Econ final 12/13

The following estimates have been obtained for the market demand for cereal: lnQ= 9.01-0.68lnP+0.75lnA-1.3lnM, where Q is the quantity of cereal , P is the price of cereal, A is the level of advertising and M is income. Based on this information, determine the effect on the consumption of cereal of (Total 4 Points) a. A 4 percent increase in income. b. A 20 percent reduction in cereal advertising.

A. Quantity demanded rises by 0.68 x 4 = 2.72% B.Quantity demanded falls by 0.75 x 20 = 15%

If the last unit of input increases total product, we know that the marginal product is:

positive

Suppose market demand and supply are given by Qd=100-2P & Qs=5+3P. If a price floor of $30 is set, what will be size of the resulting surplus?

price floor=$30 QD=100-2P QD=100-2(30) QD=100-60 QD=40 QS=5+3P QS=5+3(30) QS=5+90 QS=95 QD<Q5=SURPLUS 95-40=55

Suppose the production function is given by Q=3K+4L. What is the average product of capital when 10 units of capital and 10 units of labor are employed?

3(10)+4(10)=70 70/10=7

(LONG) Apples and Oranges are substitutes. a freeze in Florida destroys most of the orange crop. What would you expect to happen to the market for the following? Draw a proper diagram to depict the changes and effects on the price & quantity in each of the markets. A. Oranges? B. apples? C. Orange Juice?

!!LOOK AT GRAPH AND DRAW!! A. Oranges: A free of the Orange creep will decrease the supply of oranges and that will lead to an increase in the price of oranges from P to P1. B. As the price of oranges rise, the demand for the substitute apples will increase from Q to Q1 as shown in the figure above, C.Oranges: A free of the Orange creep will decrease the supply of oranges and that will lead to an increase in the price of oranges from P to P1.

If the interest rate is 5%, $100 received at the end of 7 years is worth HOW MUCH today?

100 / (1+0.05)7

Suppose the production function is Q=min {K,2L}. How much output is produced when 4 units of labor and 9 units of capital are employed?

2*4= 8

If the interest rate is 10% and cash flows are $1,000 at the end of year one & $2,000 at the end of year two, then the present value of these cash flows is:

=[1,000/(1+0.10)^1]+[2,000/(1+0.10)^2] =(1,000/1.1)+(2000/1.21) =2,561.9 =$2,562

A firm sells its product in a perfectly competitive market where other firms charge a price of $100 per unit. The firm's total costs are C(Q) = 40 + 8Q + 2Q2. a. How much output should the firm produce in the short run? b. What price should the firm charge in the short run? c. What are the firm's short-run profits? d. What adjustments should be anticipated in the long run?

A. 100=8+4Q 92=4Q Q=23 B. 100 C. 100(23)=2300 40+8(23)+2(23)^2=1058 2300-1058=1018 D. Entry will occur until economic profits shrink to zero.

You are the manager of a firm that produces a product according to the cost function C(qi) = 160 + 58qi - 6qi2 + qi3. Determine the short-run supply function if: (Note: q^2 is equivalent to q2) a. You operate a perfectly competitive business. b. You operate a monopoly. c. You operate a monopolistically competitive business.

A. P = 58 - 12q + 3q^2 if P is greater than or equal to $49; otherwise the firm produces zero units. B.There is no supply curve in this case. C.There is no supply curve in this case.

The manager of a national retailing outlet recently hired an economist to estimate the firm's production. Based on the economist's report, the manager now knows that the firm's production function is given by Q=K^1/2 L^1/2 and that capital is fixed at 4 units. A. Calculate the average product of labor when 4 units of labor are utilized. B. Calculate the marginal product of labor when 4 units of labor are utilized. C. Suppose the firm cab hire labor at a wage of $10 per hour and output can be sold at a price of $100 per unit. Determine the profit-maximizing levels of labor and output.

A. Q=K^(1/2) L^(1/2) Q=4^(1/2) 4^(1/2) Q = 4 B. Q=K^(1/2) L^(1/2) MPL = (1/2)*(K/L)^(1/2) MPL = (1/2)*(4/4)^(1/2) MPL = 1/2=0.5 C. For profit maximization: MPL/w = MPK/r [(1/2)*(K/L)^(1/2)]/[(1/2)*(L/K)^(1/2)] = w/r (K/L)^(1/2)/(L/K)^(1/2) = 10/r K/L = 10/r 1/L = 10/r L = r/10 Q=K^(1/2) L^(1/2) Q=(r/10)^(1/2)

You are the manager of a monopolistically competitive firm, and your demand and cost functions are given by Q = 36 - 4P and C(Q) = 124 - 16Q + Q2. a. Find the inverse demand function for your firm's product. b. Determine the profit-maximizing price and level of production. c. Calculate your firm's maximum profits. D.What long-run adjustments should you expect? Explain.

A. Q=36-4P 4P=36-Q P=1/4(36-Q) P = 9 - 0.25Q B.MR = 9 - .5Q and MC = -16 + 2Q. Setting MR = MC yields 9 - .5Q = -16 + 2Q. Solving for Q yields Q = 10 units. The optimal price is P = 9 - .25(10) = $6.50. C. Revenues are R = ($6.50)(10) = $65. Costs are C = 124 - 16(10) + (10)2 = $64. Thus the firm earns $1.00. D.Entry will occur until profits are zero. In the long run entry will occur and the demand for this firm's product will decrease until it earns zero economic profits.

We learned in class that economies of scope exist when the total of producing Q1 and Q2 together is less than the total cost of producing each of the types of output separately, i.e. the following condition holds: C(Q1,0)+C(0,Q2)>C(Q1,Q2) Now, suppose a firm produces two goods and has cost function given by C=100+Q1Q2+(Q1)^2+(Q2)^2 If the firm plans to produce 6 units of Q1 and 4 units of Q1: A. Does this cost function exhibit economies of scope? Show your work! B. Does this cost function exhibit cost complementaries? Show your work!

A. 100-6(4)(1) 100-24=76 76>0 Yes, there is scon of scope! B. 1>0 No there are no cost complementarities because 1 is greater than 0.

The widget industry is comprised of six firms of varying sizes. Firm 1 has 36 percent of the market. Firm 2 has 24 percent, and the remaining firms have 10 percent each. A. What is the four-firm concentration ratio for this industry? B. What is the Herfindahl-Hirschman index for the widget industry? C. Based on the U.S. Department of Justice (DOJ) merger guidelines described in the textbook, if the Herfindahl-Hirschman index is between 1500 and 2500 after a merger, and the merger increases the herfindahl-Hirschman index by more than 100, the FTC and DOJ may challenge the merger. Do you think the Justice Department would be likely to block a merger between firms 5 and 6? Show your work.

A. 36%+24%+10%+10% -------------------- = 80% 100% B. =10,000 [(36%/100%)^2+(24%/100%)^2+(10%/100%^2 *4] =10,000[0.1296+0.0576+0.01*4] =10,000[0.2272] =2,272 C. 1. 1500<HHI<2500 =10,000[(36%/100%)^2+(24%/100%)^2+(20%/100%)^2+(10%/100%)^2+(10%/100%)^2] =10,000[0.1296+0.0576+0.04+0.01+0.01] =10,000[0.2472] =2,472 2. 2,472-2272=200 200>100 Yes, the DOJ merger would be likely to block a merger between from 5 and 6.

If marginal benefits exceed marginal costs, it is more profitable to:

Increase Q

(LONG) Suppose the growth rate of the firm's profit is 5 percent, the interest rate is 6 percent, and the current profits of the firm are $80million. What is the value of the firm?

Calculate the present value of the firm as follows: present value=Current profits x [(1+interest rate)/(1-growth rate)] =$80million x [(1+0.06)/(1-0.05)] =[$80 million x (1.06)]/0.95 =$89.26 million

Which of the following is (are) true? A. Accounting costs generally understate economic costs. B. Accounting profits generally overstate economic profits. C. In the absence of any opportunity costs, accounting profits equal economic profits. D. All of the statements associated with this question are correct

D. all of the statements associated with this question are correct

The disadvantage of vertical integration is that:

Firms no longer specialize in what they do best

Which of the following forms of payment is NOT an incentive plan?

Flat salary for a plant manager

If the price for pork chops falls from $8 to $6, and this leads to an increase in demand for apple sauce from 100 to 140 jars, what is the cross-price elasticity of applesauce and pork chops at a pork chop price of $6?

Given P1=$8, P2=$6, Q1=100, Q2=140. Calculate Price Elasticity: Price Elasticity=[(Q2-Q1/P2-P1) X (P2/Q2)] =[(140-100)/(6-8)] X (6/140)] =[(40/-2) X (6/140)] = -0.86

Suppose the demand for good X is given by Qdx = 10+axPx+ayPy+amM. If ay is positive, then:

Good y and x are substitutes

Which of the following is NOT a source of rivalry in economic transactions?

Government - Producer Rivalry

Last month you assumed the position of manager for a large car dealership. The distinguishing feature of this dealership is its "no hassle" pricing strategy; prices (usually well below the sticker price) are posted on the windows, and your sales staff has a reputation for not negotiating with customers. Last year, your company spent $2 million on advertisements to inform customers about its "no hassle" policy, and had overall sales revenue of $40 million. A recent study from an agency on Madison Avenue indicates that, for each 3 percent increase in TV advertising expenditures, a car dealer can expect to sell 12 percent more cars—but that it would take a 4 percent decrease in price to generate the same 12 percent increase in units sold. Assuming the information from Madison Avenue is correct, should you increase or decrease your firm's level of advertising?

Increase advertising. Note that the information implies an advertising-to-sales ratio of 0.05, an own-price elasticity of -3 and an advertising elasticity of 4. Optimal advertising requires AR=EQ,A−EQ,P In this case, 0.05 < 1.33. To bring this equation into equality, the firm should increase its advertising, provided that the estimated elasticities of advertising and demand are correct.

As the interest rate increases, the opportunity cost of waiting to receive a future amount:

Increases

The Leontief production function implies:

L-shaped isoquants

When MB = 300-12Q & TC = 12Q + 108, the optimal level of Q is:

MB = marginal benefit Q is optimal when marginal benefit = marginal cost TC = 12Y+108 MC (the derivative of TC) = 12 MC = MB 12 = 300-12Q 12Q = 300 - 12 12Q = 288 Q= 24

Given the benefits function B(Y) = 200Y - 3Y2, the marginal benefit is:

MB(Q)=200y-3y^2 =200-6Y

The absolute value of the slope of the isoquant is the:

Marginal rate of technical substitution.

If the annual interest rate is 0%, the present value of receiving $1.10 in the next year is:

PV=FV/(1+R) $1.10=FV/(1+0) (1)1.10=FV/1(1) FV=1.1=$1.10

Which of the following are signals to the owners of scarce resources about the best uses of those resources?

Profits of Business

(LONG) Draw the demand curve Q = 400-20P. Calculate the price elasticity of demand at prices of $5, $10, $15 to show how it changes as you move along this linear demand curve (state how it changes). Show your work!!

Q=400-20P/20(SIMPLIFY) Q=200-10P Solving for P = $5, Q = 200 - 10(5) = 200 - 50 = 150. Similarly, solving for P = $10, Q = 200 - 10(10) = 100. And solving for P = $15, Q = 200 - 150 = 50. Price elasticity is the percent change in the quantity purchased divided by the percent change in price. To calculate these percentage changes, divide the change in each variable by its original value. Moving in $5 increments: As P increases from $5 to $10, Q falls from 150 to 100. Therefore, P increases by 100% (5/5) as Q falls by 33% (50/150). Elasticity = -0.33/1.00 = -0.33. As P increases from $10 to $15, Q falls from 100 to 50. P increases by 50% (5/10) as Q falls by 50% (50/100). Elasticity = -0.5/0.5 = -1.0. As P increases from $15 to $20, Q falls from 50 to 0. P increases by 33% (5/15) and Q increases by 100% (50/50). Elasticity is -1.0/0.33 = -3.03. Even though the magnitude of the change remains the same (for every $5 increase in price, the quantity purchased falls by 50), in terms of percentage change elasticity of demand increases in magnitude as price increases.

in a competitive market, the market demand is Qd = 60-6P & the market supply is Qs = 4P. A price ceiling of $3 will result in a

QD=60-6(3) QD=60-18 QD=42 QS=4(3) QS=12 QD>QS SHORTAGE 42-12=30 Shortage of 30 Unites

Technological advances will cause the supply curve to

Shift to the right

If an exercise tax is imposed on a good, then the supply curve:

Shifts up by the amount of the tax

Which of the following is Not a means of avoiding opportunism?

Spot Exchange

Suppose each of the 50 states had only one gasoline station, and all stations were the same size. The four-firm concentration ratio, based on national data, would be:

Total number of gasoline stations = 50 x 1= 50 Share of top four firms = 4 x 1 = 4 So, four firm concentration ratio = 4 / 50 = 0.08

Compute the present value of a perpetual bond that pays a monthly cash flows of $1,000 at an annual interest rate of 12%

Value of perpetual bond = Perpetual payment/interest rate Perpetual payment (Monthly) =1,000 Monthly interest rate=12/12=1% Present Value of perpetual bond =1,000/0.01=$100,000

In a competitive market, the market demand is Qd = 60-6P & the market supply is Qs = 4P. The full economic price uner a price ceiling of $3 is:

When P = $3, Qd = 60 - (6 x 3) = 60 - 18 = 42 Qs = 4 x 3 = 12 Since consumers can buy only what producers will sell, relevant market quantity is 12 units. When Q = 12, From demand function: 12 = 60 - 6P 6P = 48 P = $8

If good A is an inferior good, an increase in income leads to:

a decrease in the demand for good A

(LONG) Your firm's research department has estimated your total revenues to be R(Q) = 3,000Q-8Q2 & your total costs to be C(Q) = 100+2Q2. (Note that MB = 3,000-16Q & MC = 4Q. A. what level of Q maximizes net benefits? B. What is the maximum level of net benefits

a) Net benefit is maximized when: MB = MC 3000 - 16Q = 4Q 20Q = 3000 Q = 3000 / 20 = 150 Thus, at Q = 150, net benefit is maximized. B) Net Benefit = R - C = (3000Q - 8Q2) - (100 + 2Q2) = 3000Q - 8Q2 - 100 - 2Q2 = 3000Q - 10Q2 - 100 = 3000(150) - 10(150)2 - 100 = 450,000 - 225,000 - 100 = 224,900

The manager of a local monopoly estimates that the elasticity of demand for its product is constant and equal to -3. The firm's marginal cost is constant at $35 per unit. a. Express the firm's marginal revenue as a function of its price. b. Determine the profit-maximizing price.

a. Based on a price elasticity of demand of -3, the monopolist's marginal revenue is MR = P((1-3) / (-3)) = (0.67)P. b. Since the monopolist maximizes profits where MR = MC, the profit-maximizing price can be obtained by solving the following equation: 0.67×P = 35, so P = $52.50. (Note: If you had to round your answer in part a, and used the rounded version, your answer will be slightly different.)

The law of demand sates that, holding all else constant:

as price falls, the quantity demand rises

The differences between average total costs and average variable costs is:

average fixed cost

If a firm's function is Leontief and the wage rate goes up, the:

cost minimizing combination of capital and labor does not change

Suppose the long-run average cost curve is U-shaped. When LRAC is in the increasing stage, there exist:

diseconomies of scale.

A negative side of a revenue-sharing plan is that it:

gives no incentive for workers to minimize costs.

For given input prices, isocosts farther from the origin are associated with:

higher costs

The combinations of inputs that produce a given level of output are depicted by:

isoquants

A Herfindahl-Hirschman index of 10,000 suggests:

monopoly

Suppose the marginal product of labor is 8 and the marginal product of capital is 2. If the wage rate is $4 and the price of capital is $2, then in order to minimize costs the firm should use:

more labor and less capital.

In order to maximize bet benefits, the managerial control variable should be used up to the point where:

net marginal benefits equal zero

Shirking can take the form of:

sleeping at work, long lunch hours, and leaving work early

Long-term contracts become longer:

when specialized investment becomes more important.