Managerial Economics Final

From the 1970s through the 1990s, the relative price of a college education has increased greatly. During the same time period, college enrollment has also increased. This evidence suggests that during this time period

The demand curve for a college education has shifted rightward

When a firm moves to a higher isoquant,

The firm now produces more output

If the market price is above a firm's average cost at the quantity produced

The firm operates and makes a profit

The agency problem can be avoided if

The goals of the owner and manager are aligned

If manager performance is easily observable then

The owner can directly reward the manager

Monitoring a manager can be difficult if

The owner cannot easily observe the manager's actions

The competitive firm's supply curve is equal to

The portion of its marginal cost curve that lies about the AVC

If price is initially above the equilibrium level

Excess supply exists

What is the formula for C?

FC + VC

Which entity produces the greatest proportion of U.S. gross national product?

Firms

In a perfectly competitive market

Firms can freely enter and exit

In the long run, profits will equal zero in a competitive market because of

Free entry and exit

Which is an important aspect of the perfectly competitive market that leads to long run equilibrium?

Freedom of entry and exit

Convexity of indifference curves implies that consumers are willing to

Give up more "y" to get an extra "x" the less "x" they have

Firms that exhibit price-taking behavior

Have outputs that are too small to influence market price and thus take it as given

A competitive firm uses two inputs: capital and labor. At its current level of hiring both inputs, capital's marginal product is 12 while labor's marginal product is 18. Capital's cost (C) is $8 per unit while labor's cost (W) is $9. In the long run, to produce the same output at a lower cost, the firm should

Hire more labor and less capital

A firm bought a pizza oven for over $13,500 and if it shut down now, could sell the oven for $9,500. What is the relevant cost of the oven when considering shutting down?

$13,500 - $9,500 = $4,000

Which of the following will result in a decrease in a consumer's purchasing power?

1. A decrease in the consumer's income 2. An increase in the price of the good on the horizontal axis 3. An increase in the price of the good on the vertical line All of the above

Identify 5 industry characteristics which are considered favorable according to Porter's 5-forces model. Describe why each scenario is considered favorable.

1. High barriers to entry because it makes the possibility of a new competitor less likely. 2. Low threat of substitutes because this decreases the changes of a consumer buying the same product from another firm. 3. Low levels of silvery because the higher the rivalry in an industry, the higher the level of competition. If a firm were to experience higher levels of rivalry, it would need to develop some competitive advantage over the other firms. 4. Low supplier power because it makes a negotiation of prices for quantity more likely. 5. High buyer power because it makes a negotiation of prices with the supplier more likely.

Which of the following products would be sold in a competitive market?

1. Home internet service 2. Brent crude oil 3. Motorcycles 4. Smartphones Brent crude oil

If the average cost of producing a good is increasing as a firm produces more of the good, then which of the following must be TRUE for the relevant range of output?

1. MC > AVC 2. AVC is rising 3. AFC is falling All of the above

Which of the following statements about profit maximizing firms in a competitive market is FALSE?

1. Marginal revenue does not have to equal marginal cost 2. Firms earn no economic profit in the long run 3. p - MC = 0 4. Price equals marginal revenue Marginal revenue does have to equal marginal cost

The perfectly competitive model makes a lot of fairly unrealistic assumptions. Why do economics text books still talk a lot about this model?

1. Perfectly competitive markets maximize societal welfare. 2. It is an important model to use as a benchmark to compare other markets structures to. 3. Many market are close to being perfectly competitive. All of the above

An organization that converts inputs (like Labor, Capital, etc.) into output can be a

1. Sole proprietorship 2. Firm 3. Corporation All of the above

A common incentive owners offer managers is

1. Stock options 2. Year-end bonus 3. Profit sharing All of the above

Market structure depends upon

1. The ease of entry 2. The number of firms in the market 3. The ability of firms to differentiate their goods and services All of the above

When the isocost line is tangent to the isoquant, then

1. The last dollar spent on capital yields as much extra output as the last dollar spent on labor 2. The firm is producing that level of output at minimum cost 3. MRTS = -w/r All of the above

A market's structure is described by

1. The number of firms in the market 2. The ease with which firms can enter and exit the market 3. The ability of firms to differentiate their product All of the above

Economists define a market to be competitive when the firms

Are price takers

The short run is

A period of time in which at least one input cannot be varied

A change in relative factor prices will always result in

A rotation of the isocost lines

What is the formula for AFC?

AC - AVC

What is the formula for AC?

AFC + AVC

In deciding whether to operate in the short run, the firm must be concerned with the relationship between price of the output and

Average variable cost

Currently, when a consumer purchases a "green" automobile, the U.S. government gives the consumer a rebate. When the rebate program expires, we would expect

Consumer surplus to drop

What is one of the biggest differences between a sole proprietorship and a corporation?

Corporation shareholders elect the managers of the firm

Limited liability is a benefit to

Corporations

The model of perfect competition is valuable for

Either 1. Comparison to other markets or 2. Prediction

A microeconomic model CANNOT be used to

Evaluate the fairness of a proposal to nationalize health insurance (because fairness is subjective)

If the utility function (U) between food (F) and clothing (C) can be represented as U = the square root of F x C, the marginal utility of food

Increases as one obtains more clothing

Consumer surplus

Is the difference between what a consumer would willingly pay for a good and the price actually paid

A firm will enter a competitive market when

It can earn a positive long-run profit

Raising the price of a good by one dollar

Leads to an indeterminant change in profits

A drought in the Midwest will raise the price of wheat because of a

Leftward shift in the supply curve (drought = less produced = leftward shift)

A firm should always shut down if its revenue is

Less than its avoidable cost

Managerial economics helps managers

Make decisions in the face of scarcity

Consumers seek to

Maximize expected consumer surplus

When an isocost line is just tangent to an isoquant, we know that

Output is being produced at minimum cost

A firm that is vertically integrated

Participates in more than one successive stage of production

What is corporate governance?

Policies, procedures, and systems used to oversee the organization

If a firm is a price taker, then its marginal revenue will always equal

Price

A profit-maximizing firm decides to produce 100 units of output. This implies that the firm will

Produce at a point where its isoexpenditure line is tangent to the isoquant curve for 100 units of output

Which of the following entities does NOT seek to maximize profit?

Public sector companies

Define the concept "returns to scale." Rank the three possibilities in terms of least desirable scenario to most desirable for a rational firm. Provide an explanation for your rankings.

Returns to scale: How well a firm is doing (output) compared to how many resources the firm is putting in (input). -Least Desirable Decreasing returns to scale: When input increases and output and profit decreases. -Middle Constant returns to scale: When output, profit, and inputs remain the same. Most Desirable Increasing returns to scale: When output and profit increases while input remains the same.

If a market produces a level of output below the competitive equilibrium, then

Societal welfare is not maximized

One problem with compensation systems is that

Sometimes a manager is rewarded for an objective other than maximizing profits

Deadweight loss occurs when

Surplus losses to one group due to intervention are not offset by surplus gains to another

If the price of a pizza were to increase to $50, many people would give up eating pizza while others would continue to eat it. This would indicate

Those who are buying pizza value it at least $50 per pizza (because they value the pizza, they are WILLING to pay that much money)

An indifference curve represents bundles of goods that a consumer

Views as equally desirable

Suppose capital and labor are perfect substitutes in a long-run production process. If labor costs $15 per hour and the rental rate of capital is $20 per hour, what can we say about the profit maximizing choice of labor and capital inputs?

We will only use labor in the production process

If a competitive firm finds that it maximizes short-run profits by shutting down, which of the following must be true?

p < AVC for all levels of output