Final Econ
Excess demand of a product exerts __________pressure on prices
upward
A risk averse individual
values a lottery at less than its expected value
An individual who is a risk lover
values a lottery at more than its expected value
A business produces 5,000 units per month. It spends $12,000 on raw materials. It pays wages of $20,000. Other costs include $50,000 for rent, paid by the month. In order to break even the selling price per unit will have to be:
$16.4
Adverse selection is caused by
Hidden information
In the IO perspective, it is important to enter an industry with
High barriers to entry
In the case where interest rates are higher in Canada, which of the following is an example of a "carry trade"
Increase borrowing in the US, convert to Canadian dollars and invest in Canada
The IO Economics perspective locates the source of competitive advantage for a firm at the
Industry level
A perfectly elastic demand curve
Is a horizontal line parallel to the x axis
The reason we study the non-strategic sequential labor negotiation game:
Is to show the irrelevance of mover position, given that he is able to commit to a position
The illegality of organ sales from willing donors to willing recipients is ineffective because:
It discourages wealth creating transactions through the threat of heavy penalty
All of these are characteristics of a competitive industry, except:
Little or no information on rivals' products
Use the following to answer questions 81-84 Consider the following information for a simultaneous move game: Two discount stores (megastore and superstore) are interested in expanding their market share through advertising. The table below depicts the strategic outcomes (profits) of both stores with and without advertising.
Megastore $95 and Superstore $80
A good policy ________________ and a bad policy _________________.
Moves an asset to higher value use; moves an asset to lower value use
Use the following setup for the next three questions. Pastry Paradise is looking to expand. It decides to take over Sweet Tooth, a competitive firm. The two firms have similar technology but different costs. Pastry Paradise has $1500 fixed costs and $1 marginal cost per unit produced. Sweet Tooth has $500 fixed costs but $5 marginal cost per unit produced. If the company plans to produce 5000 units of output, is using the competitor's technology a good idea?
No
Use the following case from questions 50-54 Two ice cream trucks A&B are playing a simultaneous pricing game. If one of them prices low, he gets all the customers, a payoff of 12, while other gets zero. If both price high they each get a payoff of 6 and if both price low, they get a payoff of 5. Does the Nash equilibrium yield maximum profit?
No, because they could do better by pricing high
Scott used $4,000,000 from his savings account that paid an annual interest of 5% and a $60,000 loan at an annual interest rate of 5% to purchase a hardware store. After one year, Scott sold the business for $4,100,000. His economic profits is:
None. He runs an economic loss of $103,000
If quantity demanded for rice falls by 4% when price increases 8%, we know that the absolute value of the own-price elasticity of rice is:
.5
In a coin toss bet, where both heads and tails are equally likely, you win a dollar on heads but lose a dollar on tails. The expected value of the bet is
0
A cloth manufacturing firm is deciding whether or not to invest in new machinery. The machinery costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second year by $30,000. The firm's current fixed costs are $9,000 and current marginal cost are $15. The firm currently charges $18 per unit. The current break-even quantity is
3000
Given that the firm wants to sell both the versions, how high can the high-end professional knives be priced?
100
A publisher is deciding whether or not to invest in a new printer. The printer would cost $500, and it would increase cash flows by $600 for the next two years. What is the present value of the cash flows from the investment? You Answered
1100
Jim is planning on attending a football game. He spent $40 on the ticket. He will have to take the day off losing 8 hours of work. His hourly wage is $10. He estimates it will cost him around $20 for gas and parking at the game. Jim's total economic cost of attending the game equals
140
Three possibilities have probabilities 0.5, 0.3 and 0.2 and values $10, $20, and $30 respectively. The expected value is:
17
If AVC=$5 and AFC=15, then AC=
20
Four possibilities have probabilities 0.4, 0.2, 0.2 and 0.2 and values $80, $30, $0, and -$80 respectively. The expected value is:
22
Half of all your potential customers would pay $10 for your product but the other half would only pay $8. You cannot tell them apart. Your marginal costs are $4. If you set the price at $10, the expected profit is:
3
Given that the firm wants to sell both the versions, how much surplus does buying the no-name brand give the professional chefs?
30
A business owner makes 1000 items a day. Each day she spends 8 hours producing those items. If hired, elsewhere she could have earned $250 an hour. The item sells for $15 each. Production occurs seven days a week. If the explicit costs total $150,000 per month, what is her economic profit?
300,000
The government is looking to double the living standards of its population in 18 years, what rate of GDP growth would it need to achieve that?
4%
A business owner makes 50 items a day. He spends 8 hours in producing those items. If hired elsewhere he could have earned $10 an hour. The item sells for $10 each. Production occurs seven days a week. If the explicit costs total $10,000 a month, the accounting profit for the month equals:
5,000
Use the following setup for the next seven questions. A firm is deciding between two different sewing machines. Technology A has fixed costs of $500 and marginal costs of $50 whereas Technology B has fixed costs of $250 and marginal costs of $100. If the price is $60 per unit, what is the break even amount of units for technology A?
50
If a firm produces 8 units of output with average fixed cost=$40 and average variable cost=$25, what is its total cost?
520
A buyer values a house at $525,000 and a seller values the same house at $485,000. If sales tax is 8% and is levied on the seller, then what would be the lowest price that the seller would be willing to sell at?
523,800
If the bidders at a first-price auction have true values of $78, $72, $66, and $65, the item will sell for
78
Transcendent Technologies is deciding between developing a complicated thought-activated software, or a simple voice-activated software. Since the thought-activated software is complicated, it only has a 30% chance of actually going through to a successful launch, but would generate revenues of $50million if launched. The voice-activated software is simple and hence has a 80% chance of being launched but only generates a revenue of $10million. The complicated technology costs 10million, whereas the simple technology costs 2million. What is the expected revenue from developing the simplified software?
8 million
Given that the firm offers both the products, what is the maximum price it can charge for the high-end wok to have the chefs only buy the high-end wok?
90
Which of the following is more likely to be able to command a higher price for its products
A& C
Firms maintain their completive edge by
Being innovative Providing a superior product at the same cost as your rival Providing a good at lower costs than their rivals Correct! All the above
In a competitive industry
Correct! all of the above the firms products have a very elastic demand the firms have many rivals firms produce a product or service with very close substitutes
Individuals with homeowner's insurance tend to be more forgetful about locking their possessions safely before heading out. This is an example of
Moral hazard
Holding other things constant, if the Japanese Yen, depreciates, it makes the Japanese products
More attractive to US customers
All of the following costs are included in the calculation of accounting profit, except
Opportunity cost of capital
In sequential games,
Players take turns and observe their rivals choices before they make their choices
You can either invest in project A or B. Project A could have a value of $100 with a probability of 0.1 or a value of $75 with probability 0.9. Project B could have a value of $110 with probability 0.2 or a value of $70 with a probability of 0.8. Which project should you invest in?
Project B
A sudden fall in the market demand in a competitive industry leads to
Some firms exiting the market Correct! All of the above A market equilibrium price higher than the short run price A short run market equilibrium price lower than the original equilibrium
In oral auctions, the price that the winner pays depends on
The highest willingness to pay among the losers
Rivalry among firms would tend to be high if
There is a large number of firms in the market
Economists love auctions because
They set the price for the item, avoiding costly negotiations
A supermarket sells you a pound of coffee on the condition that you buy a gallon of milk. This is an example of
a & b
Use the following case from questions 36-38 A couple gets into an argument deciding where they would go out together. Both like to spend like with each other and have the payoffs as below
a &. b
Someone who values a lottery at more than the expected value is
a risk lover
An increase in the US demand for British pounds causes
a'&b
Consider a simultaneous move game between a union and a company. If both the parties bargain hard, each would gain nothing. If only one party bargains hard the accommodating party gets a profit of $1 million while the bargaining party gets a $5 million, while if they both accommodate, they each get $3 million. If the firm hires security guards to enforce a lockout, what are they implying?
b&c
Trades between risk lovers and risk takers
b&c
Which of the following goods is most likely to have a negative income elasticity of demand?
bargain brand noodles
Which of the following factors would shift the supply curve for ice cream to the right?
both a&c
Moral hazard in a transaction hurts
both parties
Variable costs are
costs that vary with output
If long run average costs rise with output, you have
decreasing returns to scale
It is illegal for a business to price discriminate when selling goods to other businesses unless Both A & B are true
either ra or rb is true
in a competitive industry
firms sell more if a price is above marginal cost
In the short-run, a firm's decision to shut-down should not take into consideration
fixed costs
Looking ahead at how the customer is more likely to react, what price should the shopkeeper charge?
high price
Two siblings, Bratty Brad and Mousey Mike are playing a simultaneous hit and tell game. Bratty Brad can hit Mousey Mike or not and Mousey Mike can tattle on Bratty Brad or not. Relative to no hitting and no tattling, if Bratty Brad hits Mousey Mike, and he tattles they both experience a loss of 10. Not telling, gets Mousey Mike a bruise, a loss of 5 but Bratty Brad gains 5. If he tattles untruthfully, Mousey Mike gets a gain of 5 and Bratty Brad loses 5. If they get along, no one gets anything If Mousey Mike does not tattle, what would Bratty Brad's best response be
hit
While you were an intern you bought 5 packages of hot dogs a month. After acquiring a full-time job with a considerably higher salary, you stopped purchasing hot dogs. For you, hot dogs are a
inferior good
When interest rates go up, people are
less likely to borrow
A firm that screens candidates to determine how well they would work with limited supervision is afraid of facing
moral hazard
When interest rates go down, people are
more likely to borrow
Two siblings, Bratty Brenda and Tattling Tina are playing a simultaneous hit and tell game. Bratty Brenda can hit Tattling Tina or not and Tattling Tina can tattle on Bratty Brenda or not. Relative to no hitting and no tattling, if Bratty Brenda hits Tattling Tina, and she tattles they both experience a loss of 10. Not telling, gets Tattling Tina a bruise, a loss of 5 but Bratty Brenda gains 5. If she tattles untruthfully, Tattling Tina gets a gain of 5 and Bratty Brenda loses 5. If they get along, no one gets anything If Tattling Tina tattles, what would Bratty Brenda's best response be
not hit
Which of the following is an example of the "metering" strategy
only a and b
What are economies of scope?
the cost of producing two products jointly by one firm is lesser than the cost of producing them separately
Scatterbrain Samantha often forgets to lock her house. This has caused the probability of a burglary to be 30%. If her house gets broken into, she faces a property loss of $10,000, otherwise she gets to keep her $100,000. What is her expected loss?
$3000
A business incurs the following costs per unit: Labor $5/unit; Materials $3/unit and rent $5000/month. If the firm produces 1000 units a month, the total fixed costs equals
$5,000
A consumer values a car at $30,000 and a producer values the same car at $20,000. If the transaction is completed at $24,000, the transaction will generate:
$6,000 worth of buyer surplus and $4,000 of seller surplus
A Swiss consumer wants to buy an American car. The exchange rate is 1USD=0.89CHF (Swiss Francs). The car costs $10,000. How much would the car cost him in Swiss Francs?
8,900 Francs
All of these could be sources of economies of scale except
A bottleneck procedure
A sudden fall in the market demand in a competitive industry leads to
A market equilibrium price higher than the short run price
Tax causes
A reduction in incentives to work Market distortions Correct! All of the above A decrease in wealth creating transactions
A sudden fall in the market demand in a competitive industry leads to
A short run market equilibrium price lower than the original equilibrium
A consumer values a house at $525,000 and a producer values the same house at $485,000. If the transaction is completed at $510,000, what amount of tax will result in unconsummated transaction?
A tax of $18,000
________is the problem of separating good from bad drivers
Adverse selection
In the IO perspective it is important to enter an industry with
All of the above Small number of competing firms of different sizes High barriers to entry
Which of the following defines a sunk cost?
An asset with no scrap value
The practice of buying a firm's good in one market at a low price and selling it in another market for a higher price in order to profit from the price difference is known as
Arbitrage
Which one of the following is a way to get out of a repeated Prisoner's Dilemma Nash Equilibrium?
Be forgiving
Use the following setup for questions 41-48 Both Nadia and Samantha are applying to insure their car against theft. Nadia lives in a secure neighborhood, where the probability of theft is 10%. Samantha lives in a lesser secure neighborhood where the probability of theft is 25%. Both Nadia and Samantha own cars worth $10,000, and are willing to pay $100 over expected loss for insurance. If the insurance company can successfully screen both Nadia and Samantha into appropriate contracts, it would earn
Between zero and $200
Supplier power tends to be low when
Both A&B
A manager invests $400,000 in a technology that should reduce the overall costs of production. The company managed to reduce their cost per unit from $2 to $1.85. This affects
Both a and b Econ and act profits
In the simultaneous move labor negotiation game:
Both parties bargain hard in the Nash equilibrium
arbitrage
Can force a seller to go back to uniform pricing Correct! All of the above Can offset the benefits of direct price discrimination Is the act of to buying low in one market and selling high in another market
Which of the following is not an example of price discrimination?
Charging a higher price for ice-cream during the summer and a lower price in the winter
Which of the following is the foundation for success for a company facing competition
Create and protect advantages over the competition
A weaker peso, relative to the US dollar, causes the demand for US exports to ______ and the demand of Mexican imports to______
Decrease; Decrease
If the price of a Canadian dollar went from 0.95 US dollars to 0.98 US dollars, we would say that the US dollar has
Depreciated
Which one of the statements is true?
Diminishing returns is a short-run concept while decreasing returns to scale is a long-run concept
Many bars close to campuses have started offering cheaper beer to consumers with a student IDs. These bars are using
Direct price discrimination
Average costs curves initially fall
Due to declining average fixed costs
Which of the following statements is true?
Economic profits include implicit costs.
A food company trying to increase its profits by expanding in to the soft drinks business is an example of
Economies of Scope
Farmers rotate their crops between corn and soybean to increase crop yields. This behavior exhibits
Economies of scope
For foreigners, the intersection of the demand for US dollars and the supply of US dollar is known as the
Exchange rate
Rivalry among firms would tend to be high if
Firms are located close to one another
Jill, a bookkeeper, just received an attractive offer from an outside firm and so she asks for a raise from her current employer. If the management of Jill's company is aware of the offer, she would
Have a stronger bargaining position
If a union threatens to strike during a slow demand period, it is more likely to
Have its conditions rejected
Industries with high barriers to entry
Help firms sustain long term profits
Irene's Dairy is deciding whether or not to enter the market for ice cream, currently monopolized by Mattie's Ice-cream. If it enters the market, Mattie's can either accommodate him and share his 10million in profits equally with Irene or fight him and cause a 5million loss for each in a price war. Given that Mattie could convincingly threatens to always fight, what would be Irene's best response
Not Enter
Use the following case from questions 39-44 A shoplifter and a security guard are playing a simultaneous game. If the shoplifter steals and the security guard is vigilant, the shoplifter gets caught she suffers a loss of 20, and the security guard gets a bonus worth 15. If the shoplifter steals and the security guard is not vigilant, she does not get caught and gains 15 and the guard loses 5. If the shoplifter does not steal and the guard is vigilant, the guard loses 3 for the effort, while the shoplifter gains nothing and if the shoplifter does not steal and the guard is not vigilant, neither gain anything If the simultaneous game is instead changed into a sequential game where the shoplifter can see whether the security guard is vigilant or not before deciding to steal. What is the Nash equilibrium of the game?
Not steal, Vigilant
Having a competitive advantage emanates from
One or both of the above
The RBV perspective is based on
Only A&C
A firm will shut down in the short-run if
P<AVC
Which is a screen against adverse selection
Prospective secretaries must take a typing test before being hired
If your long-run costs exhibit increasing returns to scale, securing big orders leads you to
Reduce average costs
Lara will agree to a second date with Tom only if, on their first date, Tom is well mannered and well dressed. Lara is using a
Screening mechanism
Movie theatres offer seniors discounts because
Seniors have a more elastic demand for movie tickets
A firm sells 1000 units per week. It charges $15 per unit, the average variable costs are $10, and the average costs are $25. In the long run, the firm should
Shut-down as price is lower than average cost
In the short-run:
Some inputs are fixed and some inputs are variable
Which of the following could potentially capture the value created in a market
Suppliers Industry rivals Correct! All of the above Buyers
If the Chinese Yuan devalues against the US dollar, then
The US importers would benefit while the Chinese importers would be hurt
In the market for Canadian dollars measured in US dollars, the supply of Canadian dollars is
The demand for US Dollars
For direct price discrimination to work
The firm be able to charge the low-value customers a lower price than the higher-value customers
You are considering buying a store. The store owner shows you sales figures of the store on a "typical" day. The owner has most likely shown you figures for
The more productive day
Price discrimination is
The practice of charging different prices to different individual buyers or customer groups
Marginal revenue is_____________.
The revenue from selling an additional unit of output
Supplier power tends to be low when
The supplier provides homogenous inputs
Average cost of production is
Total cost divided by total units produced
Jim is haggling with a car dealer over the sale price of a used car. Which of the following would determine the amount of surplus Jim extracts from the purchase?
Total difference between the buyer's and seller's valuations of the car Correct! All of the above The number of sellers trying to make Jim a sale The number of customers trying to buy that particular car
Which of the following is an example of price discrimination?
Tourists paying higher prices on local attractions than locals Correct! All of the above Students paying discounted rates on travel Seniors paying a lower price for tickets at movie theatres
Total costs increase from $1,500 to $1,800 when a firm increases output from 40 to 50 units. Which of the following are true?
VC rise by $300
A retailer X that is operating at a loss gets bought out by a larger chain of department stores, which shuts down the brand, using its assets for their own brand,
Wealth is created since the resources were of lesser value under the X brand and are now worth more
An important lesson about pricing is
When bargaining with the customer, do not bargain over the unit price, bargain over the bundled price
Under the non-strategic view of bargaining, the terms of agreement are determined by
Your outside options Correct! All of the above Your opponents gain from agreement Your opponent's outside options
Which firm is not dealing with adverse selection
a manufacturer contracts with suppliers regardless of ISO 9000 status
US law was recently changed so that some airplane manufacturers are immune from liability from accidents involving their decades old aircraft, laying all the responsibility on the pilots. As a result
accident rates fell due to less moral hazard
An increase in demand could arise from which of the following factors
an increase in income
Progressive Insurance's 'Tripsense' monitors driving patterns of the people who purchase the related insurance policy. This lowers insurance costs because
drivers will want to drive more carefully knowing they are being monitored
A manager invests $400,000 in a technology that should reduce the overall costs of production. The company managed to reduce their cost per unit from $2 to $1.85. All else equal, if the firm continues its production in the same economic environment, the firm's economic profits should
increase if output is high enough
An oral auction
is where bidders submit increasing bids until all but one remains is where the sole remaining bidder wins and pays his winning bid is also called an English auction Correct! all of the above
When a variable can take on different values
it is a random variable
An example of moral hazard is
people drive less safely with more airbags than without
Adverse selection in insurance requires that
potential customers face different levels of risk
When buying a car from a commission salesman you improve your bargaining position by
shopping toward the end of the month
You want to run a difference-in-difference experiment with a price increase for the bacon cheeseburger item on your menu. If you are worried about "leakage" with your control group, a good comparison menu item would be
soft drink sale
An rational, optimizing, self interested consumer would consume up to the point where
the consumer surplus from the last unit is zero
The higher the interest rates
the more value individuals place on current dollars
The first law of demand states that
the quantity demanded increases as price falls
Demand and supply analysis is particularly important if
the success of your firm is closely linked to the profitability of your primary industry
To keep employees from shirking, invest in greater monitoring
when employees fail to respond to incentive contracts
