TEE MG381
A consumer values a car at $525,000 and a seller values it as $485,000. Sales tax is 8% and is levied on the seller, the sellers bottom price is?
$527,000 At this price seller receives his value for the car. $485,000/0.92 = Approx. 527172
Suppose there are nine sellers and nine buyers in a competitive market, each willing to buy or sell one unit of a good, with values $10, $9, $8, $7, $6, $5, $4, $3, $2. Assuming there are no transactions costs, what is the equilibrium price in this market?
$6, 5 suppliers willing to sell and 5 willing to buy
You have two types of buyers for your product. Forty percent of buyers value your product at $10 and sixty percent value it at $6. What price maximizes your expected revenue?
$6, in this case, all 100% of buyers will purchase your product
You expect to sell 500 cell phones a month, which have an MC of $50. If your fixed costs are $5,000 per month, what is the break-even price?
$60, Breakeven Q= FC/(P-MC). This means that (P-MC)Q=FC, so P-MC= (FC/Q) and finally P= (FC/Q) - MC. This gives us P= (5000/500)+50 = 10+50 = $60
You own a retail establishment run by a store manager who receives a flat salary of $80,000. If you set up another store as a franchise with incentive compensation to the franchisee, what would be a reasonable total compensation range that the franchisee could earn?
$60,000- $100,000 [correct; this would allow the franchisee to earn an average salary similar to the manager but still allow it to vary with performance.]
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
$7, because total fixed cost are $5/lb. ($50k total FC / 10k units) average variable cost is given as $2 a slab, there fore average total cost (FC + VC) is 5+2= $7
You are bidding in a second-price auction for a painting that you value at $800. You estimate that other bidders are most likely to value the painting at between $200 and $600. Which of these is likely to be your best bid?
$800, in second price auction the optimal strategy is to bid exactly your value
IF GDP is expected to increase at a steady rate of 3% per year, how many years would it take for living standards to double?
24. 1.03^24=2.03 approx 2 (doubled)
Suppose your firm adopts a technology that allows you to increase your output by 15%. If the elasticity of demand is -3, how should you adjust price if you want to sell all of your output?
5% lower, Because Change in Q = e(change in price), therefore a 15% increase in Q= -3(change in price), Q = 15%, so solving for equation you find 15%/-3 = change in price = -5% or 5% less
Rational decision tree model with uncertain outcome: When customers have unknown values, you face this pricing trade off...?
price high and only sell to high value customers, or price low and sell to all customers
Which of the following provides an example of divisions based on a functional organizational structure?
research and dev, production, finance, marketing
Firms tend to raise the price of their goods after acquiring a firm that sells a substitute good because
the aggregate demand for both goods is less elastic than the demand for the individual goods.
After running a promotional campaign, the owners of a local hardware store decided to decrease the prices for the advertised prices sold in their store. One can infer that
the promotional expenditures made the demand for the advertised products more elastic. [correct; promotional activity that makes demand more elastic should be accompanied by a decrease in price.]
Holding other factors constant, a decrease in the tax for producing coffee causes
the supply curve to shift to the right, causing the prices of coffee to fall
Break even quantity is the point where
there are zero profits
Sarah's Machinery Company is deciding to dump their current technology A for a new technology B with smaller fixed costs but bigger MCs. The current technology has fixed costs of $500 and MCs of $50 whereas the new technology has fixed costs of $250 and MCs of $100. At what quantity is Sarah's Machinery Company indifferent between two technologies?
5, Total cost can be calculated as C = 500+50(Q) while technology B has C=250+100(Q). Therefore, setting these equations equal to each other gives us 500+50(Q) = 250 + 100(Q), solving for this gives Q = 5
A bakery currently sells chocolate chip cookies at a price of $16/dozen. The MC is $8/dozen. 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 retained to ensure that the price increase is profitable?
66.6%, the margin has increased from 8 (16-8) to 12(20-8), the bakery must maintain 66.6% (8/12) of its customers in order to get the same level of profitability.
When demand for a product falls, which of the following events would you NOT necessarily expect to occur?
A decrease in the supply of the product - while a decrease in demand will be associated with a decrease in quantity supplied at equilibrium, it will not cause a shift in the supply curve.
The fixed-cost fallacy occurs when
A firm considers overhead or depreciation costs to make short-run decisions and a firm considers irrelevant cost
Which of the following is an example of vertical integration?
A gourmet cheese company purchasing a dairy T. A gourmet cheese company purchasing a dairy [correct; dairy is an input into the cheese production process]
An industry is...
A group of firms producing products that are close substitutes
At the individual firm level, which of the following types of firms faces a downward-sloping demand curve?
A monopoly firm but not a perfectly competitive firm
Which of the following is true about different ways of conducting a private-value auction?
A second price auction is strategically equivalent to an oral auction
What might you reasonably expect of an industry in which firms tend to have economies of scale?
A small number of firms, firms with large volume would capture economies of scale
When a resource or capability is valuable, rare, hard to imitate, and non-substitutable firms may gain
A sustainable competitive advantage
Which of the products below is closest to operating in a perfectly competitive industry? Cotton, nike shoes, food, perdue chicken
Cotton (It's a commodity)
Why are contact lens manufacturers reluctant to sell their lenses through the Internet?
Doing so reduces the incentives of retailers to provide point-of-sale services [correct; in order to compete with online prices, retailer would likely be forced to eliminate their point of sale services, which could affect customer's overall experience with the brand]
Microsoft found that instead of producing a DVD player and a gaming system separately, it is cheaper to incorporate DVD playing capabilities in its new version of the gaming system. Microsoft is taking advantage of
Economies of Scope
Total costs increase from $1500 to $1800 when a firm increases output from 40 to 50 units. Which of the following is true if MC is constant?
FC = $300, we know that total cost = FC+VC(50). We can solve for FC with this equation. For example, using the first equation VC(40) = 1500-FC, hence VC=(1500-FC)/40. Plugging this value for VC into 1900=FC+VC(50) will give you 1800= FC+VC(50) will give you 1800=FC+50((1500-FC)/40), which lets us find FC=300
Suppose a recent and widely circulated medical article has reported new benefits of cycling for exercise. Simultaneously, the price of the parts needed to make bikes falls. If the change in supply is greater than the change in demand, the price will _____________ and the quantity will _____________.
Fall, Rise
Which of the following is NOT a factor that contributes to higher rivalry in the industry
Fast industry growth
Which type of organizational form has the benefit of closer coordination to serve a particular product or geographic area?
M-form organizations
If a firm's average cost (AC) is a rising then:
MC is greater than average cost
Rational decision tree model with uncertain outcome: If you can identify high value and low value customers, you can price discriminate and avoid trade off. To avoid being price discriminated against some customers will...
Mimic the behavior and appearance of low value customers. (ex. buying from a car dealership)
What is the main difference between a competitive firm and a monopoly firm?
Monopoly firms can generally earn positive profits over a longer period of time (before imitation and entrance)
Principal agent relationships subject to
Moral hazard problems
A shoe-producing firm decides to acquire a firm that produces shoe laces. This implies that the firm's aggregate demand (shoes + laces) will be:
More elastic than individual demands - demand of complements are more elastic than individual demands
In a firm, negative economic profit implies
More information is needed to determine accounting profit, it is impossible to determine the relationship between economic and accounting profit without the information on the economic cost involved
To combat adverse selection ______ informed parties can employ ____ techniques.
More, signaling
Changes in price of a good causes:
Movement along demand and supply curve
Which of the following types of firms are guaranteed to make positive economic profit?
Neither a competitive firm nor a monopoly
Rational decision tree model with uncertain outcome: Risk can be quantified, estimated, and hedged. Uncertainty cannot. you should...
Not mistake risk for certainty, and try to design institutions flexible enough to deal with unforeseen contingencies
A firm faces two kinds of employees, those able to sell 10 units/year, and those able to sell 5 units/year. High-productivity employees are willing to work for $100/year while low-productivity employees are willing to work for only $50/year. To screen out the low-productivity employees, the firm should
Offer a sales commission of $20/unit on sales above 5 units
A software firm can offer a high-feature version of its software or a stripped-down low-feature version, each with similar production costs. Which of the following cannot be an optimal segmentation strategy?
Offer only the low-feature version aimed at all market segments.
Solutions to the adverse selection problem
Offer plan with different deductibles so that high risk customers accept higher deductibles, mandate everyone buy insurance, create national database of customers that allows companies to look up historic risk.
Which of the following actions is consistent with a manager whose compensation depends on meeting a budget goal and who does not believe he can make that goal?
T. All available answers are correct [correct; all of these actions are consistent with this type of compensation scheme]
George and KC have been working jobs that pay $60,000 and $30,000 per year, respectively. They are trying to decide whether to quit their jobs and jointly open up a taco stand on the beach, which they estimate can earn $150,000 per year. How will the taco stand proceeds be split?
T. George gets $90,000 and KC gets $60,000 [correct; Both George and KC will share the gains from trade generated from agreement equally. This provides each of them with $30,000 of the surplus.]
A computer manufacturer has two divisions: one serving residential customers and one serving business customers. If an incentive conflict arises between the two divisions, how will overall company profits be affected?
T. Profits may fall, but it depends on the nature of the conflict.
Your notebook computer's hard drive recently crashed, and you decide to take it to a local repair technician to have it fixed. In this relationship,
Technician is agent
When a resource or capability is valuable and rare, a firm may gain a ___________
Temporary competitive advantage
Rational decision tree model with uncertain outcome: difference-in-difference experiments are a good way to gather information about the benefits and cost of a decision. What are the two differences...
The 1st difference is before versus after the decision or event. The 2nd difference is the difference between a control versus experimental group. You must chose control to balance representativeness with leakage.
Consider bargaining in which each party increases its outside option by $10,000. Which of the following is a likely result.
The bargaining split remains the same. [correct; since each surplus goes up by the same amount, the bargaining split does not change.]
A company is producing 15,000 units. At this output level, MR is $22 and the MC is $18. The firm sells each unit for $48 and average total cost is $40. What can we conclude from this information?
The company needs to increase production. [correct; When MR>MC, you need to sell more. In this case MR=$22 is greater than MC=$18, therefore they should increase production], The company needs to increase production. When MR>MC, you need to sell more. In this case MR = $22 is greater than MC=$18, therefore they should increase production.
The price of peanuts increases. At the same time, we see the price of jelly (which is often consumed with peanut butter) rise. How does this affect the market for peanut butter?
The demand curve will shift to the left; the supply curve will shift to the left
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?
The equilibrium price would fall, and the equilibrium quantity could rise or fall.
A firm is thinking of hiring an additional worker to their organization who can increase total productivity by 100 units a week. The cost of hiring him is $1,500 per week. If the price of each unit is $12:
The firm should NOT hire the workers since MR<MC he will produce $1200 a week for a salary of $1500
Metering is:
a type of indirect price discrimination
Your software development company is considering investing in a new mobile app. If it goes viral (10% probability), you expect an NPV of $1,000,000; if it is moderately successful (20% probability), you expect an NPV of $200,000; and if it fails (70% probability), you expect an NPV of $-200,000. What is the expected NPV of the product?
$0 [correct; ((0.1)*($1,000,000))+((0.2)*($200,000))+((0.7)*(-$200,000))= $100,000+$40,000-$140,000 = $0]
Two hospitals are bargaining with an insurance company to get into its provider network. The insurance company can earn $100 if it puts one of the hospitals in its network and $200 if it puts both hospitals in its network. If both hospitals merge and bargain jointly, how much more will they earn?
$0, each hospital is worth the same and together only worth twice individually, so no real gain
In bad economy, CEO has 4% chance of meeting earning estimates at regular effort and 5% at extraordinary effort. Extraordinary effort cost CEO $10,000. How large a bonus should the CEO be paid for meeting estimates to encourage extraordinary effort?
$1,000,000, extra 1% chance from extraordinary effort. Bonus must be at least $10,000/1% ( or .01)
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%.
$11.57, Because Net Present Value (NPV) is calculated by discounting future cash flows from the period they were received and subtracting the initial investment from the sum of those cash flows. In this case, (50/1.1)+(80/1.12)=111.57, $111.57-$100 initial investment gives NPV of $11.57
In the above auction, if the bidders with the first- and third-highest values ($500 and $300) collude, which of these is closest to the winning price?
$400 [correct; The second-highest value sets the price, so the collusion removing the third-highest value from active competition would not affect the price.]
Suppose that five bidders with values of $500, $400, $300, $200, and $100 attend an oral auction. Which of these is closest to the winning price?
$400, as soon as the bidder with $500 value outbids the next highest bidder the auction would end
All you can eat buffet attracts two types of customers, regular who value the buffet at $20 and eat $5 of food in cost and hungry customers who value the buffet at $40 and eat $10 in food. 100 of each type. What is the max profit?
$4500, can attract most profit from 100 people charged $40 or 200 charged $20
Your production line has recently been producing a serious defect. One of two possible processes, A and B, could be the culprit. From past experience you know that the probability that A is causing the problem is 0.8 but investigating A costs $100,000 while investigating B costs only $20,000. What are the expected error costs of shutting down process B first?
$16,000 [correct; the expected error cost in this case comes from investigating B and having A be the culprit, in other words the probability the total money spent on B will be wasted, so (0.8)*($20,000)=$16,000.]
Say the average price of a new home in Lampard City is $160,000. The local government has just passed new licensing requirements for housing contractors. Based on possible shifts in demand or supply and assuming that the licensing changes do not affect the quality of new houses, which of the following is a reasonable prediction for the average price of a new home in the future?
$170,000, the new license will lead to reduction in supply, therefore, higher equilibrium price
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 a board. If you can sell dart boards for $100 each, what is your break-even quantity?
$17500, Breakeven is Q = FC/(P-MC). In this case, fixed cost are $350,000 ($100,000 in equipment + $250,000 updates), the price is given as $100 and marginal cost is the $80 cost per additional board. Putting these in the formula, we see that 350,000/(100-80) = 17,500
Fred and his employer both know that Fred can generate $200,000 of profit per year for his company. After negotiations, they agree that he will earn $110,000 in annual compensation. What does this imply for the value of his outside or next best alternative?
$20,000, players split the $180,000 gain from trade evenly. Firm earns $90k from this a $20k difference from his salary. Because they don't split it evenly this difference is the value of the next best alternative
A consumer values a car at $20,000 and it costs a producer $15,000 to make the same car. If the transaction is completed at $18,000, the transaction will generate:
$2000 buyer surplus and $3000 in seller surplus
Joe runs the Service Division for a car dealership. The overall dealership has profit of $10 million on sales of $100 million and costs of $90 million. Joe' s division contributed $9 million in sales and $7 million in costs. If the Service Division is evaluated as a profit center, what dollar amount is most relevant to Joe?
$2M because this is the profit of the service division
A bidder's value for a good may be low ($2), medium ($5), or high ($7). There is an equal number of potential bidders having each value. Suppose two bidders participate in a second-price auction. What is the best estimate of the expected revenue from the auction?
$3.56 [correct; the price is $7 1/9 of the time, $5 3/9 of the time, and $2 5/9 of the time.]
An insurance company offers malpractice insurance, assume malpractice insurance claims against careful doctors cost $5000 on average and for reckless $30000. Doctors know whether or not they are careful or reckless. Insurance knows 10% of doctors are reckless. How much do insurance companies charge for malpractice insurance to break even?
$30,000, because careful doctors are risk neutral, they would not purchase insurance higher than 5000, at 30k only reckless doctors would purchase.
A competitive firm's profit maximizing price is $15. At MC=MR, the output is 100 units. At this level of production, average total costs are $12. The firm's profits are
$300 in the short run and zero in the long run, because (15-12)*100 = $300 for short run and long run is always regressed to zero
A business owner makes 1000 items a day. Each day she contributes eight hours to produce those items. If hired elsewhere, 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:
$300,000, revenue equals 1000 items per day time $15/item for 30 days = $450000. Explicit cost are given at $150,000. Therefore account profit = $450,000 - $150,000 = $300,000
A retailer has to pay $9 per hour to hire 13 workers. If the retailer only needs to hire twelve workers, a wage rate of $7 per hour is sufficient. What is the MC of the 13th worker?
$33, total cost of having 12 workers is $84 (12 workers * 7 hours) while the additional thirteenth worker brings the total cost up to $117 (13 workers * 9/hr). Therefore the marginal cost of the 13th worker is $33 ($117-$84)
A salesperson can put in regular effort (Resulting in 40% chance of sale) or high effort (60% chance) If high effort costs the salesperson $20 more than regular effort how large per sale bonus is required for high effort?
$33.33 this would compensate for the extra effort 60% * $33.33 = $20
A franchise restaurant chain is considering a new store in an unserved part of town. Its finance group estimates an NPV of $10 million if the population growth is 10% (40% probability), and NPV of $4 million of the population does not grow (30% probability), and an NPV of -$4 million if the population shrinks 5% (30% probability). What is the expected value of NPV (to the nearest dollar) for the following situation?
$4.0 million [correct; ((0.4)*(10m))+((0.3)*(4m))+((0.3)*(-4m))= 4m+1.2m-1.2m = 4 million]
Employer faces two employees. Regular are 70% of the population and generate $100k in productivity. Exceptional population are 30% of the population and generate $120000 in productivity. Employees know their types and reject salaries below their productivity. IF employer offers a salary equal to avg productivity in the population. What will the employers per employee profit?
-10,000 average productivity is $100,000(70%)+$120,000(30%) = $106000
All of the following provide a motive for vertical agreements EXCEPT
Diversification, this is false because diversification represents a company expanding its reach horizontally rather than vertically
Pete and Lisa are entering into a bargaining situation in which Pete stands to gain up to $5,000 and Lisa stands to gain up to $1,000, provided they reach agreement. Who is likely to have the stronger bargaining position?
Lisa, because she has less to gain
Suppose an investment project has an NPV of $75 million if it becomes successful and an NPV of -$25 million if it is a failure. What is the minimum probability of success above which you should make the investment?
0.25, you are looking for the break even, the minimum probability at which you would invest. ((p)*($75M))+((1-p))*(-$25M)=0, therefore 75p-25+25p=0 or 100p=25, so p=0.25
You are taking a multiple-choice test that awards you one point for a correct answer and penalizes you 0.25 points for an incorrect answer. If you have to make a random guess and there are five possible answers, what is the expected value of guessing?
0 Points, (1/5)*1 + (4/5) * (-.025) - .02 = 0
Your company has a customer list that includes 3000 people. Your market research indicates that 90 of them responded to the coupon. If you send a coupon to one customer at random, what's the probability that he or she will use the coupon?
0.03, chance is 90/3000 or 3% (.03)
To test the effectiveness of a two Web advertising agencies, you increase your ad purchase with agency A by 50% without changing your purchase through agency B. The referrals to your website from agency A increased by only 34% but the referrals from agency B fell by 21%. What is the difference-in-difference estimate of the referrals per dollar through agency A?
1.1 referrals per dollar: Why? Because a "difference-in-difference" estimate of referrals per dollar, you measure the change in referrals from Agency A (+34%) relative to the control group of Agency B (less -21%), for an estimate per dollar of ((55%)change in referrals/(50%)change in dollars) or 1.1. The difference between treatment (agency A) and control (agency B) referrals was 55% (=34%-(-21%). The difference in purchase amounts was 50% (=50%-0%). The diff-in-diff in referrals per dollar was 55%/50% or 1.1
Following are the costs to produce Product A, Product B, and Products A and B together. Which of the following exhibits economies of scope?
100, 150, 240. The cost of producing both products together (240) is less than the sum of the cost of producing them separately
All of the costs associated with a principal interacting with an agent are called
Agency cost
Of these four what is not a variable cost? - Raw materials - Electricity - Hourly Labor - Accounting Fees
Accounting fees, these are paid regardless off total output, they do not vary with amount that is produced. (Electricity varies by usage)
In order to create an effective incentive compensation scheme, you must have
Adequate performance measures
Voluntary transactions always:
Always produce gains for both parties
List actions which create value
Baseball slugger drawing fans into a ballpark, buying a struggling firm and selling assets for more than its worth, and student increasing decision making ability with an MBA.
In a first-price auction, you bid _______ your value, and in a second-price auction you bid ______ your value.
Below, at, bid at your value in second price auctions and shade your bid (bid below your value) in first price auctions
In common value auction...
Bid less aggressively the more competitors you face.
Which is NOT an example of adverse selection: - business bet proceeds of loan on NFL game - Accident prone driver buys auto insurance - A patient suffering from terminal disease buys life insurance - Really hungry person goes to all you can eat buffet
Business bets on NFL, because not intended use of loan, this is hidden action
ex. of moral hazard
Businesses uses loan for one purpose for another high risk investment
Economic value added helps firms avoid the hidden cost fallacy:
By taking all capital cost into account, including the cost of equity.
If you were a manager of a cost center, which of the following areas would be of most interest to you?
Capturing potential econ of scale
Which of the following changes might help solve a divisional conflict regarding a decision?
Change performance eval methods and compensation of decision makers, transfer info to the decision makers so they are better informed, change who has authority to make decision
Which of the following is true about moral hazard
Comes from thins that can't be observed, shirking is an example, can be taking of excessive risk
In the magazine Budget Travel, a hotel maid admits, "I cut corners everywhere I could. Instead of vacuuming, I found that just picking up the larger crumbs from the carpet would do. Rather than scrub the tub with hot water, sometimes it was just a spray-and-wipe kind of day.... After several weeks on the job, I discovered that the staff leader who inspected the rooms couldn't tell the difference between a clean sink and one that was simply dry, so I would often just run a rag over the wet spots.... I apologize to you now if you ever stayed in one of my rooms." Which of the following organizational forms is more likely to have caused this kind of shirking?
Company-owned hotels [correct; As managers do not share (as much) in the profits of the hotels, they have less incentive to monitor quality than the other two organizational forms.]
After firm A producing one good acquired another firm B producing another good, it lowered the prices for both goods. One can conclude that the goods were
Complements, when acquiring a complement, prices on both goods should be lowered
If a seller is concerned about collusion among bidders, which of the following changes to the auction should the seller make?
Conceal amount of winning bids
If a firm successfully adopts a product differentiation strategy, the elasticity of demand for its products should ______
Decrease
Which of the following will increase break even quantity?
Decrease in price level
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?
Demand would fall, and Budweiser would reduce price. [correct; when two goods are complements, an increase in the price of one results in a decrease in the demand for the other. To account for this decrease in demand, Budweiser would ultimately lower its prices as well]
Decentralization of decision-making authority is consistent with which of the following?
Development of computing resources at the corporate, division, and employee level. [correct; this provides decision-making tools at each level of a corporation, reducing the need to centralize decision-making authority.]
It costs a firm $90 per unit to produce product A and $70 per unit to produce product B individually. If the firm can produce both products together at $175 per unit of product A and B, this exhibits signs of
Diseconommies of scope. cost to produce the two products together (175) is more than the sum of the cost of producing them separately
Chicken has a...
First mover advantage, player who commits to course of action captures majority of gains
In the short run, a firm's decision to shit down should not take into consideration:
Fixed cost, fixed cost are only avoidable in LONG run
Which of the following organizational forms requires the strongest management oversight to ensure coordination of functions?
Functional organizations
You've just decided to add a new line to your manufacturing plant. Compute the expected loss/profit from the line addition if you estimate the following: * There's a 50% chance that profit will increase by $100,000. * There's a 30% chance that profit will remain the same. * There's a 20% chance that profit will decrease by $15,000
Gain of $47,000 Because (.5 * 100000) + (.3 * 0) -300 = $47000
A sudden decrease in the market demand in a competitive industry leads to
Losses in the short run and average profits in the long run
Consider a vendor-buyer relationship. Which of the following conditions would lead to the buyer having more bargaining power?
Lots of substitutes, cost little for buyers to switch vendors, there is relatively few buyers and many vendors
When a firm ignores the opportunity cost of capital when making an investment of shutdown decision:
Hidden-Cost Fallacy
Jim recently graduated from college. His income increased tremendously from $5,000 a year to $60,000 a year. Jim decided that instead of renting he will buy a house. This implies that
Houses are a normal good for jim
A price ceiling
Is an implicit tax on producers and implicit subsidy to consumers (less producer surplus and more consumer surplus)
Which of the following is not an example of an entry barrier
Low capital requirements for entry
Taxes do what to market activity:
Impede the movement of assets to higher value ones, decrease number of wealth creating transactions, and reduce incentives to work
What does marginal mean to economist?
Incremental
Assume a firm has the following cost and revenue characteristics at its current level of output: price= $10.00, average variable cost= $8.00 and average fixed cost = $4.00. This firm is
Incurring loss per unit of $2 but should continue to operate in short run
Moral hazard is product of
Information asymmetry
example following is not example of process designed to combat moral hazard problems
Insurance companies require applicants to provide medical history information as part of application process.
Which of the following goods has a negative income elasticity of demand?
Items from the Dollar Store - typically considered inferior goods, hence their demand will decrease as the income of the user increases
Which of the following is an example of signal?
Lawyer only offering to be paid if winning, student pursues and MBA, Air conditioning manufacturer issues 50 year warranty.
After massive promotion of Rihanna's latest music album, the producers reacted by raising prices for her albums. This implies that promotion expenditures made the album demand
Less elastic, promotion makes demand less elastic, the right response is to increase price
Transfer prices should be set at
Opportunity cost of asset being transferred
A firm in a perfectly competitive market (a price taker) faces what type of demand curve?
Perfectly elastic
In which of the following cases might you expect a manufacturer granting exclusive territories?
Pet store that requires heavy local advertising to drive sales, sandwich shop with nation wide brand reputation, custom computer sales that require a good deal of consultation.
Food fanatics caters meals where its cost of producing an extra meal is $25, each of the meals sells for $20. At this rate, what should the company do?
Produce fewer meals and increase its profit. Correct because marginal revenue = $20 and Marginal cost = $25. Produce less when MR<MC
A firm started advertising its product and this changed the product's elasticity from -2 to -1.5. The firm should
Raise price from $10 to $15, using formula)P-MC)/P=1/|e|
The concept that describes firms possessing different bundles of resources is
Resource heterogeneity
Opportunity cost is a product of
Resource scarcity
Alpha Industries is considering acquiring Foxtrot Flooring. Foxtrot is worth $20 million to its current owners under its existing operational methods. Because there are some opportunities for synergies between the two companies, Alpha believes that Foxtrot is worth $25 million as part of Alpha Industries. What do you predict for a sales price of Foxtrot?
Something between $20 and $25M : the rational actor paradigm indicates that Foxtrot will be willing to sell at anything above their value of $20m, while Alpha is willing to purchase at anything below their valuation of $25 million; a value between $20 and $25 million satisfies both of these requirements]
Attractive industries have all except what? Low Rivalry Low buyer power High entry barriers High supplier power
Shouldn't have high supplier power
On avg, demand is unknown and cost of under pricing are _____ than the cost of overpricing, then ______.
Smaller, underpriced
If a firm in a perfectly competitive industry is experiencing average revenues greater than average costs, in the long-run
Some firms will enter the industry and prices will fall
An economist estimated the cross-price elasticity for Good A and Good B to be 1.5. Based on this information, we know the goods are
Substitutes, because positive cross price elasticity means that Good A is substitute for Good B, complements have NEGATIVE cross elasticity
Buyers have power when
Switching cost are low
In which of the following instances would an acquisition make the most sense?
Synergy benefits outweigh the costs of integration [correct; the value of the synergy should outweigh the cost of acquiring it!]
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:
The income he could have earned at the car dealership, because opportunity cost reflects value of the BEST forgone alternative, in this case the car dealership salary.
A manager of a clothing firm is deciding whether to add another factory in addition to one already in production. The manager would compare
The incremental benefit expected from the second factory to the cost of the second factory [correct; the manager will decide to add another factory when the incremental benefits of that factory are greater than its incremental costs], Incremental benefit greater than its incremental cost
Christine has purchased five bananas and is considering the purchase of a sixth. It is likely she will purchase the sixth banana if
The marginal benefit of the next banana exceeds its price
Perfect price discrimination is when a firm can charge each customer exactly what they are willing to pay. In this case
The marginal revenue is the demand curve
Which of the following is critical for a firm adopting a long-term cost-reduction strategy?
The methods for achieving cost reductions are difficult to imitate
A multinational firm acquires many of its components pre-assembled from suppliers. One of these suppliers operates in a country with a much lower corporate income tax rate. How does this affect the vertical relationship between this supplier and the multinational?
The multinational should consider purchasing this supplier - The multinational can evade regulation by "realizing" a larger portion of the combined profits in the low tax jurisdiction without substantively altering its operations.
A security system company's total production costs depend on the number of systems produced according to the following equation: Total Costs = $20,000,000 + $4000*quantity produced. Given these data, which of the following is a FALSE statement?
There are diseconomies of scale, If Average cost increased with output there would be diseconommies. That is not the case here.)
As a golf club production company produces more clubs, the average total cost of each club produced decreases. This is because:
There are scale economies, declining average total cost are indicative of this
Local Spanish TV markets cater to individual cities by producing local content. This content can be produced in-house by a network or they can also purchase rights to third-party produced content. Recently, Spanish cities have erected barriers to entry in television content production that allows content producers more market power. How would this have affected vertical integration between content providers and TV networks?
There is more vertical integration to reduce the double marginalization problem [correct, TV networks place a second margin on top of the first content producer's margin. The new barriers to entry increase content producers' initial margins which makes the double marginalization problem more severe.]
What would happen to revenues if a firm in a perfectly competitive industry raised prices?
They would fall to zero revenue, it would sell nothing
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?
Total variable cost is $17,000, total fixed cost is $2250; total cost is $19250: Both the $12000 labor cost (20 workers * 40hr/week * $15 hr) and the $5000 raw materials ($10 unit * 500 units) are considered variable expenses. Factory rent is considered a fixed cost
One of the basic functions of the budgeting process is
Transferring information
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?
Two, at the price of $9, eight suppliers are willing to sell but only two buyers are willing to buy
CUS Pharmacy wishes to carry Pepgro blue pills. But Daisy Pharmaceuticals, the maker of Pepgro, will not supply CUS unless CUS agrees to carry other medications that Daisy makes. This is an example of
Tying [correct; tying is the practice of making the sale of one good conditional on the purchase of an additional, separate good, as you see here]
You' re holding an auction to license a new technology that your company has developed. One of your assistants raises a concern that bidders' fear of the winner's curse may encourage them to shade their bids. How might you address this concern?
Use oral auction, release analyst positive scenario for future profitability and analyst negative scenario (relieves fear of winners curse)
Why do vertical agreements typically pose less antitrust risk than horizontal agreements?
Vertical agreements often result in lower prices, which are beneficial to the consumer [correct; the purpose of antitrust laws are to protect the consumers, who often benefit from vertical integrations]
Wealth creating transactions are more likely to occur:
With private property rights, black markets, and strong contract enforcement
Principle agent problems
Would be reduced if owner has better info about actions of the managers
Which of the following is true about the winner's curse?
You bid incorrectly based on value of item, most optimistic estimate given and is likely wrong
In the long-run, which of the following outcomes is most likely for a firm?
Zero economic profit but positive accounting profits
Loan applications require a lot of information from applicants to avoid
adverse selection
A good incentive compensation scheme
anticipates how an agent will game a scheme
Restrictive covenants on loans used to
avoid moral hazard
NOT Example of moral hazard
bad salespeople less drawn to commission based job - Adverse selection
Assume that the price elasticity of demand for movie theaters is -.85 during all evening shows but for all afternoon shows the price elasticity of demand is -2.28. For the theater to maximize total revenue, it should
charge a lower price for the afternoon shows and higher price for the evening shows, holding other things constant .
In Nash equalibrium
each player maximizes his own payoff given the action of the other player (best response to other player for both sides)
An insurance company suffers from adverse selection if...
customer knows their willingness to pay for insurance but the company does not
Average cost fall initially due to
declining average fixed cost
Example of moral hazard
doctors on company health plan more likely to go to doctor for lesser colds
Law of diminishing marginal returns, states that marginal returns will
eventually diminish
Airlines charge a ______ price to business travelers compared to leisure travelers because business travelers have a _____ demand than leisure travelers.
higher, less elastic
For products like parking lots and hotels, costs of building capacity are mostly fixed or sunk and firms in this industry typically face capacity constraints. Therefore,
if MR>MC at capacity, then the firms should price to fill capacity. [correct; when MR>MC, it is optimal to reduce price to sell more, but one cannot sell more than capacity allows.]
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:
is equal to the market value of the land. [correct; the cost of a decision includes the cost of the best foregone option. In this case, this is the amount the government could sell the land for if they did not use if for prairie dog introduction]
Jim has estimated 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:
lower revenue in the short run but raise revenue in the long run. [correct; demand is inelastic in the short run, meaning a price decrease will decrease revenue. However, in the long revenue, demand is elastic so revenue will increase due to the price decrease]
Managers undertake an investment only if:
marginal benefits are greater than marginal costs
A firm that acquires a substitute product can reduce cannibalization by
repositioning a product so that it does not directly compete with the substitute
The prisoners' dilemma is an example of
simultaneous game
What is an example of adverse selection: - terminally ill purchasing life insurance - Employment contract encourages little effort on employee - Safe driver taking greater risk in rental than own car - All of the above
terminally ill, lower cost patient not deciding to buy but higher risk does, based on selection NOT hidden action
The higher the discount rates
the more value individuals place on current dollars
Rational decision tree model with uncertain outcome: If you are facing a decision where one of your alternatives would work well in one state of the world, but not the other and you are uncertain about which state of the world you are in...
think about how you can minimize expected error cost
Demand for insurance comes from
those who are risk averse
You are considering entry into a market in which there is currently only one producer (incumbent). If you enter, the incumbent can take one of two strategies, price low or price high. If he prices high, then you expect a $60K profit per year. If he prices low, then you expect a $20K loss per year. You should enter if
you believe the probability that the incumbent will price low is less than 0.75. [Correct; To solve this, you need to find the minimum probability needed to breakeven. E(X)= (p(x1)) + ((1-p)*(x2)). Using ((p)*($60k))+((1-p)*($-20k))=0, you find 60p-20+20p=0 or 80p=20. Therefore, p (the probability of them pricing high) needs to be a minimum of 0.25 for you to breakeven. Therefore, you would only enter if you believed the probability of them pricing low (1-p) is less than 0.75]
Rational decision tree model with uncertain outcome: Because failed initiatives are visible, but never attempted initiatives are not...
you must guard against your employees being to cautious
