ECP 6705 Module 2 - Assignment Essays

question

Due to the complexities of human thought process:

answer

behavior models are abstractions of the way we make decisions.
behavior models are simplifications of real-world human decision-making.

question

All affordable goods and services can be represented by which of the following?

answer

Consumer opportunities

question

Bundle A has at least as much of every good as bundle B and more of at least one good. If bundle A is preferred to bundle B,

answer

the more is better property is met

question

Points on an indifference curve:

answer

show consumption bundles that generate the same amount of satisfaction.

question

The marginal rate of substitution (MRS) is

answer

the absolute value of the slope of the indifference curve.

question

The budget set defines combinations of goods and services

answer

that are affordable.

question

Given the following budget constraint, PxX + PyY = M, what is the maximum affordable quantity of good Y?

answer

Y = M/PY

question

An increase in the price of good X rotates the budget line, alters the equilibrium bundle, and

answer

indicates different quantities demanded at different prices.
provides two points on a demand curve.

question

The market demand curve is the ____________ summation of all the individual demand curves.

answer

horizontal

question

The budget constraint can be given by which of the following expressions?

answer

PxX + PyY = M
Y = M/Py - Px/Py⋅X
page 108

question

Economists

answer

are able to model human behavior.

question

Consumer ______ represent the possible goods and services consumers can afford to consume and consumer ______ determine which of these goods will be consumed.

answer

opportunities; preferences

question

For any two bundles of goods and/or services, A and B, if A is preferred to B, or B is preferred to A, or the consumer is indifferent between A and B, then:

answer

preferences are complete

question

- Px/Py equals

answer

the slope of the budget line

question

Moving along an indifference curve from one bundle to another, a consumer gains 1 unit of X and gives up 3 units of Y. The marginal rate of substitution is ___ between goods X and Y.

answer

question

If a consumer spends all of his or her income on either good X or good Y or a combination of both, then the budget line is given by which of the following?

answer

PxX + PyY = M

question

Indifference curve analysis is a helpful tool used to derive

answer

the demand curve.

question

Market demand indicates the __________ quantity all consumers would purchase at each possible price

answer

total

question

Y = M/Py - Px/Py X, represents

answer

an affordable combination of goods X and Y.

question

- (PXPY) represents the___ rate of substitution.

answer

market

question

True or false: It is generally the case that indifference curves have the same shape across all consumers

answer

false

question

The budget set can be defined as which of the following?

answer

PxX + PyY ≤ M

question

The budget constraint can be given by which of the following expressions?

answer

Y = M/Py - Px/Py⋅X
PxX + PyY = M

question

Bundle A is preferred to bundle B. Bundle B is preferred to bundle C. If preferences are transitive, then

answer

bundle A is preferred to bundle C.

question

In a production function, the input that refers to machinery is called

answer

capital

question

Which of the following describes the maximum output that can be produced with a fixed set of inputs?

answer

Q = F{K,L}, where K is capital and L is labor

question

The ________ run is a period of time during which a manager can change all factors of production.

answer

long

question

If, in the short run, capital is fixed equal to K*, what is the short-run production function?

answer

Q = f(L) = F(K*, L)

question

The measure of output per unit of input is called _____.

answer

average product

question

A production function can include many inputs. Which of the following are the most commonly used inputs?

answer

Capital
Labor

question

A small sandwich shop has 8 employees and produces 216 sandwiches per day. After hiring another employee (9 total), the shop produces 231 sandwiches per day. The marginal product of the 9th labor (MPL) equals sandwiches.

answer

(231-216)/(9-8)= 15

question

Which of the following describes the maximum output that can be produced with a fixed set of inputs?

answer

Production function

question

Jack operates a small, farm-to-table, organic rice packaging plant. Jack hired another employee and saw output fall from 300 to 297 boxes of rice per day. What is this an example of?

answer

Negative marginal returns

question

The ________ run is a period of time during which at least one factor of production is fixed.

answer

short

question

Which of the following is a scheme used by managers to ensure maximum worker effort?

answer

Incentive structures

question

The short-run production function is generally expressed as a function of which of the following inputs?

answer

Labor only

question

The value of the output produced by the last unit of a particular input is called

answer

value marginal product.

question

What is the average product of capital (APk) if 12 machines produce a total of 96,000 units of output?
APk =

answer

8000

question

To maximize profits, a firm manager should produce a level of output such that the marginal benefit is __________ marginal cost.

answer

equal to

question

Marginal Product of Labor (MPL) is given by:

answer

MPL = ΔQ/ΔL

question

When each additional unit of an input increases total output by more than did the previous unit, the firm is experiencing

answer

increasing marginal returns.

question

In the production process, the manager must do which of the following?

answer

Establish the correct level of inputs
Ensure the firm operates on the production function

question

Which of the following represents an isocost line?

answer

C = wL + rK

question

Assume that each unit of labor costs $500. If a worker's marginal product of labor (MPL) equals 115 and the firm sells its product for $6.00, the value of the additional output exceeds the cost of hiring the worker by $

answer

190

question

If the cost of each additional unit of labor is w, a firm will employ additional workers until _____________________ in the range of diminishing marginal product

answer

VMPL= w

question

Given two inputs, labor and capital, costs are minimized when

answer

MRTSKL=w/r
MPlL/w=MPK/r
MPL/MPK=w/r

question

If MPL/w > MPK/r, the firm should use (less/more) capital and (less/more) labor to minimize costs.

answer

less, more

question

A line that represents the combinations of inputs that will cost the producer the same amount of money is called a(n)_____.

answer

isocost line

question

Insert one word OR the mathematical operator into the following expression to demonstrate the cost-minimizing input rule. MPL/MPK w/r

answer

MPL/MPK equals w/r

question

If a worker's marginal product of labor (MPL) equals 115 and the firm sells its product for $6.00, what is the value marginal product of labor (VMPL)?
VMPL =$

answer

$690

question

When the price of labor rises, firms have a tendency to use

answer

less labor and more capital.

question

At the cost-minimizing input mix,

answer

the slope of the isoquant equals the slope of the isocost line.

question

Costs that do not change when output changes are called costs.

answer

fixed

question

If MPL/w< MPK/r, the firm should use capital and labor to minimize costs.

answer

more, less

question

The minimum possible cost of producing each output level with fixed and variable factors is given by

answer

the short-run cost function.

question

To minimize the cost of producing a given level of output, the marginal product per dollar spent should be for all inputs.

answer

equal

question

Graphically, what is the distance between total cost (TC) and variable cost (VC)?

answer

Fixed cost

question

Which of the following statements is correct?

answer

Average fixed costs decline continuously as output expands.

question

Suppose capital, K, is on the vertical axis and labor, L, is on the horizontal axis in a graph. Which of the following would be true if the price of labor, w, increased?

answer

The isocost line rotates clockwise

question

c(q)/q, defines

answer

average total cost.

question

Costs that change when output changes are called ___ costs.

answer

variable

question

The cost of producing an additional unit of output is called (one word) cost.

answer

marginal

question

The sum of all variable and fixed costs is the firm's _____.

answer

cost function

question

When average total cost (ATC) is at its minimum, marginal cost (MC) __________ average total cost (ATC).

answer

equals

question

Fixed cost (FC) equals

answer

TC - VC

question

The expression, VC(Q)/Q, defines

answer

average variable cost.

question

As output increases, what happens to the difference between ATC and AVC?

answer

Decreases

question

Suppose a firm produces 1000 units of a good. If fixed costs (FC) equal $2500 and variable costs (VC) equal $3700 at that output level, average total cost (ATC) of each unit is equal to $

answer

6.20

question

A cost that is incurred and unrecoverable is called a _________ cost.

answer

sunk

question

Suppose that increasing output from 1000 units to 1100 units increases costs from $5,500 to $7,000. The marginal cost of producing each of the additional units is $

answer

question

Which of the following types of functions is C(Q) = f + aQ + bQ2 + cQ3?

answer

Cubic cost function

question

Where does the marginal cost (MC) curve intersect the average variable cost (AVC) curve?

answer

Where does the marginal cost (MC) curve intersect the average variable cost (AVC) curve?

question

The difference between average total cost (ATC) and average variable cost (AVC) is average __________ cost.

answer

fixed

question

With respect to the short run average cost curves, what is true of the long run average cost curve?

answer

It lies above no point on the short run average cost curves.
It equals short run average cost when short run curves use fixed inputs optimally.

question

A cost that does not change with output is called a _________ cost

answer

fixed

question

When a firm experiences economies of scale, increasing the size of the operation ___ the minimum average cost.

answer

decreases

question

Given the cost function, C(Q) = f + aQ + bQ2 + cQ3, which of the following equations defines the Marginal Cost (MC) function?

answer

C(Q) = a + 2bQ + 3cQ2

question

Accounting costs are the costs most often associated with _____.

answer

the cost of production

question

Which function defines the cost of producing at least two types of output?

answer

Multiproduct cost function

question

In the long run, all costs are _______?

answer

variable

question

Suppose it is cheaper for an auto maker to produce hybrid vehicles and diesel SUVs in the same factory than it is to have two separate facilities for each vehicle. What condition exists?

answer

Economies of scope

question

Suppose a firm expands its output and experiences higher long-run average cost. What is this condition called?

answer

Diseconomies of scale

question

A firm's economic costs are _____ its accounting costs.

answer

larger than

question

The multiproduct cost function assumes that all inputs are utilized (efficiently/effectively).

answer

efficiently

question

What exists when an increase in the output of one product reduces the marginal cost of a second product?

answer

Cost complementarity

question

When C(Q1,0) + C(Q2, 0) > C(Q1, Q2), we say that

answer

economies of scope

question

The following quadratic multiproduct cost function:
C(Q1, Q2) = f + aQ1Q2 + (Q1)2 + (Q2)2

exhibits cost complementarity when

answer

a < 0

question

Suppose a firm expands its output and experiences lower long-run average cost. What is this condition called?

answer

Economies of scale

question

Suppose a cost function is given by C(Q) = 3Q + 4Q2. If output equals 12, the value of marginal cost equals $

answer

$99

question

ΔMC1(Q1,Q2)/ΔQ2 < 0 describes cost

answer

complementarities

question

The following Quadratic Multiproduct Cost Function:
C(Q1, Q2) = f + aQ1Q2 + (Q1)2 + (Q2)2

exhibits Economies of Scope when

answer

f - aQ1Q2 > 0

question

When a firm produces the inputs it needs to make the final product, it practices which of the following?

answer

Vertical integration

question

When a buyer acquires inputs from a seller through an informal relationship, it is called

answer

spot exchange

question

An advantage of using spot exchange to acquire inputs is that it allows the firm to

answer

focus more on converting inputs into output.

question

Which of the following means to procure inputs involves a formal relationship between the buyer and seller?

answer

a contract

question

Using a contract to procure inputs tends to work well when

answer

the contract is simple.

question

Spot exchange refers to which of the following?

answer

Informal relationship between buyer and seller

question

True or false: A key advantage of acquiring inputs with spot exchange is that the firm gets to specialize in doing what it does best: converting the inputs into output.

answer

true

question

True or false: If a firm bypasses other suppliers and produces its input internally, it has engage in a spot exchange.

answer

false

question

Firms tend to acquire inputs using spot exchange when

answer

inputs are standardized.

question

What is an advantage of producing inputs internally?

answer

Firms don't rely on other firms for materials

question

Procuring inputs using a legal document that creates an extended relationship between the buyer and seller of an input is called a

answer

contract

question

Transaction costs include:

answer

search costs
expenditures to facilitate exchange
negotiation costs

question

Disadvantages of contracts are that they are

answer

costly to write.
unable to cover all contingencies.

question

Suppose a bakery invests $20,000 in a machine that can fill doughnuts with cream filling. If the machine is not useful otherwise and it cannot be resold, it is considered

answer

a specialized investment.

question

Spot exchange, contracts, and vertical integration are all methods of procuring

answer

inputs

question

When specialized investments are required to facilitate an exchange, the relationship that results is known as a(n) __________ exchange.

answer

relationship-specific

question

When a firm produces its own inputs, it engages in ___ integration.

answer

vertical

question

Which of the following is a relative disadvantage of vertical integration?

answer

Management of multiple product lines
A loss in the gains from specialization

question

Costs incurred in the acquisition of an input that exceed the cost of the input itself are called ______.

answer

transaction costs

question

What type of specialized investment exists when the buyer and seller of a input locate production facilities close to each other?

answer

Site specificity

question

Suppose a brewery invests $10,000 in a machine that can accurately measure the quality of hops (used in making beer). If the machine is not useful otherwise and it cannot be resold, it is considered

answer

a specialized investment.

question

Specialized investments _________ transaction costs.

answer

increase

question

Because specialized investments are often sunk, relationship-specific exchanges create which of the following?

answer

transactions costs

question

Suppose that you plan to leave your current job at the end of the month. As a result, you spend almost no time at all learning to use the computer programs that are specific to only your current employer. This is an example of ________.

answer

underinvestment

question

The most straightforward way to obtain inputs is by _______.

answer

spot exchange

question

Contracts

answer

reduce underinvestment.
reduce costly opportunism.

question

When capital equipment produces inputs that are only useful to one particular buyer, what type of special investment exists?

answer

Physical-asset specificity

question

Vertical integration

answer

reduces opportunism.
mitigates transaction costs.

question

Specialized investments lead to which of the following?

answer

Underinvestment
Opportunism
Costly bargaining

question

Specialized investments involve only a few parties in the transaction, which leads to ______.

answer

costly bargaining

question

In the presence of specialized investments, spot exchange

answer

does not insulate a buyer from opportunism.

question

It is optimal to acquire an input through a contract when

answer

the contracting environment is simple.
the cost of the contract is less than the transaction costs.

question

Indicate one disadvantage of using contracts to obtain inputs.

answer

Contracts require costly, up-front expenditures.

question

What can emerge when business ownership is separated from business control?

answer

The principal-agent problem

question

True or false: An advantage of vertical integration is that it "skips the middleman".

answer

true

question

By connecting managerial compensation to performance, a firm's owner can reduce or avoid

answer

the principal-agent problem.

question

An incentive contract is considered an _________ incentive to reduce the principle-agent problem

answer

internal

question

One cost to a manager of poor performance is the increased likelihood of losing his or her job due to _______.

answer

takeover

question

A firm manager should consider vertical integration if

answer

there are substantial specialized investments.
the input has characteristics that are hard to specify in a contract.

question

The principal-agent problem exists not only between owners and managers, but also between managers and

answer

workers

question

The conflict that results from the fact that a firm manager likes to earn income and also enjoys consuming leisure is called _______.

answer

the principle-agent problem

question

Profit sharing provides an incentive to increase effort by

answer

paying workers based on the firm's success.

question

Profit-sharing programs tend to ___ both the firm's profits and managerial compensation.

answer

increase

question

Linking workers' compensation to the underlying revenue of the firm is called ______.

answer

revenue sharing

question

Performance-based reward programs for firm managers are typically called ___ contracts.

answer

incentive

question

Under a piece-rate compensation method, output tends to

answer

increase

question

In order to maintain solid job performance, firm owners may rely on a manager's interest in working for another firm some day. What type of external incentive is this?

answer

Reputation

question

When a manager enters the workplace periodically to monitor workers, the manager is conducting a _______.

answer

spot check

question

When the interests of the firm manager differ from that of the firm's workers, what type of problem emerges?

answer

The principal-agent problem

question

True or false: Profit sharing occurs when a worker's compensation is tied to the underlying profitability of the firm.

answer

true

question

One disadvantage of revenue-based incentive schemes is that

answer

there is no incentive to reduce costs.

question

Under a piece-rate compensation method, workers are likely to

answer

increase quantity at the expense of quality.

question

Spot checks work through _______; performance bonuses work through ________.

answer

threat; reward

question

Revenue sharing can be particularly effective when productivity is connected to ___ rather than costs.

answer

revenue

1 of 145

question

Due to the complexities of human thought process:

answer

behavior models are abstractions of the way we make decisions.
behavior models are simplifications of real-world human decision-making.

question

All affordable goods and services can be represented by which of the following?

answer

Consumer opportunities

question

Bundle A has at least as much of every good as bundle B and more of at least one good. If bundle A is preferred to bundle B,

answer

the more is better property is met

question

Points on an indifference curve:

answer

show consumption bundles that generate the same amount of satisfaction.

question

The marginal rate of substitution (MRS) is

answer

the absolute value of the slope of the indifference curve.

question

The budget set defines combinations of goods and services

answer

that are affordable.

question

Given the following budget constraint, PxX + PyY = M, what is the maximum affordable quantity of good Y?

answer

Y = M/PY

question

An increase in the price of good X rotates the budget line, alters the equilibrium bundle, and

answer

indicates different quantities demanded at different prices.
provides two points on a demand curve.

question

The market demand curve is the ____________ summation of all the individual demand curves.

answer

horizontal

question

The budget constraint can be given by which of the following expressions?

answer

PxX + PyY = M
Y = M/Py - Px/Py⋅X
page 108

question

Economists

answer

are able to model human behavior.

question

Consumer ______ represent the possible goods and services consumers can afford to consume and consumer ______ determine which of these goods will be consumed.

answer

opportunities; preferences

question

For any two bundles of goods and/or services, A and B, if A is preferred to B, or B is preferred to A, or the consumer is indifferent between A and B, then:

answer

preferences are complete

question

- Px/Py equals

answer

the slope of the budget line

question

Moving along an indifference curve from one bundle to another, a consumer gains 1 unit of X and gives up 3 units of Y. The marginal rate of substitution is ___ between goods X and Y.

answer

question

If a consumer spends all of his or her income on either good X or good Y or a combination of both, then the budget line is given by which of the following?

answer

PxX + PyY = M

question

Indifference curve analysis is a helpful tool used to derive

answer

the demand curve.

question

Market demand indicates the __________ quantity all consumers would purchase at each possible price

answer

total

question

Y = M/Py - Px/Py X, represents

answer

an affordable combination of goods X and Y.

question

- (PXPY) represents the___ rate of substitution.

answer

market

question

True or false: It is generally the case that indifference curves have the same shape across all consumers

answer

false

question

The budget set can be defined as which of the following?

answer

PxX + PyY ≤ M

question

The budget constraint can be given by which of the following expressions?

answer

Y = M/Py - Px/Py⋅X
PxX + PyY = M

question

Bundle A is preferred to bundle B. Bundle B is preferred to bundle C. If preferences are transitive, then

answer

bundle A is preferred to bundle C.

question

In a production function, the input that refers to machinery is called

answer

capital

question

Which of the following describes the maximum output that can be produced with a fixed set of inputs?

answer

Q = F{K,L}, where K is capital and L is labor

question

The ________ run is a period of time during which a manager can change all factors of production.

answer

long

question

If, in the short run, capital is fixed equal to K*, what is the short-run production function?

answer

Q = f(L) = F(K*, L)

question

The measure of output per unit of input is called _____.

answer

average product

question

A production function can include many inputs. Which of the following are the most commonly used inputs?

answer

Capital
Labor

question

answer

(231-216)/(9-8)= 15

question

Which of the following describes the maximum output that can be produced with a fixed set of inputs?

answer

Production function

question

Jack operates a small, farm-to-table, organic rice packaging plant. Jack hired another employee and saw output fall from 300 to 297 boxes of rice per day. What is this an example of?

answer

Negative marginal returns

question

The ________ run is a period of time during which at least one factor of production is fixed.

answer

short

question

Which of the following is a scheme used by managers to ensure maximum worker effort?

answer

Incentive structures

question

The short-run production function is generally expressed as a function of which of the following inputs?

answer

Labor only

question

The value of the output produced by the last unit of a particular input is called

answer

value marginal product.

question

What is the average product of capital (APk) if 12 machines produce a total of 96,000 units of output?
APk =

answer

8000

question

To maximize profits, a firm manager should produce a level of output such that the marginal benefit is __________ marginal cost.

answer

equal to

question

Marginal Product of Labor (MPL) is given by:

answer

MPL = ΔQ/ΔL

question

When each additional unit of an input increases total output by more than did the previous unit, the firm is experiencing

answer

increasing marginal returns.

question

In the production process, the manager must do which of the following?

answer

Establish the correct level of inputs
Ensure the firm operates on the production function

question

Which of the following represents an isocost line?

answer

C = wL + rK

question

answer

190

question

If the cost of each additional unit of labor is w, a firm will employ additional workers until _____________________ in the range of diminishing marginal product

answer

VMPL= w

question

Given two inputs, labor and capital, costs are minimized when

answer

MRTSKL=w/r
MPlL/w=MPK/r
MPL/MPK=w/r

question

If MPL/w > MPK/r, the firm should use (less/more) capital and (less/more) labor to minimize costs.

answer

less, more

question

A line that represents the combinations of inputs that will cost the producer the same amount of money is called a(n)_____.

answer

isocost line

question

Insert one word OR the mathematical operator into the following expression to demonstrate the cost-minimizing input rule. MPL/MPK w/r

answer

MPL/MPK equals w/r

question

If a worker's marginal product of labor (MPL) equals 115 and the firm sells its product for $6.00, what is the value marginal product of labor (VMPL)?
VMPL =$

answer

$690

question

When the price of labor rises, firms have a tendency to use

answer

less labor and more capital.

question

At the cost-minimizing input mix,

answer

the slope of the isoquant equals the slope of the isocost line.

question

Costs that do not change when output changes are called costs.

answer

fixed

question

If MPL/w< MPK/r, the firm should use capital and labor to minimize costs.

answer

more, less

question

The minimum possible cost of producing each output level with fixed and variable factors is given by

answer

the short-run cost function.

question

To minimize the cost of producing a given level of output, the marginal product per dollar spent should be for all inputs.

answer

equal

question

Graphically, what is the distance between total cost (TC) and variable cost (VC)?

answer

Fixed cost

question

Which of the following statements is correct?

answer

Average fixed costs decline continuously as output expands.

question

Suppose capital, K, is on the vertical axis and labor, L, is on the horizontal axis in a graph. Which of the following would be true if the price of labor, w, increased?

answer

The isocost line rotates clockwise

question

c(q)/q, defines

answer

average total cost.

question

Costs that change when output changes are called ___ costs.

answer

variable

question

The cost of producing an additional unit of output is called (one word) cost.

answer

marginal

question

The sum of all variable and fixed costs is the firm's _____.

answer

cost function

question

When average total cost (ATC) is at its minimum, marginal cost (MC) __________ average total cost (ATC).

answer

equals

question

Fixed cost (FC) equals

answer

TC - VC

question

The expression, VC(Q)/Q, defines

answer

average variable cost.

question

As output increases, what happens to the difference between ATC and AVC?

answer

Decreases

question

Suppose a firm produces 1000 units of a good. If fixed costs (FC) equal $2500 and variable costs (VC) equal $3700 at that output level, average total cost (ATC) of each unit is equal to $

answer

6.20

question

A cost that is incurred and unrecoverable is called a _________ cost.

answer

sunk

question

Suppose that increasing output from 1000 units to 1100 units increases costs from $5,500 to $7,000. The marginal cost of producing each of the additional units is $

answer

question

Which of the following types of functions is C(Q) = f + aQ + bQ2 + cQ3?

answer

Cubic cost function

question

Where does the marginal cost (MC) curve intersect the average variable cost (AVC) curve?

answer

Where does the marginal cost (MC) curve intersect the average variable cost (AVC) curve?

question

The difference between average total cost (ATC) and average variable cost (AVC) is average __________ cost.

answer

fixed

question

With respect to the short run average cost curves, what is true of the long run average cost curve?

answer

It lies above no point on the short run average cost curves.
It equals short run average cost when short run curves use fixed inputs optimally.

question

A cost that does not change with output is called a _________ cost

answer

fixed

question

When a firm experiences economies of scale, increasing the size of the operation ___ the minimum average cost.

answer

decreases

question

Given the cost function, C(Q) = f + aQ + bQ2 + cQ3, which of the following equations defines the Marginal Cost (MC) function?

answer

C(Q) = a + 2bQ + 3cQ2

question

Accounting costs are the costs most often associated with _____.

answer

the cost of production

question

Which function defines the cost of producing at least two types of output?

answer

Multiproduct cost function

question

In the long run, all costs are _______?

answer

variable

question

Suppose it is cheaper for an auto maker to produce hybrid vehicles and diesel SUVs in the same factory than it is to have two separate facilities for each vehicle. What condition exists?

answer

Economies of scope

question

Suppose a firm expands its output and experiences higher long-run average cost. What is this condition called?

answer

Diseconomies of scale

question

A firm's economic costs are _____ its accounting costs.

answer

larger than

question

The multiproduct cost function assumes that all inputs are utilized (efficiently/effectively).

answer

efficiently

question

What exists when an increase in the output of one product reduces the marginal cost of a second product?

answer

Cost complementarity

question

When C(Q1,0) + C(Q2, 0) > C(Q1, Q2), we say that

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economies of scope

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The following quadratic multiproduct cost function:
C(Q1, Q2) = f + aQ1Q2 + (Q1)2 + (Q2)2

exhibits cost complementarity when

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a < 0

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Suppose a firm expands its output and experiences lower long-run average cost. What is this condition called?

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Economies of scale

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Suppose a cost function is given by C(Q) = 3Q + 4Q2. If output equals 12, the value of marginal cost equals $

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$99

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ΔMC1(Q1,Q2)/ΔQ2 < 0 describes cost

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complementarities

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The following Quadratic Multiproduct Cost Function:
C(Q1, Q2) = f + aQ1Q2 + (Q1)2 + (Q2)2

exhibits Economies of Scope when

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f - aQ1Q2 > 0

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When a firm produces the inputs it needs to make the final product, it practices which of the following?

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Vertical integration

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When a buyer acquires inputs from a seller through an informal relationship, it is called

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spot exchange

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An advantage of using spot exchange to acquire inputs is that it allows the firm to

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focus more on converting inputs into output.

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Which of the following means to procure inputs involves a formal relationship between the buyer and seller?

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a contract

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Using a contract to procure inputs tends to work well when

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the contract is simple.

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Spot exchange refers to which of the following?

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Informal relationship between buyer and seller

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True or false: A key advantage of acquiring inputs with spot exchange is that the firm gets to specialize in doing what it does best: converting the inputs into output.

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true

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True or false: If a firm bypasses other suppliers and produces its input internally, it has engage in a spot exchange.

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false

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Firms tend to acquire inputs using spot exchange when

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inputs are standardized.

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What is an advantage of producing inputs internally?

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Firms don't rely on other firms for materials

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Procuring inputs using a legal document that creates an extended relationship between the buyer and seller of an input is called a

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contract

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Transaction costs include:

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search costs
expenditures to facilitate exchange
negotiation costs

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Disadvantages of contracts are that they are

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costly to write.
unable to cover all contingencies.

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Suppose a bakery invests $20,000 in a machine that can fill doughnuts with cream filling. If the machine is not useful otherwise and it cannot be resold, it is considered

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a specialized investment.

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Spot exchange, contracts, and vertical integration are all methods of procuring

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inputs

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When specialized investments are required to facilitate an exchange, the relationship that results is known as a(n) __________ exchange.

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relationship-specific

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When a firm produces its own inputs, it engages in ___ integration.

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vertical

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Which of the following is a relative disadvantage of vertical integration?

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Management of multiple product lines
A loss in the gains from specialization

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Costs incurred in the acquisition of an input that exceed the cost of the input itself are called ______.

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transaction costs

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What type of specialized investment exists when the buyer and seller of a input locate production facilities close to each other?

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Site specificity

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Suppose a brewery invests $10,000 in a machine that can accurately measure the quality of hops (used in making beer). If the machine is not useful otherwise and it cannot be resold, it is considered

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a specialized investment.

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Specialized investments _________ transaction costs.

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increase

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Because specialized investments are often sunk, relationship-specific exchanges create which of the following?

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transactions costs

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answer

underinvestment

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The most straightforward way to obtain inputs is by _______.

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spot exchange

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Contracts

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reduce underinvestment.
reduce costly opportunism.

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When capital equipment produces inputs that are only useful to one particular buyer, what type of special investment exists?

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Physical-asset specificity

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Vertical integration

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reduces opportunism.
mitigates transaction costs.

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Specialized investments lead to which of the following?

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Underinvestment
Opportunism
Costly bargaining

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Specialized investments involve only a few parties in the transaction, which leads to ______.

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costly bargaining

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In the presence of specialized investments, spot exchange

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does not insulate a buyer from opportunism.

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It is optimal to acquire an input through a contract when

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the contracting environment is simple.
the cost of the contract is less than the transaction costs.

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Indicate one disadvantage of using contracts to obtain inputs.

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Contracts require costly, up-front expenditures.

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What can emerge when business ownership is separated from business control?

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The principal-agent problem

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True or false: An advantage of vertical integration is that it "skips the middleman".

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true

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By connecting managerial compensation to performance, a firm's owner can reduce or avoid

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the principal-agent problem.

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An incentive contract is considered an _________ incentive to reduce the principle-agent problem

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internal

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One cost to a manager of poor performance is the increased likelihood of losing his or her job due to _______.

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takeover

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A firm manager should consider vertical integration if

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there are substantial specialized investments.
the input has characteristics that are hard to specify in a contract.

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The principal-agent problem exists not only between owners and managers, but also between managers and

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workers

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The conflict that results from the fact that a firm manager likes to earn income and also enjoys consuming leisure is called _______.

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the principle-agent problem

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Profit sharing provides an incentive to increase effort by

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paying workers based on the firm's success.

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Profit-sharing programs tend to ___ both the firm's profits and managerial compensation.

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increase

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Linking workers' compensation to the underlying revenue of the firm is called ______.

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revenue sharing

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Performance-based reward programs for firm managers are typically called ___ contracts.

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incentive

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Under a piece-rate compensation method, output tends to

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increase

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In order to maintain solid job performance, firm owners may rely on a manager's interest in working for another firm some day. What type of external incentive is this?

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Reputation

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When a manager enters the workplace periodically to monitor workers, the manager is conducting a _______.

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spot check

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When the interests of the firm manager differ from that of the firm's workers, what type of problem emerges?

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The principal-agent problem

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True or false: Profit sharing occurs when a worker's compensation is tied to the underlying profitability of the firm.

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true

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One disadvantage of revenue-based incentive schemes is that

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there is no incentive to reduce costs.

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Under a piece-rate compensation method, workers are likely to

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increase quantity at the expense of quality.

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Spot checks work through _______; performance bonuses work through ________.

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threat; reward

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Revenue sharing can be particularly effective when productivity is connected to ___ rather than costs.

answer

revenue

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