Final Test
14 Consider the following cost structures for three oil producers: Fossils R Us Green House Oils Shale Ale Plant and property $1,000,000 $900,000 $1,050,000 Extraction costs (per barrel) $75 $100 $95 Capacity per day 100,000 barrels 75,000 barrels 90,000 barrels If the price for a barrel of oil is currently $98, what is the amount of barrels produced by these suppliers?
190,000 barrels Fossils R Us and Shale Ale will both be willing to produce to their full capacity.
15. Which one of the following represents an economic, but not an accounting, cost of owning a factory?
The interest foregone by the owner on the personal savings invested in the factory. The interest the owner could have earned by investing the money elsewhere is an opportunity cost, and would not be included in the accounting costs.
24. A real estate developer is offering identical houses for sale for $400,000 each, and has 12 willing customers. The developer is considering lowering the price to $350,000, since at that price there would be an additional 4 customers willing to purchase houses. What would be the developer's marginal revenue from lowering the price in this way?
$200,000 The current revenue is $400,000*12 = $4.8M. By lowering the price, the seller would get $350,000*16 = $5.6M, which is $800,000 more. Thus, for each of the four extra sales, the seller is receiving $200,000 per sale.
23. A monopolistic seller of rare oriental rugs discovers that 60% of the population is willing to pay $1,000 for a rug. The remaining 40% of the population is willing to pay $2000. Each rug costs $600 to produce. How much should the monopolist charge for each rug?
$2000 Charging $2000 would lead to 40% of the population purchasing at $1400 profit each. If there are 100 customers, that would be total profits of $56,000.
Whereas most websites and online web services must continually update and improve user design, Craigslist, a classified advertisements website, has remained largely the same since 1996. What phenomenon might explain this?
A network effect that makes switching to competitor sites difficult. Once Craigslist became popular, it had more sellers and buyers than other sites, making it the most attractive site to use regardless of whether it had been updated and improved.
In which of the following scenarios is the winner of the auction LEAST likely to suffer from the winner's curse?
A son winning his mother's favorite painting to give her for her birthday. In this auction, the buyer's valuation of the product does not depend on others' valuations and/or information.
20. A day care program frequently has a few parents picking up their children late. In an attempt to curb this, the daycare decides to charge a fine to parents who are more than 10 minutes late. However, after the fine was implemented, the number of late parents increased. Which of these conclusions can be true?
All of the above
A clothing store has a discount for customers who purchase multiple shirts: after paying full price for one shirt, the second shirt is 50% off. Bob goes to the store and finds a type of shirt he likes that is sold for $30 per shirt, so he purchases two shirts for a total cost of $45. Which of the following MUST be true?
Bob's willingness to pay for two shirts is at least $45. Since Bob purchased the shirts for $45, he must have been willing to pay that much for them.
Fred and Frank are vacationing dog owners. Each owns two dogs which he would like to leave behind at the Pampered Pets Resort while he travels. The graphs below depict their individual demand curves for dog babysitting services.
Graph4 is correct. To obtain the total demand from the two customers, simply sum the two demand curves horizontally.
25.A monopolistic seller of sports cars has traced out the following demand curve: 10 customers have willingness to pay (WTP) of $100K each, another 10 customers have WTP of $150K each, another 10 customers have WTP of $200K each; and a further 15 customers have WTP of $250K. Each sports car costs $50K to produce, but the production process requires a fixed machinery investment of $1.5M as well. The seller is considering setting one of the following prices: I. A price of $150K II. A price of $200K III. A price of $250K What is the order of the profits, from greatest to least, generated by these three pricing schemes?
II > I > III Pricing scheme I would generate a profit of ($150K-$50K) * 35 - $1.5M = $2M. Pricing scheme II would generate ($200-$50K) * 25 - $1.5M =$2.25M. Pricing scheme III would generate ($250K-$50K) * 15 - $1.5M = $1.5M.
10. In a focus group discussing a newly opened fitness club, the following scene plays out: One lady points out that it would be useful to add more cardiovascular machines One gentleman voices disagreement, saying that the space should be allocated towards more weight training A second lady speaks up in agreement with the gentleman, saying that she would appreciate a greater variety in the weight training machines. Which of the following should we conclude from this discussion?.
None of the above. The sample size is too small to draw any of the above conclusions.
11.Despite having sufficient snow, a local ski mountain has decided to close in early March for the end of the ski season. What is the most likely reason to shut down in this situation?
Owners expect that revenue earned won't cover variable costs. If the revenue is not enough to cover operating costs, the ski resort would have no reason to stay open.
19.A year of unusually good rainfall has made it cheaper to irrigate farmlands. However, a popular new diet has persuaded some consumers to stop eating vegetable oil, a product often made from canola. What impact have these two changes had on the equilibrium price and quantity sold of canola?
Price has decreased and the effect on quantity cannot be determined Supply increases and demand decreases. Price will certainly decline, but the effect on quantity will depend on the relative magnitude of the two shifts.
16. A new restaurant has introduced a wildly popular macaroni and cheese dish made with goat cheese. However, at approximately the same time, an outbreak of disease has decreased the local goat population (without impacting the safety of goat cheese). How do the price and quantity of goat cheese change?
Price increases and the effect on quantity cannot be determined Demand has increased due to the new dish, but supply has decreased due to the goat disease. Price will definitely increase, but the effect on quantity depends on the magnitude of the impact of these two events.
Refer to the figure below showing the market demand for bottled beer in Massachusetts. The arrows are consistent with which of the following events?
Producers have increased the price of bottled beer and hence quantity demanded has decreased. The diagram depicts how the change in the price of a good reduces quantity demanded.
13.A ticket reseller purchases a ticket to a football game for $40 and offers it for sale at a price of $75. A consumer is willing to pay $90 at most for the ticket, and purchases it at $75. What does the $50 difference (between $40 and $90) represent?
Profit + consumer surplus The difference between WTP and price is consumer surplus, and the difference between price and cost is the profit
9. The home electronic store conducts a similar conjoint analysis in another country, where customer preferences are different. In this country, customers fall into one of two well-defined and equal-sized segments, with average part-worths as shown below in the table. Again, customers will be deciding between the store's TV (either the "quality offering" or the "size offering") and a competing store's product. Which TV should the store introduce in order to maximize revenues?
Revenues will be the same no matter which TV is introduced. Customers in segment A will purchase the TV no matter which one is introduced. Customers in segment B will always choose the competing TV. Since the TVs are offered for the same price, either TV will bring in the same revenue
22.Suppose that when a monopolistic car manufacturer raised its prices, it lost half of its customer base, but reported higher profits than before. Which of the following can be concluded?
The firm was originally pricing where marginal revenue was lower than marginal cost. The fact that the manufacturer could increase its revenues by raising prices and narrowing the client base indicated that the WTP of the high-type consumers was sufficiently higher than the WTP of the low-type consumers to make it inefficient to serve the low-type consumers.
18. After an earthquake disrupts the supply of clean drinking water to many residents of a city, the city restricts grocery stores from raising the prices they charge for bottled water. If no side markets arise, which of the following statements is true?
The law restricting a price increase will exacerbate the water shortage (or "excess demand"). Some residents might be able to limit their water consumption and would purchase less water if prices rose. If prices are kept low, the quantity of water demanded will be very high, creating more of a water shortage.
17. A country has passed a law setting a minimum wage for factory workers 5% below the equilibrium price. How will this law impact the labor market?
The law will have no impact on the market. Since the minimum wage is below the equilibrium price, it will have no impact on market outcomes.
21.A monopolist's profits are maximized when:
The marginal revenue equals the marginal cost. The monopolist's revenue is maximized when marginal revenue is equal to the marginal cost.
8. A home electronics store is trying to decide what TV to introduce into its product line. After performing a conjoint analysis, the store finds that customers generally fall into one of three well-defined customer segments, with average part-worths as shown in the tables below. 25% of customers are in Segment A, 40% are in Segment B, and 35% are in Segment C. These customers will be deciding between the store's TV (either the "quality offering" or the "size offering") and a competing store's product. Which TV should the store introduce in order to maximize revenues?
The quality offering. Segment C will purchase the TV no matter what. Segment B, which will purchase from the competitor unless the quality offering is introduced, contains more customers than segment A, which will purchase from the competitor unless the size offering is introduced.
Which of the following statements is true?
To obtain the demand curve for the whole market, one can simply sum horizontally all individual demand curves. Market demand is the sum of individual demand.
12. A factory currently manufactures and sells 800 boats per year. Each boat costs $5,000 to produce. $4,000 of the per-boat costs are for materials and other variable costs, while the per-boat fixed costs (incurred on yearly rent, administrative, and other fixed costs) are $1,000. If boat orders increase to 1000 boats per year, how do per-unit costs change?
Variable costs are unchanged at $4,000 per boat and fixed costs fall to $800 per boat The $800,000 in fixed costs is now spread across 1,000 boats. This results in $800 in fixed costs per boat. Variable costs are unchanged.
The table below shows a Red Sox fan's demand for tickets to a game: Price Quantity Demanded $100 1 $90 5 $80 5 $70 5 $60 5 Which of the following statements is true?
WTP for the third ticket is between $90 and $100. Since the third ticket is purchased at $90 but not at $100, the fan must have WTP between $90 and $100 for it.