Managerial Economics Exam 1 Review

In addition to its namesake​ cupcake, Hostess Brands produces Twinkies. Huge​ mixing-baking-cooling-wrapping machines produce both these products in Hostess​ Brands' factory in​ Emporia, Kansas. These machines mix the batter for each of the​ products, pour the batter into​ pans, and move the pans into​ long, winding ovens where they are baked and then into equally​ long, winding tunnels where they are cooled. Before wrapping​ them, the machines finish the tasty treats by injecting filling into them and applying any necessary topping. The machines even automatically clean the baking​ pans! Which of the following are explicit costs for Hostess​ Brands, which are implicit​ costs, and which are not costs at​ all? 1. The cost of the electricity used to run the production machines 2. The salary paid to the night-shift manager 3. The wear on the machines as they are used 4. The price paid for the paper used to wrap the products 5. The fixed lease payments made on the factory

1. Explicit Cost 2. Explicit Cost 3. Implicit Cost 4. Explicit Cost 5. Explicit Cost

What is the effect of each of the following changes on the supply curve of jeans? 1. A rise in the price of transporting the jeans from Thailand, where they are made, to the US, where they are sold. 2. A fall in the wages paid to the workers who sew the jeans. 3. A fall in the price of jeans. 4. An increase in the number of companies manufacturing jeans.

1. Leftward shift of the curve 2. Rightward shift of the curve 3. Downward movement along the curve 4. Rightward shift of the curve

Harvey owns both a hardware business and the building that he uses to run the business. What information would you need to calculate the total opportunity cost of operating​ Harvey's hardware​ business?

1. The amount Harvey could earn by renting out his building to another firm 2. The information common to both accounting and opportunity costs 3. The value of Harvey's time spent on his hardware business

Using Marginal Analysis, managers should undertake: Action : Marginal benefit : Marginal cost 1 unit : $600 : $100 2 units : $500 : $200 3 units : $400 : $400 4 units : $300 : $1,100

3 units of the action because that is the action that sets the marginal benefit equal to the marginal cost

True or False: All else​ equal, the higher the actual price consumers must pay to purchase a​ product, the greater the consumer surplus.

False

True or False: An increase in income shifts the supply curve of appliances to the right.

False

True or False: An increase in the cost of producing honey results in a movement up along the supply curve of honey.

False

True or False: An increase in the number of demanders for a good will cause a downward movement along the demand curve.

False

True or False: If an increase in the price of Good X causes the demand for Good Y to shift rightward, Goods X and Y are complements.

False

True or False: Marginal analysis is the comparison of the total benefit of an action compared to its total cost.

False

True or False: The marginal benefit of an action is the same as the total benefit of an action.

False

True or False: The terms "total revenue" and "total profit" mean the same thing.

False

Explain how producing more than the equilibrium quantity decreases​ society's total surplus.

For each unit that exceeds the equilibrium quantity, the marginal cost of the unit exceeds the maximum price a consumer is willing to pay for the unit. Total surplus would be higher if none of the units greater than the efficient quantity were produced and consumed.

Total Revenue equals

P x Q, where P is the price and Q is the quantity sold

At the 30th unit of action, the marginal benefit is equal to $50 and the marginal cost is equal to $40. Which of the following is true?

The 30th unit of action should be undertaken.

Grocery stores must allocate shelf space to different brands.​ Safeway, a large grocery store​ chain, allocates more space to Post cereals. Safeway's opportunity cost of this action is _____________________.

The foregone profit to Safeway that could have been earned on other products

If an increase in consumers' incomes results in a leftward shift of the demand curve for a good, which of the following is true?

The good is an inferior good

If deadweight loss exists in a competitive​ market, which one of the following is​ true?

The market is either under or over producing

At the equilibrium price, which of the following is true?

The quantity demanded equals the quantity supplied.

Ethanol producers persistently lobby the government to issue regulations increasing the amount of ethanol that oil refiners must add to gasoline. Which of the following are reasons why ethanol producers lobby the government for these​ regulations?

The regulations would raise ethanol producers' profits The regulations would increase the amount of ethanol producers supply The regulations increase the demand for ethanol by requiring oil refiners to use it in their gasoline

If the price of ground beef decreases, which of the following will occur?

There will be a movement down the demand curve for ground beef.

If the price of peanut butter increases, which of the following will occur?

There will be a movement up the demand curve for peanut butter.

If the price of tomato juice decreases, which fo the following will occur?

There will be movement down the supply curve for tomato juice.

If the price of avocados increases, which of the following will occur?

There will be movement up the supply curve for avocados.

Increased consumption of natural foods by pet owners has led to increased demand for natural foods for their pets. The​ Colgate-Palmolive Company produces and sells​ Hill's Science Diet cat food. Suppose that you work for a similar​ company, also producing​ 'scientific' cat food. Your marketing team presents research showing that consumers do not consider​ so-called scientific cat food natural. Based on the trend toward natural cat​ foods, what do you expect will happen to the equilibrium price and quantity of scientific cat​ food? Based on this​ result, what​ recommendation(s) would you make to top​ management?

Top management could shift production toward natural cat foods and use marketing that emphasizes the natural aspects of their products. The demand for scientific cat food​ decreases, so the demand curve shifts to the left. Top management could consider rebranding their cat food with a name that emphasizes its natural attributes.

True or False: A news report discussing a medical study that found conclusive evidence of the positive health benefits of farm-raised eggs is likely to cause a rightward shift of the demand curve for farm-raised eggs.

True

True or False: Accounting depreciation for an asset is an arbitrary number and is not necessarily related to the​ asset's real deprecation.

True

True or False: All else​ equal, the higher the actual price producers receive for their​ product, the greater the producer surplus.

True

True or False: At equilibrium price, the quantity demanded is equal to the equilibrium quantity.

True

True or False: Bakeries can use their equipment to produce either bread or cookies, so bread and cookies are substitutes in production.

True

True or False: If a decrease in the price of Good X causes the demand for Good Y to shift rightward, Goods X and Y are complements.

True

True or False: If the actual price is below the equilibrium price, a shortage forces the price to rise to the equilibrium price.

True

True or False: If the marginal benefit to a store of staying open an extra hour is less than the marginal cost, the managers should decide to not stay open the extra hour.

True

True or False: In a competitive​ market, if the deadweight loss is equal to​ zero, society enjoys the largest total surplus.

True

True or False: Producing the efficient quantity of a product maximizes society's total surplus form the product.

True

True or False: The presence of consumer surplus means that some consumers are willing to pay a higher price for a product than the price they currently pay.

True

True or False: You are a manager for Texas​ Instruments, a major producer of Systems on a Chip​ (SoC) used in​ smartphones, tablets, and similar devices. You predict a massive increase in demand for​ them, so you expect the price of SoCs to rise.

True

What could have caused the leftward shift in the demand curve?

a decrease in the expected future price of Good Z a decrease in the price of a substitute for Good Z an increase in income if Good Z is an inferior good an increase in the price of a complement for Good Z a decrease in income if Good Z is a normal good

Which of the following will cause a movement down the demand curve for frozen chicken nuggets?

a decrease in the price of frozen chicken nuggets

What could have caused the rightward shift in the demand curve?

an increase in the price of a substitute for Good Z a decrease in income if Good Z is an inferior good an effective marketing campaign that changes preferences towards Good Z an increase in the number of demanders for Good Z an increase in the expected future price fo Good Z

Which of the following will cause a movement along the demand curve for apple juice?

an increase in the price of apple juice

Which of the following will cause a movement up the demand curve for digital printing services?

an increase in the price of digital printing services

If the marginal ____________ of an action exceeds its marginal ____________ then the action ____________ be performed.

benefit; cost; should

Opportunity cost is hard to measure, _________________.

but managers who use it have more accurate cost estimates

Each hour a store remains open it incurs a marginal cost. If the marginal benefit of staying open does not change but the marginal cost doubles, then the manager will ______________ the hours the store remains open.

decrease

If the marginal benefit curve is linear and downward sloping and the marginal cost curve is linear and upward sloping, an increase in the marginal cost that causes an upward shift of the curve will ______________ the profit - maximizing number of units undertaken.

decrease

The ____________ shows the maximum price consumers are willing to pay for each unit of a product.

demand curve

The​ ___________ shows the maximum price consumers are willing to pay for each unit of a product.

demand curve

If Goods X and Y are substitutes, if the price of Good X decreases, this will cause a movement ___________ the demand curve for Good X and a ___________ shift in the demand for Good Y.

down; leftward

If Good X and Y are complements, if the price of Good X decreases, this will cause a movement _________ the demand for Good X and a ___________ shift in the demand curve for Good Y.

down; rightward

At equilibrium price, the equilibrium quantity is __________________________.

equal to the quantity supplied and to the quantity demanded

If there is overproduction in a competitive​ market, the quantity produced is​ _____________ than the efficient quantity and the marginal benefit to society is​ _____________ than the marginal cost.

greater; less

The owners of a local retailer once​ remarked, "We can always beat the price that​ Kohl's charges for identical merchandise." When​ questioned, the owners revealed that this was possible because "​Kohl's must pay rent on its store while we own our building and have no rent to pay." These owners ______ a problem with their economic logic because they _________________.

have; fail to account for the opportunity cost of owning their building

Rob Kalin founded​ Etsy, an online marketplace where crafters sell unique products. Etsy competes with eBay and Amazon.com. Six years after its​ founding, Mr. Kalin said that maximizing​ shareholders' value, which is effectively the same as maximizing​ profit, was "ridiculous". The major investors financing the company removed Mr. Kalin from his position as the head of the company within a few months. They favored Mr.​ Kalin's removal because __________.

he openly admitted that he was not interested in maximizing profit, the objective of the firm

All else​ equal, the lower the​ price, the​ ________ the consumer surplus and the​ ________ the producer surplus.

higher; lower

All else​ equal, the lower the​ price, the​ ___________ the consumer surplus and the​ ____________ the producer surplus.

higher; lower

During its telecast of the​ Olympics, NBC ran an ad promoting its new "Fall Shows." Because the advertisement aired when there was a lull in the​ action, an analyst said that the promotion was free. The analyst is ___________ because NBC ________ an opportunity cost of _______________________________________________.

incorrect; incurs; the foregone ad revenue it lost by using the airtime for their own ads

An increase in the number of corn producers ________________ the supply of corn and shifts the supply curve of corn to the ______________.

increases; right

To maximize total profit, managers want to produce the quantity in which marginal benefit ___________ marginal cost.

is equal to

If the equilibrium price of ammonia is $600 per metric ton and the actual price is $560 per metric ton, the quantity demanded ____________ the quantity supplied.

is greater than

How does an advance in technology affect the supply curve?

it shifts the supply curve to the right

If there is underproduction in a competitive​ market, the quantity produced is​ ____________ than the efficient quantity and the marginal benefit to society is​ _______________ than the marginal cost.

less; greater

All else equal, the higher the price, the _____________ the consumer surplus and the ____________ the producer surplus.

lower; higher

All else​ equal, the higher the​ price, the​ ________ the consumer surplus and the​ ________ the producer surplus.

lower; higher

Bauxite is used to produce aluminum. You are a manager for Rio Tinto​ Alcan, a major aluminum producer. If you think that the demand for bauxite and the supply of bauxite will both increase but you do not know the relative​ sizes, then you expect that the cost of bauxite ________________.

might rise, fall, or not change.

Economists assume that the paramount goal of managers of profit-seeking firms is ______________.

only profit maximization

Managers should use ____________ cost when making managerial decisions because it considers the return from alternative uses of the​ firm's resources.

opportunity

Toyota's factory can use its assembly lines to produce either the Toyota Camry or the Camry Hybrid. For this Toyota factory, the Camry and the Camry Hybrid are ___________ in production. A decrease in the price of the Camry Hybrid would _____________ the supply of the Camry.

substitutes; increase

At any price higher than the equilibrium price, there is a __________ and the price will __________.

surplus; fall

At any price higher than the equilibrium price, a ______________ in quantity will be created and at any price lower than the equilibrium price, a ______________ in quantity will be created.

surplus; shortage

If there is underproduction in a competitive​ market, ________________.

the marginal benefit to society exceeds the marginal cost

If there is overproduction in a competitive​ market, ___________________.

the marginal cost to society exceeds the marginal benefit

The law of supply refers to the relationship between _________________________.

the price of a good or service and the quantity supplied of that good or service

If there is overproduction in a competitive​ market, _______________ will increase if the quantity produced​ ________________ to the equilibrium quantity.

total surplus; decreases

If there is underproduction in a competitive​ market, _________________ will increase if the quantity produced​ _________________ to the equilibrium quantity.

total surplus; increases

If Goods X and Y are substitutes, if the price of Good X increases, this will cause a movement ________________ the demand curve for Good X and a ______________ shift in the demand for Good Y.

up; rightward

If Big Brothers Hot Dog stand sold 500 hot dogs at a price of $2 per hot dog, the total revenue is __________.

$1,000

The total cost for 15 units is $150 and the cost of the 15th unit itself is $20. The marginal cost of the 15th unit is _______.

$20

You are the manager of a​ medium-sized farm with 100 acres of workable land. You can farm the land​ yourself, rent the land to another farmer for $2,500 per​ acre, or sell the land to a developer for $40,000 per acre. You have an investment opportunity that pays a return of 66% a year. If you decide to farm the land​ yourself, your opportunity cost for a year will be _________.

$250,000

Cigna Corporation can sell one of its buildings for $50 million. Cigna's most profitable investment opportunity has an annual profit of 10%. The building will fall in value to $48 million after a year. Cigna could rent the building for an annual rent of $6 million. Based on one-year returns, what is Cigna's opportunity cost of USING the building?

$5 million

Ace Alexia plays professional tennis for a​ living, but in spite of her big first​ serve, she is not very successful. During the last​ year, Ace could have earned ​$75,000 as a tennis instructor at the Atlanta Tennis Club. She would have spent $7,000 on​ meals, paid rent on a condo in Atlanta at $800 per​ month, and made car payments of $300 per month.​ Instead, she remained a pro and won ​$100,000 in prize money in various tournaments around the country. In doing​ so, she spent $12,000 on transportation and lodging and paid her​ coach/trainer $10,000 for the year. She also spent $7,000 on​ meals, paid rent on her condo in Atlanta at $800 per​ month, and made the payments on her car of ​$300 per month. ​Ace's opportunity cost of playing tennis last year was _________. If Ace became a tennis instructor instead of being a professional tennis​ player, her total income minus her costs​ (her net​ income) would be ________ by $_________.

$54,800 smaller; $3,000

A year ago, American Sugar Refining (ASR) paid $20 million for a vacuum pan to help produce sugar. The vacuum pan will last for 20 years. At the present time, ASR could sell the vacuum pan for $14 million. The economic depreciation over the year equals ________________.

$6 million