Questions:
1. For a linear (inverse) demand function, increases in output will cause total revenue to decrease when marginal revenue is
a. Positive
b. Negative
c. Unit elastic
d. Elastic
2. Suppose the production function is given by Q = 10K +4L. What is the marginal product when 5 units of capital and 10 units of labor are employed?
a. 10
b. 4
c. 18
d. 9
3. The higher the interest rate
a. The greater the present value of a future amount
b. The smaller the present value of a future amount
c. The greater the level of inflation
d. None of the statements associated with this question are correct
4. The demand for good X has been estimated by Qxd = 20-5Px+4Py. Suppose that good x sells at $3 per unit and good y sells for $2 per unit. Calculate the own price elasticity
a. -1.15
b. -21.67
c. -5.0
d. 0.92
5. The own price elasticity of demand for apples is -1.5. If the price of apples increases by 10 percent, what will happen to the quantity of apples demanded?
a. It will increase 15 percent
b. It will fall 15 percent
c. It will increase 10 percent
d. It will fall 10 percent
6. Which of the following signals to firm owners that scarce resources might be better allocated to a different industry?
a. Fewer government regulations in that other industry
b. Profits in that other industry
c. Better availability of labor in that other industry
d. Cheaper cost of capital in that other industry
7. Other things held constant, consumer surplus decreases as:
a. The price of a good decreases
b. The price of a good increases
c. The supply curve shifts to the right
d. None of the above
8. Other things held constant, producer surplus increases as
a. The price of a good decreases
b. The price of a good increases
c. The demand curve shifts downward
d. None of the above
9. Other things equal, the lower the interest rate:
a. The lower the NPV
b. The higher the NPV
c. The higher the PV
d. None of the statements associated with this question are correct
10. An excise tax of $2.00 per pound of sugar placed on the suppliers of sugar would shift the supply curve:
a. Down by $2.00
b. Down by more than $2.00
c. Up by $2.00
d. Up by less than $2.00
11. The demand for good X has been estimated to be in Qxd = 100 - 5 in Px + 2 in Py + 4 in M. The cross-price elasticity of demand between goods X and Y is:
a. 2
b. -5
c. -2
d. There is insufficient information needed to find the elasticity of good X
12. When the long run average cost curve is decreasing (assuming a U-shaped curve) there exist
a. Economies of scale
b. Diseconomies of scale
c. Constant returns to scale
d. None of these
13. A price ceiling is
a. The minimum legal price that a firm can charge
b. The maximum legal price that a firm can charge
c. Above the competitive equilibrium price
d. Equal to the competitive equilibrium price
14. What is the marginal net benefit of producing the fourth unit?
No. Units Produced Total Revenue Total Cost
0 0 0
1 20 10
2 40 20
3 55 28
4 65 35
5 70 40
a. 10
b. 7
c. 30
d. 3
15. The main reason firms may exit a market is because of
a. The lack of economic profits
b. Decreased technology
c. Expensive labor
d. High capital costs
16. Suppose the marginal product of capital is 16 and the marginal product of labor is 3. If the price of capital is $4 and the wage rate is $3, then in order to minimize costs the firm should use:
a. More capital and less labor
b. More labor and less capital
c. three times more capital than labor
d. none of the answers are correct
17. $100 received at the end of seven years in worth how much today if the interest rate is 8 percent?
a. 100/(0.08)7
b. 100/(1 + 0.08)7
c. 100/(1 + 8)7
d. 100
18. If good A is a normal good, an increase in income leads to:
a. An increase in the demand for good B
b. A decrease in the demand for good A
c. An increase in the demand for good A
d. No change in the quantity demanded for good A
19. When demand is unit elastic, marginal revenue will be:
a. Positive
b. Negative
c. Zero
d. There is not sufficient information to determine the marginal revenue
20. The difference between total costs and variable costs is:
a. Marginal costs
b. Average fixed cost
c. Fixed cost
d. None of the statements is correct
21. The demand curve for a good is vertical when it is:
a. A perfectly inelastic good
b. A unitary elastic good
c. A perfectly elastic good
d. An inferior good
22. Good X is an inferior good and its demand is given by Qxd = a0 + axPx + ayPy + amM + aHH. Then we know that:
a. ax<0
b. ax>0
c. am<0
d. aM>0
23. When the government imposes a price ceiling above the market price, the result will be that:
a. Surpluses occur
b. Shortages become a problem
c. Supply and demand will shift up to the new equilibrium
d. A price floor set above the equilibrium price will have no effect on the market equilibrium
24. Larger firms produce a product at larger average cost than small firms when:
a. Economies of scope exist
b. Diseconomies of scale exist
c. Economies of scale exist
d. Cost complementarities exist
25. When the marginal cost of producing one output is reduced when the output of another product is increased this is called:
a. Cost complementarities
b. Economies of scope
c. Economies of scale
d. The marginal rate of technical substitution
26. If Starbucks's marketing department estimates the income elasticity of demand for its coffee to be 1.7, how will the prospect of an economic boom (expected to increase consumers' incomes by 4 percent over the next year) impact the quantity of coffee Starbucks expects to sell?
Answer: It will change by ____________ percent
27. Suppose the cross price elasticity of demand between goods X and Y is 4. How much would the price of good Y have to change in order to change the consumption of good X by 40 percent?
Answer: ____________ percent
28. What is the value of a preferred stock that pays a perpetual dividend of $150 at the end of each year when the interest rate is 3 percent?
Answer: $_________________ (round response to the nearest dollar)
29. A firm produces output according to a production function:
Q = F(K,L) = min {2K, 2L}
a. How much output is produced when K = 2 and L = 3?
Answer: ______________
b. If the wage rate is $40 per hour and the rental rate on capital is $20 per hour, what is the cost minimizing input mix for producing 4 units of output?
Answer: Capital __________
Labor ___________
c. How does your answer to part b change if the wage rate decreases to $20 per hour but the rental rate on capital remains at $20 per hour?
1. Capital and labor increase
2. It does not change
3. Capital decreases and labor increases
4. Capital increases and labor decreases
30. The head of the accounting department at a major software manufacturer has asked you to put together a pro forma statement of the company's value under several possible growth scenarios and the assumption that the company's many divisions will remain a single entity forever. The manager is concerned that, despite the fact that the firm's competitors are comparatively small, collectively their annual revenue growth has exceeded 50 percent over each of the last five years. She has requested that the value projections be based on the firm's current profits of $2.4 billion (which have yet to be paid out to stockholders) and the average interest rate over the past 20 years (7 percent) in each of the following profit growth scenarios.
a. Profits grow at an annual rate of 10 percent _____________________
b. Profits grow at an annual rate of 5 percent _____billion(round to 2 decimal places)
c. Profits grow at an annual rate of 0 percent ____billion(round to 2 decimal places)
d. Profits decline at an annual rate of 3 percent ____billion(round to 2 decimal places)