Question 1
If the annual interest rate is 5 percent, the present discounted value of $100 to be received in one year is:
Select one:
A. $105
B. $90
C. $80
D. $95.23
Question 2
The difference between accounting and economic profit is:
Select one:
A. caused by confusion over tax laws
B. the value of owned resources in their next best alternative use
C. the result of superior training received by accountants
D. proportionately very small for owner-managed firms
E. a decreasing function of interest rates
Question 3
The cross-price elasticity of demand is defined as the:
Select one:
A. percentage change in the quantity demanded of a good divided by the percentage change in the good's price
B. percentage change in the quantity demanded of a good divided by the percentage change in a different good's price
C. percentage change in a good's price divided by the percentage change in a different good's price
D. change in the quantity demanded of a good divided by the change in its price
E. change in the quantity demanded of a good divided by the change in income
Question 4
At a price of P0 in the above figure, which of the following statements is FALSE?
Select one:
A. P0 is the market clearing price.
B. There is a surplus equal to Q0.
C. There is an equilibrium in the market.
D. Quantity demanded equals quantity supplied.
Question 5
The demand for a product is more inelastic the:
Select one:
A. longer the time period covered
B. lower the average income of consumers
C. better the available substitutes
D. poorer the available substitutes
Question 6
Suppose there is a simultaneous decrease in demand and increase in supply. Given this information, we know with certainty that
Select one:
A. the equilibrium price will decrease.
B. the equilibrium price will decrease, and the equilibrium quantity will increase.
C. both the equilibrium price and the equilibrium quantity will decrease.
D. the equilibrium price will increase.
Question 7
If the demand for a product falls and the supply stays the same,
Select one:
A. the market clearing price will rise and the equilibrium quantity will fall.
B. both the market clearing price and the equilibrium quantity will fall.
C. both the market clearing price and the equilibrium quantity will rise.
D. the market clearing price will fall and the equilibrium quantity will rise.
Question 8
Along a linear demand curve, total revenue is maximized:
Select one:
A. where the slope of a line from the origin to the demand curve is equal to the elasticity
B. where the elasticity is -1
C. near the quantity axis intercept
D. near the price axis intercept
E. where the elasticity is 0
Question 9
Makers of disposable diapers must advertise 6 percent more to offset completely the 3 percent decline in sales due to heightened environmental concern. The advertising elasticity of demand is:
Select one:
A. 5.0
B. 0.3
C. 0.5
D. 0.20
E. 0.25
Question 10
According to the above figure, the highest price that consumers would be willing to pay for quantity Q2 is
Select one:
A. P1.
B. P0.
C. P2.
D. cannot be determined from the diagram.
Question 11
When average product is at a maximum, marginal product is:
Select one:
A. zero
B. increasing
C. equal to average product
D. greater than average product
E. less than average product
Question 12
The law of diminishing marginal returns states that:
Select one:
A. the marginal product of labor declines as all inputs are increased
B. production functions exhibit decreasing returns to scale
C. the marginal product of labor returns as more capital is used
D. the marginal product of a factor eventually diminishes as more of the input is used, holding other inputs fixed
E. the marginal product of a factor always diminishes as more of the input is used, holding other inputs fixed
Question 13
The long-run average cost curve slopes downward if there are:
Select one:
A. some factors without diminishing marginal returns
B. economies of scope in the management of multiplant operations
C. economies of scale
D. diseconomies of scope in the management of multiplant operations
E. no factors without diminishing marginal returns
Question 14
If price is $12 when the price elasticity of demand is -1, then marginal revenue must be:
Select one:
A. $24
B. $18
C. $12
D. $6
E. $0
Question 15
Framjam Sports Equipment produces basketballs at its factory in Kentucky and soccer balls at its factory in Illinois. At its current annual rate of production, the cost of producing soccer balls is $75,000 and the cost of producing basketballs is $35,000. If the firm consolidates production at a single location, the annual cost of production will be $100,000. What is the degree of economies of scope in this case?
Select one:
A. 4
B. 5
C. 0.90
D. 0.10
E. 1.15
Question 16
When average total cost is at its minimum:
Select one:
A. average variable cost is declining with increases in output
B. average variable cost plus average fixed cost is declining with increases in output
C. average total cost is equal to average variable cost
D. marginal cost is equal to average variable cost
E. marginal cost is equal to average total cost
Question 17
Bill's Mechanical Devices Inc. produces robots for the automotive industry. If its average variable costs are given by AVC = 25, its fixed costs are $2,500, and it charges $75 a robot, what is Bill's break-even level of output?
Select one:
A. 25 robots
B. 33.3 robots
C. 50 robots
D. 75 robots
E. 100 robots
Question 18
In the table below, the average product of labor at L = 1 is:
Select one:
A. 5
B. 8
C. 0.2
D. 2
E. 3
Question 19
Hedge Fun is a landscaping firm that specializes in topiary. Last year, the firm had 50 employees and served 130 customers. This year, it had 60 employees and served 160 customers. What is the marginal product of labor?
Select one:
A. 2
B. 3
C. 4
D. 5
Question 20
In the model of perfect competition, there are:
Select one:
A. high barriers to entry and no nonprice competition
B. low barriers to entry and some advertising and product differentiation
C. very high barriers to entry and some advertising and product differentiation
D. high barriers to entry and some advertising and product differentiation
E. low barriers to entry and no nonprice competition
Question 21
If price is above the average variable cost but below the average total cost of a representative firm in a competitive industry:
Select one:
A. there will be entry to the industry over time
B. there will be exit from the industry over time
C. the firms in the industry are just earning a normal rate of return
D. the firms in the industry are earning a supranormal rate of return
E. the industry is in long-run equilibrium
Question 22
In the model of monopolistic competition, firms produce a:
Select one:
A. standardized product with considerable control over price
B. differentiated product with considerable control over price
C. standardized product with no control over price
D. differentiated product with no control over price
E. differentiated product with some control over price
Question 23
For the Minnie Mice Company, the elasticity of demand is -6 and the profit-maximizing price is 30. If MC is marginal cost and AVC is average variable cost, then:
Select one:
A. MC = 25
B. AVC = 25
C. MC = 30
D. AVC = 36
E. MC = 36
Question 24
A supplier of fur coats estimates that the price elasticity of demand for its coats is -3.75. The firm has determined that an additional $100,000 in advertising would generate $275,000 in additional revenues. You would advise the firm to:
Select one:
A. advertise, since the marginal revenues are greater than the cost of advertising
B. abandon the advertising plan, since the demand elasticity is greater than 1 (in absolute value)
C. abandon the advertising plan, since the marginal revenue from an additional dollar of advertising is less than $3.75
D. advertise, since the fur coats are a luxury item
Question 25
First-degree price discrimination occurs when a firm:
Select one:
A. Charges different prices for different quantities sold.
B. Charges each buyer a different price for each individual unit
purchased.
C. Charges each buyer a different price based on an ability to pay.
D. Charges each buyer a different prices based on time of day/
Question 26
Kim is indifferent between $2,500 for sure and a bet with a 40 percent chance of $2,400 and a 60 percent chance of $2,600. Kim is:
Select one:
A. risk-averse
B. risk loving
C. risk-neutral
D. a profit maximizer
E. irrational
Question 27
A manager has a utility function U = C 0.5 if she doesn't work hard and U = C 0.5 - 1 if she does. Expected profit will increase from 1,400 to 1,600 if she works hard. The manager receives compensation C equal to 82 plus a portion x of any profit in excess of 1,400. What is the value of x that will make the manager indifferent between shirking and working hard?
Select one:
A. 0.09
B. 0.105
C. 0.19
D. 0.242
Question 28
Potential entrant E threatens to enter incumbent I's market and I threatens to lower price to P should E enter. It is crucial for E to believe I's threat that:
Select one:
A. P>I's average total cost
B. P>I's average variable cost
C. P is low enough to discourage E
D. I could conceivably charge P without E's threat
Question 29
Suppose that firm A finds itself facing the following payoff matrix in its rivalry with firm B:
A threatens to play strategy W. This threat is:
Select one:
A. credible because the Nash equilibrium occurs where A plays W and B plays Z
B. credible because the joint optimal solution occurs where A plays W and B plays Z
C. not credible because A's dominant strategy is to play X
D. credible because A's dominant strategy is to play W
E. not credible because B will never play strategy Z
Question 30
By definition, a Nash equilibrium in a duopoly is the situation in which each player:
Select one:
A. plays a dominant strategy
B. plays the best strategy given the other's strategies
C. gets the highest possible payoff
D. gets the highest payoff possible without lowering the opponent's payoff
E. is happy with the outcome
Question 31
Consider the decision tree below. This tree illustrates hypothetical payoffs to General Mills (GM) and Quaker Oats (Q) if they engage in a price war.
If GM cuts prices, its payoff will be:
Select one:
A. $5 million per year
B. $10 million per year
C. $2 million per year
D. $3 million per year
Question 32
A dominant strategy is one that:
Select one:
A. beats all others, regardless of the opponent's choice
B. beats all others, given the opponent's choice
C. is beaten by all others, regardless of the opponent's choice
D. is beaten by all others, given the opponent's choice
E. beats at least one other, given the opponent's choice
Question 33
The cost of pollution originating in the chemical industry is Cp= 4P + 2P2, where P is the quantity of pollutants emitted. The cost of pollution control for this industry is Cc= 120 - 12P. What is the optimal level of pollution?
Select one:
A. 0 units
B. 1 unit
C. 2 units
D. 3 units
E. 4 units
Question 34
Using the coefficient of variation instead of the standard deviation accounts for the:
Select one:
A. timing of payoffs
B. risk attendance of managers
C. riskiness of different projects
D. size of different projects
E. use of a weighted average of different profits
Question 35
A manager is indifferent between a rate of return of 8% when the standard deviation (s) of a project is zero and a rate of return of 12% when s is 2. The manager's risk premium when s = 2 is:
Select one:
A. 0 percent
B. 2 percent
C. 4 percent
D. 8 percent
E. 12 percent
Question 36
A person who has a utility function (with income on the horizontal axis and utility on the vertical axis) that is linear is:
Select one:
A. risk-averse
B. risk loving
C. risk-neutral
D. irrational
E. always sad
Question 37
Expected utility is:
Select one:
A. the profit from a given decision
B. a probability weighted average of possible profits
C. an evenly weighted average of possibility profits
D. a probability weighted average of possible utility levels
E. the expected profits plus a number that depends on risk
Question 38
Firms can avoid or limit the asset substitution problem by:
Select one:
A. funding with equity
B. establishing a reputation for protecting creditors
C. insuring bondholders against risk
D. applying to the government for insurance for bondholders
E. a, b, or c
Question 39
Donald has a beach house on the Outer Banks of North Carolina that was severely damaged in the most recent hurricane to strike the coast. Due to beach erosion he has rebuilt twice in the past 20 years. He is intent on rebuilding, confident that government-provided flood insurance will cover his expenses. This is an example of:
Select one:
A. how market-based solutions to problems are superior to government solutions
B. moral hazard
C. adverse selection
D. asset substitution
Question 40
A technique for dealing with the principal-agent problem is to:
Select one:
A. require managers to purchase shares of stock in the firm
B. establish a profit-sharing plan for managers
C. establish year-end bonuses based on the profits of the firm
D. all the above
E. none of the above
Question 41
Which of the following is a credible signal of product quality?
Select one:
A. a money back guarantee
B. high price
C. a warrantee
D. assurances by a salesperson
E. a and c
Question 42
Most states require car owners to provide evidence that they have auto insurance when they register their cars and obtain license plates. For the sellers of insurance policies, this may help to limit the severity of the:
Select one:
A. information asymmetry
B. moral hazard problem
C. signaling problem
D. adverse selection problem
E. Akerlof problem
Question 43
One way to solve the problem of adverse selection in markets for homeowner's insurance is to:
Select one:
A. only insure customers who make claims against their policies
B. use deductibles to encourage safe behavior
C. offer premium discounts to people who install house alarm systems
D. require homeowner's insurance as a condition of acquiring a mortgage
E. b, c, and d
Question 44
Adverse selection implies that:
Select one:
A. the market for used cars is perfectly competitive
B. the market for used cars will contain more cars of higher than average quality
C. the market for used cars will contain more cars of lower than average quality
D. all used cars will be of equal quality
E. the government overinsures the market for used cars
Question 45
The socially optimal level of pollution control occurs where the marginal:
Select one:
A. benefit of pollution control is zero
B. cost of pollution is minimized
C. cost of pollution control equals the marginal cost of pollution
D. cost of pollution control is minimized
E. cost of pollution control equals the marginal benefit of pollution
Question 46
If an activity produces an external diseconomy, then there will be too:
Select one:
A. much of the activity undertaken by private parties from a social viewpoint
B. little of the activity undertaken by private parties from a social viewpoint
C. much of the activity undertaken by government from a private viewpoint
D. much of the activity undertaken by private parties from a private viewpoint
E. much of the activity undertaken by government from a social viewpoint
Question 47
The first federal antitrust law was the:
Select one:
A. Sherman Act
B. Clayton Act
C. Federal Trade Commission Act
D. Robinson-Patman Act
E. Celler-Kefauver Act
Question 48
The market concentration ratio:
Select one:
A. shows the percentage of total sales or production accounted for by the four largest firms in an industry
B. is a widely used, reliable measure of an industry's market structure
C. was developed by a Swedish and a German statistician in the late 1890s
D. shows the percentage of total sales or production accounted for by the ten largest firms in the United States
E. is so flawed a measure of an industry's market structure that it is almost never used
Question 49
Consider the following strategy matrix for the two coffee companies Little Kona and Big Brew. Big brew currently dominates the coffee market and little Kona is considering entering the market. Payoffs are in millions of dollars.
a. Does either company have a dominant strategy in this game?
b. Based on your answer to part a, what do you think each company will do?
c. Suppose Big Brew threatens to set a low price if little Kona enters. Is this a credible threat?
Explain.
Question 50
A couple of years ago you started a small business importing and selling ethnic foods in your area. Given your competitive pricing and the high quality of your products, you have experienced strong demand and have reached a capacity constraint. Expanding will cost a fixed payment of $200,000. You have to decide whether to expand your business given the uncertainty of the current economic environment. You believe that there is a 40% chance that demand will remain strong, in which case your revenues will be $400,000 and $250,000 otherwise. If you don't expand, your revenues will be $100,000 if demand is strong and $50,000 otherwise.
a. Based on the information given, and assuming you are risk neutral, should you expand? Why or why not?
b. Is your answer to part b sensitive to small changes in the subjective probabilities used in the problem? If not, what appear to be a determining factor for your decision?
Show all your work. Your explanation determines your grade.
Question 51
The demand for RakerInc's drill presses has been estimated to be:
Q = 41,250 - 2P + 0.002A
Where Q is quantity demanded, P is the price of drill presses and A is real income. Assume that A is $50,000.
a. Explain the rationale for the variables in the equation and the reason for the estimated coefficient signs on P and A ?
b. What other variables might be included in this demand function? What is the predicted sign for these variables? Explain.
c. As a consultant, you are asked to determine whether the firm should decrease the price to increase Total Revenues. What do you need to calculate to answer this question? At the current price of $15,000 what is your recommendation? Why?
d. By how much will sales increase if advertising expenditures increase by 1%?
Question 52
Adverse selection is less of a problem where information is hidden and available only to those who subscribe to expensive trade publications.
Is the statement above true or false? Comment on the statement above in light of your knowledge of the adverse selection models we learned in class.
In your answer, be sure to address what is adverse selection, why it occurs and what you would recommend be done to resolve it.
Be sure to give all relevant details. Your explanation determines your grade.
Question 53
Suppose that Wilma's utility function is given by
U(E) = 100 - 2E 2,
whereE = Wilma's work effort in producing homemade dinners, measured in hours per day.
The marginal utility of effort for Wilma is:
Select one:
A. 2E 2
B. -2E
C. 100
D. -4E
Question 54
Please use the following profit function (per worker) for the Blue Delta Faucet Company to answer the following questions:
P(e) = 40e - (2e2 + 100)
Note that P = firm profits and e = worker-hours per day. Assume that effort is observed perfectly.
At this profit-maximizing level of effort for the firm, profits per worker will be:
Select one:
A. $40
B. $100
C. $300
D. $400