BA 511 Final
Calculate the markup price if MC = $10.00 and price elasticity equals 1.7. hint: Optimal price is P=MC/[1-1/ (elasticity)]
$24.27
Concerning the maximization of output subject to a cost constraint, which of the following statements (if any) are true?
-At the optimal input combination, the slope of the isoquant must equal the slope of the isocost line. -The optimal solution occurs at the boundary of the feasible region of input combinations. -The optimal solution occurs at the point where the isoquant is tangent to the isocost lines.
What's true about both the short-run and long-run in terms of production and cost analysis?
-In the short-run, one or more of the resources are fixed -In the long-run, all the factors are variable -The time horizon determines whether or not an input variable is fixed or not -The law of diminishing returns is based in part on some factors of production being fixed, as they are in the short run.
Which of the following statements concerning the shareholder wealth maximization model is (are) true?
-The timing of future profits is explicitly considered. -The model provides a conceptual basis for evaluating differential levels of risk
Which of the following is a source of market power for a monopolist?
-a firm may have a patent or copyright -a firm may control critical resources -a firm may have a government-authorized franchise -a firm may enjoy economies of scale
Identify the reasons why the quantity demanded of a product increases as the price of that product decreases.
-as the price declines, the real income of the consumer increases -as the price of product A declines, it makes it more attractive than product B
Regulatory agencies engage in all of the following activities _______.
-controlling entry into the regulated industries -overseeing the quality of service provided by the firms -setting prices that consumers will pay
In the case of pure monopoly:
-one firm is the sole producer of a good or service which has no close substitutes -the firm's profit is maximized at the price and output combination where marginal cost equals marginal revenue
In pure competition:
-the optimal price-output solution occurs at the point where marginal revenue is equal to price -a firm's demand curve is represented by a horizontal line -a firm is a price-taker since the products of every producer are perfect substitutes for the products of every other producer
Holding the total output constant, the rate at which one input X may be substituted for another input Y in a production process is:
-the slope of the isoquant curve -the marginal rate of technical substitution (MRTS) -equal to M P subscript x divided by M P subscript y
If price elasticity in region 1 is -2 and in region 2 is -3. In order to maximize profit in both region 1 and region 2, what relationship could be between optimal price P1 in region 1 and optimal price P2 in region 2? Hints: read Differential pricing and the price elasticity of demand on page 517 or Lecture slides 29.
3P1 = 4P2
14. If transactions costs can be reduced in a marketplace, then total producer and consumer surplus will: A. increase. B. stay the same. C. decrease. D. first increase and then decrease.
A
17. Dell Computer attempts to collect information about customers before purchase and assemble customized product for the customer. This process tries to: A. reduce transactions costs for both Dell and the customer. B. reduce transactions costs for the customer only. C. increase transactions costs for Dell so that it can reduce taxable profits. D. increase transactions costs for customers so that IBM can sell send PCs also.
A
23. Putting together two goods - shaving cream and razors - to increase value is using the power of: A. complementary goods. B. substitute goods. C. unrelated goods. D. technologically advanced goods.
A
30. In a corporation, one important source of value is that 'whole organization' is worth more than the sum of its parts. This is called: A. team production capabilities. B. collective cost analysis benefits. C. complementary goods value creation. D. substitute goods value creation.
A
Finding a way to create and capture value is part of: A. business strategy. B. cost control systems. C. management control, but not general management. D. allowing the market to run a company's future plans.
A
Empirical estimates of the price elasticity of demand in the following table suggest that the demand for household consumption of bedroom funiture is:
All others remain unchanged, price increases will decrease both sales in unit and revenue.
18. The fast food industry from Back Yard Burgers to KFC promises good food delivered quickly. The value of the consumer's time: A. is less important than productions costs. B. is a key component in creating value for the firm and the consumer. C. is usually so low that fast food is unimportant in the marketplace. D. must be discounted to make sure it is negative.
B
28. Paul Romer argues that "what underlies this process [economic success] are instructions, formulas, recipes, and methods of doing things." He is referring to the: A. hardware or tangible assets. B. software or intangible assets. C. wetware or soup recipes. D. hardware or human resources.
B
31. In a competitive market, the firm has a difficult time capturing value due to the large number of rivals. But it can be successful at capturing value if the: A. firm's cost curves are higher than rivals. B. firm's superior productivity is based on value of the whole organization. C. firm's superior productivity is based on selected components of superiority within the firm. D. demand for the firm's product is inelastic.
B
A manufacturer produces two types of computer software, Word processing (W) and Spreadsheet (S), which is offered to two different retail outlets (#1 and #2). The following table shows the maximum price each retail outlet is willing to pay for each individual software product. Product W Product S Retail #1 $170 $105 Retail #2 $95 $135 What is the optimal pricing strategy that will maximize revenue for the manufacturer, given the maximum the retail outlets are willing to pay?
Bundle both products (W and S) and sell them at $230
15. If consumers find that there are substantial transactions costs to purchasing a product, then: A. overall consumer demand is greater at each price. B. overall consumer demand is the same at each price. C. overall consumer demand is less at each price. D. equilibrium price and quantity both fall.
C
16. In terms of business strategy, managers will attempt to adopt business strategies that attempt to: A. maximize transactions costs. B. stabilize transactions costs. C. Minimize transactions costs. D. Invert transactions costs.
C
21. Ready-to-eat products like Kraft Lunchables: A. decrease producer transactions costs. B. increase producer transactions costs. C. decrease consumer transactions costs. D. increase consumer transactions costs.
C
22. Since September 11, 2001, longer lines, longer airport waits, and limits on carry-on luggage have all contributed to: A. an increase vacation air travel. B. an increase in business air travel. C. a decline in value of air travel. D. an increase in value of air travel.
C
24. Bundling of complements to create value strategically usually leads to lower prices for the consumer: A. greater volume sold, and lower profits. B. less sold, and lower profits. C. greater volume sold, and greater profits. D. less sold, and greater profits.
C
25. Successful invention and innovation in the marketplace: A. can create value and is easy to capture. B. cannot create value and is difficult to capture. C. can create value but is often difficult to capture. D. is not important to most company's strategy.
C
26. A company can translate its assets into value if it effectively uses them in the marketplace. The three types of assets are tangible assets, intangible assets and: A. fungible assets. B. liability assets. C. human assets. D. machinery and tools.
C
27. Human resources as a source of creating value in a modern company are also referred to as: A. hardware. B. software. C. wetware. D. dryware.
C
29. A firm can capture value through market power or through superior factors of production. The latter are also called: A. housing rents. B. monopoly rents. C. Ricardian rents. D. Bushian rents.
C
34. Setting up of outlet malls in rural highways is an example of: A. increased consumer transactions cost. B. increased producer transactions cost. C. reduced consumer transactions cost. D. reduced producer transactions cost.
C
The following statements regarding Deterministic Trend-forecasting models are correct ,EXCEPT
Can help to Identify major future changes in the direction of an economic data series
The following statement regarding collusion is correct, EXCEPT
Collusion is more successful when percentage of external suppliers is small.
12. Strategy refers to the general policies that managers adopt to increase: A. costs. B. the number of customers at the same price. C. the rate of technological change. D. the generation of profits.
D
13. As opposed to corporate strategy, business strategy is focused on: A. cost control of fixed costs. B. demand management. C. the choice of industries in which to produce. D. the choice of how to compete with other firms in the industry.
D
19. The learning effect is one form of: A. diversification. B. creating value through increasing transactions costs. C. creating value through stabilizing transactions costs. D. creating value through decreasing transactions costs.
D
20. Wal-Mart, like many companies in the new economy, uses a hub-and-spoke distribution system to: A. increase costs of stocking and inventory . B. change consumer attitudes toward warehouse shopping. C. shift consumer demand to the left. D. decrease costs of stocking and inventory.
D
32. With creating value we have: A. a shift in both the demand and supply curves to the right. B. a shift in both the demand and supply curves to the left. C. demand shift to the right and supply to the left. D. demand shift to the left and supply to the right.
D
33. Setting up a hub-and-spoke distribution towards inventory and retail delivery is an example of: A. increased consumer transactions cost. B. increased producer transactions cost. C. reduced consumer transactions cost. D. reduced producer transactions cost.
D
35. Manufacturers of printers and computers set prices independently. This means that they: A. do not consider the positive effect that their lower prices have on the other's profit. B. do not consider the negative effect that their lower prices have on the other's profit. C. do not consider the positive effect that their higher prices have on the other's profit. D. do not consider the negative effect that their higher prices have on the other's profit.
D
36. Hardware, software and wetware refer to: A. fixed costs, variable costs and liabilities. B. financial resources, buildings and overhead. C. buildings, computers and financial resources. D. physical assets, "soft" assets such as its advertising strategies and human resources.
D
37. Profits will be: A. high regardless of the degree of rivalry. B. high when the degree of rivalry is high. C. low when the degree of rivalry is low. D. low when the degree of rivalry is high.
D
38. Degree of rivalry is: A. high when excess capacity of existing firms is low. B. low when fixed costs of existing firms are high. C. high when fixed costs of existing firms are low. D. high when fixed costs of existing firms are high.
D
39. Economies of scope are said to exist when: A. one firm produces many products rather than separate firms for each. B. many firms produce many products rather than one firm producing all. C. many firms produce a single product rather than one firm. D. one firm produces multiple products rather than separate firms producing all.
D
40. Diversifying to reduce volatility is a: A. good idea only if shareholders can hold a diversified portfolio. B. good idea only if managers cannot hold a diversified portfolio. C. good idea only if managers can hold a diversified portfolio. D. good idea only if shareholders cannot hold a diversified portfolio.
D
41. Related diversification occurs when: A. a business serves itself first before serving others. B. a business serves others first before serving itself. C. a business serves itself and allows other to serve it. D. a business serves itself and many other common businesses.
D
Which of the following will increase (V0), the shareholder wealth maximization model of the firm: V0∙(shares outstanding) = Σ∞t=1 (π t ) / (1+ke)t + Real Option Value.
Decrease the required rate of return (ke).
Knowing how to avoid a price war has become a critial success factor in tight oligopolistic groups. What strategies could be used to avoid price wars?
Growing total Market Differential pricing Use reference prices and framing effects Product Innovation
In a relationship among total, average and marginal products, where TP is maximized:
MP is equal to zero
Which of the following statements is (are) true concerning a pure competition situation?
Marginal revenue is equal to price.
The law of diminishing marginal returns:
NONE: states that each and every increase in the amount of the variable factor employed in the production process will yield diminishing marginal returns is a mathematical theorem that can be logically proved or disproved is the rate at which one input may be substituted for another input in the production process
Land's End estimates a demand curve for turtleneck sweaters to be: Log Q = .41 + 2.3 Log Y - 3 Log P where Q is quantity, P is price, and Y is a measure on national income. If the marginal cost of imported turtleneck sweaters is $9.00. (HINT: P (1 +1/E) = MC). The optimal monopoly price would be:
P = $13.50
Unique Creations has a monopoly position in magnometers. If the marginal cost for a mag-nometer is $50 and the price elasticity for magnometers is -4, what is the profit-maximizing markup? Hint: P (1 +1/E) = MC.
P= [E/ (E+1)] * MC P = [-4/(-4+1)] * 50 P = 4/3 * 50 or 1.33 * 50 P = $66.67
Which of the statements about price discrimination is (are) false?
Public utilities practice first-degree price discrimination.
A monopolist seller of Irish ceramics faces the following demand function for its product: P = 62 - 3Q. The fixed cost is $10 and the variable cost per unit is $2. What is the maximizing QUANTITY for this monopoly? Hint: MR is twice as steep as the inverse demand curve: MR = 62 - 6 Q. (Pick closest answer)
Q= 10
The main difference between perfect competition and monopolistic competition is:
The degree of product differentiation
If the marginal product of labor is 100 and the price of labor is 10, while the marginal product of capital is 200 and the price of capital is $30, then what should the firm?
The firm should use relatively more labor
What is the profit maximization point for a firm in a purely competitive environment?
The output where P = MC
A customer pays an admission fee to get into the local YMCA, and also a monthly membership fee. This is called:
Two-part tariff
Related diversification occurs when:
a business serves itself and many other common businesses.
The following are possible examples of price discrimination, EXCEPT:
a product sells at a higher price at location A than at location B, because transportation costs are higher from the factory to A.
Which of the following is an example of an oligopolistic market structure?
air transport industry
Which of the following is never negative?
average product
Finding a way to create and capture value is part of:
business strategy
Successful invention and innovation in the marketplace:
can create value but is often difficult to capture
Putting together two goods - shaving cream and razors - to increase value is using the power of:
complementary goods.
Of the following, which is not an economic rationale for public utility regulation?
constant cost industry
To reduce Agency Problems, executive compensation should be designed to:
create incentives so that managers act like owners of the firm.
The learning effect is one form of:
creating value through decreasing transactions costs.
Ready-to-eat products like Kraft Lunchables:
decrease consumer transactions costs
The factor(s) which cause(s) a movement along the demand curve include(s):
decrease in price of the good demanded
Given a Cobb-Douglas production function estimate of Q equals 1.19 L to the power of.72 end exponent K to the power of.18 end exponent for a given industry, this industry would have:
decreasing returns to scale
Manufacturers of printers and computers set prices independently. This means that they:
do not consider the negative effect that their higher prices have on the other's profit.
In a competitive market, the firm has a difficult time capturing value due to the large number of rivals. But it can be successful at capturing value if the:
firm's superior productivity is based on value of the whole organization.
A cartel is a situation where firms in the industry
have an agreement to restrict output.
All of the following are mechanisms which reduce the adverse selection problem except ____.
high interest rates
In the Cobb-Douglas production function left parenthesis Q equals alpha L to the power of beta 1 end exponent K to the power of beta 2 end exponent right parenthesis :
if the amount of labor input (L) is increased by 1 percent, the output will increase by β1 percent
Those goods having a calculated income elasticity that is negative are called:
inferior goods
If one defines incremental cost as the change in total cost resulting from a decision, and incremental revenue as the change in total revenue resulting from a decision, any business decision is profitable if:
it increases revenue more than costs or reduces costs more than revenue it decreases some costs more than it increases others (assuming revenues remain constant) it increases some revenues more than it decreases others (assuming costs remain constant)
Which of the following barometric indicators would be the most helpful for forecasting future sales for an industry?
leading economic indicators.
Profits will be:
low when the degree of rivalry is high.
If a cartel seeks to maximize profits, the market share (or quota) for each firm should be set at a level such that the ____ of all firms is identical.
marginal profit
To maximize profits, a monopolist that engages in price discrimination must allocate output in such a way as to make identical the __________ in all markets.
marginal revenue
When the cross elasticity of demand between one product and all other products is low, one is generally referring to a(n) ____ situation
monopoly
If price exceeds average costs under pure competition, ____ firms will enter the industry, supply will ____, and price will be driven ____.
more; increase; down
Factors that affect the ability of oligopolistic firms to successfully engage in cooperation include ____.
number and size distribution of sellers size and frequency of orders product heterogeneity
Barometric price leadership exists when
one firm in the industry initiates a price change and the others follow it as a signal of chang-es in cost or demand in the industry.
In a kinked demand market, whenever one firm decides to lower its price,
other firms will automatically follow.
If consumers find that there are substantial transactions costs to purchasing a product, then:
overall consumer demand is less at each price
A firm in pure competition would shut down when:
price is less than average variable cost
The demand curve facing the firm in ____ is the same as the industry demand curve.
pure monopoly
Dell Computer attempts to collect information about customers before purchase and assemble customized product for the customer. This process tries to:
reduce transactions costs for both Dell and the customer.
Setting up a hub-and-spoke distribution towards inventory and retail delivery is an example of:
reduced producer transactions cost.
The kinked demand curve model was developed to help explain:
rigidities observed in prices in oligopolistic industries
___________ is a new product pricing strategy which results in high initial product price. This price is reduced over time as demand at the higher price is satisfied.
skimming
In a production process, an excessive amount of the variable input relative to the fixed input is being used to produce the desired output. This statement is true for:
stage III
In the long-run, firms in a monopolistically competitive industry will
tend to just cover costs, including normal profits
In the short-run for a purely competitive market, a manufacturer will stop production when:
the contribution to fixed costs is zero or less
The segmenting of customers into several small groups such as household, institutional, commercial, and industrial users, and establishing a different rate schedule for each group is known as:
third-degree price discrimination
Economic profit is defined as the difference between revenue and ____.
total economic cost
