Final exam Managerial Economics
"Roper Spring Water" is considering a new bottling line that costs $230,000, lasts 4 years, and yields cost savings of $55,000 in year 1, $65,000 in year 2, and $75,000 in years 3 and 4. If the interest rate is 7%, what is the present value of the cost savings of the line?
$226,615
What is the present value of $500 in 15 years if the interest rate is 4.5%?
$258.36
Why do producers offer money-back guarantees?
'To signal the hidden qualities of the product.
Total revenue is maximized when marginal revenue equals .(Enter a number.)
0
If 15 workers produce 180 cars per day, what is the average product of labor (APL)? APL = cars
12
Demand is given by: Q^d = 20 - 3P Supply is given by: Q^s = 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 $
24. (explanation: Pfloor *(Q^s - Q^d))
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 (VMP )? VMPL
690
Which of the following events show an increase in supply?
A rightward shift of the supply curve
What happens to average fixed cost (AFC) as output declines?
AFC increases
In general, in a market dominated by only a few firms, how do firms collude?
Agreeing to charge higher prices Agreeing to keep output low
Which of the following will cause a decrease in the supply of "farm-to-fork" vegetables?
An increase in government regulations on agriculture. An increase in the price of fertilizer used on these farms. A reduction in the number of "farm-to-fork" vegetable producers
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
Describe the information in an auction characterized by independent private value.
Asymmetric information
For a linear production function, Q = aK + ßL, what is the marginal rate of technical substitution (MRTS)?
B/a
Which of the following can yield profits higher than those achieved by a single price to all buyers such that MC = MR?
Block pricing, Commodity bundling, Price discrimination
Consider the payoffs for the following simultaneous, one-shot game: Firm A charges low, Firm B charges low: 0,0, (respectively) Firm A charges low, Firm B charges high: 50, -10 (respectively) Firm A charges high, Firm B charges low: -10, 50 (respectively) Firm A charges high, Firm B charges high: 10,10 (respectively) What is the outcome of the game?
Both charge low
A production function that assumes that inputs are relatively substitutable is called a
Cobb-Douglas production function
What type of analysis studies the movement from one equilibrium to another?
Comparative static analysis
The MPL of the 5th worker is 9 units, the MPL of the 6th worker is 7 units and the MPL of the 7th worker is 4 units. This is an example of which of the following?
Decreasing marginal returns
What is true of demand for a good that has many available substitutes?
Demand is relatively elastic.
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.
Equilibrium price decreases. The effect on equilibrium quantity is uncertain.
R^2 can be given by:
Explained variation/ Total variation AND ss regression, ss total
What is an advantage of producing inputs internally?
Firms don't rely on other firms for materials
Determine a key difference between monopolistic competition and monopoly.
In monopolist competition, there are other firms that sell similar products.
According to the "Five Forces Framework, " market entry can erode the sustainability of profits for existing firms. This is due to
Increased competition, Introduction of new products, Formation of new companies
What are "iid normal" random variables?
Independently and identically distributed normal random variables
Which of the following is among the five forces that impact the sustainability of industry profits, according to Michael Porter?
Industry rivalry, Entry, Power of buyers
Spot exchange refers to which of the following?
Informal relationship between buyer and seller
What is the analytical tool that defines a combination of inputs that yields the same output?
Isoquant
How does block pricing enhance a firm's profits?
It forces consumers to make an all-or-nothing purchase.
Rapel Valley in Chile is renowned for its ability to produce high-quality wine at a fraction of the cost of many other vineyards around the world. Rapel Valley produces over 20 million bottles of wine annually, of which 5 million are exported to the United States. Each bottle entering the United States is subjected to a $0.50 per bottle excise tax, which generates about $2.5 million in tax revenues. Strong La Niña weather patterns have caused unusually cold temperatures, devastating many of the wine producers in that region of Chile.How will La Niña affect the supply and price of Chilean wine?
It will cause supply to decrease and price to increase.
The Leontief production function implies that isoquants are what shape?
L-shaped
Define the marginal net benefit of a one-unit change in output, (Q). That is, the MNB(Q).
MB(Q) - MC(Q)
Marginal Product of Capital (MP k) is given by:
MP = AQ
Which of the following describes the rate at which labor and capital can be substituted for each other?
Marginal rate of technical substitution
Which function defines the cost of producing at least 2 types of output?
Multiproduct cost function
Which is a strategy firms use to tailor goods and services to meet the needs of a particular segment of the market?
Niche marketing
What is the optimal bidding strategy for an English auction?
Remain active until price exceeds the bidder's valuation.
In perfect competition, profit equals
Revenues - cost
A dispute between a firm and its stockholders over what to do with a $10 million surplus would likely be analyzed using which application of multistage games?
Sequential bargaining
According to the "Five Forces Framework, " industry profits tend to be lower when which of the following exists?
Suppliers have the power to negotiate favorable terms for their inputs. OR Buyers have the power to negotiate favorable terms for products.
An oligopoly where each firm believes that rivals will lower their prices in response to a price decrease, but will not change their prices in response to a price increase is called a oligopoly.
Sweezy
Suppose a market contains a few firms, many consumers, differentiated products, and a belief by firm managers that other firms will match price decreases, but not price increases. What type of market is this?
Sweezy oligopoly
Fixed cost (FC) equals
TC - VC
What is true of market price and output under a collusive agreement among oligopolists?
The are the same as in monopoly.
Graphically, what area represents producer surplus?
The area above the supply curve and below the price.
Which area forms consumer surplus?
The area below the demand curve and above the price.
When income is constant and the price of good X, P , increases, what is the effect on the budget line (x is measured on the horizontal axis, y on the vertical axis)?
The budget line rotates clockwise.
How does moral hazard increase the cost of medical services?
The cost of insurance claims rises due to increased visits. Demand for medical services increases. Insurance companies increase rates to cover rising costs.
What is true of the effect of a change in marginal cost (MC) as it applies to Cournot and Sweezy oligopoly models?
The effect of a change in MC generally is very different in each model.
What occurs if players know precisely when a repeated game will end?
The end-of-period problem
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
What is the optimal bidding strategy for a second-price, sealed-bid auction?
The player bids his own valuation of the item.
What is the key difference in determining the profit-maximizing price and output under monopoly versus monopolistic competition?
There is no difference.
What must be true about combinations of labor and capital along a given isoquant?
They all must produce the same amount of output
What can be said about goods X and Y if the cross-price elasticity between X and Y is positive?
They are substitutes.
Firms spend substantial amounts of money in order to verify the credit-worthiness of their customers. Why?
To reduce asymmetric information
At what point does the price war in a Bertrand oligopoly with two firms end?
When P1 = P2 = MC
Do changes in marginal cost affect firms in Cournot oligopoly differently than in Sweezy oligopoly? Why or why not?
Yes. It is due to a firm's perception of how other firms will react to its decisions.
What is the marginal product of capital (MP ) for the following linear production function?
a
If elasticity is given by, E x,Y 0/0AX then elasticity is positive when: %AY'
a decrease in Y leads to a decrease in X. an increase in Y leads to an increase in X.
Since airlines are relatively uninformed about consumers' exact preferences, they often charge different prices for different tickets depending on length-of-stay, Saturday stay-over, time of purchase, etc. As a result, consumers reveal their preferences by choosing the ticket option that best suits their needs. This process is called
a self-selection device.
When one party to a transaction has better information than another, it is called
asymmetric information.
The supply curve for product X is given by QXS = -340 + 20PX .a. Find the inverse supply curve. b. How much surplus do producers receive when Qx = 420? When Qx = 1,120?
a. P = 17 + 1/20 Q b. When QX = 420: $38 When QX = 1,120: $73
Y — — - X, represents
an affordable combination of goods X and Y.
Economists
are able to model human behavior.
When strategies for a multistage game are a Nash equilibrium, but involve a threat that is not credible, then we say that these strategies
are not a subgame perfect equilibrium.
Insider trading is an example of information.
asymmetric
Workers tend to know much more about their own tendencies than their resumes predict. This is an example of
asymmetric information.
The measure of output per unit of input is called
average product
Total product per worker is called
average product of labor
C(Q) defines
average total cost
Firms use pricing when they package products together in order to enhance profits by forcing consumers to make an all-or-nothing decision.
block
In a sequential-move game, the player who moves first
cannot make decisions based on what the other player does.
In a production function, the input that refers to machinery is called
capital
A production function can include many inputs. Which of the following are the most commonly used inputs?
capital labor
LMC(Q, Q) < O describes cost
complementarities.
If a firm's benefit and cost structure are given by B(Q) and C(Q), respectively, then marginal benefit and marginal cost are equal to:
dB(Q)/d(Q) ; dC(Q)/d(Q)
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) cost (ATC). average total
equal
When firms in a competitive industry sustain losses, they will long run. the industry in the
exit
When a surplus exists, there is a tendency for price to (rise/fall) in order to equate quantity demanded and quantity supplied.
fall
True or false: It is generally the case that indifference curves have the same shape across all consumers.
false
Games in which players know a game will end, but they do not know when the game will end are called games. (Enter one word in each blank)
fineitely repeated
Suppose elasticity is given by, E 0/0AV X,Y The absolute value of elasticity will be is large relative to the change in Y. (greater/less) than 1 when the change in X
greater
The ___ the F-statistic, the better the overall fit of the regression line through the actual data
higher
Performance-based reward programs for firm managers are typically called contracts.
incentive
If IE < 1, an increase in the price of the good will ___ total revenue.
increase
If demand is inelastic, a(n) ___ in price will lead to an increase in total revenue.
increase
Profit-sharing programs tend to compensation. both the firm's profits and managerial
increase
When a monopolist increases output by one unit, total revenue
increases by less than price.
Warranties and guarantees can be analyzed using games.
infinitely repeated
If P exceeds AVC but is less than ATC, the firm
is sustaining a loss. should remain open.
In a production function, the input that refers to workers is called
labor
The short-run production function is generally expressed as a function of which of the following inputs?
labor only
The downward-sloping portion of the VMP defines the demand for maximizing firm. It slopes downward due to by a profit
labor; diminishing marginal returns
The production. run is a period of time during which a manager can change all factors of
long
For small gambles, people are generally risk For larger gambles, people are generally risk
loving, averse
Multiproduct firms that have cost complementarities tend to have firms producing a single product. marginal costs than
lower
The ___ the P-value for an estimated coefficient, the more confident you are in the estimate.
lower
Indicate how a manager can induce a risk averse individual to consume new products.
lower price, Offer free samples
If income elasticity of good X is positive, (E > O), then good X is considered a(n) ___ good.
normal
The -form of a game indicates the number of players, the potential strategies, and the payoffs to alternative strategies.
normal
A strong incentive structure:
offers bonuses to managers based on firm performance. aligns worker self-interest with firms' interest.
Elasticity measures the responsiveness of
one variable to changes in another.
In order to maximize profits in the short run, a manager must determine how much output to produce given
only variable inputs within his control.
Economic costs are ___ and include ___ costs.
opportunity costs; explicit and implicit
A market with many "small" buyers and sellers, identical products, no transaction costs, and free entry and exit where buyers and sellers have perfect information is called
perfect competition
If the market for corn contains many buyers and sellers (none of whom can influence price), a homogeneous product, and free entry in the market, we consider the market to be
perfectly competitive
According to the law of supply, as the price of a good decreases,
quantity supplied decreases.
When specialized investments are required to facilitate an exchange, the relationship that results is known exchange (2 words) as a(n)
relationship specific
In order to maintain solid job performance, firm owners may rely on a manager's interest in working for another firm some day. What type of external incentive is this?
reputation
When a consumer reaches a point of indifference between paying a given price and searching for a lower price, then that consumer has reached his/her price.
reservation
Revenue sharing can be particularly effective when productivity is connected to rather than costs.
revenue
The most straightforward way to obtain inputs is by
spot exchange
The budget set defines combinations of goods and services
that are affordable.
The marginal rate of substitution (MRS) is
the absolute value of the slope of the indifference curve.
Marginal revenue is
the change in total revenue from a one-unit change in output.
When consumers have more time to react to a price change of a good,
the demand for the good becomes relatively more elastic. the consumers are able to locate more substitutes.
The minimum possible cost of producing each output level with fixed and variable factors is given by
the short-run cost function.
Due to the complexities of human thought process:
-behavior models are abstractions of the way we make decisions. -behavior models are simplifications of real-world human decision-making.
"Roper Spring Water" is considering a new bottling line that costs $230,000, lasts 4 years, and yields cost savings of $55,000 in year 1, $65,000 in year 2, and $75,000 in years 3 and 4. If the interest rate is 7%, what is the net present value of the machine? Should Roper Spring Water buy the machine?
-$3,385; No
Indicate which of the following are applications of multistage games.
-Entry game -Innovation game -Sequential bargaining
Suppose a spinach farmer operates in perfect competition. At the market price of $3.00 per bunch, the farmer sells 125 bunches per day. If the farmer increases her price to $3.01, she will sell bunches.
0
Inverse market demand is: P = 1,000 - (Ql+ 02). Costs for each firm are identical and given by: qq = 4Qi The profit earned by each firm in a Bertrand oligopoly equal $
0 Firms earn zero economic profit in a Bertrand oligopoly.
For a given demand curve and cost function in a market with two firms, rank from highest to lowest the profit levels of the following firms: a Cournot duopolist, a Stackelberg leader, a Stackelberg follower, a Bertrand duopolist.
1 A Stackelberg leader 2 A Cournot duopolist 3 A Stackelberg follower 4 A Bertrand duopolist
Suppose that two-thirds of the stores in a market charge $800 for a certain brand of mountain bike while one-third of the stores charge $500. The expected benefit of an additional search equals $ (Enter one number in the blank)
100
A firm in monopolistic competition faces a demand function equal to: P = 200 - 20, and a cost function equal to C(Q) = 10 + 40. The profit-maximizing price equals $ .00.
102
Inverse market demand is: P = 1,000 - (Ql+ 02). Costs for each firm are identical and given by: qq = 4Qi The profit earned by a Cournot oligopolist equals $
110224 Solving the two reaction functions results in QI = Q price of $336. Each firm earns a profit of $110,224. = 332. The total output in the market is 664, which yields a market
Suppose 25% of workers in a market are willing to work for $55,000 and 75% of workers are willing to work for $63,000. The expected benefit of searching (interviewing) another worker equals $
2000
The following quadratic multiproduct cost function: C(QI, 02) = f + aQlQ2 + (QIY + (Q2)2 exhibits cost complementarity when
a<0
An affordable bundle of goods and services that yields the most satisfaction is generally referred to as equilibrium.
consumer
Isoprofit curves
do not intersect.
When the total cost of producing two goods within the same firm is less than the cost of producing them in exist. (3 separate firms, words)
economies of scope
If a firm manager is able to determine and charge the maximum amount that each consumer would be willing to pay for a good or service, it is called degree price discrimination.
first
If an upstream manager has market power and produces inputs for a downstream firm where MR = MC, then the price that the downstream division pays for the input is
greater than marginal cost.
Under a piece-rate compensation method, workers are likely to
increase quantity at the expense of quality.
When demand for a good decreases, then
less is demanded at all prices.
equilibrium is a condition describing a set of strategies in which no player can make themselves better off by unilaterally changing their strategy, given the other players' strategy choices.
nash
For a manager who is risk decisions. , the of profits does not affect managerial
neutral; variance
When there are a few, relatively large firms in an industry, it is called
oligopoly
In order to maximize profits in the short run, a manager must determine how much output should be produced, given
only variable inputs within his or her control.
A pricing strategy that involves charging higher prices during times of increased demand is called
peak-load pricing
What type of price control will the government impose if it considers the equilibrium price to be too high?
price ceiling
When the government purchases the surplus generated by a price floor, it is called a
price support
A function that defines the profit-maximizing level of output given the output levels of another firm is called a(n) (one word) function.
reaction
Linking workers' compensation to the underlying revenue of the firm is called
revenue sharing
In the absence of a dominant strategy, a player might pursue a strategy that guarantees the highest payoff given the worst possible scenario. Such a strategy is call a(n)
secure strategy
A health club charges consumers an enrollment fee and also a monthly fee. This is an example of pricing. (2 words)
two-part
If E = 1, then demand is said to be ___ elastic.
unitary
Suppose that demand is linear and given by: Qd=a - (I P + (I P + M + (I H Cross-price elasticity is given by:
αy* Py/ Qx
Which of the following can yield profits higher than those achieved by charging a single price to all buyers?
-Block pricing -Price discrimination -Commodity bundling
What occurs if both an upstream and a downstream division of a firm both charge a price that exceeds marginal cost?
-Double marginalization -Less-than-optimal overall profits
Which of the following are criticisms of the mark-up formula?
-Elasticity of demand changes as price changes. -Elasticity of demand increases as price increases.
In the production process, the manager must do which of the following?
-Ensure the firm operates on the production function --Derive the market demand curve -Establish the correct level of inputs
When an employee announces his intention to quit an existing job, he has an increased incentive to "shirk" work on his last (or next-to-last) day. Which of the following should be the ideal strategies adopted by a manager in this situation?
-Extend the rewards of good work beyond the employment period. -Offer a hard-working employee a better job reference.
With respect to the short run average cost curves, what is true of the long run average cost curve?
-It lies above no point on the short run average cost curves. -It equals short run average cost when short run curves use fixed inputs optimally.
Long-run properties of perfect competition include:
-P = min AC -p = MC
In a repeated game with a known final period, why are promises to cooperate generally broken?
-Players understand that there is no effective punishment in the last period. -"Backwards unraveling" continues until players know that no punishment can be used in any period.
Which of the following methods can firms use to induce brand loyalty?
-Rebates after multiple purchases -Advertising campaign
The different auction types differ with respect to:
-The timing of the bidder's decisions -The amount the winner pays
Why do out-of-town consumers tend to make purchases in chain stores?
-They have less information about local products. -Consumers opt for familiar products, even if the expected quality is lower.
Which of the following are reasons that randomized pricing can benefit a firm?
-They reduce the ability of rival firms to undercut a firm's price -Consumers cannot learn which firm has the lowest price
Given independent private values, the expected revenues of the auctioneer in an English auction
-are the same as a second-price auction. -are the same as a first-price auction.
In order to be considered a subgame perfect equilibrium, a set of strategies must
-be a Nash equilibrium for each subgame. -be a Nash equilibrium.
In an infinitely repeated game,
-collusion is possible. -players receive payoffs during each play of the game
Disadvantages of contracts are that they are
-costly to write. -unable to cover all contingencies.
Firms can reduce the incentive to shop for low-price information by
-increasing uncertainty about the best deals. -changing prices with unpredictable regularity.
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.
In order to sustain a cooperative outcome in an infinitely repeated game, players should
-punish a player that cheats by selecting the one-shot, Nash equilibrium strategy. -cooperate provided no player has ever cheated.
Vertical integration
-reduces opportunism. -mitigates transaction costs.
In order for third-degree price discrimination to enhance profits,
-sellers must be able to prevent resale. -the elasticity of demand for various consumers must be different. -firms must be able to determine the elasticity of demand of different consumers.
Once a firm makes a specialized investment, other firms may attempt to take advantage of the sunk nature of the investment. This is known as
-the "hold up" problem -opportunism
It is optimal to acquire an input through a contract when
-the cost of the contract is less than the transaction costs. -the contracting environment is simple.
Commodity bundling can enhance profits when
-the firm does not know consumers' willingness to pay. -consumers differ in their willingness to pay.
A firm manager should consider vertical integration if
-the input has characteristics that are hard to specify in a contract. -there are substantial specialized investments.
Signals in both the product market and the labor market are useful if
-they are difficult to mimic. -they are observable. -they are reliable.
Inverse market demand is: P = 1,000 - (Ql+ 02). Costs for each firm are identical and given by: cq = 4Qi The profit earned by each firm in a Bertrand oligopoly equal $
0
Suppose that "Roper's Rice" faces a price elasticity of demand estimated to be -2.7. In this case, the profit- maximizing price will be times the marginal cost (round to the tenths place).
1.6
When a monopolist or a monopolistic competitor faces a price elasticity of demand equal to -2.4, the optimal markup factor equals decimal place) (Enter one number in the blank.) (round to one
1.7
A firm in monopolistic competition faces a demand curve with own-price elasticity equal to -2 and an advertising elasticity equal to 0.2. This firm should devote of its revenues to advertising.
10
Suppose that "Wilson's Wheat" faces a price elasticity of demand estimated to be -1.1. In this case, the profit- maximizing price will be (Enter one number in the blank) times the marginal cost (round to the tenths place).
11
Inverse market demand is: P = 1,000 - (Ql+ 02). Costs for each firm are identical and given by: qq = 4Qi The profit earned by the leader in a Stackelberg oligopoly equals $
124002 The leader produce 498 units and the follower produces 249, for a total of 747 units in the market. The resulting market price is $253 and the leader earns $124,002 in profit.
Suppose 4 firms compete in a homogeneous-product Cournot oligopoly. If each firm's marginal cost equals $112 and market price elasticity of demand equals -2.25, the profit-maximizing, equilibrium price equals $ (Enter one number in the blank)
126
The inverse demand function for two firms in a homogeneous-product, Stackelberg oligopoly is P = 60 - (Q + 02) and costs for the two firms are CI(QI) = 4Q AND, C (02) = 402. Under these conditions, the follower's output equals
14 The follower's output 60 4 1 — —Z— - —(28) = 14 2(1) 2 2b 2
A small sandwich shop has 8 employees and produces 216 sandwiches per day. After hiring another employee (9 total), the shop produces 231 sandwiches per day. The marginal product of the 9th labor (MPL) equals sandwiches.
15
Suppose that increasing output from 1000 units to 1100 units increases costs from $5,500 to $7,000. The marginal cost of producing each of the additional units is $
15
The inverse demand function for two firms in a homogeneous-product, Stackelberg oligopoly is P = 60 - (Q + 02) and costs for the two firms are CI(QI) = 401 AND, C2(Q2) = 402. Under these conditions, the market price equals $ .00
18 The leader's output is 28 and the follower's is 14. P = 60 - (28 + 14) = 18
Rank output levels from highest to lowest of the following industry models: Collusion, Cournot, Bertrand, and Stackelberg.
2 Stackelberg; 4 Collusion; 3 Cournot; 1 Bertrand
When a monopolist or a monopolistic competitor faces a price elasticity of demand equal to -1.7, the optimal markup equals
2.4
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 _____.
25
The inverse demand function for two firms in a homogeneous-product, Stackelberg oligopoly is P = 60 - (Q + 02) and costs for the two firms are CI(QI) = 401 AND, C2(Q2) = 402. Under these conditions, the leader's output equals
28 a + c -2c Leader's output = 2b _ 60 + 4-2(4) = 28 2(1)
Moving along an indifference curve from one bundle to another, a consumer gains 1 unit of X and gives up 3 units of Y. The marginal rate of substitution is between goods X and Y.
3
A firm in monopolistic competition faces a demand curve with own-price elasticity equal to -5 and an advertising elasticity equal to 0.15. This firm should devote % of its revenues to advertising.
3 (.15/-(-5)) = 3
If the interest rate is 8%, the expected growth rate of a firm for the foreseeable future is 6%, and the firm's current profits are $60 million, then the value of the firm on the ex-dividend date is $ million. (Enter a number in the blank.)
3,180.
If the interest rate is 8%, the expected growth rate of a firm in 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. (Enter a number in the blank.)
3,240. (Explanation PV = Pi0 * (1+i)/(i-g))
Demand is given by: 20 - 3P Supply is given by: 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 $ (Enter your response as a number with two decimals: dollars and cents).
3.50 (explanation: First, calculate the amount supplied at $2.50 using the supply function. Then, use the demand function to solve for the maximum price that consumers are willing to pay for the amount supplied at $2.50.)
The inverse demand function for a monopolist is given by P = 50 - 40. If the profit-maximizing output level is 5 (QM = 5), the monopoly price is
30
The estimates above were obtained from the following regression: Total Cost = a + b(Number of Bookings) where total cost and number of bookings were for a vacation-rental cabin. What is the estimate of fixed cost for this cabin?
358.27
Inverse market demand is: P = 1000 - (Ql+ 02). Costs for each firm are identical and given by: qq = 4Qi The price charged by each firm in a Bertrand oligopoly equals $
4 Price is equal to marginal cost ins a Bertrand oligopoly.
Suppose the inverse demand function is: P = 12 - Q, and cost is given by C(Q) = 40. If marginal revenue is MR = 12 - 20 and marginal cost is MC = 4, then the profit-maximizing level of output equals and the profit-maximizing price equals $
4, 8
Suppose there is an auction where bidders have independent private values and bids are evenly distributed between $2 and $10. If John recognizes that his valuation of the item equals $5.00, then his optimal bidding strategy in a first-price, sealed bid auction with 4 bidders equals $
4.25
Suppose there is an auction where bidders have independent private values and bids are evenly distributed between $2 and $10. If John recognizes that his valuation of the item equals $5.00, then his optimal bidding strategy in a Dutch auction with 5 bidders equals $
4.40
A firm in monopolistic competition faces a demand function equal to: P = 200 - 20, and a cost function equal to C(Q) = 10 + 40. The profit-maximizing level of output equals whole number.) units. (Round your answer to a
49
Inverse market demand is: P = 1,000 - (Ql+ 02). Costs for each firm are identical and given by: qq = 4Qi Output under a collusive agreement equals
498
Suppose there is an auction where bidders have independent private values and bids are evenly distributed between $2 and $10. If John recognizes that his valuation of the item equals $5.00, then his optimal bidding strategy in a second-price, sealed bid auction with 5 bidders equals $
5
Inverse market demand is: P = 1000 - (Ql+ 02). Costs for each firm are identical and given by: qq = 4Qi The profit earned by the follower in a Stackelberg oligopoly equals $
62001 The leader produce 498 units and the follower produces 249, for a total of 747 units in the market. The resulting market price is $253 and the follower earns $62,001 in profit.
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
Suppose that a fair die is rolled and, based on the result, you receive the following payout: Rolling a six pays $12, a five pays $10, a four pays $8, a three pays $6, a two pays $4, and a one pays $2. The expected value of the game equals $
7
Suppose 2 firms compete in a homogeneous-product Cournot oligopoly. If each firm's marginal cost equals $50 and market price elasticity of demand equals -1.5, the profit-maximizing, equilibrium price equals $ (Enter one number in the blank)
75
Suppose the inverse demand function is: P = 12 - 40, and cost is given by C(Q) = 40. The profit-maximizing price equals $
8
Suppose 5 firms compete in a homogeneous-product Cournot oligopoly. If each firm's marginal cost equals $75 and market price elasticity of demand equals -1.7, the profit-maximizing, equilibrium price equals $
85
The estimates above were obtained from the following regression: Total Cost = a + b(Number of Bookings) where total cost and number of bookings were for a vacation-rental cabin. What is the minimum increase in total cost one should expect from an additional booking?
88.52
A firm should shut down when P AVC?
<
Players find it in their interest to maintain a collusive agreement when Cheat Coop . (rrcoop - TTN)
<-
In a recent speech, the governor of your state announced: "One of the biggest causes of juvenile delinquency in this state is the high rate of unemployment among 16 to 19 year olds. The low wages offered by employers in the state have given fewer teenagers the incentive to find summer employment. Instead of working all summer, the way we used to, today's teenagers slack off and cause trouble. To address this problem, I propose to raise the state's minimum wage by $1.50 per hour. This will give teens the proper incentive to go out and find meaningful employment when they are not in school." Highlight a possible flaw in the governor's reasoning:
A higher minimum wage will serve as a higher price floor, reducing quantity demand for labor by firms.
Where does the marginal cost (MC) curve intersect the average variable cost (AVC) curve?
At minimum AVC.
Which of the following statements is correct?
Average fixed costs decline continuously as output expands.
What is the marginal product of labor (MP ) for the following linear production function? Q = = aK + ßL
B
What is the marginal product of labor (MP) for the following Cobb-Douglas production function? Q = F(K, L) = Kae
BKa Lb-1
Why do firms in a Sweezy oligopoly resist changing their prices so long as marginal cost remains within a certain range?
Because of the effect of price changes on the behavior of rival firms.
Consider the following payoffs available to two firms in the United States, "A" and "B", in a one- shot game. When "A" and "B" both advertise: $3, $3, respectively When neither "A" nor "B" advertise: $12, $12, respectively When "A" advertises and "B" does not: $20, $2, respectively When "A" doesn't advertise and "B" does: $2, $20, respectively Why don't the firms agree to not advertise?
Both firms have an incentive to cheat.
Suppose the demand for good X is log-linear and given by InQxd = ßo + ßxlnPx + ß InP + ßMlnM + ßHlnH Cross-price elasticity is
By
Given the cost function, C(Q) = f + aQ + bQ2 + cQ3, which of the following defines the Marginal Cost (MC) function?
C(Q) = a + 2bQ + 3cQ2
In a simultaneous-move, one-shot game, a Nash outcome is often inferior to the outcome that would result if the firms colluded. Which of the following is a reason why firms do not collude to reach a "better" outcome?
Collusion is illegal in the U.S.
Which of the following pricing strategies extract additional surplus from consumers?
Commodity bundling Block pricing Price discrimination Two-part pricing
Define marginal analysis.
Comparing incremental benefits with incremental costs.
Suppose a firm expands its output and experiences the same level of long-run average cost. What is this condition called?
Constant returns to scale
Which relationship best describes the following statement: "Buyers are trying to 'rip-off sellers and sellers are trying to gouge buyers."
Consumer-producer rivalry
Indicate one disadvantage of using contracts to obtain inputs.
Contracts require costly, up-front expenditures.
An auction environment where bidders know neither their own valuation of the item nor the other bidders' valuation of the item.
Correlated value estimates
What is true of demand for a good that has few close substitutes?
Demand is relatively inelastic.
Define the competitive firm's demand.
Df = P = MR
Suppose a firm expands its output and experiences higher long-run average cost. What is this condition called?
Diseconomies of scale
The information available in a first-price, sealed-bid auction is identical to a(n) auction.
Dutch
Indicate the four basic types of auctions.
Dutch, Second-price, sealed-bid First-price, sealed bid, English
Reservation price satisfies which of the following conditions? (Where p represents the price and c represents the cost per search.)
EB(R) = c
When the number of firms, N, equals 2 (Cournot duopoly), what is true of the relationship between market elasticity (E ) and the individual firm's elasticity (E)?
EF = 2EM
When the number of firms, N, equals 1 (monopoly), what is true of the market elasticity (E ) and the individual firm's elasticity (E)?
EM = EF
Which of the following is considered an expression for income elasticity?
EQx, M=%ΔQdx/ %ΔM AND EQx, M=∂Qdx/ ∂M * MQx
Cross-price elasticity is given by which of the following expressions?
EQx,Py=%ΔQdx/ %ΔPy AND EQx,Py=∂Qdx/ ∂Py * PyQx
In order to maximize expected profits, a manager should produce a level of output where
E[MR] = MC
In a simultaneous-move, one-shot game, a Nash outcome is often inferior to the outcome that would result if the firms colluded. Why might collusion disintegrate among profit-seeking firms?
Each firm has an incentive to cheat in order to obtain higher profits.
The statistical analysis of economic data is called
Econometrics
Suppose it is cheaper for an auto maker to produce hybrid vehicles and diesel SUVs in the same factory than it is to have two separate facilities for each vehicle. What condition exists?
Economies of scope
Rapel Valley in Chile is renowned for its ability to produce high-quality wine at a fraction of the cost of many other vineyards around the world. Rapel Valley produces over 20 million bottles of wine annually, of which 5 million are exported to the United States. Each bottle entering the United States is subjected to a $0.50 per bottle excise tax, which generates about $2.5 million in tax revenues. Strong La Niña weather patterns have caused unusually cold temperatures, devastating many of the wine producers in that region of Chile. Assuming La Niña does not impact the California wine-producing region, how will La Niña impact the market for Californian wines?
Equilibrium price and quantity will increase.
When demand for a good or service increases, which of the following occur(s)?
Equilibrium price increases, Equilibrium quantity increases
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.
Equilibrium price increases. The effect on equilibrium quantity is unclear.
Which of the following occur(s) when the supply of a good or service decreases?
Equilibrium quantity decreases, Equilibrium price increases
What can we predict about the market for craft beer if both demand and supply decrease simultaneously?
Equilibrium quantity decreases.
What is another name for the Leontief production function?
Fixed proportions production function
How does the U.S. patent system create monopolies?
Grants an inventor exclusive right to sell the product
Net benefits are maximized at a level of output, (Q), where MB = MC. Why?
If MB > MC, increasing (Q) adds more to total benefit than total cost.
If demand is highly elastic, what is true of the profit-maximizing markup? Why?
It is relatively low due to the availability of substitutes.
Good X is produced in a competitive market using input A. Explain what would happen to the supply of good X in each of the following situations: b. An excise tax of $3 is imposed on good X.
It will decrease.
Good X is produced in a competitive market using input A. Explain what would happen to the supply of good X in each of the following situations: c. An ad valorem tax of 7 percent is imposed on good X.
It will decrease.
Good X is produced in a competitive market using input A. Explain what would happen to the supply of good X in each of the following situations: a. The price of input A decreases.
It will increase.
Good X is produced in a competitive market using input A. Explain what would happen to the supply of good X in each of the following situations: d. A technological change reduces the cost of producing additional units of good X.
It will increase.
Suppose that Jack, the manager of "Roper's Rice," sorts a group of newly hired employees (about whom he is uninformed) according to their characteristics.
Jack is screening.
Marginal Product of Labor (MP) is given by:
MPl =change Q/ change L
In oligopoly, a manager maximizes profits at the point where
MR = MC
Assuming P > AVC, a profit-maximizing firm, in a perfectly competitive market, produces a level at which,
MR = MC P = MC P = MR
A monopolist's marginal revenue (MR) is given by:
MR = P(1+E)/E
What is the marginal revenue (MR) of the inverse linear demand function,
MR = a + 2bQ
Given a revenue function: The monopolist's marginal revenue (MR) is given by
MR = dP/dQ Q+P MR = P(1+E)/E MR = dR/dQ
Profit maximization for the two-plant monopolist occurs when the monopolist uses resources such that
MR(Q) = MC(Q) and MR(Q) = MC2(Q) MC(Q) = MCJQ)
Suppose the inverse demand function for two firms in a Cournot oligopoly is given by P = 12 - (Q + 09. Which of the following represent MRI and MR ?
MR2 = 12 - Q1 - 2Q2 MR1 = 12 - Q2 - 2Q1
At the point of consumer equilibrium,
MRS = Px/ Py
The affordable bundle that generates the most consumer satisfaction is given at
MRS = Px/Py consumer equilibrium
Consider the following relationship between marginal revenue and elasticity of demand: MR x If demand is elastic, what is the value of marginal revenue?
Marginal revenue is positive.
Comparative static analysis assumes which of the following?
No price floors, Goods are allocated by price, No price ceilings
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%? (Select all answers that apply.)
No. The net present value of the technology is negative. No. The manager would do better to invest the $300,000 at 5%.
Consider the following demand function: Q^d = 900 - 15P. Solve for the inverse demand function.
P = 60 - 1/15 Q^d
If price elasticity, E F -m, the price should be set such that
P = MC
To maximize profits, a perfectly competitive firm should produce in the range of increasing marginal cost where P = MC and
P > AVC
Demand is given by: 20 - 3P Supply is given by: 2 + 3P Determine the equilibrium price (P*) and quantity (Q*).
P& = $3; Q& = 11
If the profits earned by the firm are the same in each period and the horizon is infinite, the present value of a firm is given by:
PV firm = (1+i/1) Pi
From the point of view of a firm's owner, which of the following will help reduce the effects of the principal-agent problem?
Performance-based incentive
A criticism of sequential bargaining applications of multistage games includes which of the following?
Players don't know the true payoffs to other players.
The law of demand analyzes the relationship between price and quantity demanded holding which of the following variables constant?
Prices of related goods, Income
What happens in a perfectly competitive industry when firms earn profits?
Profits of remaining firms fall Supply increases Price falls
Consider the following function: Qx^S=15P^x -300. Determine the inverse supply function.
Px = 20 + 1/15 Qx^S
The budget set can be defined as which of the following?
PxX + PyY <- M
If a consumer spends all of his or her income on either good X or good Y or a combination of both, then the budget line is given by which of the following?
PxX + PyY = M
The budget constraint can be given by which of the following expressions?
PxX+PyY=M Y=m/p - Px/Py *X
Suppose the linear production function of a firm is given by Q = F(K, L) = aK + bL, where a and b are constants. Suppose it takes workers (L) 4 hours to produce what a machine (K) can make in 1 hour. Which of the following equations correctly states the production function of the firm?
Q = 4K +L
Which of the following describes the maximum output that can be produced with a fixed set of inputs?
Q = where K is capital and L is labor OR Production function
Determine the reaction function for firm 1 in a Cournot duopoly with an inverse demand curve given by: P = 12 - (Q + Q) and zero costs.
Q1 = R1(Q2) = 6 - 1/2 Q2
Which of the following is a Cobb-Douglas production function? (Mark all that apply.)
Q=F(K,L) = K 0.25 + L 0.25 Q= F(K,L) =Ka + Lb
If, in the short run, capital is fixed equal to K&*, what is the short-run production function?
Q=f(L) = F(K*,L)
What measure tells the fraction of the total variation in the dependent variable that is explained by the regression?
R-square
What is another name for a best-response function?
Reaction function
Suppose an individual prefers a risky prospect with the possibility to win $18, but an expected value of $12, over $12 with certainty. What type of individual is this?
Risk loving
Which pricing strategy is easily employed by monopolists, Cournot oligopolists, and monopolistic competitors?
Set price such that MR = MC
How can a firm overcome the problem of double marginalization?
Set transfer prices that maximize the overall value of the firm.
If firm 1 has first-mover advantage over firm 2 AND firm 2 maximizes profit given the output of firm 1, what type of industry is this?
Stackelberg oligopoly
Suppose a single firm (the leader) chooses output before all other firms (the followers). If the followers accept the leader's output and maximize profits based on the leader's given level of output, then this industry is characterized as a(n) (one word) oligopoly.
Stackelberg.
How might asymmetric information lead some consumers to leave a market completely?
The belief that a seller will only sell a good for a price that exceeds its value.
Cheat - TT - TIN), where TICheat is the maximum one-shot payoff if the player Coop Suppose TT cheats, TICOOP is the cooperative, one-shot payoff, TIN is the one-shot Nash equilibrium payoff, and I IS the interest rate. What does the right-hand side of the equation represent?
The present value of what is given up in the future by cheating in the present.
What can emerge when business ownership is separated from business control?
The principal-agent problem
Which of the following does a market supply curve show?
The quantity that all producers are willing and able to produce at all prices.
What is the t-statistic of a parameter estimate?
The ratio of the value of the estimate to its standard error
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?
$2,600 million
One disadvantage of revenue-based incentive schemes is that
'there is no incentive to reduce costs.
The value of the output produced by the last unit of a particular input is called
'value marginal product.
Inverse market demand is: P = 1,000 - (Ql+ 02). Costs for each firm are identical and given by: qq = 4Qi Determine the profit function for a Cournot oligopolist.
- (Ql+ - 4Qi
Which of the following is a reason to avoid a price matching strategy?
-A firm cannot prevent a consumer from lying about lower prices elsewhere. -A competitor has lower costs.
`How do firms benefit from inducing brand loyalty?
-A firm reduces the number of customers who will switch to another firm if it undercuts its price. -Customers will continue to buy a firm's product even if another firm offers it at a better price.
How do firms benefit from inducing brand loyalty?
-A firm reduces the number of customers who will switch to another firm if it undercuts its price. -Customers will continue to buy a firm's product even if another firm offers it at a better price.
How do many firms induce brand loyalty?
-Advertising that promotes a product as "better" than a competitor's product. -Frequent-visit cards and preferred customer cards
Why is it expressly more difficult to determine optimal bidding strategies with correlated values than with independent private values?
-Bidders don't know their own valuations. -Bidders learn the valuation of others through the auction process. -Bidders don't know the valuations of others.
Florida, like several other states, has passed a law that prohibits "price gouging" immediately before, during, or after the declaration of a state of emergency. Price gouging is defined as "...selling necessary commodities such as food, gas, ice, oil, and lumber at a price that grossly exceeds the average selling price for the 30 days prior to the emergency." Many consumers attempt to stock up on emergency supplies, such as bottled water, immediately before and after a hurricane or other natural disaster hits an area. Also, many supply shipments to retailers are interrupted during a natural disaster.Assuming that the law is strictly enforced, what are the economic effects of the price gouging statute?
The statute acts as a price ceiling and will result in a shortage.
Which of the following does NOT comprise effective management?
Understanding the marginal rate of substitution
Which of the following describes supply and demand analysis?
Use to predict pricing trends. A qualitative tool, A forecasting tool
If the cost of each additional unit of labor is w, a firm will employ additional workers until in the range of diminishing marginal product
VMPl =w
Suppose you value a painting at $500 and you are bidding on it against someone who values the painting at $75. If you knew what the other bidder's valuation was, how would this affect your own valuation? Your bidding strategy?
Valuation would not change; bidding strategy would be less aggressive.
When a firm produces the inputs it needs to make the final product, it practices which of the following?
Vertical integration
Given the following inverse market demand in a homogeneous-product Cournot duopoly: P = a - b(Ql+ Q), the marginal revenue of firm 1 equals
a - bQ2- 2bQ1
a. Determine the Nash equilibrium outcomes that arise if the players make decisions independently, simultaneously, and without any communication. Which of these outcomes would you consider most likely? b. Suppose player 1 is permitted to "communicate" by uttering one syllable before the players simultaneously and independently make their decisions. What should player 1 utter? What outcome do you think would occur as a result? c. Suppose player 2 can choose its strategy before player 1, that player 1 observes player 2's choice before making her decision, and that this move structure is known by both players. What outcome would you expect?
a. (35,35), (55,55), with (35,35) more likely b. A result (55,55) c. (55,55)
A monopoly is considering selling several units of a homogeneous product as a single package. A typical consumer's demand for the product is Qd = 80 - .5P, and the marginal cost of production is $100. a. Determine the optimal number of units to put in a package. b. How much should the firm charge for this package?
a. 30 units b. $3,900
a. What level of output should this firm produce in the short run? b. What price should this firm charge in the short run? c. What is the firm's total cost at this level of output? d. What is the firm's total variable cost at this level of output? e. What is the firm's fixed cost at this level of output? f. What is the firm's profit if it produces this level of output? g. What is the firm's profit if it shuts down? h. In the long run, should this firm continue to operate or shut down?
a. 7 b. $28 c. $224 d. $98 e. $126 f. $-28 g. $126 h. shut down
The demand for good X is given byQXd = 6,000 - (1/2)PX - PY + 9PZ + (1/10)MResearch shows that the prices of related goods are given by Py = $6,500 and Pz = $100, while the average income of individuals consuming this product is M = $70,000.
a. Good Y is: a complement. Good Z is: a substitute. b. Is X an inferior or a normal good? Good X is: a normal good. c. How many units of good X will be purchased when Px = $5,230? 4,785. d. Determine the demand function and inverse demand function for good X. Graph the demand curve for good X. 7,400 - 0.5 PX. Inverse demand function: PX = 14,800 - 2 QXd.
Identify the term that refers to the practice of combining several products together and selling them together at one price.
commodity bundling
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 (2 words)
confidence interval
In two-part pricing, the optimal fixed fee is the amount of the surplus.
consumer
All affordable goods and services can be represented by which of the following?
consumer opportunities
The difference between what consumers are willing to pay for a good or service and the market price is known as
consumer surplus
The monopolist is restricted to price-quantity combinations that lie on the demand curve as a result of decisions made by
consumers
A market where all producers have access to the same technology, consumers respond quickly to price changes, firms cannot quickly lower price, and there are no sunk costs is called a(n) market.
contestable
Procuring inputs using a legal document that creates an extended relationship between the buyer and seller of an input is called a
contract
When increasing the output of one product reduces the marginal cost of another product, it is called
cost complementarity.
Suppose an industry contains a few firms, many consumers, differentiated or homogeneous products, barriers to entry, and a belief by firms that rivals will not change output if they change output. This is called a oligopoly.
cournot
If the demands for two products produced by a firm are interrelated through costs or demand, selling one product at or below cost and the other product above cost can enhance profits. What is this strategy called?
cross-subsidization
The welfare loss to society due to the level of output produced by a monopolist is called the loss of monopoly.
deadweight
If demand is elastic, a(n) ___ in price will lead to an increase in total revenue.
decrease
If MR is less than MC, a profit-maximizing monopolist should:
decrease output to maximize profits
According to the law of demand, as market price increases, quantity demanded (increases/decreases).
decreases
When a firm experiences economies of scale, increasing the size of the operation the minimum average cost.
decreases
assets are general investments made by a firm that allow it to exchange with a particular buyer.
dedicated
A manager in an industry with some market power can use information about which of the following to determine a profit-maximizing price?
demand elasticity
Demand for a firm's product in oligopoly
depends on how other firms react to pricing decisions.
From the point-of-view of the consumer, Bertrand oligopoly is outcome similar to since it leads to an
desirable; perfect competition
By investing in multiple projects simultaneously, a manager can reduce risk. This is called
diversification
In a Cournot oligopoly, managers believe that their output decisions
do not affect their rivals' output decisions.
strategy is one that results in the highest possible payoff independent of other players' actions.
dominant
When long-run average costs fall as output increases, we say that the firm experiences of scale. (1 word)
economies
When the total cost of producing two goods within the same firm is less than the cost of producing them in separate firms, exist.
economies of scope
If marginal cost (MC) is less than minimum average variable cost (AVC), then MC is
either increasing or decreasing.
If IE Q,Px = infinity I, then demand is said to be perfectly
elastic
Suppose in an ascending sequential-bid auction, a painting is sold at auction to the highest bidder. This is an example of a(n) auction.
english
When firms in monopolistic competition earn positive economic profits, other firms tend to ___ the market.
enter
To minimize the cost of producing a given level of output, the marginal product per dollar spent should be for all inputs. (Use one word or a mathematical operator)
equal
Given independent private values, the expected revenues of the auctioneer in a first-price auction,
equal those in a Dutch auction.
At the point where the cost curve C(Q) and the revenue line R(Q) are the farthest vertical distance apart, the marginal cost (MC) is marginal revenue (MR).
equal to
To maximize profits, a firm manager should produce a level of output such that the marginal benefit is marginal cost.
equal to
In order to maximize profits under a third-degree price discrimination scheme, a firm with market power produces the output where marginal revenue
equals marginal cost to each group.
The overall profits of a firm are maximized when the upstream division produces the inputs such that its marginal cost
equals the net marginal revenue of the downstream division.
A perfectly competitive firm maximizes profits at a point where P MC is MC over the range where
equals; increasing
When a consumer has no incentive to change to a different, affordable bundle of goods and services, the consumer has reached
equilibrium
Managers can more accurately estimate the profit-maximizing price using a(n)
estimated demand function and marginal cost.
A cost that does not change with output is called a cost
fixed
Graphically, what is the distance between total cost (TC) and variable cost (VC)?
fixed cost
An advantage of using spot exchange to acquire inputs is that it allows the firm to
focus more on converting inputs into output.
Suppose elasticity is given by, E 0/0AY• X,Y The absolute value of elasticity will be is large relative to the change in Y. (greater/less) than 1 when the change in X
greater
The parameter estimate is statistically different from zero when the absolute value of the t- statistic is
greater or equal to 2
A sandwich shop has identified two groups of consumers for its pulled-pork sandwiches: A and B. Group A's price elasticity of demand is -3.75 and group B's is -1.8. If there is no possibility of resale, then the shop should charge a higher price to which group?
group B
Increases in population or population density tend to ___ the demand for goods and services, all things equal. (Enter one word in the blank.)
increase
Specialized investments (increase/decrease) transaction costs.
increase
In the case of yes-or-no managerial decisions, which of the following refers to the additional revenues derived from a decision?
incremental revenues
In monopolistic competition, each firm uses the demand curve and the marginal revenue curve to establish output and price. In monopoly, the firm uses the demand curve and the marginal revenue curve to establish output and price.
individual; market
Extended warranties and money-back guarantees are examples of
insurance aimed at risk averse consumers.
The basic tool used to summarize profits in a Cournot oligopoly is a(n) curve.
isoprofit
If firms seek to be infinitely lived,
it does not pay to cheat customers if the one-time gain is offset by a loss in future sales.
In a finitely repeated game, a firm has no incentive to cheat if
it expects to earn less from cheating than from not cheating.
When firms know who their rivals are and who their rivals' customers are
it is easier to sustain a collusive agreement.
Suppose that two-thirds of the stores in a market charge $800 for a certain brand of mountain bike while one-third of the stores charge $500. If a customer is at a store charging $800 and the cost of an additional search equals $125, then
it isn't worthwhile to continue searching for a lower price.
The line that minimizes the squared deviations between the line and the actual data points is called the ___ ___ regression line. (2 words)
least squres
Given fixed prices, when consumer income decreases, the budget line shifts to the (Enter one word)
left
Suppose elasticity is given by, E 0/0AV X,Y The absolute value of elasticity will be small relative to the change in Y. (one word) than 1 when the change in X is
less
MPL MP , the firm should use > (less/more) capital and (less/more) labor to minimize costs.
less more
When the price of labor rises, firms have a tendency to use
less labor and more capital.
In a perfectly competitive firm, in the short run, a firm will shut down to minimize losses when price is average variable cost.
less than
Maximizing short-term profits is the same as maximizing long-term profits when the growth rate in profits is
less than the interest rate and both are constant.
According to the law of diminishing marginal rate of technical substitution, as a producer uses of an input, level of output. of the other input must be used to achieve the same
less; more
Bertrand oligopoly and homogeneous products result in firms charging a price that equals (Enter one word in each blank)
marginal cost
NE The simple pricing rule for a Cournot oligopoly, P = 1+NE market demand, the closer the profit-maximizing price is to (2 words) x MC, suggests that the more elastic the
marginal cost
One of the most basic pricing strategies for firms with market power is to set price such that marginal (2 words) revenue equals
marginal cost
x p represents the rate of substitution. (Enter only one word in the blank.)
market
MR=PX is an expression that tells us the marginal revenue for a firm that has at least some . (2 words)
market power
A price ceiling is defined as the ___ legal price that can be charged in the market.
maximum
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
Suppose a manager flips a coin to decide whether or not she should monitor employees' production. This is an example of a(n) (one word) strategy.
mixed
When many buyers and sellers freely enter and exit a market having similar, yet differentiated products, it is called
monopolistic competition
Fast-food hamburgers are characterized by a large group of sellers producing slightly different goods. What type of market is this?
monopolistically competitive
Economies of scale and scope, cost complementarity, and patents are all sources of power. (Enter one word in the blank.)
monopoly
The market structure where a firm has a large degree of market power is called
monopoly
A hidden action that benefits one party at the expense of another party is known as
moral hazard
Rising medical costs and insurance premiums have increased, in part, due to
moral hazard
MPL MP , the firm should use minimize costs. labor to
more less
Entry and exit into and out of a market can often be analyzed using which of the following game representations?
multistage games
Consider the following linear demand function where P is the price of related goods, M is income, and H is other factors: According to the law of demand, the value ofa is
negative
Suppose option 1 is the realization of a random variable with an expected value equal to zero and variance equal to 100, and option 2 is the realization of a random variable with an expected value equal to zero and variance equal to 10,000. Which of the two options is riskier?
option 2
Inverse market demand is: P = 1,000 - (Ql+ 02). Costs for each firm are identical and given by: qq = 4Qi Under collusion, what is the inverse market demand curve?
p = 1,000 -Q
In the long run, firms in monopolistic competition produce a level of output where
p > MC P = ATC > minimum average costs
Profit sharing provides an incentive to increase effort by
paying workers based on the firm's success.
Suppose your state transforms the High Occupancy Vehicle lane (HOV or Carpool lane) into a toll lane during rush hour, such that drivers must pay $5.00 to use the lane between 3:30 pm and 6:00 pm. At all other times, the lane costs $0.50. This is an example of
peak-load pricing
In the following linear demand function, Qd=a +aP+aP + a M + aH where P is the price of related goods, M is income, and H is other factors, the value ofa is:
positive if good X is normal, negative if good X is inferior
In the following linear demand function, where P is the price of related goods, M is income, and H is other factors, the value ofa is
positive if goods X and Y are substitutes, negative if goods X and Y are complements
Consumer ___ generally determine which goods and services will be consumed, given that they are affordable.
preferences
For any two bundles of goods and/or services, A and B, if A is preferred to B, or B is preferred to A, or the consumer is indifferent between A and B, then:
preferences are complete.
The amount that would have to be invested today to generate a given future value is defined as
present value.
For a perfectly competitive firm, marginal revenue is equal to the market
price
In a perfectly competitive market, the individual producer's demand curve is the market
price
The higher the marginal cost, the higher the profit-maximizing
price
Collusion leads to
price that exceeds marginal cost.
When a firm advertises that it "Will Not Be Undersold" it is likely pursuing a strategy. (2 words)
price-matching
If the marginal cost of producing in Plant 1 exceeds the marginal cost of producing in Plant 2, the monopolist should
produce more in Plant 2 and less in Plant 1.
The difference between the market price and the amount at which producers are willing and able to sell a good is called ___ surplus.
producer
Brand loyalty can be difficult to establish if consumers believe that
products in a market are homogeneous.
In order to be effective, spot checks must be
random frequent
Changing prices from hour to hour or day to day in an attempt to "hide" pricing information from consumers strategy. (Enter one word in each blank.) is called
randomized-pricing
In the Stackelberg model, the follower's profit-maximizing level of output is determined by its function.
reaction
Given an inverse demand function, P = a - b(Q + Q), and cost functions, C2Q2 a-Cl 1 —Q2 is the then, 2b 2
reaction function for firm 1.
Given an inverse demand function, P = a - b(Q + Q), and cost functions, CIQI a-c I 2 - —QI is the then, 2b 2
reaction function for firm 2.
Suppose an individual prefers $12 with certainty over a risky prospect with the possibility to win $18, but an expected value of $12. What type of individual is this?
risk averse
A common practice in the electric utility industry is to charge a higher rate on the first 150 kilowatt hours than on subsequent hours. This method of extracting some consumer surplus is called
second-degree price discrimination.
Successful managers understand how to structure incentives in order to overcome which economic condition?
self interest
A game in which a player moves after observing another player's move is called a move game. (Enter one word in the blank)
sequential
Multistage games permit players to make
sequential decisions.
A period of time during which at least one input is fixed is called the run.
short
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, increase
If P is less than AVC, the firm
should shut down is sustaining a loss
Points on an indifference curve:
show consumption bundles that generate the same amount of satisfaction.
When it comes to determining where resources are most highly valued by society, profits play the role of a(n) ___.
signal
Why might individuals include the letters, Ph.D after their names?
signaling
Profit maximization by firms improve the total welfare of society by
signaling where scarce resources are most highly valued. inducing entry into the market.
When the absolute value of the t-statistic is large, the standard error of the parameter estimate is (small/large) relative to the absolute value of the parameter estimate.
small
The cost of bargaining increases when able to exchange. imply(ies) that only a few parties are
specialized investments
When a firm's acquisition of an input does not involve specialized investments, it can use exchange without concern for opportunism.
spot
When a buyer acquires inputs from a seller through an informal relationship, it is called (2 words)
spot exchange
In the Sweezy model, pricing decisions are based on
strategic interaction among firms. beliefs about rivals' reactions to price changes.
A cost that is incurred and unrecoverable is called a cost.
sunk
In a monopoly, where the firm chooses output based on marginal revenue (which is less than price),
supply curves do not exist.
Demand is given by: 20 - 3P Supply is given by: 2 + 3P If the government imposes a price floor of $4, what is the amount of the surplus or shortage the market experiences?
surplus of 6
If a firm's owners allow division managers to set internal prices in order to maximize their division's profits,
the firm earns lower overall profits.
In an environment of interdependence where one firm's profits depend not only on the firm's actions, but on the actions of its rival firms, game
the game is played only once.
a-c 1 r2(Q) = —E - —01 describes 2b 2
the output of the follower in a Stackelberg oligopoly. the Cournot reaction function of the follower in a Stackelberg model.
The following function, Qx^s = 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 technology and technology-related goods. the price of inputs such as labor costs. the price of other supply shifters such as taxes.
The demand function indicates that the quantity of a good consumed depends on:
the price of the good, the effect of the demand shifters, the income of buyers
By connecting managerial compensation to performance, a firm's owner can reduce or avoid
the principal-agent problem.
Consumer equilibrium occurs at the point where the MRS is equal to
the ratio of the prices.
At the cost-minimizing input mix,
the slope of the isoquant equals the slope of the isocost line.
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
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.
If a market is perfectly contestable, existing firms are disciplined by
the threat of entry by new firms.
Oligopolistic firms are more likely to collude and charge high prices in a finitely repeated game played an uncertain number of times if
there is a high probability that the game will be played in subsequent periods.
Student discounts and senior citizen discounts are examples of price discrimination. (2 words)
third-degree
Spot checks work through , performance bonuses work through
threat; reward
Costs incurred in the acquisition of an input that exceed the cost of the input itself are called
transaction costs
Since specialized investments are often sunk, relationship-specific exchanges create which of the following?
transaction costs
The internal price at which an upstream division should sell inputs to a downstream division in order to maximize overall profits is called pricing. (Give your answer as a single word.)
transfer
Suppose Player "A" adheres to the same action each time the game is played until Player "B" takes an action that causes Player "A" to shift his approach. Player "A" has adopted a strategy.
trigger
When a firm charges a fee for the right to purchase a product plus a per-unit charge for each unit purchased, what type of pricing strategy is the firm employing?
two-part pricing
Suppose that you plan to leave your current job at the end of the month. As a result, you spend almost no time at all learning to use the computer programs that are specific to only your current employer. This is an example of
underinvestment
Total revenue is maximized at a point where demand is
unitary elastic.
Costs that change when output changes are called blank.) costs. (Enter one word in the
variable
In the long run, all costs are
variable
"The sum of the probabilities that different outcomes will occur multiplied by the squared deviations from the mean of the random variable" describes which of the following?
variance
When a firm produces its own inputs, it engages in integration.
vertical
Due to the interdependent nature of an oligopolistic market, a firm manager who wishes to maximize profits must also consider
whether rival firms will match price changes.
A manager's attitude toward risk project. affect the likelihood that they will pursue a risky
will
If winning a common value auction informs the bidder that the winning bid exceeds the valuations of all other bidders, then the winning bidder experiences the (2 words)
winners curse
If winning a common value auction informs the bidder that the winning bid exceeds the valuations of all other bidders, then the winning bidder experiences the . (2 words)
winners curse
The principal-agent problem exists not only between owners and managers, but also between managers and
workers
Given a demand function, Q P M, H), define own price elasticity.
∂Qdx/ ∂Px * PxQx
When a few firms with market power agree to restrict output and/or charge higher price, it is called
collusion.
The demand curve for a product is given by QXd = 1,200 - 3PX - 0.1PZ where Pz = $300.a. What is the own price elasticity of demand when Px = $140? Is demand elastic or inelastic at this price? What would happen to the firm's revenue if it decided to charge a price below $140? b. What is the own price elasticity of demand when Px = $240? Is demand elastic or inelastic at this price? What would happen to the firm's revenue if it decided to charge a price above $240? c. What is the cross-price elasticity of demand between good X and good Z when Px = $140? Are goods X and Z substitutes or complements?
a. Own price elasticity: -.56 Demand is: inelastic If the firm prices below $140, revenue will: decrease b. Own price elasticity: -1.6 Demand is: elastic If the firm prices above $240, revenue will: decrease c. Cross-price elasticity: -0.4 Goods X and Z are: complements
a. How much would the firm's revenue change if it lowered price from $12 to $10? Is demand elastic or inelastic in this range? b. How much would the firm's revenue change if it lowered price from $4 to $2? Is demand elastic or inelastic in this range? c. What price maximizes the firm's total revenues? What is the elasticity of demand at this point on the demand curve?
a. Revenue change: $ 8, elastic b. 8, inelastic c. 7, unitary elastic
a. Suppose demand is D and supply is S0. If a price ceiling of $6 is imposed, what are the resulting shortage and full economic price? b. Suppose demand is D and supply is S0. If a price floor of $12 is imposed, what is the resulting surplus? What is the cost to the government of purchasing any and all unsold units? c. Suppose demand is D and supply is S0 so that equilibrium price is $10. If an excise tax of $6 is imposed on this product, what happens to the equilibrium price paid by consumers? The price received by producers? The number of units sold? d. Calculate the level of consumer and producer surplus when demand and supply are given by D and S0 respectively. e. Suppose demand is D and supply is S0. True or False: A price ceiling of $2 would be beneficial to consumers?
a. Shortage: 3 Full economic price: $12 b. Surplus: 1.5 units Cost to government: $18 c. Equilibrium price paid by consumers: $12 Price received by producers: $6 Number of units sold: 1 units d. Consumer surplus: $4 Producer surplus: $8 e. True
What is the marginal product of capital (MPK) for the following Cobb-Douglas production function? Q = F(K, L) = Kae
aK a-1 Lb
Due to the hidden characteristics of consumers, insurance companies often face a problem of:
adverse selection.
In two-part pricing, firms extract of the consumer surplus.
all
If elasticity is given by, E x,Y 0/0AX then elasticity is negative when: %AY'
an increase in Y produces a decrease in X. a decrease in Y produces an increase in X.
Moral hazard tends to result from
asymmetric information and hidden actions.
VC(Q) The expression, defines
average variable cost
Individuals who are generally willing to pay an insurance premium to avoid risk are called risk
averse
A price ceiling is considered effective if it is set ___ the equilibrium price.
below
A simultaneous-move pricing game played by two firms is often called a game. duopoly
bertrand
The optimal bidding strategy for a first-price, sealed bid auction is for the bidder to
bid less than his or her valuation of the item.
Six-packs of soda, cartons of eggs, and three-packs of paper towels are all examples of products sold using what kind of pricing strategy?
block pricing
Consider the following payoffs available to two firms, "A" and "B", in a one-shot game. When "A" and "B" both advertise: $3, $3, respectively When neither "A" nor "B" advertise: $12, $12, respectively When "A" advertises and "B" does not: $20, $2, respectively When "A" doesn't advertise and "B" does: $2, $20, respectively
both advertise
If consumers are willing to pay more for "Roper's Rice" than they are for "Rice by Russell", then "Roper's Rice" is enjoying additional value due to
brand equity
Bundle A is preferred to bundle B. Bundle B is preferred to bundle C. If preferences are transitive, then
bundle A is preferred to bundle C.
Marginal cost (MC) is given by
change C/ change Q
Advertising elasticity measures
changes in consumption due to changes in advertising.
