question
Which of the following does NOT affect the way in which the firm allocates its resources?
answer
Productive technology, degree of supplier competition, and transactions costs are among the many factors which affect the firm's allocation of resources
question
Which of the following is the most important characteristic of transactions costs?
answer
Asset specificity.
question
Which of the following is NOT a method firms use to promote employee efficiency?
answer
Fixed salary.
question
Transactions costs of a good or service, being higher than internal provision:
answer
Result in the firm providing the good or service for itself.
question
Which of the following would represent an appropriate course of action if a firm wished to maximize its market share?
answer
Reduce the selling price.
question
Which of the following is a venue for outsourcing in business?
answer
-Human relations.
-Production, such as Kodak's production of reloadable and digital cameras.
-Paper work such as payroll administration.
-Production, such as Kodak's production of reloadable and digital cameras.
-Paper work such as payroll administration.
question
Which of the following will result in the firm maximizing its profits?
answer
Production of the quantity of output which equates the revenue generated with the costs incurred of the last unit produced.
question
Which of the following best describes the production period 'short run'?
answer
None of the above accurately describes the short run.
question
Which of the following objectives most likely would represent a firm attempting to maximize its profit?
answer
-Branch revenues should increase by 15% over the next 24 months.
-Branch profit margins should increase by 12% over the next 18 months.
-Firm research and development on new products should be increased by 8% during the next fiscal year.
-Branch profit margins should increase by 12% over the next 18 months.
-Firm research and development on new products should be increased by 8% during the next fiscal year.
question
Which of the following best describes modern corporations in the U.S.?
answer
Large publicly held firms in which the management of the firm is typically a very small proportion of its owners.
question
Which of the following best describes the process by which modern corporate managers' goals are brought in-line with the owners' goals?
answer
The management team's compensation package is tied to the performance of the firm which reflects the owners' or stockholders' goals.
question
Which of the following best describes 'business risk'?
answer
The variability of profits due to changes in the aggregate economy.
question
Which of the following would NOT increase the firm's level of financial risk?
answer
Increasing interest rates when the firm's outstanding debt's interest rate is fixed.
question
Which of the following best describes 'Market Value Added'?
answer
The difference between the market value of the firm and the amount of contributed capital.
question
Which of the following is a component of economic costs?
answer
-Opportunity cost.
-Replacement cost.
-The foregone interest revenue of dividends distributed to stockholders.
-Replacement cost.
-The foregone interest revenue of dividends distributed to stockholders.
question
Which of the following best describes 'Economic Value Added'?
answer
A measure that some companies emphasize over traditional measures such as earnings per share and return on equity.
question
'Normal profit' is defined as:
answer
The amount resources must earn to remain committed to a particular firm.
question
Which of the following statements is FALSE?
answer
An economist measures cost and depreciation on a historical basis.
question
Which of the following are concerns for firms doing business abroad?
answer
-How cultural differences influence business goals and attitudes towards risk.
-Differences in legal systems.
-The risk of expropriation of corporate resources by foreign governments.
-Differences in legal systems.
-The risk of expropriation of corporate resources by foreign governments.
question
Generally, 'profit maximization' is:
answer
Assumed to be the firm's objective.
question
Which of the following best describes demand?
answer
The amount of a good consumers are willing and able to purchase over a particular time period holding all factors except price constant.
question
Which of the following is NOT addressed in the Law of Demand?
answer
The perception of consumers that higher-priced goods are of better quality than lower-priced goods.
question
Which of the following best describes the difference between a change in quantity demanded and a change in demand?
answer
A change in quantity demanded occurs when the price of the good has changed; a change in demand occurs when a non-price determinant of demand for the good has changed.
question
Which of the following will NOT shift the demand curve for pizza?
answer
All of the above will shift the demand curve for pizza.
question
Which of the following is NOT a factor which will shift the demand curve for some product?
answer
An increase in the price of the good itself.
question
Which of the following would NOT shift Santa Claus' demand for elf labor?
answer
An increase in the elf wage rate.
question
Which of the following would NOT shift the supply of Buffalo Burgers?
answer
An increase in the price of Buffalo Burgers.
question
Which of the following would tend to increase the supply of Buffalo Burgers?
answer
An increase in the number of buffalo ranchers.
question
Which of the following best describes the conditions necessary for a market to attain equilibrium?
answer
All of the above accurately describe the conditions necessary for a market to attain equilibrium.
question
If a price ceiling is the maximum legal price that may be charged for some good or service, and a price floor is the minimum legal price that may be charged for some good or service, which of the following circumstances would result in a shortage?
answer
None of the above situations would result in a shortage.
question
Which of the following cannot be determined using comparative statics analysis?
answer
Whether or not a new equilibrium price and quantity is equitable (fair) in comparison to the old equilibrium price and quantity.
question
Which of the following would result in an increase in equilibrium price and quantity for Dodge Neons?
answer
None of the above would increase the equilibrium price and quantity of Dodge Neons.
question
Which of the following would result in an increase in equilibrium quantity and a decrease in equilibrium price for filet mignon?
answer
An increase in the supply of grain used to feed cows.
question
Which of the following would NOT increase the equilibrium quantity of personal computers?
answer
Progress in robotics technology for producing computer chips and a simultaneous decrease in consumer income.
question
Which of the following does not describe how the allocating function of price determines long-run equilibrium quantity?
answer
All of the above accurately describe the long-run process.
question
Consider the market for flat screen television sets. Suppose that the demand for flat screen TVs has increased as people desire the improved picture quality offered by these TVs. At the same time, assume that the cost of making flat screen TVs falls. What will happen in the market for flat screen TVs.
answer
The quantity of TVs will increase while the price change can not be determined.
question
As a result of the Atkins diet, the demand for beef in the U.S. is likely to:
answer
Increase as consumer tastes and preferences shift towards beef.
question
Which of the following best describes recent events in the market for coffee?
answer
A drought in a large coffee producing nation such as Brazil is enough to cause prices to rise.
question
Use the following estimated demand function to answer questions 19 and 20.
QD = 1750 - 125 P + 150 Adv + 15 PC + 1.1 Pop
Where: QD = Quantity of pizzas ordered for delivery per weekP = Price of pizza in dollars; Average Price = $10 Adv = Advertising expenditures in thousands of dollars; Average Advertising = $1,500PC = Price of a competitor or complement in dollars; Average Price of competitor or complement = $9.00Pop = Population of the immediate area in hundreds of persons; Average Population = 5,600 persons
Which of the following would NOT be an accurate interpretation for the equation expressed above?
QD = 1750 - 125 P + 150 Adv + 15 PC + 1.1 Pop
Where: QD = Quantity of pizzas ordered for delivery per weekP = Price of pizza in dollars; Average Price = $10 Adv = Advertising expenditures in thousands of dollars; Average Advertising = $1,500PC = Price of a competitor or complement in dollars; Average Price of competitor or complement = $9.00Pop = Population of the immediate area in hundreds of persons; Average Population = 5,600 persons
Which of the following would NOT be an accurate interpretation for the equation expressed above?
answer
As the price of the complementary good increases by $1.00, this good's sales decrease by approximately 15 units per week, holding all else constant.
question
Which of the following statements is true?
answer
Following the conventional format of economic equations, the function for this demand curve would be: P = 16.92928 - 0.008 Q
question
Which of the following best describes the concept of price elasticity of demand?
answer
The proportion of change in sales for a given proportional change in price.
question
Which of the following does describe why average values are used as scale figures in the arc elasticity formula?
answer
- For a given dollar amount of a price variance, a price markup will result in a greater proportional change than a price markdown.
-The value of the elasticity will be different, though mathematically correct, if one base point is chosen over another.
-The value of the elasticity will be different, though mathematically correct, if one base point is chosen over another.
question
Which of the following does NOT describe why the arc elasticity formula may be judged as superior to the point elasticity formula?
answer
The arc elasticity isolates the effects of instantaneous changes in the variables.
question
Which of the following describes why the point elasticity formula may be judged as superior to the arc elasticity formula?
answer
-Since demand curves are as of a moment in or over a very short period of time, use of quantities and prices from two different times may distort the elasticity as the demand curve may have shifted.
- Use of two points along the demand curve does not accurately reflect the elasticity at either point, but at the mid-point between the two.
-If the demand curve is nonlinear, the arc elasticity may not represent the appropriate elasticity for decision making.
- Use of two points along the demand curve does not accurately reflect the elasticity at either point, but at the mid-point between the two.
-If the demand curve is nonlinear, the arc elasticity may not represent the appropriate elasticity for decision making.
question
If the demand function is estimated to be Q = 22 - 2P, and we wish to evaluate the impact of a change in price from 5 to 6 using the arc elasticity formula, which of the following statements is correct?
answer
Over this range of values, the demand function exhibits unitary price elasticity of demand.
question
Which of the following statements accurately describes the effects of price-elastic demand?
answer
"Our firm can increase our revenue by cutting our selling price."
question
Which of the following statements is/are true?
answer
A negative exponent on the price variable indicates the good follows the Law of Demand.
question
Which of the following will most likely result in decreased sensitivity of sales to changes in price for a particular firm's new product ("new" meaning "not previously owned")?
answer
A reduction in the amount of time over which the sensitivity is measured.
question
Which of the following would be consistent with Marshall's analysis of the factors that would increase elasticity for derived demand?
answer
Technological advances result in increased substitutability for the good in question.
question
For the estimated demand function Q = 22 - 2P,
answer
-the arc elasticity over the prices of $3 and $5 is -0.5714.the point elasticity at a price of $4 is -0.5714.marginal revenue will be positive at prices above $5.50.
question
Which of the following statements is true?
answer
-For firms facing linear downward-sloping demand curves, marginal revenue will be positive but decreasing for all quantities greater than 1.
-For a firm facing a linear downward-sloping demand curve, the firm will always maximize its profits at a point on its demand curve for which the good is price elastic.
-For a firm facing a linear downward-sloping demand curve, the firm is acting irrationally in regard to profit maximization if it attempts to operate on an inelastic portion of their demand curve.
-For a firm facing a linear downward-sloping demand curve, the firm will always maximize its profits at a point on its demand curve for which the good is price elastic.
-For a firm facing a linear downward-sloping demand curve, the firm is acting irrationally in regard to profit maximization if it attempts to operate on an inelastic portion of their demand curve.
question
Which of the following would describe an aspect of long-run adjustment to rising gasoline prices?
answer
-Consumers replace SUVs with smaller, more fuel efficient cars.
-U.S. automobile manufacturers began to design and produce higher-mileage automobiles.
-Urban areas invest in new public transportation systems.
-U.S. automobile manufacturers began to design and produce higher-mileage automobiles.
-Urban areas invest in new public transportation systems.
question
Given a firm's demand curve has been estimated as Q = 24 - 4 P, which of the following statements is NOT true?
answer
The firm will maximize its revenue at quantity of 12 and price of $4.00.
question
Given the information in Question 15, which of the following statements is true?
answer
The firm will earn a profit of $9.00 at the profit-maximizing level of Q.
question
Use the following estimated demand equation to answer questions 17 through 20.
QD = 210 - 25 P + 45 Inc - 75 PC + 10 Adv
Where: QD = Quantity Demanded in Units
P = Price in Dollars (Average P = $8.00)
Inc = Consumer Income in Thousands of Dollars (Average Inc =$4,000)
PC = Price of a Related Good (Competitor or Complement) (Average PC = $2.00)
Adv = Advertising Expenditure in Thousands of Dollars (Average Adv = $15,000)
If all variables are simultaneously at their means (averages),
QD = 210 - 25 P + 45 Inc - 75 PC + 10 Adv
Where: QD = Quantity Demanded in Units
P = Price in Dollars (Average P = $8.00)
Inc = Consumer Income in Thousands of Dollars (Average Inc =$4,000)
PC = Price of a Related Good (Competitor or Complement) (Average PC = $2.00)
Adv = Advertising Expenditure in Thousands of Dollars (Average Adv = $15,000)
If all variables are simultaneously at their means (averages),
answer
This good follows the Law of Demand.
question
Given the information provided above, one can conclude:
answer
None of the above is true.
question
Given the information provided above, one can conclude:
answer
A 1% increase in income will be associated with a 0.947% increase in quantity, on average, ceteris paribus.
question
Given the information provided above, one can conclude:
answer
The good is price elastic, normal and income inelastic; the related good is a complement and cross-price inelastic, and this good is advertising inelastic.
question
Which of the following best describes demand?
The amount good consumers are willing to purchase at a particular price over a period of time.
The amount of a good consumers are willing and able to purchase over a particular time period holding all factors except price constant.
The willingness and ability of consumers to purchase a particular product.
How much consumers will buy at all possible prices in a particular time period holding all factors constant.
The amount good consumers are willing to purchase at a particular price over a period of time.
The amount of a good consumers are willing and able to purchase over a particular time period holding all factors except price constant.
The willingness and ability of consumers to purchase a particular product.
How much consumers will buy at all possible prices in a particular time period holding all factors constant.
answer
The amount of a good consumers are willing and able to purchase over a particular time period holding all factors except price constant.
question
Which of the following is NOT addressed in the Law of Demand?
The effect of a price increase on quantity demanded.
The inverse relationship between the willingness and ability of consumers to purchase a good and the price of that good.
The perception of consumers that higher-priced goods are of better quality than lower-priced goods.
The expectation that the demand curve for most goods is negatively sloped (downward sloping).
The effect of a price increase on quantity demanded.
The inverse relationship between the willingness and ability of consumers to purchase a good and the price of that good.
The perception of consumers that higher-priced goods are of better quality than lower-priced goods.
The expectation that the demand curve for most goods is negatively sloped (downward sloping).
answer
The perception of consumers that higher-priced goods are of better quality than lower-priced goods.
question
Which of the following best describes the difference between a change in quantity demanded and a change in demand?
A change in quantity demanded occurs when the price of the good has changed; a change in demand occurs when a non-price determinant of demand for the good has changed.
A change in quantity demanded occurs when the number of consumers changes; a change in demand occurs when the good's price changes.
A change in quantity demanded occurs when the demand curve shifts; a change in demand is reflected as a movement along the demand curve.
There is no difference; the terms are synonymous.
A change in quantity demanded occurs when the price of the good has changed; a change in demand occurs when a non-price determinant of demand for the good has changed.
A change in quantity demanded occurs when the number of consumers changes; a change in demand occurs when the good's price changes.
A change in quantity demanded occurs when the demand curve shifts; a change in demand is reflected as a movement along the demand curve.
There is no difference; the terms are synonymous.
answer
A change in quantity demanded occurs when the price of the good has changed; a change in demand occurs when a non-price determinant of demand for the good has changed.
question
Which of the following will NOT shift the demand curve for pizza?
An increase in the price of soft drinks or beverages in general.
The discovery that eating mozzarella cheese will extend one's life expectancy.
A dietary shift away from breads and other high carbohydrate foods.
All of the above will shift the demand curve for pizza.
An increase in the price of soft drinks or beverages in general.
The discovery that eating mozzarella cheese will extend one's life expectancy.
A dietary shift away from breads and other high carbohydrate foods.
All of the above will shift the demand curve for pizza.
answer
All of the above will shift the demand curve for pizza.
question
Which of the following is NOT a factor which will shift the demand curve for some product?
An increase in the price of a substitute good.
An increase in the price of the good itself.
An increase in consumer income.
An expectation of a future price decline.
An increase in the price of a substitute good.
An increase in the price of the good itself.
An increase in consumer income.
An expectation of a future price decline.
answer
An increase in the price of the good itself.
question
Which of the following would NOT shift Santa Claus' demand for elf labor?
Technological progress in toy-making manufacturing.
An increase in the population growth rate.
An increase in the elf wage rate.
An increase in the level of educational attainment of the average elf.
Technological progress in toy-making manufacturing.
An increase in the population growth rate.
An increase in the elf wage rate.
An increase in the level of educational attainment of the average elf.
answer
An increase in the elf wage rate.
question
Which of the following would NOT shift the supply of Buffalo Burgers?
An increase in the price of buffalo meat.
An increase in the price of Buffalo Burgers.
An increase in the interest rate offered on money market mutual funds.
An increase in the incidence of Mad Buffalo Disease.
An increase in the price of buffalo meat.
An increase in the price of Buffalo Burgers.
An increase in the interest rate offered on money market mutual funds.
An increase in the incidence of Mad Buffalo Disease.
answer
An increase in the price of Buffalo Burgers.
question
Which of the following best describes the conditions necessary for a market to attain equilibrium?
The quantity supplied by producers is equivalent to the quantity demanded by consumers.
The price accepted by the producer for the last unit is equivalent to the price the last consumer was willing and able to pay.
Consumers are willing and able to pay price P for quantity Q, and producers are willing and able to supply quantity Q at price P.
All of the above accurately describe the conditions necessary for a market to attain equilibrium.
The quantity supplied by producers is equivalent to the quantity demanded by consumers.
The price accepted by the producer for the last unit is equivalent to the price the last consumer was willing and able to pay.
Consumers are willing and able to pay price P for quantity Q, and producers are willing and able to supply quantity Q at price P.
All of the above accurately describe the conditions necessary for a market to attain equilibrium.
answer
All of the above accurately describe the conditions necessary for a market to attain equilibrium.
question
If a price ceiling is the maximum legal price that may be charged for some good or service, and a price floor is the minimum legal price that may be charged for some good or service, which of the following circumstances would result in a shortage?
The government establishes a price support (floor) for milk at a price of $2.00 per gallon, while the market equilibrium price would be (is) $1.75.
The government establishes a price support (floor) for wheat at a price of $12.00 per bushel, while the equilibrium price would be (is) $14.00.
New York City local government establishes a rent control (price ceiling) on apartments in a certain section of the city at $1,200 per month, while the equilibrium price for the apartments would be (is) $1,150 per month.
None of the above situations would result in a shortage.
The government establishes a price support (floor) for milk at a price of $2.00 per gallon, while the market equilibrium price would be (is) $1.75.
The government establishes a price support (floor) for wheat at a price of $12.00 per bushel, while the equilibrium price would be (is) $14.00.
New York City local government establishes a rent control (price ceiling) on apartments in a certain section of the city at $1,200 per month, while the equilibrium price for the apartments would be (is) $1,150 per month.
None of the above situations would result in a shortage.
answer
None of the above situations would result in a shortage.
question
Which of the following cannot be determined using comparative statics analysis?
Whether or not a new equilibrium price and quantity is equitable (fair) in comparison to the old equilibrium price and quantity.
The effects of market changes as of two different points in time.
The effects of the imposition of a price ceiling on equilibrium price and quantity in a market previously in equilibrium.
None of the above can be determined using comparative statics analysis.
Whether or not a new equilibrium price and quantity is equitable (fair) in comparison to the old equilibrium price and quantity.
The effects of market changes as of two different points in time.
The effects of the imposition of a price ceiling on equilibrium price and quantity in a market previously in equilibrium.
None of the above can be determined using comparative statics analysis.
answer
Whether or not a new equilibrium price and quantity is equitable (fair) in comparison to the old equilibrium price and quantity.
question
Which of the following would result in an increase in equilibrium price and quantity for Dodge Neons?
An increase in the price of BMWs.
The expectation of a future price decline of Dodge Neons.
Technological progress in robotics for building automobiles.
None of the above would increase the equilibrium price and quantity of Dodge Neons.
An increase in the price of BMWs.
The expectation of a future price decline of Dodge Neons.
Technological progress in robotics for building automobiles.
None of the above would increase the equilibrium price and quantity of Dodge Neons.
answer
None of the above would increase the equilibrium price and quantity of Dodge Neons.
question
Which of the following would result in an increase in equilibrium quantity and a decrease in equilibrium price for filet mignon?
A decrease in the proportion of vegetarians in the market.
An increase in the supply of grain used to feed cows.
An increase in the number of pork tenderloin producers.
None of the above would result in an increase in equilibrium quantity and a decrease in equilibrium price of filet mignon.
A decrease in the proportion of vegetarians in the market.
An increase in the supply of grain used to feed cows.
An increase in the number of pork tenderloin producers.
None of the above would result in an increase in equilibrium quantity and a decrease in equilibrium price of filet mignon.
answer
An increase in the supply of grain used to feed cows.
question
Which of the following statements is true?
Following the conventional format of economic equations, the function for this demand curve would be: QD = 1750 - 125 P
Following the conventional format of economic equations, the function for this demand curve would be: QD = 2116.16 - 125 P
Following the conventional format of economic equations, the function for this demand curve would be: P = 16.92928 - 0.008 Q
Following the conventional format of economic equations, the function for this demand curve would be: P = 14 - 0.008 Q
Following the conventional format of economic equations, the function for this demand curve would be: QD = 1750 - 125 P
Following the conventional format of economic equations, the function for this demand curve would be: QD = 2116.16 - 125 P
Following the conventional format of economic equations, the function for this demand curve would be: P = 16.92928 - 0.008 Q
Following the conventional format of economic equations, the function for this demand curve would be: P = 14 - 0.008 Q
answer
Following the conventional format of economic equations, the function for this demand curve would be: P = 16.92928 - 0.008 Q
question
Which of the following best describes the concept of price elasticity of demand?
The amount by which quantity changes for a given change in price.
The proportion of change in sales for a given proportional change in price.
The proportion of change in price for a given proportional change in sales.
The proportion of change in sales for a given proportional change in the Consumer Price Level.
The amount by which quantity changes for a given change in price.
The proportion of change in sales for a given proportional change in price.
The proportion of change in price for a given proportional change in sales.
The proportion of change in sales for a given proportional change in the Consumer Price Level.
answer
The proportion of change in sales for a given proportional change in price.
question
Which of the following does NOT describe why average values are used as scale figures in the arc elasticity formula?
For a given dollar amount of a price variance, a price markup will result in a greater proportional change than a price markdown.
The value of the elasticity will be different, though mathematically correct, if one base point is chosen over another.
Both of the above are accurate depictions of the rationale.
None of the above are reasons for using average values as scale figures.
For a given dollar amount of a price variance, a price markup will result in a greater proportional change than a price markdown.
The value of the elasticity will be different, though mathematically correct, if one base point is chosen over another.
Both of the above are accurate depictions of the rationale.
None of the above are reasons for using average values as scale figures.
answer
Both of the above are accurate depictions of the rationale.
question
Which of the following does NOT describe why the arc elasticity formula may be judged as superior to the point elasticity formula?
The arc elasticity is suitable for determining the effects of average changes over a range of values for the variables.
The arc elasticity isolates the effects of instantaneous changes in the variables.
The decision maker may be either unfamiliar with calculus or deem the point elasticity as inferior.
It is easily calculated and may yield an adequate measure for the current set of circumstances.
The arc elasticity is suitable for determining the effects of average changes over a range of values for the variables.
The arc elasticity isolates the effects of instantaneous changes in the variables.
The decision maker may be either unfamiliar with calculus or deem the point elasticity as inferior.
It is easily calculated and may yield an adequate measure for the current set of circumstances.
answer
The arc elasticity isolates the effects of instantaneous changes in the variables.
question
Which of the following describes why the point elasticity formula may be judged as superior to the arc elasticity formula?
Since demand curves are as of a moment in or over a very short period of time, use of quantities and prices from two different times may distort the elasticity as the demand curve may have shifted.
Use of two points along the demand curve does not accurately reflect the elasticity at either point, but at the mid-point between the two.
If the demand curve is nonlinear, the arc elasticity may not represent the appropriate elasticity for decision making.
All of the above may describe why the point elasticity may be judged as superior to the arc elasticity.
Since demand curves are as of a moment in or over a very short period of time, use of quantities and prices from two different times may distort the elasticity as the demand curve may have shifted.
Use of two points along the demand curve does not accurately reflect the elasticity at either point, but at the mid-point between the two.
If the demand curve is nonlinear, the arc elasticity may not represent the appropriate elasticity for decision making.
All of the above may describe why the point elasticity may be judged as superior to the arc elasticity.
answer
All of the above may describe why the point elasticity may be judged as superior to the arc elasticity.
question
If the demand function is estimated to be Q = 22 - 2P, and we wish to evaluate the impact of a change in price from 5 to 6 using the arc elasticity formula, which of the following statements is correct?
The price elasticity associated with this demand function is constant at -2.
A $1.00 increase in price would be associated with a 1-unit decrease in quantity demanded, on average, ceteris paribus.
Over this range of values, the demand function exhibits unitary price elasticity of demand.
None of the above statements are an accurate reflection of the effect on quantity demanded from the given price change.
The price elasticity associated with this demand function is constant at -2.
A $1.00 increase in price would be associated with a 1-unit decrease in quantity demanded, on average, ceteris paribus.
Over this range of values, the demand function exhibits unitary price elasticity of demand.
None of the above statements are an accurate reflection of the effect on quantity demanded from the given price change.
answer
Over this range of values, the demand function exhibits unitary price elasticity of demand.
question
Which of the following statements accurately describes the effects of price-elastic demand?
"Our firm can increase our revenue by cutting our selling price."
"We can definitely increase our profits by cutting our price."
Since our sales fall by 10,000 units for every $1.00 increase in price, we must lower our price to increase profits."
None of the above accurately describes the effects of price elastic demand.
"Our firm can increase our revenue by cutting our selling price."
"We can definitely increase our profits by cutting our price."
Since our sales fall by 10,000 units for every $1.00 increase in price, we must lower our price to increase profits."
None of the above accurately describes the effects of price elastic demand.
answer
Our firm can increase our revenue by cutting our selling price."
question
Which of the following would NOT describe an aspect of long-run adjustment to rising gasoline prices?.
Consumers replace SUVs with smaller, more fuel efficient cars.
U.S. automobile manufacturers began to design and produce higher-mileage automobiles.
Consumers make no changes in their current driving habits.
Urban areas invest in new public transportation systems
Consumers replace SUVs with smaller, more fuel efficient cars.
U.S. automobile manufacturers began to design and produce higher-mileage automobiles.
Consumers make no changes in their current driving habits.
Urban areas invest in new public transportation systems
answer
Consumers make no changes in their current driving habits.
question
Which of the following describes marginal revenue?
The rate of change in total revenue for an arbitrarily small change in input prices.
The addition to total revenue associated with a one-unit rise in quantity.
The amount of revenue generated from the last unit produced.
The change in total revenue for a given change in price.
The rate of change in total revenue for an arbitrarily small change in input prices.
The addition to total revenue associated with a one-unit rise in quantity.
The amount of revenue generated from the last unit produced.
The change in total revenue for a given change in price.
answer
The addition to total revenue associated with a one-unit rise in quantity.
question
For the estimated demand function Q = 22 - 2P,
the arc elasticity over the prices of $3 and $5 is -0.5714.
the point elasticity at a price of $4 is -0.5714.
marginal revenue will be positive at prices above $5.50.
All of the above are true.
the arc elasticity over the prices of $3 and $5 is -0.5714.
the point elasticity at a price of $4 is -0.5714.
marginal revenue will be positive at prices above $5.50.
All of the above are true.
answer
...
question
Which of the following best describes the difference between the short-run and the long-run?
The short-run is generally regarded as a period of 3 years or less while the long-run is generally regarded with a period of time over 3 years.
The short-run is a period of time when all inputs are fixed while in the long-run at least one input is variable.
In the short-run, at least one input is fixed and at least one input is variable; in the long-run, all inputs are variable.
In the short-run, productive technology is assumed to be restricted from advancement; in the long-run, productive technology is allowed to progress.
The short-run is generally regarded as a period of 3 years or less while the long-run is generally regarded with a period of time over 3 years.
The short-run is a period of time when all inputs are fixed while in the long-run at least one input is variable.
In the short-run, at least one input is fixed and at least one input is variable; in the long-run, all inputs are variable.
In the short-run, productive technology is assumed to be restricted from advancement; in the long-run, productive technology is allowed to progress.
answer
In the short-run, at least one input is fixed and at least one input is variable; in the long-run, all inputs are variable.
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Which of the following best describes the marginal product of an input?
The additional cost from utilizing an additional unit of the input.
The additional amount of the input required to produce an additional unit of output.
The amount of output generated per unit of the input employed.
The amount of output generated from the last unit of the input employed.
The additional cost from utilizing an additional unit of the input.
The additional amount of the input required to produce an additional unit of output.
The amount of output generated per unit of the input employed.
The amount of output generated from the last unit of the input employed.
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The amount of output generated from the last unit of the input employed.
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Under which of the following conditions would output / total product be maximized?
Marginal product of the input is zero.
Average product of the input is zero.
Marginal product is positive but decreasing.
Average product is positive but decreasing.
Marginal product of the input is zero.
Average product of the input is zero.
Marginal product is positive but decreasing.
Average product is positive but decreasing.
answer
Marginal product of the input is zero.
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Which of the following best describes the 'Law of Diminishing Returns'?
Beyond some point, output / total product per unit of the input employed must fall.
Beyond some point, additional units of the input employed will result in smaller increases in output / total product.
Beyond some point, additional units of the input employed will result in decreases to output / total product.
None of the above accurately describes the 'Law of Diminishing Returns'.
Beyond some point, output / total product per unit of the input employed must fall.
Beyond some point, additional units of the input employed will result in smaller increases in output / total product.
Beyond some point, additional units of the input employed will result in decreases to output / total product.
None of the above accurately describes the 'Law of Diminishing Returns'.
answer
Beyond some point, additional units of the input employed will result in smaller increases in output / total product.
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Under which of the following circumstances would a firm NOT be acting rationally in regards to the stages of production?
The firm is encountering diminishing returns to the input.
The firm's output / total product per unit of the input is falling.
The last unit of the input employed yielded greater output than the previous unit.
The firm would be acting rationally under all of the above circumstances.
The firm is encountering diminishing returns to the input.
The firm's output / total product per unit of the input is falling.
The last unit of the input employed yielded greater output than the previous unit.
The firm would be acting rationally under all of the above circumstances.
answer
The last unit of the input employed yielded greater output than the previous unit.
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If a firm's output increases by 10 percent
After all inputs were increased by 100 units, the firm is experiencing increasing returns to scale.
After an 8 percent increase in a single input, holding the others constant, would indicate the firm is experiencing decreasing returns to scale.
After the firm increased input usage of all inputs by 12 percent to obtain this increase in output, the firm would be encountering decreasing returns to scale.
None of the above conclusions can be drawn.
After all inputs were increased by 100 units, the firm is experiencing increasing returns to scale.
After an 8 percent increase in a single input, holding the others constant, would indicate the firm is experiencing decreasing returns to scale.
After the firm increased input usage of all inputs by 12 percent to obtain this increase in output, the firm would be encountering decreasing returns to scale.
None of the above conclusions can be drawn.
answer
After the firm increased input usage of all inputs by 12 percent to obtain this increase in output, the firm would be encountering decreasing returns to scale.
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Which of the following types of cost is NOT relevant to managerial decision-making?
Replacement cost.
Historical cost.
Incremental cost.
Implicit cost.
Replacement cost.
Historical cost.
Incremental cost.
Implicit cost.
answer
Historical cost.
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Which of the following describes the relationship between production and cost?
Cost is production expressed in monetary terms.
The limiting assumptions of short-run production analysis apply to short-run cost analysis.
Total variable cost is the 'mirror image' of total product.
All of the above accurately describe the relationship between production and cost.
Cost is production expressed in monetary terms.
The limiting assumptions of short-run production analysis apply to short-run cost analysis.
Total variable cost is the 'mirror image' of total product.
All of the above accurately describe the relationship between production and cost.
answer
All of the above accurately describe the relationship between production and cost.
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The short-run cost functions do NOT work under which of the following assumptions:
For 2 inputs, labor and capital, labor is variable, capital is fixed.
The firm operates with a given level of "state-of-the-art" technology.
The firm uses the inputs to produce multiple products.
The firm is a price taker in the input market.
For 2 inputs, labor and capital, labor is variable, capital is fixed.
The firm operates with a given level of "state-of-the-art" technology.
The firm uses the inputs to produce multiple products.
The firm is a price taker in the input market.
answer
The firm uses the inputs to produce multiple products.
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the effect of the law of diminishing returns to a variable input can be seen in the short-run cost curves as:
Total cost increases at a decreasing rate when the firm is encountering diminishing returns.
Marginal cost is increasing.
The firms total cost per unit of output (ATC) is increasing.
All of the above are true.
Total cost increases at a decreasing rate when the firm is encountering diminishing returns.
Marginal cost is increasing.
The firms total cost per unit of output (ATC) is increasing.
All of the above are true.
answer
Marginal cost is increasing.
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Which of the following would NOT be a factor that would result in a downward sloping learning curve?
The proverbial "practice makes perfect."
The firm is encountering constant or diminishing returns to scale.
A decrease in cost per unit of output as workers become more proficient in the production process.
All of the above are reasons for downward sloping learning curves.
The proverbial "practice makes perfect."
The firm is encountering constant or diminishing returns to scale.
A decrease in cost per unit of output as workers become more proficient in the production process.
All of the above are reasons for downward sloping learning curves.
answer
The firm is encountering constant or diminishing returns to scale.
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Which of the following would NOT result in increased efficiency of production through economies of scope?
The firm's inputs are unique to the final good it produces, which is equally unique.
The firm produces two types of goods which have similar inputs and production processes.
The firm develops a complementary service for the good it produces.
All of the above situations would result in increased efficiency as specified under economies of scope.
The firm's inputs are unique to the final good it produces, which is equally unique.
The firm produces two types of goods which have similar inputs and production processes.
The firm develops a complementary service for the good it produces.
All of the above situations would result in increased efficiency as specified under economies of scope.
answer
The firm's inputs are unique to the final good it produces, which is equally unique.
question
Question 1.
Which of the following is NOT a characteristic of the perfectly competitive market structure?
The product the firm produces is homogeneous or standardized.
The firm may raise the price of the product it sells incurring small declines in sales.
The firm can sell all it wants at the market clearing price.
Consumers are assumed to have complete (perfect) information regarding the producers in the market.
Which of the following is NOT a characteristic of the perfectly competitive market structure?
The product the firm produces is homogeneous or standardized.
The firm may raise the price of the product it sells incurring small declines in sales.
The firm can sell all it wants at the market clearing price.
Consumers are assumed to have complete (perfect) information regarding the producers in the market.
answer
The firm may raise the price of the product it sells incurring small declines in sales.
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A firm operating in a perfectly competitive market will NOT
Face significant barriers to entry or exit of the industry.
Have significant control over the price it receives for the product it produces.
Produce a differentiated (non-standardized, heterogeneous) product.
The perfectly competitive firm will not face or cannot do any of the above.
Face significant barriers to entry or exit of the industry.
Have significant control over the price it receives for the product it produces.
Produce a differentiated (non-standardized, heterogeneous) product.
The perfectly competitive firm will not face or cannot do any of the above.
answer
The perfectly competitive firm will not face or cannot do any of the above.
question
Which of the following is NOT part of the basic business decision to enter or exit a perfectly competitive industry?
How much should we charge for our product?
How much output should we produce?
If we incur a loss, will this be a short-run phenomenon, or a reason to exit the industry?
None of the above are part of the business case decision to enter or exit a perfectly competitive industry.
How much should we charge for our product?
How much output should we produce?
If we incur a loss, will this be a short-run phenomenon, or a reason to exit the industry?
None of the above are part of the business case decision to enter or exit a perfectly competitive industry.
answer
How much should we charge for our product?
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For firms in perfectly competitive industries
Profit maximization (profit Max) occurs at Q where MR = ATC.
The firms TR function will rise and attain a maximum.
Profit maximization (profit Max) occurs at Q where P = MC.
None of the above are true.
Profit maximization (profit Max) occurs at Q where MR = ATC.
The firms TR function will rise and attain a maximum.
Profit maximization (profit Max) occurs at Q where P = MC.
None of the above are true.
answer
Profit maximization (profitMax) occurs at Q where P = MC.
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A production possibilities frontier is bowed outward when
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the rate of tradeoff between the two goods being produced depends on how much of each good is being produced.
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The rate of tradeoff between producing product x and producing product y is constant in
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a graph that shows a straight line and not a curve.
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The most obvious benefit of specialization and trade is that they allow us to
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consume more goods than we otherwise would be able to consume.
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The opportunity cost of an item is
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what you give up to get that item.
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The producer that requires a smaller quantity of inputs to produce a certain amount of a good, relative to the quantities of inputs required by other producers to produce the same amount of that good,
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has an absolute advantage in the production of that good.
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If Shawn can produce donuts at a lower opportunity cost than Sue, then
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Shawn has a comparative advantage in the production of donuts.
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"Other things equal, when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises." This relationship between price and quantity demanded is referred to as
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the law of demand.
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A rightward shift of a demand curve is called a(n)
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increase in demand.
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The demand curve for coffee shifts
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when a determinant of the demand for coffee other than the price of coffee changes.
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Each of the following is a determinant of demand except
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production technology.
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"Other things equal, when the price of a good rises, the quantity supplied of the good also rises, and when the price falls, the quantity supplied falls as well." This relationship between price and quantity supplied
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is referred to as the law of supply.
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A improvement in production technology will shift the
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supply curve to the right.
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In general, elasticity is a measure of
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how much buyers and sellers respond to changes in market conditions.
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Demand is said to be price elastic if
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buyers respond substantially to changes in the price of the good.
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The price elasticity of demand measures how much
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quantity demanded responds to a change in price.
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Demand is inelastic if the price elasticity of demand is
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less than 1.
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Goods with many close substitutes tend to have
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more elastic demands.
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When the price of candy bars is $1.00, the quantity demanded is 500 per day. When the price falls to $0.80, the quantity demanded increases to 600. Given this information and using the midpoint method, we know that the demand for candy bars is
answer
inelastic.
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When the price of a good is $5, the quantity demanded is 100 units per month; when the price is $7, the quantity demanded is 80 units per month. Using the midpoint method, the price elasticity of demand is about
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0.67.
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An increase in price causes an increase in total revenue when demand is
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inelastic.
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Willingness to pay
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measures the value that a buyer places on a good.
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Consumer surplus is
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the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.
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Bob purchases a book for $6, and his consumer surplus is $2. How much is Bob willing to pay for the book?
answer
$8.
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On a graph, consumer surplus is represented by the area
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below the demand curve and above price.
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A supply curve can be used to measure producer surplus because it reflects
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sellers' costs.
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Producer surplus is
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the amount a seller is paid minus the cost of production.
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George produces cupcakes. His production cost is $10 per dozen. He sells the cupcakes for $16 per dozen. His producer surplus per dozen cupcakes is
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$6
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Total surplus
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can be used to measure a market's efficiency, is the sum of consumer and producer surplus, and is the value to buyers minus the cost to sellers.
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We can say that the allocation of resources is efficient if
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total surplus is maximized.
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Total surplus is represented by the area below the
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demand curve and above the supply curve, up to the equilibrium quantity.
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A business incurs the following costs per unit: Labor $125/unit; Materials $45/unit and rent $250,000/month. If the firm produces 1,000,000 units a month, the total variable costs equal
answer
$170Million
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A business incurs the following costs per unit: Labor $125/unit; Materials $45/unit and rent $250,000/month. If the firm produces 1,000,000 units a month, the total fixed costs equal
answer
$250,000
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A business incurs the following costs per unit: Labor $125/unit; Materials $45/unit and rent $250,000/month. If the firm produces 1,000,000 units a month, the total costs equal
answer
$170,250,000
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Variable costs are
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costs that vary with output
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Fixed costs are
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costs that do not vary with output
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Accountants and Economists differ in their calculations of profits in that;
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accountants consider explicit costs only
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A business owner makes 50 items a day. He spends 8 hours in producing those items. If hired elsewhere he could have earned $10 an hour. The item sells for $10 each. Production occurs seven days a week during the month of February. If the explicit costs total $10,000 a month, the accounting profit for the month equals:
answer
$4,000
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A business owner makes 50 items a day. She spends 8 hours in producing those items. If hired elsewhere she could have earned $10 an hour. The item sells for $10 each. Production occurs seven days a week during the month of February. If the explicit costs total $10,000 a month the economic profit for the month equals:
answer
$1,760
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If a firm is earning negative accounting profits, it implies
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That the firm's economic profits are necessarily negative
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The fixed-cost fallacy occurs when
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A firm considers sunk costs, overhead, and depreciation costs in making decisions.
question
The hidden-cost fallacy occurs when
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A firm ignores relevant costs
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A firm wishes to shut down an office and fire 100 employees. The company will save $3000 per month per employee. It is estimated that each employee contributes $4,100 to the company. The firm rents office space for this group of employees at $1500. What should the company do?
answer
Not fire the employees since keeping them generates a profit of $1085 per employee
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Marginal cost is
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The cost of producing an additional unit of output
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Marginal revenue is
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The revenue from selling an additional unit of output
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Managers undertake an investment only if
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Marginal revenue is greater than marginal costs
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According to the law of diminishing returns
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Production increases at a decreasing rate
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At the current level of production, if the firm's MR>MC, then the firm should
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produce more
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If Marginal Cost (MC) is higher than Average Cost (AC), average cost is
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rising
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When economists speak of "marginal", they mean
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Incremental
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If AVC=$15 and AFC=$10, then ATC=
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$25
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In the short run,
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Some production costs are fixed
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If the interest rate is 11%, $1500 received at the end of 12 years is worth how much today?
answer
1500/(1 +0 .11)^12
question
Lucy invested $10,000 at the rate of 12%. According to the rule of 72, it would take ______ years for her money to double
answer
6
question
Ricky is thinking about borrowing $10,000 from Fred. He promises Fred cash flows of $5000 for the next three years. If Fred's cost of capital is 10%, what is the present value of the stream of cash flows?
answer
$12,434.26
question
A firm's fixed costs are $10 million. It sets the price at $1800 per unit and has marginal costs of $1,000.
The break-even quantity is
The break-even quantity is
answer
12,500
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Which of the following defines a sunk cost?
answer
An asset with no scrap value
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Which of the following will increase the break-even quantity?
answer
A decrease in the price level
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A firm is deciding between two different sewing machines. Technology A has fixed costs of $500 and marginal costs of $50 whereas Technology B has fixed costs of $250 and marginal costs of $100.
At what quantity is the firm indifferent between the two technologies?
At what quantity is the firm indifferent between the two technologies?
answer
5
question
A firm sells 1000 units per week. It charges $70 per unit, the average variable costs are $25, and the average total costs are $65. In the short run, the firm should
answer
Continue operating as the firm is covering all the variable costs and all of the fixed costs
question
A firm sells 1000 units per week. It charges $70 per unit, the average variable costs are $25, and the average total costs are $65. At what price would the firm consider shutting down in the short run?
answer
$25
question
A firm sells 1000 units per week. It charges $70 per unit, the average variable costs are $25, and the average total costs are $65. At what price would the firm consider exiting the market in the long run?
answer
$65
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Production Possibilities Frontier (PPF)
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identifies potential choices in the allocation of inputs between two activities or goods
question
Obtainable choices
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any point on or inside the PPF is obtainable Points outside the PPF aren't obtainable... without trade
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Efficient choices
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any point on the frontier is efficient; Points inside the PPF aren't efficient
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Absolute Advantage
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ability to produce a good using fewer inputs than another producer
question
Comparative Advantage
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ability to produce a good at a lower opportunity cost than another producer
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Opportunity cost
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whatever must be given up to obtain something; your next best alternative
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Quantity demanded
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amount of the good that buyers are willing & able to purchase
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Law of demand
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the claim that, other things equal, the quantity demanded of most goods falls when the price of the good rises
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Factors that can cause a shift of the entire demand curve:
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Income, prices of related goods, tastes, expectations, number of buyers
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Normal good:
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increase in income leads to increase in demand; normal goods have a positive income elasticity of demand because higher income raises the quantity demanded
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Inferior good:
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increase in income leads to decrease in demand; inferior goods have negative income elasticity of demand because higher income lowers the quantity demanded
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Substitute
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when a fall in the price of one good reduces the demand for the other good you have a substitute; Substitutes have positive cross-price elasticities because an increase in the price of one good (hot dogs) induces people to buy more of its substitute (hamburgers)
question
Complements
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when a fall in the price of one good increases the demand for the other good you have a complement; Complements have negative cross-price elasticities because an increase in the price of one good (jelly) induces people to buy less of its complement (peanut butter)
question
Number of Buyers
answer
adding another individual to the market demand
curve would shift it to the right because the quantity demanded in the market would be higher at every price
curve would shift it to the right because the quantity demanded in the market would be higher at every price
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Quantity supplied
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amount of the good sellers are willing & able to sell
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Law of supply
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the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises
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Factors that cause a shift of the entire supply curve:
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Input prices, technology, expectations, number of sellers
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Technology
answer
By reducing firms' costs, advances in technology allow them to supply more of a given product at a given price.
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Surplus
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a situation in which quantity supplied is greater than quantity demanded ≈ excess supply
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Shortage
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a situation in which quantity demanded is greater than quantity supplied ≈ excess demand
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The law of supply & demand
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the claim that the price of any good adjusts to bring the quantity supplied & the quantity demanded for that good into balance.
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Elasticity
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a measure of the responsiveness of one variable to changes in another variable; the % change in one variable that arises due to a given % change in another variable
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Price elasticity of demand
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measure of how much QD responds to a change in the price of a good; Equals the absolute value of the percentage change quantity demanded divided by percentage change in price = |(% Δ Qd ÷ % Δ price)|
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Income elasticity of demand
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measure of how much QD responds to a change in consumers' income; Equals % change in quantity demanded / % change income
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Cross-price elasticity of demand
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measure of how much QD of one good responds to change in the price of another good; Equals % change in Qd of good 1 / % change in price of good 2
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Price elasticity of supply
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measure of how much QS responds to change in the price of a good; Equals % change in Qs / % change in price
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Midpoint Method is used to calculate elasticity between 2 points on a linear demand curve:
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|{(Q2-Q1)/[(Q2+Q1)/2]} / {(P2-P1)/[(P2+P1)/2|
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necessities vs. luxuries:
answer
necessities tend to have more inelastic demands
while luxuries tend to have more elastic demands
while luxuries tend to have more elastic demands
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availability of close substitutes:
answer
goods with close substitutes tend to have
more elastic demands because it is easy to switch from that good to others
more elastic demands because it is easy to switch from that good to others
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definition of the market:
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narrowly defined markets (vanilla ice cream) tend
to be more elastic than broadly defined markets (food) because it is easier to find substitutes for narrowly defined goods (vanilla frozen yogurt)
to be more elastic than broadly defined markets (food) because it is easier to find substitutes for narrowly defined goods (vanilla frozen yogurt)
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time horizon:
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goods tend to have more elastic demands over longer time horizons because more drastic behavioral changes can be made (buying more fuel efficient cars or taking public transportation due to increased fuel costs)
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expenditure share:
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goods that make up a small portion of your total budget tend to be more inelastic than those that make up a sizeable portion of your budge
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if elasticity > 1
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≈ elastic demand as quantity moves proportionally more than price; perfectly elastic as elasticity of demand approaches infinity & the
demand curve becomes horizontal (so small changes in price lead to huge changes in quantity demanded)
demand curve becomes horizontal (so small changes in price lead to huge changes in quantity demanded)
question
if elasticity = 1
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≈ unit elastic as quantity moves the same proportionally as price
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if elasticity < 1
answer
≈ inelastic demand as quantity moves proportionally less than price; perfectly inelastic in the extreme case of zero elasticity as the
demand curve is vertical -- regardless of the price, quantity demanded stays the same
demand curve is vertical -- regardless of the price, quantity demanded stays the same
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Appearance:
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although elasticity ≠ slope, all things being equal, inelastic demand curves tend to be steeper than elastic demand curves
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With inelastic demand:
answer
↑ price leads to ↑ total revenue; This makes sense as the percentage change in quantity demanded is less than the percentage change in price.
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With elastic demand:
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↑ price leads to ↓ total revenue; Here the percentage change in quantity demanded is greater than the percentage change in price.
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Unit elastic demand:
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total revenue is already maximized
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Welfare Economics
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the study of how the allocation of resources affects economic well- being
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Consumer Surplus
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measures the benefit that buyers receive from a good as the buyers themselves perceive it
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Consumer surplus
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the amount a buyer is willing to pay for a good
MINUS the actual amount paid; Can be seen visually as the area above the price & below the
demand curve
MINUS the actual amount paid; Can be seen visually as the area above the price & below the
demand curve
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Producer Surplus
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measures the benefit to sellers of participating in a market; the amount a seller is paid for a good or service minus the seller's cost of providing the good or service
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Efficiency
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the property of a resource allocation maximizing the total surplus received by all members of society
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Price Ceiling
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a legal maximum on the price at which a good can be sold; Below equilibrium, it has an effect because the market price was higher than the price ceiling = binding; higher quantity demanded + lower quantity supplied =
shortage
shortage
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Price Floor
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a legal minimum on the price at which a good can be sold; Above equilibrium, it has an effect because the market price was lower than the price floor = binding; Higher quantity supplied + lower quantity demanded = surplus
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When supply is more elastic than demand
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tax incidence falls more heavily on consumers than producers
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When demand is more elastic than supply
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tax incidence falls more heavily on producers than consumers
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Deadweight loss
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the fall in total surplus that results from a market
distortion such as a tax; Taxes cause deadweight losses because they prevent buyers & sellers from realizing gains from trade.
distortion such as a tax; Taxes cause deadweight losses because they prevent buyers & sellers from realizing gains from trade.
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If world price > domestic price,
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export the good; you have a comparative advantage in production of the good
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If world price < domestic price,
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import the good
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Externality
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the uncompensated impact of one person's actions on the well-being of a bystander
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Negative Externalities
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exist when the social cost (private cost + external
cost) of a good exceeds the private cost of the good
cost) of a good exceeds the private cost of the good
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Positive Externalities
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exist when the social value (private value + external benefit) of a good exceeds the private value of the go
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Explicit Costs
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Explicit costs require an outlay of cash whether they are fixed or variable
question
Implicit Costs
answer
Implicit costs don't require an outlay of cash.
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Decision-making rule:
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When making a decision, you should consider all the costs and benefits that vary with the consequence of a decision and only the costs and benefits that vary with the consequence of the decision. These are the relevant costs and relevant benefits of a decision.
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Sunk-cost fallacy:
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you consider costs and benefits that do not vary with the consequences of your decision. You make decisions based on irrelevant costs and benefits.
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Hidden-cost fallacy:
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You fail to consider all the costs and benefits that vary with the consequence of the decision. You ignore relevant costs.
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Economies of scale
answer
are captured as ATC falls; Spreading FC across more output
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Diseconomies of scale
answer
are faced as ATC rises; Diminishing Marginal Returns
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the Marginal Cost (MC) curve
answer
intersects the Average Total Cost (ATC) curve at its minimum. This point of intersection, the minimum of the ATC curve, is often called the efficient scale of the firm.
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Profit is maximized by producing the quantity such that
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MR = MC
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If MR > MC
answer
you need to raise output (by cutting price to sell more)
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If MR < MC
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you need to cut output (by raising price to sell less)
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Present Value
answer
= (Future Value) / [(1 + r)^k]
question
Future Value
answer
= (Present Value) * (1 + r)^k
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Present Value of a perpetual asset
answer
= CF/ r
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The breakeven quantity (Q) is
answer
Q = F / (P - MC)
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In the short run fixed costs ≠ avoidable:
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Only consider variable costs when
making productions decisions
making productions decisions
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In the long run all costs are avoidable:
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So consider total costs when making exit decisions.
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Command Process
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The use of central planning and the directives of government authorities to answer the questions of what, how and for whom. p.7
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Economic decisions for the firm-what
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What goods and services should be produced? The product decision.
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Economic decisions for the firm-how
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How should these goods and services be produced? The hiring, staffing, and capital budgeting decision.
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Economic decisions for the firm-for whom?
answer
For whom should these goods and services be produced? The market segmentation decision. p.8
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Market process
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The use of supply, demand, and managerial incentives to answer the questions of what, how, and for whom. p.7
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Resources
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Factors of production or inputs. Land, labor, capital, and entrepreneurship. p.5
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Scarcity
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A condition that exists when resources are limited relative to the demand for their use. In the market process, the extent of this condition is reflected in the price of resources or the goods and services they produce. p.5
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Traditional process
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The use of customs and traditions to answer the questions of what, how, and for whom. p.7
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BRIC
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Brazil, Russia, India, and China. These countries account for 40% of the world's population and GDP growth rates have been twice that of the US over the last decade.
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Command process
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The use of central planning and the directives of government authorities to answer the questions what, how and for whom.
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Economic decisions for the firm
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"What goods and services should be produced?" -the product decision. "How should these goods and services be produced?" - the hiring, staffing and capital-budgeting decision. "For whom should these goods and services be produced?" - the market segmentation decision.
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Economics
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The study of how choices are made under conditions of scarcity. The basic economic problem can be defined as "What goods and services should be produced and in what quantities?" How should these goods and services be produced?" "For whom should these goods and services be produced?"
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Managerial economics
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The use of economic analysis to make business decisions involving the best use of a firm's scarce resources
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Market process
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The use of supply, demand and material incentives to answer the questions of what, how, and for whom.
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Opportunity cost
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The amount or subjective value forgone in choosing one activity over the next best alternative. This cost must be considered whenever decisions are made under conditions of scarcity.
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Resources
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Also referred to as factors of production or inputs, economic analysis usually includes four basic types: land, labor, capital and entrepreneurship. This chapter also includes managerial skills and entrepreneurship.
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Scarcity
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A condition that exists when resources are limited relative to the demand for their use. In the market process, the extent of this condition is reflected in the price of resources or the goods and services they produce.
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Traditional process
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The use of customs and traditions to answer the questions of what, how and for whom.
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