1. In 1796, Gottfried Christoph Hartel, a German music publisher, calculated the cost of printing music using an engraved plate technology and used these estimated cost functions to make production decisions. Hartel figured that the fixed cost of printing a musical page - the cost of engraving the plates - was 900 pfennigs. The marginal cost of each additional copy of the page was 5 pfennigs (Scherer, 2001).
Graph the average total cost, average variable cost, and marginal cost functions.
a) Plot the average cost curve. Let the three points correspond to quantities of 20, 60 and 180 units of output. Label this curve ‘AC'.
b) Draw the marginal cost curve. Label this curve ‘MC'.
c) Plot the average variable cost curve. Label this curve ‘AVC'.
2. Assume the short run variable cost function for Japanese beer is VC=0.8q0.67
If the fixed cost (F) is $2400 and the firm produces 550 units, determine the total cost of production (C), the variable cost of production (VC), the marginal cost of production (MC), the average fixed cost of production (AFC), and the average variable cost of production (AVC). What happens to these costs if the firm increases its output to 600?
Assuming the firm produces 550 units, the variable cost of production (VC) is
VC = _______ (Enter your response rounded to two decimal places)
3. As a result of the refining process, the refiner's output from refining crude oil is heating fuel and gasoline in virtually fixed proportions. What can you say about economies of scope for such a firm? What is the sign of its measure of economies of scope?
The firms measure of economies of scope is:
a. Negative
b. Positive
This indicates ________ of scope.
a. Diseconomies
b. Economies
4. Let F be the fixed cost of production, let VC be the variable cost of production, C be the total cost, MC be the marginal cost, AFC, the average fixed cost, AVC, the average variable cost, and AC, the average cost. Complete the following cost table. (Enter numeric responses rounded to two decimal places)
5. What types of firms would not normally maximize profit?
a. A partnership
b. An organization pursing the public interest
c. A corporation
d. A sole proprietorship
e. A firm owned by shareholders
6. What types of firm organizations allow owners of a firm to obtain the advantages of limited liability?
a. Sole proprietorships
b. Corporations
c. Partnerships
d. State-owned enterprises
e. Non-profit firms
7. A firm owns and manages rental properties is considering buying a building that would cost $800,000 this year, but would yield an annual revenue stream of $80,000 per year for the foreseeable future. For what range of interest rates would this purchase increase the present value of the firm?
The present value of the firm will increase with this investment for interest rates (r)such that
r< ____% (Enter your response rounded to two decimal places)
8. In 2012, the Campbell Soup Company acquired BolthouseFarmsfor $1.55 billion. This acquisition increased the level of vertical integration in Campbell, as Bolthouse Farms owned and operated extensive farming operations where it produced many food items used in Campbell's products.
Suppose that the value of produce provided by these farms after the acquisition would be $80 million per year for Campbell and that, in addition, Campbell could save $15 million per year in costs it would otherwise spend in searching for and negotiating over equivalent produce. However, the transaction cost of the acquisition (lawyers' fees, relocating some production facilities, paying severance to unnecessary employees, etc.) required a one-time payment of $30 million.
Assume that Campbell receives the produce related benefits in perpetuity. If the interest rate used to discount furture earnings is 5%, what is the present value benefit to Campbell?
The Present value (PV) to Campbell is
PV = $ ___ million (Enter your response rounded to two decimal places.)
9. Which market structure best describes (a) airplane manufacturing, (b) electricians in a small town, (c) farms that grow tomatoes, and (d) cable television in a city? Why?
a) Airline manufacturing is:
a. An oligopoly because there are only a few airline manufacturers.
b. Monopolistically competitive because airplanes are a homogeneous product
c. An oligopoly because there are no entry barriers to airline manufacturing
d. Perfectly competitive because airline manufacturing are price takers
e. A monopoly because airplanes have no close substitutes.
b) Electricians in a small town
c) Farms that grow tomatoes
d) Cable television in a city
10. Which of the following is a consequence of "going public"?
Selling shares in an initial public offering results in
a) Original owners gaining control of the firm
b) Ownership becoming broadly distributed
c) No longer seeking to maximize profit
d) Unlimited liability
e) The inability to raise money
11. Should a firm shut down if its weekly revenue is $1,000, its variable cost is $600, and its fixed cost is $1,400, of which $450 is avoidable if it shuts down? Why?
The firm should
a) Shut down because revenue of $1,000 is less than avoidable costs
b) Produce because revenue of $1,00 is greater than variable costs.
c) Produce because revenue is positive
d) Shut down because variable costs are less than fixed costs
e) Shut down because revenue of $1,000 is less than fixed costs.
12. Peter, the owner of a chain of retail stores, makes the same offer to the manager at each of his stores. "At the end of the year, you give me $60,000 and you can keep any additional profit." Anne gladly agrees to manage one of the stores, knowing that the total profit at the store will substantially exceed $120,000 if it is run well.
Suppose that instead, Anne's compensation, Y, is half of her store's profit (π) minus $60,000:
Y = Π/2 -60000
Will she seek to maximize the store's profit?
If Ann wants to maximize her earnings, then she
a) Will not maximize the store's profit because she only has half the store's incentives
b) Will maximize the stores profit because her costs are unavoidable
c) Will not maximize the stores profit because her costs are not fixed
d) Will not maximize the stores profit because she would lose money
e) Will maximize the stores profit because it will maximize her salary.