BE 301

After the first week of his MBA Managerial Economics class, one of your pharmaceutical sales representatives accuses you of committing the sunk cost fallacy by refusing to allow him to reduce price to make what he considers to be a really tough sale. Which of the following suggest the sales representative may be right? a.Most of the costs of drug development are sunk, not fixed. b. Sales representatives are paid a sales commission on revenue, so they want to price where MR>0 instead of where MR>MC. c. Sales representatives don't worry that a low price today may make it more difficult for the company's other sales representatives to charge higher prices to their customers. d. Sales representatives forget that P>MC does NOT imply that MR>MC.

a

An example of price floor is a. Minimum wages b. Rent controls in New York c. Both a and b d. None of the above

a

Average costs curves initially fall a. Due to declining average fixed costs b. Due to rising average fixed costs c. Due to declining marginal costs d. Due to rising marginal costs

a

Government regulation often a. provides incentives to conduct business in an illegal black market b. plays no role in generating wealth c. is the best way to eliminate poverty d. does not enforce property rights

a

Jim recently graduated from college. His income increased tremendously from earning $5000 a year to $60,000 a year, Jim decided that instead of renting he would buy a house. This implies that a. Houses are normal goods for Jim b. Houses are inferior goods for Jim c. Renting and Owning are complementary for Jim d. Need information on the price of houses

a

Once marginal cost rises above average cost, a. Average Costs will increase b. Average costs are unaffected c. Average costs will decrease d. None of the above

a

Sarah's Machinery Company is deciding to dump their current technology. A for a new technology B with small fixed costs but big marginal costs. The current technology has fixed costs of $500 and marginal costs of $50 whereas the new technology has fixed costs of $250 and marginal costs of $100At what quantity is Sarah Machinery indifferent between two technologies? a. 5 b. 6 c. 7 d. 8

a $500 + $50x Q = $250 + $100x Q Q=5 units. If you expect to sell more than 5 units use the high-FC/Low-MC technology, if less than 5, use the low-FC/high-MC technology

Mr. D's Barbeque of Pickwick, TN produces 10,000 dry-rubbed rib slabs per year. Annually Mr. D's fixed costs are $50,000. The average variable cost per slab is a constant $2. The average total cost per slab then is a. $7 b. $2 c. $5 d. impossible to determine.

a AC = AFC + VC = ($50,000/10,000) + $2 = $7

A firm adopts a technology that allows you to increase your output by 15%. If the elasticity of demand in the US is -3, how should you adjust your price if you want to sell all of your output? a.5% lower b. 0.5% lower c. 15% higher d. 15% lower

a Elasticity is defined as % change in Q/% change in P. You have the % change in Q(+15%), and the elasticity. You only need to find the corresponding percent change in Q

A business owner makes 1000 items a day. Each day he or she contributes 8 hours to produce those items. If hired, elsewhere he/she could have earned $250 an hour. The item sells for $15 each. Production does not stop during weekends. if the explicit costs total $150,000 for 30 days, the firm's accounting profit for the month equals: a. $300,000 b. $60,000 c. $450,000 d. $240,000

a In terms of explicit costs only, TR = 1,000 items/day x 30 days x $15/item = $450,000, You need to subtract the explicit costs of $150,000

Following are the costs to produce Product A, Product B, and Products A and B together. Which of the following exhibits economies of scope? a. 50, 75, 120 b. 50, 75, 125 c. 50, 75, 130 d. All of the above

a Notice that joint production is more cost effective than separate production

Based on the numbers above, the cross price elasticity between iPhones and Samsung phones is: a. 3.22, indicating they are substitutes b. -3.22, Indicating they are substitutes c. The price and cross-price elasticities are the same d. It cannot be determined without knowing what happened to the price of iPhones

a On this one, you are trying to gauge how the demand for iPhones changes when the price of Samsung phones a related product, likely a substitute) changes: (6,800-8,500)/(350-375) x (350+375)/(6,800+8,500) = 3.22 The two products are substitutes.

A firm produces 500 units per week. It hires 20 full-time workers (40 hours/week) at an hourly wage of $15. Raw materials are ordered weekly and they costs $10 for every unit produced, The weekly cost of the rent payment for the factory is $2,250. How do the overall costs breakdown? a. Total variable cost is $17,000; total fixed cost is $2,250; total cost is $19,250 b. Total variable cost is $12,000; total fixed cost is $7,250; total costs $19,250 c. Total variable cost is $5,000; total fixed cost is $14,250; total cost is $19,250 d. Total variable cost is $5,000; total fixed cost is $2,250; total cost is $7,250

a TC= FC + VC TC = S2,250 + (20 workers x 40hrs/weeks $15+ $10/unit x$500 units) TC = S2,250 + S17,000

Opportunity costs arise due to a. Resource scarcity b. Interest rates c. Limited wants d. Unlimited scarcity

a The fact that wants are unlimited and means are limited scarce) gives rise to opportunity costs. Remember that the concept of opportunity costs stresses the fact that resource scarcity implies mutually exclusive, alternative uses. As such, the opportunity cost is measured as the value of the next best alternative forgone.

Last week, Samsung dropped the price of one of its phones (thru all carriers) from $375 to $350 in the Kc area. in response, customer purchases rose from 12,000 phones to 15,500 phones. During the same period, iPhone prices remained the same, but purchases of iPhones dropped from 8,500 to 6,800. The price elasticity of demand for Samsung phones is: a. -3.69 b. 3.69 c. -2.59 d. -1.59

a You are trying to find the price elasticity of demand for Samsung phones, Focus on how the number of Samsung phones changes as the price is cut from $375 to $350 (15,500-12,000)/(350-375) x 350+375) / (15,500 + 12,000) = -3.69

An individual's value for a good or service can be measure (albeit imperfectly) by the a. The amount of money he or she used to pay for a good b. The amount of money he or she is willing to pay for it c. The amount of money he or she has to spend on goods d. None of the above

b

Buyers consider Marlboro cigarettes and Budweiser beer to be complements. If Marlboro just increased its prices, what would you expect to occur in the Budweiser market? a. Demand would rise, and Budweiser would reduce price. b. Demand would fall, and Budweiser would reduce price. c. Demand would fall, and Budweiser would increase price. d. Demand would rise, and Budweiser would increase supply.

b

Christine has purchased five bananas and is considering the purchase of a sixth. It is likely she will purchase the sixth banana if a. The marginal value she gets from the sixth banana is lower than its price. b. The marginal benefit of the sixth banana exceeds its price. c. The average value of the sixth bananas exceeds the price. d. The total personal value of six bananas exceeds the total expenditure to purchase six bananas.

b

Now suppose that competition among several market makers forces the spread down toS2, How many goods are traded? a. Five b. Four c. Three d. Τwο

b

Suppose there is a single market maker in this market. What is the optimal bid-ask spread? a. $2 bid; $10 ask b. $4 bid; $8 ask c. $5 bid; $7 ask d. $6 bid; $6 ask

b

Which of the following goods have a negative income elasticity of demand? a. Cars b. items from Dollar stores c. Shoes d. Bread

b

Suppose there are nine sellers and nine buyers, each willing to buy or sell one unit of a good, with values {$10, $9, $8, $7, $6, $5, $4, $3, $2). Assuming no transactions costs and a competitive market, what is the equilibrium price in this market? a. $5 b. $6 c. $7 d. $8

b Draw the graph and discussed in class or create a table. Focus on all the voluntary wealth-creating transactions that could be effected

What is the net present value of a project that requires a $100 investment today and returns $50 at the end of the first year and $80 at the end of the second year? Assume a discount rate of 10%. a. $10.52 b. $11.57 c. $18.18 d. $30.00

b -$100 + $50/1.1 + $80/1.1^2 =$11.57

The higher the Interest rates a. the more value individuals place on future dollars b. the more value individuals place on current dollars c. less investments will take place d. does not affect the investment strategy

b B and C are possible answers, with B being the better one. You can interpret interest rates (or the discount rate) as a premium placed on current dollars or a discount placed on future dollars. Also, as the interest rate rises (which is not the same a "higher" interest rates), you can expect some investments to be put off or abandoned.

A consumer values a car at $525,000 and a producer values the same car at S485,000. If sales tax is 8% and is levied on the seller, then the sellers bottom line price is a. $527,000 b. $523,800 c. $525,000 D. $500,000

b The seller's bottom line price is $485,000 x 1.08 = $523,800

After graduating from college, Jim had three choices, listed in order of preference: (1) Move to Florida from Philadelphia, (2) work in a car dealership in Philadelphia, or (3) play soccer for a minor league in Philadelphia. His opportunity cost of moving to Florida includes a. The benefits he could have received from playing soccer b. The income he could have earned at the car dealership c. Both a and b d. cannot be determined from the given information

b You are given a ranking of Jim's preferences. As such, when he decides to move to FL, he sacrifices the alternatives that require him to stay in Philly. However, his opportunity cost stems from the value of his next best alternative, which as described in his ranking, is working in car dealership, or more precisely the economic benefit he would have derived from that.

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: a. No surplus b. S4,000 worth of seller surplus and unknown amount of buyer surplus c. $6,000 worth of buyer surplus and $4,000 of seller surplus d. S6,000 worth of buyer surplus and unknown amount of seller surplus

c

A manager of a clothing firm is deciding whether to add another factory in addition to one already in production. The manager would compare a. The total benefits gained from the two factories to the total costs of running the two factories. b. The incremental benefit expected from the second factory to the total costs of running the two factories. c. The incremental benefit expected from the second factory to the cost of the second factory d. The total benefits gained from the two factories to the incremental costs of running the two factories.

c

All the following are examples of variable costs, except a. Labor Costs b. Cost of raw materials c. Accounting fees d. Electricity costs

c

As a golf club production company produces more clubs, the average total cost of each club produced decreases. This is because: a. Total fixed costs are decreasing as more clubs are produced. b. Average variable cost is decreasing as more clubs are produced. c. There are economies of scale d. total variable cost is decreasing as more clubs are produced

c

If a firm's average cost is rising then a. Marginal cost is less than average cost. b. Marginal cost is rising. c. Marginal cost is greater than average cost d. The firm is making an economic profit

c

Managers undertake an investment only if a.Marginal benefits of the investment are greater than zero b. Marginal costs of the investment are greater than marginal benefits of the investment c. Marginal benefits are greater than marginal costs d. Investment decisions do not depend on marginal analysis

c

Microsoft found that instead of producing a DVD player and a gaming system separate, it is cheaper to incorporate DVD playing capabilities in their new version of the gaming system. Microsoft is taking advantage of a. Economies of Scale b. Learning curve c. Economies of Scope d. Decreasing marginal costs

c

When demand for a product falls, which of the following events would you NOT necessarily expect to Occurr a. A decrease in the quantity of the product supplied. b. A decrease in its price. c. A decrease in the supply of the product. d. A decrease in the quantity bought and sold

c

When economists speak of "marginal", they mean a. Opportunity b. Scarcity c. incremental d. Unimportant

c

Which of the following is classified as a sunk cost? a. Cost of the next best alternative b. Additional cost of producing an additional unit c. Research costs to determine the implementation of a technology d. Total cost of producing a product

c

Which of the following will increase the break-even quantity? a. A decrease in overall fixed costs b. A decrease in the marginal costs c. A decrease in the price level d. An increase in price level

c An increase in the break-even quantity implies that it takes you longer (need to produce and sell more units) before you can break even. In that case, an increase in FC, an increase in MC, or a reduction in price will cause the break-even quantity to increase.

The U.S. Government bought 112,000 acres of land in southeastern Colorado in 1968 for $17,500,000, The cost of using this land today exclusively for the reintroduction of the black-tailed prairie dog a. is zero, because they already own the land. b. is zero, because the land represents a sunk cost. c. is equal to the market value of the land. d. is equal to the total dollar value the land would yield if used for farming and ranching. e. depends on the value to society of black-tailed prairie dogs.

c At this point in time, the comparison is between the alternative uses for the land. The reintroduction of the prairie dog would displace the next highest valued alternative use for the land. Since we cannot know what the next best use is, the market value of the land is a good indication of the value others place on the land.

You expect to sell 500 cellphones a month, which have a marginal cost of $50. If your fixed costs are $5,000 per month, what is the break-even price? a. $10 b. $50 c. $60 d. $100

c At this point, all your costs are avoidable. Thus, ($5,000 + $50x500)/500 = $60

Economic Value Added helps firms to avoid the hidden-cost fallacy a. by ignoring the opportunity costs to using a capital b. by differentiating between sunk and fixed costs c. by taking all capital costs into account including the cost of equity d. none of the above

c EVA forces you to consider the opportunity cost of all the capital you use/control. As such, it tends to make implicit costs explicit (something relevant that you may have considered irrelevant) thus allowing you to deal with the hidden cost fallacy

A bakery currently sells chocolate chip cookies at a price of $16 per dozen. The marginal cost per dozen is $8. The cookies are becoming more popular with customers and so the bakery owner is considering raising the price to $20/dozen. What percentage of customers must be maintained to ensure that the price increase is profitable? a.28.0% b. 33.3% c. 66.66% d. 72.0%

c Here you can try and assume that you targeting a give profit level. Let's call it $X. You know by how much the price will rise and that MCF stays the same. As such: $16x Q-$8x Q = $X, which is your profit function before the price increase and $20 x Q'-$8 x C = SX, which is you profit function after the price increase, with a new quantity, Q' if you set these equal you get: $8 x Q = $12 x Q', or 8/12 = Q'/Q, which gives you 66.7%. This implies that with the given price Increase, the quantity could fall to 66.67% of what it originally was and profits will be unaffected. If you keep at least that percentage of your customers (or more), the price increase will be profitable. All in all, for the price increase to be profitable, the quantity should fall by less than (1 - .667) = 33%.

A firm is thinking of hiring an additional worker to their organization who they believe can increase total productivity by 100 units a week. The cost of hiring him or her is $1500 per week. If the price of each unit is $12, a.The MR of hiring the worker is $1500 b. The MC of hiring the worker is $1200 c. The firm should not hire the Worker since MB< MC d. All the above

c MB of hiring the worker (all else equal) = $12 x 100 = $1,200 < MC = $1,500

A company is producing 15,000 units. At this output level, marginal revenue is $22 and the marginal cost is $18. The firm sells each unit for $48 and average total cost is $40. What can we conclude from this information a. The company is making a loss b. The company needs to cut production c. The company needs to increase production d. Not enough information is provided

c Need to compare MR to MC. In this case, MR = $22 > MC = $18. As such, the company should consider expanding production

If the market for a certain product experiences an increase in supply and a decrease in demand, which of the following results is expected to occur? a. Both equilibrium price and the equilibrium quantity could rise or fall. b. Equilibrium price would rise, and the equilibrium quantity could rise or fall. c. Equilibrium price would fall, and the equilibrium quantity could rise or fall. d. Equilibrium price would fall, and the equilibrium quantity would fall.

c This is one of those case when you can safely predict the overall trend in one of the variables average price). The effect on quantity will remain indeterminate unless you have information on which of the two effect dominates

An economist estimated the cross-price elasticity for peanut butter and Nutela to be +1.5. Based on this information, we know the goods are a. Inferior goods. b. Complements. c. inelastic. d. Substitutes.

d

Changes in prices of a good causes a. Movement along the demand curve b. Movement along the supply curve c. No effect to either curve d. Both a and b

d

Holding other factors constant, a decrease in the tax for producing coffee causes a. The supply curve to shift to the left, causing the prices of coffee to rise b. The supply curve to shift to the right, causing the prices of coffee to rise c. The supply curve to shift to the left, causing the prices of coffee to fall d. The supply curve to shift to the right, causing the prices of coffee to fall

d

If the government imposes a price floor at $9 (i.e., price must be $9 or higher) in the above market, how many goods will be traded? a. Five b. Four c. Three d. Two

d

Taxes: a. Impede the movement of assets to higher valued uses b. Reduce incentives to work C. Decreases the number of wealth creating transactions d. All the above

d

The biggest advantage of the free market system is a. Generates wealth with the help of government intervention b. That prices assists in moving assets from high valued to low value uses c. it forces involuntary exchanges d. Creates wealth by letting a person follow his or her own self-interest

d

The fixed-cost fallacy occurs when a. A firm considers irrelevant costs b. A firm ignores relevant costs c. A firm considers overhead or depreciation costs to make short-run decisions d. Both a and c

d

Wealth creating transactions are more likely to occur a. With private property rights b. With contract enforcement c. With black markets d. a and b

d

What are some of the solutions for a hold-up problem? a. Mergers b. Contracts c. Exchange of "hostages' d. All the above

d

What might you reasonably expect of an industry in which firms tend to have economies of scale? a. Exceptional competition among firms b. A large number of firms c. Highly diversified firms d. A small number of firms

d

Which of the following is NOT true if a firm shuts down and produces zero output in the short run? a. Variable costs will be zero. b. Losses will be incurred. c. Fixed costs will be greater than zero. d. Fixed costs will be less than zero.

d

Which of the following is the reason for the existence of consumer surplus? a.Consumers can purchase goods that they "want" in addition to what they "need." b. Consumers can occasionally purchase products for less than their production cost. c. Some consumers receive temporary discounts that result in below-market prices. d. Some consumers are willing to pay more than the market price.

d

Which one of the following is true? a. Nike has a more inelastic demand curve than Shoes b. The demand curve for gas is more elastic in the short-run than in the long-run c. Cigarettes have a more elastic demand than televisions d. Salt has a more inelastic demand than meat

d

You are considering opening a new business to sell dartboards. You estimate that your manufacturing equipment will cost $100,000, facility updates will cost $250,000, and on average it will cost you $80 (in labor and material) to produce aboard. If you can sell dartboards for $100 each, what is your breakeven quantity? a. 1000 b. 3,500 с. 4375 d. 17,500

d FC/(P-MC) = S350,000/($100-$80 = 17,500

Assume a firm has the following cost and revenue characteristics at its current level of output: price=$10.00, average variable cost-S8.00 and average fixed cost =$4.00. This firm is a.incurring a loss of $2.00 per unit and should shut down. b. Realizing only a normal profit. c. Realizing an economic profit of $2.00 per unit. d. Incurring a loss per unit of $2.00, but should continue to operate in the short run.

d On a per unit basis, the firm gets $10 and spends $12, thus losing $2 per unit at the current output level. However, since the $10 is more than enough to cover the variables costs per unit (avoidable costs per unit), the firm is better off continuing to operate, Shutting down would cause the firm to lose its fixed costs, which are greater than the current operating loss they incur.

If a firm is earning negative economic profits, it implies a. That the firm's accounting profits are zero b. That the firm's accounting profits are positive c. That the firm's accounting profits are negative d. More information is needed to conclude about accounting profits

d You need more info to answer this question, Because economic profits expand the definition of accounting costs to include implicit costs, what we can expect is that economic profits will be lower than accounting profits. A firm may be earning accounting profits, but after including the implicit costs, the company can be shown to generate an economic loss. Or, you can start with a company that is losing money from an accounting perspective, in which case including implicit costs will only result in a more severe loss.

Jim has estimated the elasticity of demand for gasoline to be -0.7 in the short-run and -1.8 in the long run. A decrease in taxes on gasoline would: a. Lower tax revenue in both the short and long run. b, Raise tax revenue tr both the short and long run. c. Raise tax revenue in the short run but lower tax revenue in the long run. d. Lower tax revenue in the short run but raise tax revenue in the long run.

d if the tax is cut, you can treat this as a price cut. When demand is inelastic, cutting the price by a given percentage will result in the quantity demanded going up less than proportionately. As such, the revenue will fall. With an elastic demand (in the LR, in this case), the outcome is the opposite.

A business owner makes 1000 items a day. Each day he/she contributes 8 hours to produce those items, (f hired, elsewhere he/she could have earned $250 an hour. The item seis for $15 each. Production does not stop during weekends. If the explicit costs total $150,000 for 30 days, the economic profit for the month equals: a. $300,000 b. $60,000 c. $450,000 d. $240,000

d in this case, you have to account for the value of the forgone alternative the owner faces: $250/hour x 8 hours/day x 30 days = $60,000