |EQ,P|< 1, then demand is said to be ________.
inelastic
In a production function, the input that refers to workers is called
labor
A firm's economic costs are _____ its accounting costs.
larger then
The ________ run is a period of time during which a manager can change all factors of production.
long
According to Adam Smith, by pursuing its self-interest (maximizing profits), a firm tends to
meet the needs of society.
Which of the following is an example of a price floor?
minimum wage
Demand tends to be ___________ elastic when consumers have more time to react to price changes.
more
If MPL/w < MPK/r, the firm should use ___ capital and ___ labor to minimize costs.
more; less
Consider the following linear demand function where Py is the price of related goods, M is income, and H is other factors: Qxd = α0 + αxPx + αyPy + αMM + αHH According to the law of demand, the value of αx is _____.
negative
When a shortage exists, there is a tendency for price to ________ in order to equate quantity demanded and quantity supplied.
rise
Consumer-consumer rivalry is due in large measure to which of the following?
scarcity
Successful managers understand how to structure incentives in order to overcome which economic condition?
self-interest
The ________ run is a period of time during which at least one factor of production is fixed.
short
If the price of a good or service is less than the equilibrium price, a _____ exists. As a result, the price tends to _____.
shortage; rise
A function that describes the relationship between output and various prices of that output, prices of inputs, and values of other variables is called
the supply function
Suppose a firm manager converts 65% of his available factory space in to an indoor playground for neighborhood children. The implicit cost of this decision is
the value of the next-best alternative for the space
When the t-statistic for a parameter estimate is large in absolute value, you can be confident that the true parameter is not
zero. (Large is equal or greater to 2.)
Total revenue is maximized when marginal revenue equals ____ which is when the own price elasticity of demand is equal to ____
zero; -1
If |EQ,P|= 1, then demand is said to be ________ elastic.
unitary
Total revenue is maximized at a point where demand is
unitary elastic
Costs that change when output changes are called ___ costs.
variable
What basic principles comprise effective management?
- identify goals and constraints - recognize the nature and importance of profits - understand incentives -understand markets - recognize the time value of money - use marginal analysis - make data-driven decisions