Managerial Economics 301 Dr. Du

The industry elasticity of demand for good X is -2, while the elasticity of demand for an individual manufacturer of good X product is -8. Based on this information, the Rothschild index is:

1/4, including there is no significant monopoly power in this industry

Refer to Figure 1. Which of the following statement is correct?

A price ceiling at $12 would have no effect on the market

The marginal rate of technical substitution is :

Absolute value of the slope of the isoquant

Which of the following is more likely to be perfect competition?

Agriculture industry in the United States

Which of the following is an example of oligopoly?

Airline industry in the United States

Refer to Figure 1 above. Which of the graphs shown would be consistent with a firm with monopoly power and is making positive economic profits

Panel C

The figure above shows the marginal revenue, marginal cost, and average total cost curve faced by a manufacturing firm. Based on the graph above, answer the following questions: What market structure does this graph represent?

Perfect competition

A perfectly competitive firm faces a:

Perfectly elastic demand curve

Which of the following is true under monopoly?

Price is greater than marginal cost

If people (including consumers and producers) expect future prices for automobiles to be lower, what will happen to the equilibrium price and equilibrium quantity?

Price will decrease, and quantity is ambiguous

Assume a firm is a perfectly competitive market has the short-run total cost function TC = 100 +180Q+8Q^2. If the market price is $340, what should it do?

Produce 10 units per time period

Economies of scope refers to:

Producing the related goods within one firm is cheaper than producing them separately

Consider a market consisting of two firms where the inverse demand curve is given by P = 500 -2Q1 - 2Q2. Each firm has a marginal cost of $100. Based on this information, If the two firms form a cartel, what would be the total cartel output and price?

Q = 100 ; P $300

Consider a market consisting of two firms where the inverse demand curve is given by P = 500 -2Q1 - 2Q2. Each firm has a marginal cost of $100. Based on this information, we can obtain the reaction function of firm 1 is:

Q1 = 100 - 1/2Q2

Consider a market consisting of two firms where the inverse demand curve is given by P = 500 -2Q1 - 2Q2. Each firm has a marginal cost of $100. Based on this information, What is the Cournot equilibrium based on the above scenario?

Q1 = 66.67; Q2 = 66.67

Managers should use inputs at levels where the:

Value marginal product of labor equals wage

Which of the following statement is incorrect?

Variable cost are lower than fixed costs

When there is a specialized investment and market condition is fairly uncertain and it is not easy to cover all future events, the best way to produce inputs is through:

Vertical Integration

Which of the following is true for a firm with market power and is maximizing its profit?

P > MR

If the interest rate is 5%, what is the present value of $100 received one year from now? (use two decimals)

$95.24

Scenario 2. Suppose there is only one airline company that flies from Norfolk to New York City (NYC) and the demand for a round-trip ticket is given by P = 600 - 4Q, where Q is the amount of tickets sold during one day. The total cost of flying from Norfolk to NYC is C(Q) = 20,000 + 8Q. Refer to scenario 2. What is the amount of profit at the profit-maximizing quantity?

$1,904

During spring break, students have an elasticity of demand for a trip to Florida of -3. How much should an airline charge the students for a ticket if the price it charges the general public is $300? Assume the general public has an elasticity of 1.5.

$150

Scenario 2. Suppose there is only one airline company that flies from Norfolk to New York City (NYC) and the demand for a round-trip ticket is given by P = 600 - 4Q, where Q is the amount of tickets sold during one day. The total cost of flying from Norfolk to NYC is C(Q) = 20,000 + 8Q. Refer to scenario 2. What price should this airline company charge to maximum profit?

$304

Scenario 2. Suppose there is only one airline company that flies from Norfolk to New York City (NYC) and the demand for a round-trip ticket is given by P = 600 - 4Q, where Q is the amount of tickets sold during one day. The total cost of flying from Norfolk to NYC is C(Q) = 20,000 + 8Q. Refer to scenario 2. How many airline tickets should this company charge to maximum profit?

$74

Scenarios 2: A farm must decide whether or not to purchase a new tractor. The tractor will reduce costs by $2,500 in the second year, and $3,000 in the third year, and $3,000 in the fourth year. These cost savings will be realized at the end of each year. The tractor costs $9,000 today. Assume the interest rate is 7%. Refer to scenario 2, what is the present value of the total cost saving?

$8,790

Scenario 1: A production process has the following input - output relationship using labor (L) and capital (K). The following table provides information on how many outputs can be produced for L and K. Refer to scenario 1. Which of the following points are on the same isoquant?

( K = 4, L = 2) (K = 2, L = 3)

A long contract

- Give firms more incentive to invest in specialized investment - Reduces hold up problems -May be deficient ex post when market conditions changes - Is more costly to write than a short contract (All of the above)

Which of the following features is common to both perfectly competitive markets and monopolistically competitive markets?

- There is free entry and exit - Long run equilibrium is zero economic profit

Scenario 1: Suppose a linear demand function is estimated for good x as, Qd = 100 - 8Px + 6Py + M. Px = $4, Py = $2, and M = 10. M is the average income of consumers, measured in thousands of dollars. Refer to scenario 1, what is the price elasticity for good x? (Keep two decimals)

-0.36

Scenarios 2: A farm must decide whether or not to purchase a new tractor. The tractor will reduce costs by $2,500 in the second year, and $3,000 in the third year, and $3,000 in the fourth year. These cost savings will be realized at the end of each year. The tractor costs $9,000 today. Assume the interest rate is 7%. Refer to scenario 2, what is the present value of the total cost saving?

-210

A special Investment necessarily leads to:

-A higher bargaining cost -Vertical integration -Horizontal integration -Opportunistic behaviors during a transaction (All of the above)

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

-Average total cost curve -Average fixed cost curve -Average variable cost curve (All of the above)

The source(s) of monopoly power for a monopoly may be:

-Economies of scale -Economies of scope -Patents (All the above)

Which of the following is NOT a type of specialized investment in the case of GM and Fisher ?

-Production of metal bodies requires workers with specific skills -Production of metal bodies requires a particular stamping machine -Production of metal bodies requires a specific location (All of the above)

Which of the following conditions is true when a producer minimizes the cost of producing at a given level of output?

-The MRTS is equal to the ratio of input prices -The marginal product per dollar spent on all inputs are equal -The marginal products of all inputs are equal (All of the above)

The main difference between monopolistic competition and monopoly is:

-The number of sellers in the market -The ease of entry and exit from the market -Long run outcome (All of the above)

Scenario 1: Suppose a linear demand function is estimated for good x as, Qd = 100 - 8Px + 6Py + M. Px = $4, Py = $2, and M = 10. M is the average income of consumers, measured in thousands of dollars. Refer to scenario 1, what is the cross-price elasticity of good x with respect to the price of good y? (Keep two decimals)

0.13

An industry is comprised of 12 firms. Two largest firms have a market share of 30% each, and the remaining 10 firms equally share the rest of the market. What is the 4-firm concentration ratio of this industry?

0.68

Scenario 1. The table below gives the sales of the five largest gasoline stations in a small town. Refer to scenario 1. What is the four-firm concentration ratio in the market?

0.92

Scenario 1: A production process has the following input - output relationship using labor (L) and capital (K). The following table provides information on how many outputs can be produced for L and K. Refer to scenario 1. What is the marginal rate of technical substitution between D (K = 2, L = 2) and E (K = 1 ,L = 3) ?

1

If the price elasticity for lobster is 0.4, a 40% increase in price will lead to a:

16% decrease in demand for lobster

Scenario 1: A production process has the following input - output relationship using labor (L) and capital (K). The following table provides information on how many outputs can be produced for L and K. Refer to scenario 1. What is the marginal rate of technical substitution between A (K = 4, L = 2) and B (K = 2 ,L = 3) ?

2

Scenario 1. The table below gives the sales of the five largest gasoline stations in a small town. Refer to scenario 1. What is the HHI?

2,696

Given the following table, how many hours of labor should be hired to maximize profits when market price is $2 and wage rate is $10 per hour?

4

Scenario 2. You are an efficiency expert hired by a manufacturing firm that uses capital and labor as inputs. The firm produces and sells a given output and is currently employing 50 workers and 10 machines. During the consulting process, you find out that for this company capital is much more productive than labor: the marginal product of labor is 4 and the marginal product in capital is 50. The average wage rate they pay to their workers is $40 per hour, and the rental rate of capital is $100 per hour. Refer to scenario 2. The slope of the isocost is:

4/10 simplified as 2/5

Good A is an inferior good, an increase in income leads to:

A decrease in the demand for good A

Suppose that good X is a substitute for good Y. Then an increase in the price of good Y leads to

An increase in the demand of good X

Producer surplus is the

Area above the supply curve but below the market price of the good

Which of the following is true about marginal product?

As the use of an input increases with other inputs fixed, additional output will eventually decrease

Which of the following would not shift the supply curve?

Average income level

Economies of scale exist whenever:

Average total costs decline as output increases

Economies of scale occur when:

Average total costs fall as output increases

Scenario 2. You are an efficiency expert hired by a manufacturing firm that uses capital and labor as inputs. The firm produces and sells a given output and is currently employing 50 workers and 10 machines. During the consulting process, you find out that for this company capital is much more productive than labor: the marginal product of labor is 4 and the marginal product in capital is 50. The average wage rate they pay to their workers is $40 per hour, and the rental rate of capital is $100 per hour. Refer to scenario 2. The cost function for this firm is:

C = 40L + 100K

Changes in the price of an input will

Change the slope of isocosts

If the price of good X becomes lower,

Consumer surplus becomes higher and producer surplus becomes lower

Which of the following is NOT an example of transaction costs?

Cost paid to the input supplier

Scenario 1: Suppose a linear demand function is estimated for good x as, Qd = 100 - 8Px + 6Py + M. Px = $4, Py = $2, and M = 10. M is the average income of consumers, measured in thousands of dollars. Refer to scenario 1, if the price of good y decreases by 20%, what would happen to the quantity demanded for good x?

Decrease by 2.6%

You are a manager for a monopolistically competitive firm. Suppose your marginal cost decreases (shifts down) due to a more efficient production technique, how should you adjust profit-maximizing price and quality?

Decrease price and increase quality

If people (Including consumers and producers) expect future prices for automobiles to be lower, what will happen to the demand and supply for automobiles today?

Demand will shift to the left, and supply will shift to the right

The marginal rate of technical substitution

Determines the rate at which a producer can substitute between two inputs in order to increase one additional unit of output

The disadvantage of vertical integration is that

Firms no longer specialize in what they do best

Which of the following is an implicit cost to a firm that produces a good or service?

Foregone profits of producing a different good or service

Monopolistic competition is characterized by:

Heterogenous products and zero economic profit in the long run

Scenario 3: A recent WSJ article talked about many avocado farmers in San Diego country are struggling to grow avocado trees because water price in that area has been increasing. Suppose at the original price of $2 a pound, the demand for avocado is inelastic. How would an increase the price of avocado affect the sales of avocado?

Increase

Scenarios 2: A farm must decide whether or not to purchase a new tractor. The tractor will reduce costs by $2,500 in the second year, and $3,000 in the third year, and $3,000 in the fourth year. These cost savings will be realized at the end of each year. The tractor costs $9,000 today. Assume the interest rate is 7%. Refer to scenario 2, if the interest rate is forecasted to be lower than 7%, what would happen to the present value of the total cost saving?

Increase

When a 20% change in price causes a change in quantity demanded less than 20% demand for the product is:

Inelastic

Vertical Integration

Is attractive when relationship specific exchange is unimportant

The combinations of inputs that produce a given level of output are depicted by:

Isoquants

Scenario 3: A recent WSJ article talked about many avocado farmers in San Diego country are struggling to grow avocado trees because water price in that area has been increasing. How would this increase in water price affect demand and supply of avocado in San Diego?

It will decrease the supply for avocado

The own-price elasticity of demand for apples is -1.2. if the price for apples increases by 8%, what will happen to the quantity of apples demanded?

It will fall by 9.6%

Scenario 3: A recent WSJ article talked about many avocado farmers in San Diego country are struggling to grow avocado trees because water price in that area has been increasing. How would this increase in water price affect the market equilibrium?

It will increase equilibrium price and decrease equilibrium quantity

Scenario 1: A production process has the following input - output relationship using labor (L) and capital (K). The following table provides information on how many outputs can be produced for L and K. Refer to scenario 1. Suppose wage rate (w) = $10 and rental rate of capital (r) = $20. At point D (K = 4, L =2), which input had a higher marginal product?

Labor and capital have the same marginal product

Which of the following is an example of monopoly?

Local utility industry is a small town

Scenario 2. Suppose there is only one airline company that flies from Norfolk to New York City (NYC) and the demand for a round-trip ticket is given by P = 600 - 4Q, where Q is the amount of tickets sold during one day. The total cost of flying from Norfolk to NYC is C(Q) = 20,000 + 8Q. Refer to scenario 2. What is the marginal revenue function?

MR = 600 - 8Q

The change in total output attributable to the last unit of an input is the:

Marginal Product

Scenario 2. Suppose there is only one airline company that flies from Norfolk to New York City (NYC) and the demand for a round-trip ticket is given by P = 600 - 4Q, where Q is the amount of tickets sold during one day. The total cost of flying from Norfolk to NYC is C(Q) = 20,000 + 8Q. Refer to scenario 2. What can you say about this airline company's marginal cost?

Marginal cost is constant

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

More inelastic

Scenario 1: A production process has the following input - output relationship using labor (L) and capital (K). The following table provides information on how many outputs can be produced for L and K. Refer to scenario 1. Suppose wage rate (w) = $10 and rental rate of capital (r) = $20. At point A (K = 4, L =2), is the form minimizing cost?

No

Scenario 1: A production process has the following input - output relationship using labor (L) and capital (K). The following table provides information on how many outputs can be produced for L and K. Refer to scenario 1. Suppose wage rate (w) = $10 and rental rate of capital (r) = $20. At point D (K = 2, L =2), is the form minimizing cost?

No

The figure above shows the marginal revenue, marginal cost, and average total cost curve faced by a manufacturing firm. Based on the graph above, answer the following questions: Does this firm have any monopoly power?

No

The figure above shows the marginal revenue, marginal cost, and average total cost curve faced by a manufacturing firm. Based on the graph above, answer the following questions: Does this firm make positive profit?

No

The typical marginal cost curve for a firm is upward sloping in the short run. This is because:

None of the above

Consider a market characterized by the HHI of 3,000. One of the firms in this market has a lerner index of 0.89 and is considering a horizontal merger with a competing firm. The merger wile likely increase HHI by 500. Based on this information is it likely that the U.S. Department of justice will:

Reject merger sine the industry is highly concentrated and the firm proposing the merger has significant market power

You are consulting a manufacturing firm that uses capital and labor as inputs. The firm produces and sells a given output. If w= $20, r = $100, MPl = 4, and MPk = 10 the firm:

Should use more L and less K to cost minimize

If firms are making loss in a monopolistically competitive market, which of the following is most likely to happen in the long run?

Some firms will leave the market, which increases the market price and reduces the loss

Which of the following is NOT a means of avoiding hold-up problems?

Spot exchange

Scenario 1: Suppose a linear demand function is estimated for good x as, Qd = 100 - 8Px + 6Py + M. Px = $4, Py = $2, and M = 10. M is the average income of consumers, measured in thousands of dollars. Refer to scenario 1, what is the relationship between good x and good y?

Substitutes

An ad valorem tax causes

Supply curve to become steeper

An excise tax on suppliers causes

Supply curve to shift to the left

Technological advances will cause

Supply curve to shift to the right

Which of the following is NOT the important factor that affects the magnitude of the own price elasticity of a good?

Supply of the good

Refer to Figure 1. If the government imposes a price floor of $14 in this market, the result would be a

Surplus of 40

The industry elasticity of demand for yogurt is -2, while the elasticity of demand for an individual yogurt brand is -5. We can conclude that

The Rothchild index is 0.4, and there is some monopoly power in this industry

Suppose you used a statistical technique and estimated a demand function for Starbucks coffee. The demand function is given by Qd= 100 - ).5*P - 4Pm + 0.001*income, where Qd is the quantity of coffee sold per day, and P is the price of Starbucks coffee, and Pm is the price of McDonald's coffee. Regarding this equation, which of the coefficient has the wrong sign according to your knowledge?

The coefficient of Pm has the wrong sign

When a firm decreases the price of its own product and finds its total revenue to increase, then:

The demand for this product is price elastic

Assume a firm employs 10 workers and pays each $20 per hour. Also assume that the marginal product of an 11th worker would be 5 additional units of output per hour and that the price the firm receives for its good is $4 per unit. In the short run:

The firm should continue to employ exactly 10 workers

Scenario 2. You are an efficiency expert hired by a manufacturing firm that uses capital and labor as inputs. The firm produces and sells a given output and is currently employing 50 workers and 10 machines. During the consulting process, you find out that for this company capital is much more productive than labor: the marginal product of labor is 4 and the marginal product in capital is 50. The average wage rate they pay to their workers is $40 per hour, and the rental rate of capital is $100 per hour. Refer to scenario 2. Based on the information, you conclusion is:

The firm should use more capital and less labor to reduce cost

The ranking of industries by the four-firm concentration ratio usually, but not always, reveals the same pattern as ranking by HHI. When a discrepancy is found it is usually due to the following:

The four-firm concentration indices contain data on only the largest four-firms, while HHI are based on data for all firms in the industry

Which of the following statements is true?

The more elastic the demand, the lower is profit-maximizing markup

Suppose you used a statistical technique and estimated a demand function for Starbucks coffee. The demand function is given by Qd= 100 - ).5*P - 4Pm + 0.001*income, where Qd is the quantity of coffee sold per day, and P is the price of Starbucks coffee, and Pm is the price of McDonald's coffee. Suppose P = $2, Pm = $2, and income =$50,000. Which of the following statement is correct?

The price elasticity of demand for Starbucks coffee is inelastic

Which of the following us not a determinant of demand?

The price of a resource that is used to produce the good

A firm uses two inputs ( call them "computers" and "programmers") in production. The combination of computers and programmers minimizes its total cost when:

The ratio of the marginal production of computers over the price of computers equals the ratio of the marginal product of programmers over the wage of programmers

When a related product's price decreases, a firm finds fewer customers purchase its own product then:

The two products are substitutes, and the cross-price elasticity is positive

Economic Profits are:

Total revenue minus total opportunity cost

Scenario 1. The table below gives the sales of the five largest gasoline stations in a small town. Refer to scenario 1. Is this industry considered "highly concentrated" according to the government guideline?

Yes

Scenario 2. Suppose there is only one airline company that flies from Norfolk to New York City (NYC) and the demand for a round-trip ticket is given by P = 600 - 4Q, where Q is the amount of tickets sold during one day. The total cost of flying from Norfolk to NYC is C(Q) = 20,000 + 8Q. Refer to scenario 2. What is the lerner index for this company?

close to 1