Managerial Economics Exam 1 Review
In addition to its namesake cupcake, Hostess Brands produces Twinkies. Huge mixing-baking-cooling-wrapping machines produce both these products in Hostess Brands' factory in Emporia, Kansas. These machines mix the batter for each of the products, pour the batter into pans, and move the pans into long, winding ovens where they are baked and then into equally long, winding tunnels where they are cooled. Before wrapping them, the machines finish the tasty treats by injecting filling into them and applying any necessary topping. The machines even automatically clean the baking pans! Which of the following are explicit costs for Hostess Brands, which are implicit costs, and which are not costs at all? 1. The cost of the electricity used to run the production machines 2. The salary paid to the night-shift manager 3. The wear on the machines as they are used 4. The price paid for the paper used to wrap the products 5. The fixed lease payments made on the factory
1. Explicit Cost 2. Explicit Cost 3. Implicit Cost 4. Explicit Cost 5. Explicit Cost
What is the effect of each of the following changes on the supply curve of jeans? 1. A rise in the price of transporting the jeans from Thailand, where they are made, to the US, where they are sold. 2. A fall in the wages paid to the workers who sew the jeans. 3. A fall in the price of jeans. 4. An increase in the number of companies manufacturing jeans.
1. Leftward shift of the curve 2. Rightward shift of the curve 3. Downward movement along the curve 4. Rightward shift of the curve
Harvey owns both a hardware business and the building that he uses to run the business. What information would you need to calculate the total opportunity cost of operating Harvey's hardware business?
1. The amount Harvey could earn by renting out his building to another firm 2. The information common to both accounting and opportunity costs 3. The value of Harvey's time spent on his hardware business
Using Marginal Analysis, managers should undertake: Action : Marginal benefit : Marginal cost 1 unit : $600 : $100 2 units : $500 : $200 3 units : $400 : $400 4 units : $300 : $1,100
3 units of the action because that is the action that sets the marginal benefit equal to the marginal cost
True or False: All else equal, the higher the actual price consumers must pay to purchase a product, the greater the consumer surplus.
False
True or False: An increase in income shifts the supply curve of appliances to the right.
False
True or False: An increase in the cost of producing honey results in a movement up along the supply curve of honey.
False
True or False: An increase in the number of demanders for a good will cause a downward movement along the demand curve.
False
True or False: If an increase in the price of Good X causes the demand for Good Y to shift rightward, Goods X and Y are complements.
False
True or False: Marginal analysis is the comparison of the total benefit of an action compared to its total cost.
False
True or False: The marginal benefit of an action is the same as the total benefit of an action.
False
True or False: The terms "total revenue" and "total profit" mean the same thing.
False
Explain how producing more than the equilibrium quantity decreases society's total surplus.
For each unit that exceeds the equilibrium quantity, the marginal cost of the unit exceeds the maximum price a consumer is willing to pay for the unit. Total surplus would be higher if none of the units greater than the efficient quantity were produced and consumed.
Total Revenue equals
P x Q, where P is the price and Q is the quantity sold
At the 30th unit of action, the marginal benefit is equal to $50 and the marginal cost is equal to $40. Which of the following is true?
The 30th unit of action should be undertaken.
Grocery stores must allocate shelf space to different brands. Safeway, a large grocery store chain, allocates more space to Post cereals. Safeway's opportunity cost of this action is _____________________.
The foregone profit to Safeway that could have been earned on other products
If an increase in consumers' incomes results in a leftward shift of the demand curve for a good, which of the following is true?
The good is an inferior good
If deadweight loss exists in a competitive market, which one of the following is true?
The market is either under or over producing
At the equilibrium price, which of the following is true?
The quantity demanded equals the quantity supplied.
Ethanol producers persistently lobby the government to issue regulations increasing the amount of ethanol that oil refiners must add to gasoline. Which of the following are reasons why ethanol producers lobby the government for these regulations?
The regulations would raise ethanol producers' profits The regulations would increase the amount of ethanol producers supply The regulations increase the demand for ethanol by requiring oil refiners to use it in their gasoline
If the price of ground beef decreases, which of the following will occur?
There will be a movement down the demand curve for ground beef.
If the price of peanut butter increases, which of the following will occur?
There will be a movement up the demand curve for peanut butter.
If the price of tomato juice decreases, which fo the following will occur?
There will be movement down the supply curve for tomato juice.
If the price of avocados increases, which of the following will occur?
There will be movement up the supply curve for avocados.
Increased consumption of natural foods by pet owners has led to increased demand for natural foods for their pets. The Colgate-Palmolive Company produces and sells Hill's Science Diet cat food. Suppose that you work for a similar company, also producing 'scientific' cat food. Your marketing team presents research showing that consumers do not consider so-called scientific cat food natural. Based on the trend toward natural cat foods, what do you expect will happen to the equilibrium price and quantity of scientific cat food? Based on this result, what recommendation(s) would you make to top management?
Top management could shift production toward natural cat foods and use marketing that emphasizes the natural aspects of their products. The demand for scientific cat food decreases, so the demand curve shifts to the left. Top management could consider rebranding their cat food with a name that emphasizes its natural attributes.
True or False: A news report discussing a medical study that found conclusive evidence of the positive health benefits of farm-raised eggs is likely to cause a rightward shift of the demand curve for farm-raised eggs.
True
True or False: Accounting depreciation for an asset is an arbitrary number and is not necessarily related to the asset's real deprecation.
True
True or False: All else equal, the higher the actual price producers receive for their product, the greater the producer surplus.
True
True or False: At equilibrium price, the quantity demanded is equal to the equilibrium quantity.
True
True or False: Bakeries can use their equipment to produce either bread or cookies, so bread and cookies are substitutes in production.
True
True or False: If a decrease in the price of Good X causes the demand for Good Y to shift rightward, Goods X and Y are complements.
True
True or False: If the actual price is below the equilibrium price, a shortage forces the price to rise to the equilibrium price.
True
True or False: If the marginal benefit to a store of staying open an extra hour is less than the marginal cost, the managers should decide to not stay open the extra hour.
True
True or False: In a competitive market, if the deadweight loss is equal to zero, society enjoys the largest total surplus.
True
True or False: Producing the efficient quantity of a product maximizes society's total surplus form the product.
True
True or False: The presence of consumer surplus means that some consumers are willing to pay a higher price for a product than the price they currently pay.
True
True or False: You are a manager for Texas Instruments, a major producer of Systems on a Chip (SoC) used in smartphones, tablets, and similar devices. You predict a massive increase in demand for them, so you expect the price of SoCs to rise.
True
What could have caused the leftward shift in the demand curve?
a decrease in the expected future price of Good Z a decrease in the price of a substitute for Good Z an increase in income if Good Z is an inferior good an increase in the price of a complement for Good Z a decrease in income if Good Z is a normal good
Which of the following will cause a movement down the demand curve for frozen chicken nuggets?
a decrease in the price of frozen chicken nuggets
What could have caused the rightward shift in the demand curve?
an increase in the price of a substitute for Good Z a decrease in income if Good Z is an inferior good an effective marketing campaign that changes preferences towards Good Z an increase in the number of demanders for Good Z an increase in the expected future price fo Good Z
Which of the following will cause a movement along the demand curve for apple juice?
an increase in the price of apple juice
Which of the following will cause a movement up the demand curve for digital printing services?
an increase in the price of digital printing services
If the marginal ____________ of an action exceeds its marginal ____________ then the action ____________ be performed.
benefit; cost; should
Opportunity cost is hard to measure, _________________.
but managers who use it have more accurate cost estimates
Each hour a store remains open it incurs a marginal cost. If the marginal benefit of staying open does not change but the marginal cost doubles, then the manager will ______________ the hours the store remains open.
decrease
If the marginal benefit curve is linear and downward sloping and the marginal cost curve is linear and upward sloping, an increase in the marginal cost that causes an upward shift of the curve will ______________ the profit - maximizing number of units undertaken.
decrease
The ____________ shows the maximum price consumers are willing to pay for each unit of a product.
demand curve
The ___________ shows the maximum price consumers are willing to pay for each unit of a product.
demand curve
If Goods X and Y are substitutes, if the price of Good X decreases, this will cause a movement ___________ the demand curve for Good X and a ___________ shift in the demand for Good Y.
down; leftward
If Good X and Y are complements, if the price of Good X decreases, this will cause a movement _________ the demand for Good X and a ___________ shift in the demand curve for Good Y.
down; rightward
At equilibrium price, the equilibrium quantity is __________________________.
equal to the quantity supplied and to the quantity demanded
If there is overproduction in a competitive market, the quantity produced is _____________ than the efficient quantity and the marginal benefit to society is _____________ than the marginal cost.
greater; less
The owners of a local retailer once remarked, "We can always beat the price that Kohl's charges for identical merchandise." When questioned, the owners revealed that this was possible because "Kohl's must pay rent on its store while we own our building and have no rent to pay." These owners ______ a problem with their economic logic because they _________________.
have; fail to account for the opportunity cost of owning their building
Rob Kalin founded Etsy, an online marketplace where crafters sell unique products. Etsy competes with eBay and Amazon.com. Six years after its founding, Mr. Kalin said that maximizing shareholders' value, which is effectively the same as maximizing profit, was "ridiculous". The major investors financing the company removed Mr. Kalin from his position as the head of the company within a few months. They favored Mr. Kalin's removal because __________.
he openly admitted that he was not interested in maximizing profit, the objective of the firm
All else equal, the lower the price, the ________ the consumer surplus and the ________ the producer surplus.
higher; lower
All else equal, the lower the price, the ___________ the consumer surplus and the ____________ the producer surplus.
higher; lower
During its telecast of the Olympics, NBC ran an ad promoting its new "Fall Shows." Because the advertisement aired when there was a lull in the action, an analyst said that the promotion was free. The analyst is ___________ because NBC ________ an opportunity cost of _______________________________________________.
incorrect; incurs; the foregone ad revenue it lost by using the airtime for their own ads
An increase in the number of corn producers ________________ the supply of corn and shifts the supply curve of corn to the ______________.
increases; right
To maximize total profit, managers want to produce the quantity in which marginal benefit ___________ marginal cost.
is equal to
If the equilibrium price of ammonia is $600 per metric ton and the actual price is $560 per metric ton, the quantity demanded ____________ the quantity supplied.
is greater than
How does an advance in technology affect the supply curve?
it shifts the supply curve to the right
If there is underproduction in a competitive market, the quantity produced is ____________ than the efficient quantity and the marginal benefit to society is _______________ than the marginal cost.
less; greater
All else equal, the higher the price, the _____________ the consumer surplus and the ____________ the producer surplus.
lower; higher
All else equal, the higher the price, the ________ the consumer surplus and the ________ the producer surplus.
lower; higher
Bauxite is used to produce aluminum. You are a manager for Rio Tinto Alcan, a major aluminum producer. If you think that the demand for bauxite and the supply of bauxite will both increase but you do not know the relative sizes, then you expect that the cost of bauxite ________________.
might rise, fall, or not change.
Economists assume that the paramount goal of managers of profit-seeking firms is ______________.
only profit maximization
Managers should use ____________ cost when making managerial decisions because it considers the return from alternative uses of the firm's resources.
opportunity
Toyota's factory can use its assembly lines to produce either the Toyota Camry or the Camry Hybrid. For this Toyota factory, the Camry and the Camry Hybrid are ___________ in production. A decrease in the price of the Camry Hybrid would _____________ the supply of the Camry.
substitutes; increase
At any price higher than the equilibrium price, there is a __________ and the price will __________.
surplus; fall
At any price higher than the equilibrium price, a ______________ in quantity will be created and at any price lower than the equilibrium price, a ______________ in quantity will be created.
surplus; shortage
If there is underproduction in a competitive market, ________________.
the marginal benefit to society exceeds the marginal cost
If there is overproduction in a competitive market, ___________________.
the marginal cost to society exceeds the marginal benefit
The law of supply refers to the relationship between _________________________.
the price of a good or service and the quantity supplied of that good or service
If there is overproduction in a competitive market, _______________ will increase if the quantity produced ________________ to the equilibrium quantity.
total surplus; decreases
If there is underproduction in a competitive market, _________________ will increase if the quantity produced _________________ to the equilibrium quantity.
total surplus; increases
If Goods X and Y are substitutes, if the price of Good X increases, this will cause a movement ________________ the demand curve for Good X and a ______________ shift in the demand for Good Y.
up; rightward
If Big Brothers Hot Dog stand sold 500 hot dogs at a price of $2 per hot dog, the total revenue is __________.
$1,000
The total cost for 15 units is $150 and the cost of the 15th unit itself is $20. The marginal cost of the 15th unit is _______.
$20
You are the manager of a medium-sized farm with 100 acres of workable land. You can farm the land yourself, rent the land to another farmer for $2,500 per acre, or sell the land to a developer for $40,000 per acre. You have an investment opportunity that pays a return of 66% a year. If you decide to farm the land yourself, your opportunity cost for a year will be _________.
$250,000
Cigna Corporation can sell one of its buildings for $50 million. Cigna's most profitable investment opportunity has an annual profit of 10%. The building will fall in value to $48 million after a year. Cigna could rent the building for an annual rent of $6 million. Based on one-year returns, what is Cigna's opportunity cost of USING the building?
$5 million
Ace Alexia plays professional tennis for a living, but in spite of her big first serve, she is not very successful. During the last year, Ace could have earned $75,000 as a tennis instructor at the Atlanta Tennis Club. She would have spent $7,000 on meals, paid rent on a condo in Atlanta at $800 per month, and made car payments of $300 per month. Instead, she remained a pro and won $100,000 in prize money in various tournaments around the country. In doing so, she spent $12,000 on transportation and lodging and paid her coach/trainer $10,000 for the year. She also spent $7,000 on meals, paid rent on her condo in Atlanta at $800 per month, and made the payments on her car of $300 per month. Ace's opportunity cost of playing tennis last year was _________. If Ace became a tennis instructor instead of being a professional tennis player, her total income minus her costs (her net income) would be ________ by $_________.
$54,800 smaller; $3,000
A year ago, American Sugar Refining (ASR) paid $20 million for a vacuum pan to help produce sugar. The vacuum pan will last for 20 years. At the present time, ASR could sell the vacuum pan for $14 million. The economic depreciation over the year equals ________________.
$6 million