question
A monopolist's profits are maximized when:
answer
The monopolist's revenue is maximized when marginal revenue is equal to the marginal cost.
question
Suppose that when a monopolistic car manufacturer raised its prices, it lost half of its customer base, but reported higher profits than before. Which of the following can be concluded?
answer
The fact that the manufacturer could increase its revenues by raising prices and narrowing the client base indicated that the WTP of the high-type consumers was sufficiently higher than the WTP of the low-type consumers to make it inefficient to serve the low-type consumers
question
A monopolistic seller of sports cars has traced out the following demand curve: 10 customers have willingness to pay (WTP) of $100K each, another 10 customers have WTP of $150K each, another 10 customers have WTP of $200K each; and a further 15 customers have WTP of $250K. Each sports car costs $50K to produce, but the production process requires a fixed machinery investment of $1.5M as well. The seller is considering setting one of the following prices:
I. A price of $150K
II. A price of $200K
III. A price of $250K
What is the order of the profits, from greatest to least, generated by these three pricing schemes?
I. A price of $150K
II. A price of $200K
III. A price of $250K
What is the order of the profits, from greatest to least, generated by these three pricing schemes?
answer
II > I > III
is correct
Pricing scheme I would generate a profit of ($150K-$50K) 35 - $1.5M = $2M. Pricing scheme II would generate ($200-$50K) 25 - $1.5M =$2.25M. Pricing scheme III would generate ($250K-$50K) * 15 - $1.5M = $1.5M.
is correct
Pricing scheme I would generate a profit of ($150K-$50K) 35 - $1.5M = $2M. Pricing scheme II would generate ($200-$50K) 25 - $1.5M =$2.25M. Pricing scheme III would generate ($250K-$50K) * 15 - $1.5M = $1.5M.
question
A monopolistic producer of caviar has historically sold all of its caviar to 10 distributors. Recently, one of the distributors has acquired all of its competitors, becoming the caviar producer's sole customer. How are the caviar producer's prices and profits likely to change as a result of this downstream consolidation?
answer
The customer now has the power to negotiate price with the seller, and prices will likely fall as a result. Profit will decrease as the customer captures an increased share of the surplus.
question
"Marginal revenue" refers to the:
answer
change in total revenue that results from selling an extra unit.
question
An artisan who creates customized furniture has a customer who is interested in purchasing several pieces of furniture. The artisan decides to sell the furniture via a two-part tariff, charging a fee to work with the customer and an additional price for each individual piece of furniture. How should the artisan determine the price of each piece of furniture?
answer
An optimal two-part tariff prices each unit at marginal cost, and charges a lump sum fee on top.
question
The tiny town of Nemo has three neighborhoods located on a straight line: Neighborhood 1, Neighborhood 2, and Neighborhood 3, with Neighborhood 2 located equidistant between Neighborhood 1 and Neighborhood 3. There is one daycare center, located on Neighborhood 1. There are 10 families residing in each neighborhood, and each family has one child. Each family is willing to pay $70/day for daycare, and prefers daycare closest to its own neighborhood (though at current distances, families will purchase daycare services even if it's two neighborhoods away). Families are indifferent between any two daycares in the same neighborhood. Suppose that daycare costs $30/day per child to provide. A new daycare center is thinking of opening in Nemo. If both daycares will keep their price at $70/day, which neighborhood should the new daycare open in?
answer
Being located in Neighborhood 2 would attract all residents of Neighborhoods 2 and 3, and none of the residents of Neighborhood 1, for a surplus of: 20 * ($70 - $30) = $800/day.
question
A dairy farmer is a monopolist in the milk industry and is currently selling milk at the profit maximizing price. As a result of a terrible storm, the dairy farmer sees an increase in cost of feed for the cows. At the same time, the dairy farm receives an insurance check which effectively lowers the fixed costs of the farm. What effect will this cost change have on the optimal price of milk the farmer sets?
answer
The increase in variable costs will increase the optimal price that should be set by the farmer.
If variable (marginal) costs increase, marginal revenue will now be lower than marginal cost. Thus the monopolist must increase the price it charges until marginal revenue is equal to marginal cost.
If variable (marginal) costs increase, marginal revenue will now be lower than marginal cost. Thus the monopolist must increase the price it charges until marginal revenue is equal to marginal cost.
question
A prediction market has been formed through which participants can bet with each other on the outcomes of the World Cup. One security in this market is priced at $30. This security gives its owner the right to $100 if Country A wins the World Cup and $0 otherwise. Which of the following is true?
answer
On average, the participants in this prediction market think Country A has a 30% chance to win.
question
A region is in the middle of a very cold and snowy winter. As a result, hot chocolate has become more desirable, and many of the shipping channels for imported goods have closed due to the weather. What will happen to the price and quantity sold of hot chocolate made with imported cocoa?
answer
The cold weather will increase the demand for hot chocolate, but the snow and blocked shipping channels will reduce the supply of hot chocolate. Price will certainly increase, but without knowing the relative magnitude of the effects of these changes, we cannot determine the effect on quantity.
question
The American Medical Association is considering putting a permanent cap on the number of medical residents (which effectively would cap the number of licensed doctors). What effect would this cap have if it were set below the current number of doctors?
answer
A cap will limit the number of doctors now and in the future, making wages higher.
question
A market's equilibrium outcome maximizes:
answer
the sum of producer surplus and consumer surplus.
question
A price ceiling is set at 10% below the market equilibrium price. Which of the following must result from the price ceiling? Select all that apply.
Consumer surplus decreases
Producer surplus decreases
Total surplus decreases
Deadweight loss increases
There is no effect because the price ceiling is below the market equilibrium price.
Consumer surplus decreases
Producer surplus decreases
Total surplus decreases
Deadweight loss increases
There is no effect because the price ceiling is below the market equilibrium price.
answer
Consumer surplus decreases
Under the price ceiling, fewer consumers will be able to purchase the good than would have bought the good at the equilibrium price, decreasing consumer surplus. However, the consumers that do purchase the good are buying it at a lower price, which increases their own consumer surplus. Thus, total consumer surplus could increase or decrease, depending on the relative size of each effect.
Producer surplus decreases
is correct
Under the price ceiling, fewer consumers are purchasing the good and they are each buying it at a lower price. Both effects lower producer surplus.
Total surplus decreases
is correct
Total surplus is WTP - WTS for each item sold. Under the price ceiling, the WTP and the WTS are not changing, but the number of items sold has decreased. Thus, total surplus has decreased.
Deadweight loss increases
is correct
Deadweight loss is the amount of total surplus that would have been created at the equilibrium price but is not created due to the market intervention. If total surplus decreases, then deadweight loss must increase.
There is no effect because the price ceiling is below the market equilibrium price.
A price ceiling ABOVE the market equilibrium price would have no effect. A price ceiling below the market equilibrium price does have an impact on the market.
Under the price ceiling, fewer consumers will be able to purchase the good than would have bought the good at the equilibrium price, decreasing consumer surplus. However, the consumers that do purchase the good are buying it at a lower price, which increases their own consumer surplus. Thus, total consumer surplus could increase or decrease, depending on the relative size of each effect.
Producer surplus decreases
is correct
Under the price ceiling, fewer consumers are purchasing the good and they are each buying it at a lower price. Both effects lower producer surplus.
Total surplus decreases
is correct
Total surplus is WTP - WTS for each item sold. Under the price ceiling, the WTP and the WTS are not changing, but the number of items sold has decreased. Thus, total surplus has decreased.
Deadweight loss increases
is correct
Deadweight loss is the amount of total surplus that would have been created at the equilibrium price but is not created due to the market intervention. If total surplus decreases, then deadweight loss must increase.
There is no effect because the price ceiling is below the market equilibrium price.
A price ceiling ABOVE the market equilibrium price would have no effect. A price ceiling below the market equilibrium price does have an impact on the market.
question
If Bangladesh increases its machinery imports from China, what will most likely happen to the exchange rate?
answer
Increase CNY/BDT
is correct
The new demand for Chinese machinery imports will increase the demand for Chinese Yuan needed to buy the machinery from China. The increased demand for Chinese Yuan (CNY) will increase the price of CNY and thus the exchange rate CNY/BDT.
is correct
The new demand for Chinese machinery imports will increase the demand for Chinese Yuan needed to buy the machinery from China. The increased demand for Chinese Yuan (CNY) will increase the price of CNY and thus the exchange rate CNY/BDT.
question
A polling agency decides to set up a prediction market for the presidential election. There are only two candidates in the election, Candidate A and Candidate B. The polling agency sets up a security that pays $100 to the owner if Candidate A wins the election and $0 otherwise. The current price for the security is $50. Which of the following is the best conclusion that the polling agency can make given the security price?
answer
That, on average, people believe that Candidate A and Candidate B are equally likely to win the election.
is correct
A $50 security indicates that market participants, on aggregate, believe the security is worth $50 - that is, Candidate A has a 50% chance of winning. Since there are only two candidates this means that on aggregate market participants believe both candidates have a 50% chance of winning.
is correct
A $50 security indicates that market participants, on aggregate, believe the security is worth $50 - that is, Candidate A has a 50% chance of winning. Since there are only two candidates this means that on aggregate market participants believe both candidates have a 50% chance of winning.
question
A local government implements a price ceiling of $4/gallon on milk. If the equilibrium price is $3 what will be the effect on the market for milk?
answer
There will be no effect on the market for milk.
is correct
A price ceiling limits how high a price can be charged. Setting a price ceiling above the equilibrium price will have no impact on the market, since the equilibrium price already conforms to the law.
is correct
A price ceiling limits how high a price can be charged. Setting a price ceiling above the equilibrium price will have no impact on the market, since the equilibrium price already conforms to the law.
question
The cost of rare earth metals used in electronics is steadily rising due to the increasing difficulty of mining them as they become scarcer. At the same time, laptops, tablets, and smartphones are becoming increasingly popular as substitutes to desktop computers. What impact will these two events have on the equilibrium price and quantity of desktop computers?
answer
The impact on price cannot be determined and the quantity will decrease.
is correct
Higher costs will decrease the supply of desktop computers. This fall in supply causes quantity to fall and prices to rise. The greater prevalence of substitutes for desktop computers will decrease demand. This also causes quantity to fall, but lowers prices. Thus we can only say for certain that quantity decreases. The direction of price will be determined by the relative magnitude of the previous two shifts.
is correct
Higher costs will decrease the supply of desktop computers. This fall in supply causes quantity to fall and prices to rise. The greater prevalence of substitutes for desktop computers will decrease demand. This also causes quantity to fall, but lowers prices. Thus we can only say for certain that quantity decreases. The direction of price will be determined by the relative magnitude of the previous two shifts.
question
Computer prices in the last year have gone down due to technological advancements. At the same time, there has been a large decrease in the supply of new software developers, raising the costs of producing computer software. What will be the impact on the equilibrium price and quantity of computer software?
answer
The price will increase and the impact on quantity cannot be determined.
is correct
Computers and computer software are complements. As a result of the fall in computer prices, demand for computer software will increase. The increased demand will cause both prices and quantity to rise. At the same time, the supply of software will fall due to the higher costs. This raises the price of software and causes quantity to fall. Thus we can only say for certain that price increases. The overall change in quantity will be determined by the relative magnitudes of the two shifts.
is correct
Computers and computer software are complements. As a result of the fall in computer prices, demand for computer software will increase. The increased demand will cause both prices and quantity to rise. At the same time, the supply of software will fall due to the higher costs. This raises the price of software and causes quantity to fall. Thus we can only say for certain that price increases. The overall change in quantity will be determined by the relative magnitudes of the two shifts.
question
Consider the market for chocolate bars. A major chocolate company is trying to project their revenue for the upcoming year. Due to excellent predicted weather conditions, the cost of cocoa, a key ingredient in chocolate, will decrease for next year. At the same time, a popular magazine has started promoting the health benefits of chocolate. Just from this information, what can the company know about next year's revenue?
answer
The impact on revenues cannot be determined.
is correct
Due to the increased demand, prices and quantity increase. Due to the increased supply, prices decreases and quantity increases. Thus quantity increases but the impact on price cannot be determined. Revenue is equal to price multiplied by quantity. As a result, the effect on revenue cannot be determined.
is correct
Due to the increased demand, prices and quantity increase. Due to the increased supply, prices decreases and quantity increases. Thus quantity increases but the impact on price cannot be determined. Revenue is equal to price multiplied by quantity. As a result, the effect on revenue cannot be determined.
question
Consider the market for print encyclopedias. In the last 10 years, the cost of producing encyclopedias has decreased substantially due to lower printing and information acquisition costs. At the same time, more and more people have started using the internet as their primary source of information. What can we infer about the change in the price and quantity in the encyclopedia market over the last 10 years?
answer
Price has decreased and the effect on quantity cannot be determined
is correct
With a greater number of alternative sources of information, demand for encyclopedias will decrease. This fall in demand will result in both lower both prices and quantity. At the same time, the supply of encyclopedias will increase due to lower costs. This lowers the price and increases quantity. Thus, we can only say for certain that price decreases. The overall change in quantity will be determined by the relative magnitudes of the two effects.
is correct
With a greater number of alternative sources of information, demand for encyclopedias will decrease. This fall in demand will result in both lower both prices and quantity. At the same time, the supply of encyclopedias will increase due to lower costs. This lowers the price and increases quantity. Thus, we can only say for certain that price decreases. The overall change in quantity will be determined by the relative magnitudes of the two effects.
question
Firms bear more of the incidence of a tax when demand is: more or less elastic?
answer
more elastic.
is correct
When the demand curve is less steep, or more elastic, consumers are more sensitive to the price change caused by the tax, and as a result are able to adjust quantity demanded accordingly. Thus consumers will end up "paying" a smaller portion of the tax and firms will bear more of the incidence of the tax.
is correct
When the demand curve is less steep, or more elastic, consumers are more sensitive to the price change caused by the tax, and as a result are able to adjust quantity demanded accordingly. Thus consumers will end up "paying" a smaller portion of the tax and firms will bear more of the incidence of the tax.
question
Consumers bear more of the incidence of a tax when supply is: more or less elastic?
answer
more elastic.
is correct
When the supply curve is less steep, or more elastic, firms are more sensitive to the price change caused by the tax, and as a result are able to adjust quantity supplied accordingly. Thus firms will end up "paying" a smaller portion of the tax and consumers will bear more of the incidence of the tax.
is correct
When the supply curve is less steep, or more elastic, firms are more sensitive to the price change caused by the tax, and as a result are able to adjust quantity supplied accordingly. Thus firms will end up "paying" a smaller portion of the tax and consumers will bear more of the incidence of the tax.
question
A factory currently manufactures and sells 800 boats per year. Each boat costs $5,000 to produce. $4,000 of the per-boat costs are for materials and other variable costs, while the per-boat fixed costs (incurred on yearly rent, administrative, and other fixed costs) are $1,000. If boat orders increase to 1000 boats per year, how do per-unit costs change?
answer
Variable costs are unchanged at $4,000 per boat and fixed costs fall to $800 per boat
is correct
The $800,000 in fixed costs is now spread across 1,000 boats. This results in $800 in fixed costs per boat. Variable costs are unchanged.
is correct
The $800,000 in fixed costs is now spread across 1,000 boats. This results in $800 in fixed costs per boat. Variable costs are unchanged.
question
A ticket reseller purchases a ticket to a football game for $40 and offers it for sale at a price of $75. A consumer is willing to pay $90 at most for the ticket, and purchases it at $75. What does the $50 difference (between $40 and $90) represent?
answer
Profit + consumer surplus
is correct
The difference between WTP and price is consumer surplus, and the difference between price and cost is the profit.
is correct
The difference between WTP and price is consumer surplus, and the difference between price and cost is the profit.
question
A farm equipment manufacturer has already spent $3 million in research and development to design a new model of tractor. To produce the tractors, the company will have to contract to rent a factory for a year at a cost of $20 million, and will then spend an additional $10,000 per tractor in materials and wages.
The company estimates that it can sell 2,000 tractors per year at a certain price, and concludes that it should produce the tractors. What is the lowest price the company could be using in this calculation?
The company estimates that it can sell 2,000 tractors per year at a certain price, and concludes that it should produce the tractors. What is the lowest price the company could be using in this calculation?
answer
$20,000
is correct
The company needs to earn enough on each tractor to cover the fixed costs of operating for a year. $20 million spread over 2,000 tractors is $10,000 per tractor, so adding in the variable costs, the company needs to sell each tractor for $20,000
is correct
The company needs to earn enough on each tractor to cover the fixed costs of operating for a year. $20 million spread over 2,000 tractors is $10,000 per tractor, so adding in the variable costs, the company needs to sell each tractor for $20,000
question
Suppose the farm equipment manufacturer from the previous question was able to charge $30,000 per tractor, and produces and sells 2,000 tractors per year at that price. As a reminder, the company originally spent $3 million in research and development costs. The company now spends $20 million at the beginning of each year to rent a factory, and $10,000 per tractor in materials and wages.
If another manufacturer enters the market in the middle of a year and engages the company in a price war, what is the lowest price the company would be willing to charge for each tractor?
If another manufacturer enters the market in the middle of a year and engages the company in a price war, what is the lowest price the company would be willing to charge for each tractor?
answer
$10,000
is correct
The company should be willing to produce tractors as long as the price they sell for covers the variable costs of production.
is correct
The company should be willing to produce tractors as long as the price they sell for covers the variable costs of production.
question
An entrepreneur has developed a method of manufacturing light bulbs that significantly reduces the costs of production. The entrepreneur should enter the industry if:
answer
Its average cost per light bulb is less than existing manufacturers' variable cost per light bulb.
is correct
Existing firms will be able to lower prices to the level of their variable costs. The entrepreneur will only want to enter if prices will be high enough to cover total costs.
is correct
Existing firms will be able to lower prices to the level of their variable costs. The entrepreneur will only want to enter if prices will be high enough to cover total costs.
question
The table below shows fixed and variable costs per unit for an ice cream shop, "Company A," and its local competitor, "Company B."
Company A Company B
Rent and Utilities $1.25 per cone $1.50 per cone
Ingredients $1.00 per cone $0.75 per cone
Current Daily Output 1000 ice cream cones 700 ice cream cones
Costs for rent and utilities are fixed by contract, and the two shops produce the same flavor of ice cream. The owner of Company A is considering lowering the price of its ice cream, starting a price war with Company B in an effort to grab market share from its competitor. Would it be a wise decision for Company A to enter a price war with Company B?
Company A Company B
Rent and Utilities $1.25 per cone $1.50 per cone
Ingredients $1.00 per cone $0.75 per cone
Current Daily Output 1000 ice cream cones 700 ice cream cones
Costs for rent and utilities are fixed by contract, and the two shops produce the same flavor of ice cream. The owner of Company A is considering lowering the price of its ice cream, starting a price war with Company B in an effort to grab market share from its competitor. Would it be a wise decision for Company A to enter a price war with Company B?
answer
No, because Company B's cost structure allows it to lower prices further than Company A.
is correct
A price war would be won by the company that can lower its prices the most. The ability to lower prices is based off of the variable costs per unit.
is correct
A price war would be won by the company that can lower its prices the most. The ability to lower prices is based off of the variable costs per unit.
question
An increase in the popularity of corn ethanol as a fuel increases the demand for corn around the world, causing the price to rise. What is the reason behind the higher price?
answer
To meet higher demand, the industry relies more on less cost efficient producers of corn.
is correct
As more corn is demanded, the additional corn will be produced by less efficient suppliers, and prices will increase to cover their costs.
is correct
As more corn is demanded, the additional corn will be produced by less efficient suppliers, and prices will increase to cover their costs.
question
A ticket broker purchases two tickets to an upcoming concert for $30 each, although the original ticket holder would have been willing to sell each ticket for $10. The ticket broker later sells the tickets to a new buyer for $50 each. If the new buyer would have been willing to pay up to $90 for each ticket, what fraction of the total value created is captured by the broker?
answer
1/4
is correct
The ticket reseller captures $20 in profit on each ticket ($50 - $30). The total value created is $80 per ticket ($90 - $10).
is correct
The ticket reseller captures $20 in profit on each ticket ($50 - $30). The total value created is $80 per ticket ($90 - $10).
question
The average total cost to bake 100 cookies is $0.17 per cookie. The marginal cost is constant at $0.10 for each cookie produced. The total cost to bake 100 cookies is:
answer
$17.00
is correct
The average total cost of $0.17 per cookie includes both marginal cost ($0.10 per cookie) and fixed cost per unit ($0.07 per cookie). The total cost of baking 100 cookies is the average total cost multiplied by the number of cookies.
is correct
The average total cost of $0.17 per cookie includes both marginal cost ($0.10 per cookie) and fixed cost per unit ($0.07 per cookie). The total cost of baking 100 cookies is the average total cost multiplied by the number of cookies.
question
An entrepreneur is considering starting a new business to produce and sell gourmet cookie dough. The entrepreneur estimates that average total costs per pack of dough would be $7, of which variable costs per pack would be $5.
An incumbent bakery in the neighborhood sells cookie dough for $10 per pack. The entrepreneur estimates that this bakery spends $8 in total costs on each pack of dough, $7 of which is variable costs.
Should the entrepreneur start the new business?
An incumbent bakery in the neighborhood sells cookie dough for $10 per pack. The entrepreneur estimates that this bakery spends $8 in total costs on each pack of dough, $7 of which is variable costs.
Should the entrepreneur start the new business?
answer
The entrepreneur should start the new business as long as customers are willing to pay at least as much for his cookie dough as for the incumbent's product.
is correct
Since the entrepreneur's average cost per unit is equal to the established competitor's variable cost per unit, the entrepreneur should pursue the venture if customers' are willing to pay more than $7 for the entrepreneur's dough.
is correct
Since the entrepreneur's average cost per unit is equal to the established competitor's variable cost per unit, the entrepreneur should pursue the venture if customers' are willing to pay more than $7 for the entrepreneur's dough.
question
Willingness to Sell (WTS)
answer
Willingness to sell is the minimum amount of money that a supplier is willing to accept in return for the input it sells (e.g., labor, machines, other forms of capital). This is typically viewed from the standpoint of a firm - the WTP is consumer willingness to pay for the firm's completed product, and WTS is its suppliers' willingness to sell the inputs it needs.
question
Fixed costs
answer
Fixed costs are costs that do not vary as quantity produced rises or falls. Variable costs are costs that do vary with the level of production.
Fixed costs that have already been incurred (at the time that the firm is making a production or pricing decision) are called "sunk costs," and should not impact decision-making.
Sound decision making requires taking into account not only the direct costs of resources, but also their opportunity costs. Opportunity cost is the value of the best alternative use of that resource.
Fixed costs that have already been incurred (at the time that the firm is making a production or pricing decision) are called "sunk costs," and should not impact decision-making.
Sound decision making requires taking into account not only the direct costs of resources, but also their opportunity costs. Opportunity cost is the value of the best alternative use of that resource.
question
Relative Cost Analysis
answer
Relative cost analysis is the analysis of a how a firm's costs compare to its competitors for each activity in its business. Relative cost analysis is most useful when calculated on a per-product basis.
Knowing a competitor's costs can help a firm predict the range of prices that the competitor would be willing to charge (including how low it might be willing to engage in a price war). It can also help a firm understand how efficient its own production process is.
Knowing a competitor's costs can help a firm predict the range of prices that the competitor would be willing to charge (including how low it might be willing to engage in a price war). It can also help a firm understand how efficient its own production process is.
question
Supply Curve
answer
A relative cost analysis for all the firms in the industry results in a supply curve. Just as a demand curve illustrates how much of a good a buyer will purchase at each price, a supply curve describes how much of a good a supplier will be willing to provide at each price.
question
Economies of Scale
answer
"Economies of scale" result from firms being able to spread their fixed costs over larger units of production. Industries with high levels of fixed costs are therefore more attractive if a firm knows that it can produce at large scale, since it can spread these costs over many units. Industries with high fixed costs are also likely to have fewer firms competing in them. Industries with low fixed costs are easier to enter and have a low minimum efficient scale.
question
Patrick recognizes that customers will not likely pay more than $5.00 per game to bowl at his alley. If Patrick charges this amount, how many years will it take him to turn a profit? (Assume that customers will still demand to bowl 5,000 games each year on each lane at the alley)
Recap of costs:
The total costs to build the alley would be $2 million, which would include 24 lanes, machinery, the front desk, a snack bar, pins, bowling balls and shoes. Patrick estimates that customers would bowl roughly 5000 games per year on each of the lanes. In order to operate the alley, Patrick must have 6 employees working at all times. He anticipates keeping his business open 12 hours per day, 365 days per year and paying each employee $15/hour.
Recap of costs:
The total costs to build the alley would be $2 million, which would include 24 lanes, machinery, the front desk, a snack bar, pins, bowling balls and shoes. Patrick estimates that customers would bowl roughly 5000 games per year on each of the lanes. In order to operate the alley, Patrick must have 6 employees working at all times. He anticipates keeping his business open 12 hours per day, 365 days per year and paying each employee $15/hour.
answer
-Just under 10 years
is correct
If Patrick were to charge $5 per game, he would make ($5.00 per game)(5,000 games per lane per year)(24 lanes) = $600,000 per year in revenues. His costs would be equal to (6 employees)($15 per hour)(12 hours per day)*(365 days per years) = $394,200 per year. Thus, each year he would make $205,800 in profits. At this rate, it would take him $2,000,000/$205,800 per year = 9.72 years to recover his initial investment to build the alley.
is correct
If Patrick were to charge $5 per game, he would make ($5.00 per game)(5,000 games per lane per year)(24 lanes) = $600,000 per year in revenues. His costs would be equal to (6 employees)($15 per hour)(12 hours per day)*(365 days per years) = $394,200 per year. Thus, each year he would make $205,800 in profits. At this rate, it would take him $2,000,000/$205,800 per year = 9.72 years to recover his initial investment to build the alley.
question
economies of scale
answer
A firm or industry can exhibit both economies and diseconomies (negative economies) of scale depending on its level of output. Economies of scale tend to benefit firms/industries most as they increase output from low levels, while diseconomies of scale occur as they continue to increase production from high to even higher levels.
question
Equilibrium
answer
The price and quantity designated by the intersection of demand and supply curves is usually referred to as the "market outcome" or "market equilibrium."
When prices exceed the equilibrium price, quantity supplied exceeds quantity demanded, resulting in excess supply of the product. When prices are lower than the equilibrium price, quantity demanded exceeds quantity supplied, resulting in excess demand for the product. Situations of excess demand or excess supply typically result in price adjustments until market equilibrium is reached.
When prices exceed the equilibrium price, quantity supplied exceeds quantity demanded, resulting in excess supply of the product. When prices are lower than the equilibrium price, quantity demanded exceeds quantity supplied, resulting in excess demand for the product. Situations of excess demand or excess supply typically result in price adjustments until market equilibrium is reached.
question
A clothing store is selling a new style of bathing suits in preparation for the summer season. The store's manager thinks that consumers' willingness to pay for a bathing suit is $65 each, but she is not confident in her estimate. She wants to sell the bathing suits within the next 6 months, before summer ends, because after that she needs to make room in the store for the next year's styles. What price should the manager set for the bathing suit?
answer
The manager can price the bathing suits at $75 each to see if they will sell. If they do not, there is plenty of time to decrease the price.
question
A restaurant sells salsa and guacamole, each of which can be eaten with the tacos that the restaurant sells. The manager of the restaurant is not sure whether salsa and guacamole are substitutes or complements. However, after increasing the price of guacamole from $2.00 to $2.50, the manager notices that daily salsa sales rise by 5%. What is the cross price elasticity of salsa and guacamole, and what can the manager conclude about their relationship?
answer
1/5. Salsa and guacamole are substitutes.
is correct
Cross price elasticity is the percent change in quantity demanded of one good (+5%) divided by the percent change in price of the other good (+25%). A positive cross price elasticity indicates that the goods are substitutes.
is correct
Cross price elasticity is the percent change in quantity demanded of one good (+5%) divided by the percent change in price of the other good (+25%). A positive cross price elasticity indicates that the goods are substitutes.
question
A large beer company previously had a yearly budget of $50 million per year for advertising but increased the budget to $60 million in order to run a commercial during the Super Bowl. That year revenues increased by 1%. Should the beer company continue with the increased advertising budget?
answer
Yes, but only if the increase in revenues was greater than the increase in expenditures.
is correct
If the original total revenue was $1 billion, then the increase in revenue would have been 1% of that, so $10 million. This is equal to the increase in advertising expenditures. Thus if original revenues were greater than $1 billion, it makes sense to keep the increased budget.
is correct
If the original total revenue was $1 billion, then the increase in revenue would have been 1% of that, so $10 million. This is equal to the increase in advertising expenditures. Thus if original revenues were greater than $1 billion, it makes sense to keep the increased budget.
question
A traveler's willingness to pay for a room in a hotel in a remote location is $70. The traveler's willingness to pay for a hot breakfast is $10. The traveler views hotel rooms and hot breakfast as complementary products. What is most likely the traveler's willingness to pay for a room in a hotel that includes complimentary hot breakfast?
answer
More than $80
is correct
Since the two goods are complementary, the traveler's WTP for a bundle of the two should be higher than the sum of WTP for the two individual products.
is correct
Since the two goods are complementary, the traveler's WTP for a bundle of the two should be higher than the sum of WTP for the two individual products.
question
An art collector is bidding on a statue that would complete a collection he is trying to assemble. The statue is being sold in a Vickrey (sealed second-price) auction. The collector should place a bid:
answer
equal to his willingness to pay for the statue.
is correct
This maximizes the chances of the collector winning the auction without creating any risk that he will overpay.
is correct
This maximizes the chances of the collector winning the auction without creating any risk that he will overpay.
question
English Outcry
answer
Open outcry auctions (or English auctions): buyers submit increasing bids. The consumer with the highest WTP wins, typically bidding (and paying) just above the consumer with the 2nd highest WTP.
question
Sealed second place
answer
Sealed second-price auctions (or Vickrey auctions): buyers submit sealed bids. The highest bidder wins the auction, and pays the 2nd highest bid. Bidders are motivated to bid their exact WTP, to maximize their chance of winning the product without the risk of overpaying.
question
Sealed first place
answer
- Sealed first-price auctions: buyers submit sealed bids. The highest bidder wins the auction and pays what he or she bid. Bidders might be motivated to bid below their WTP in order to ensure that if they win, they will capture some value.
question
What type of auction is better for any situation?
answer
The Revenue Equivalence Result states that, under certain general conditions, each of these types of auctions should result in approximately the same revenue for the seller. This revenue will be approximately equal to the 2nd highest bidder's WTP.
Auctions are useful tools for a seller who has little information about consumers' WTP, but can result in uncertainty and delay for consumers. As a result, fixed prices may be preferred to auctions in certain settings.
Auctions are useful tools for a seller who has little information about consumers' WTP, but can result in uncertainty and delay for consumers. As a result, fixed prices may be preferred to auctions in certain settings.
question
Winners curse
answer
The winner's curse occurs when the winner of an auction "overpays" for a product - that is, pays more than what turns out to be the true value of the product. This tends to occur when the product is worth about the same amount to each bidder; the winner is the person who most overestimated the value of the product.
question
Conjoint Analysis
answer
Conjoint analysis is a specialized survey design, which determines consumers' preferences for individual features of a product. Conjoint analysis asks respondents to rank different bundles of features, and uses responses to assign a numerical value (called a "part-worth") to each feature. Firms can then use these numerical values to predict consumer reactions to a product, and to decide what product features to offer.
question
Advertising
answer
Commonly observed forms of advertising are: (a) Advertising a specific firm's product, (b) Advertising an industry (e.g., diamonds), or (c) Negative advertising against a competitor ("badmouthing").
Advertising its own product shifts the demand curve facing a firm to the right. Advertising an industry is more beneficial when a firm has few important competitors: this will shift the demand curve for the entire industry to the right, and since the firm has a large share of the market, most increased purchases in the industry will benefit the firm. Running negative advertisements about a firm's competitor will shift the demand curve for the competitor's product to the left and (if the competitor's product is a substitute for the firm's own product) shift the curve demand for the firm's product to the right.
Advertising its own product shifts the demand curve facing a firm to the right. Advertising an industry is more beneficial when a firm has few important competitors: this will shift the demand curve for the entire industry to the right, and since the firm has a large share of the market, most increased purchases in the industry will benefit the firm. Running negative advertisements about a firm's competitor will shift the demand curve for the competitor's product to the left and (if the competitor's product is a substitute for the firm's own product) shift the curve demand for the firm's product to the right.
question
Subsituts and compliment
answer
Substitutes are products that can replace each other (the combined WTP for two products that are substitutes is lower than the sum of the WTP for each individual product). As the availability of substitutes increases, or their prices fall, the demand curve for a firm's product shifts left.
Complements are products that consumers wish to consume together (the combined WTP for two products that are complements is greater than the sum of WTP for each individual product). As the availability of complements increases, or their prices fall, the demand curve for a firm's product shifts right.
Firms can increase demand for their products by making substitutes less available or more expensive, or by making complements more available or cheaper.
Complements are products that consumers wish to consume together (the combined WTP for two products that are complements is greater than the sum of WTP for each individual product). As the availability of complements increases, or their prices fall, the demand curve for a firm's product shifts right.
Firms can increase demand for their products by making substitutes less available or more expensive, or by making complements more available or cheaper.
question
A pair of products has a cross-price elasticity of demand of -0.8 and each of the products has an advertising elasticity of demand of about 0.4. Which of the following pairs of products does these metrics most likely describe?
answer
Peanut butter and jelly
is correct
These products greatly complement each other and would have a negative cross-price elasticity of demand. Both of these products are also typically advertised, but less so than alcohols like wine.
is correct
These products greatly complement each other and would have a negative cross-price elasticity of demand. Both of these products are also typically advertised, but less so than alcohols like wine.
question
Complements
answer
By definition, the WTP for two goods that complement each other is higher than the sum of the WTP for each good individually.
A negative cross-price elasticity between two goods implies they are complements.
A consumer will be less likely to buy peanut butter if the store does not have jam in stock. Similarly, a consumer is unlikely to purchase a single glove or a single sneaker.
A negative cross-price elasticity between two goods implies they are complements.
A consumer will be less likely to buy peanut butter if the store does not have jam in stock. Similarly, a consumer is unlikely to purchase a single glove or a single sneaker.
question
You are the Head of Strategy for Sunglass World and your company is considering releasing a new brand of highly protective UV sunglasses. You decide to conduct a conjoint analysis to determine which aspects of sunglasses that consumers value most. The consumers in your analysis are presented with sunglasses with combinations of the following options:
Colors: Black, Brown, Gold, Silver
Shape: Round, Square, Half-Moon
UV Protection: High, Medium, Low
If you ran a survey asking respondents to rank all possible combinations of sunglasses, how many different pairs would the respondents have to rank?
Colors: Black, Brown, Gold, Silver
Shape: Round, Square, Half-Moon
UV Protection: High, Medium, Low
If you ran a survey asking respondents to rank all possible combinations of sunglasses, how many different pairs would the respondents have to rank?
answer
Respondents would have to rank 433=36 different combinations.
question
Your toy company is looking into launching a new line of dolls and action figures but is unsure if kids these days still actually play with them. As part of your market research, you send out a survey to 1000 households that have purchased toys in the last five years. You also decide to run two focus groups: one group of children ages 4-16 and one group of parents.
Which of the following questions asked in a survey or focus group would be unbiased and allow you to gain reliable information?
Which of the following questions asked in a survey or focus group would be unbiased and allow you to gain reliable information?
answer
A survey question asking households, "What fraction/percentage of income do you estimate that your family spends on entertainment in a given month?"
An anonymous survey question asking children, "what's your favorite toy and why do you like to play with it?
An anonymous survey question asking children, "what's your favorite toy and why do you like to play with it?
question
In what way does randomization help an experimenter to overcome the "missing variables" problem?
answer
Randomization helps control for unobserved variables not being measured in the experiment.Randomization makes it so that the effect of other individual-specific variables, should, on average, cancel out across the treatment and control groups.By randomly creating groups, experimenters can avoid biased samples that may result, for example, when individuals select into groups based on observable differences.
question
Whereas most websites and online web services must continually update and improve user design, Craigslist, a classified advertisements website, has remained largely the same since 1996. What phenomenon might explain this?
answer
A network effect that makes switching to competitor sites difficult.
is correct
Once Craigslist became popular, it had more sellers and buyers than other sites, making it the most attractive site to use regardless of whether it had been updated and improved.
is correct
Once Craigslist became popular, it had more sellers and buyers than other sites, making it the most attractive site to use regardless of whether it had been updated and improved.
question
You dont use an auction, when
answer
If the seller knows buyers' WTP, it would be easier to set a fixed price for the item.
question
An art collector is bidding on a statue that would complete a collection he is trying to assemble. The statue is being sold in a Vickrey (sealed second-price) auction. The collector should place a bid:
answer
equal to his willingness to pay for the statue.
is correct
This maximizes the chances of the collector winning the auction without creating any risk that he will overpay.
is correct
This maximizes the chances of the collector winning the auction without creating any risk that he will overpay.
question
A company believes that its product will exhibit network effects if enough consumers begin to use it. How might this company decide to price its product?
answer
Offering the product for free will pull in more consumers, which will in turn increase other consumers' WTP.
question
...
answer
...
question
cross-price elasticity of demand that is negative?
answer
High-speed internet access and an online streaming service for TV shows
is correct
Two items with a negative cross-price elasticity are considered to be complements. An increase in the price of one good reduces the quantity demanded of the other. High-speed internet is a natural complement to online streaming services.
Pens and pads of paper
is correct
Two items with a negative cross-price elasticity are considered to be complements. An increase in the price of one product reduces the quantity demanded of the other. A pad of paper is not very valuable without a pen to write in it, so they are complements.
is correct
Two items with a negative cross-price elasticity are considered to be complements. An increase in the price of one good reduces the quantity demanded of the other. High-speed internet is a natural complement to online streaming services.
Pens and pads of paper
is correct
Two items with a negative cross-price elasticity are considered to be complements. An increase in the price of one product reduces the quantity demanded of the other. A pad of paper is not very valuable without a pen to write in it, so they are complements.
question
What are the factors that can directly impact a consumer's WTP for a good? What doesn't
answer
In general, lower prices for substitute goods will result in lower willingness to pay for the original good.
In general, higher consumer incomes will increase the willingness to pay for a good.
In many cases, age can affect willingness to pay for a good. For example, a senior citizen would likely be willing to pay more for a cane than a young adult would.
The price of a good does not, by itself, change the willingness to pay for that good
In general, higher consumer incomes will increase the willingness to pay for a good.
In many cases, age can affect willingness to pay for a good. For example, a senior citizen would likely be willing to pay more for a cane than a young adult would.
The price of a good does not, by itself, change the willingness to pay for that good
question
Suppose a gelato shop increases its prices by 5 percent and sees a resulting 10 percent decrease in the quantity of gelato sold. Price elasticity of demand for gelato is:
answer
Price elasticity of demand is the percentage change in quantity demanded divided by percentage change in price (10/5 = 2).
question
Which of the following will cause the demand curve for a low-price wine produced in California to become flatter?
answer
Other wine manufacturers decide to make and sell low-price wine.
is correct
The demand curve for the California wine will become flatter as more substitutes become available.
is correct
The demand curve for the California wine will become flatter as more substitutes become available.
question
A company that wishes to maximize revenue should try to:
answer
In order to maximize revenue, a firm should set prices where the elasticity of demand is 1.
question
After increasing its average subscription prices in 2011, Netflix lost 800,000 subscribers. Despite this decrease in quantity sold, revenue for Netflix increased 49%. We can conclude that, prior to the price increase, Netflix was pricing at a point on its demand curve where demand was:
answer
When Netflix increased prices, revenue increased. This suggests that the company was previously operating at a part of the demand curve where demand was inelastic.
question
product has a price elasticity of 1.4. This means that:
answer
Total revenue falls when the price increases.
is correct
The price elasticity is greater than 1, which shows that the percentage change in quantity demanded will be greater than the percentage change in price.
is correct
The price elasticity is greater than 1, which shows that the percentage change in quantity demanded will be greater than the percentage change in price.
question
Demand Curve
answer
A demand curve for an individual buyer simply summarizes that consumer's willingness to pay for various quantities of a product.
question
Shifting the Demand Curve
answer
Changes in consumer willingness to pay result in shifts of the demand curve. For example, an increase in a consumer's WTP for a product will shift her demand curve outward; a decrease in WTP will shift her demand curve inward.
Slopes versus shifts: Changes in price correspond to movements along the demand curve. Non-price factors that affect WTP correspond to shifts in the demand curve (inward or outward).
Slopes versus shifts: Changes in price correspond to movements along the demand curve. Non-price factors that affect WTP correspond to shifts in the demand curve (inward or outward).
question
Elasticity
answer
The slope of a market demand curve measures how responsive buyers are to changes in price. When the curve is flat or near-flat, a small dip in price sparks a large surge in the quantity demanded. When the curve is steep or vertical, changes in price have little impact on the quantity demanded. Steep curves are often called "inelastic," and flat curves are often called "elastic." Demand is typically more elastic if a product is a luxury rather than a necessity, or if the product has many substitutes.
question
price elasticity of demand
answer
Price elasticity of demand is a better measure of price sensitivity than slope.
is correct
This is true because slope measures absolute changes in quantity and is sensitive to the units of measurement; in contrast, elasticity is not.
This is generally true. The higher the price, the less willing consumers will be to put up with increases in price for a particular product. For example, consumers might be willing to put up with a 100% price increase for a $1 candy bar, but not for a $20,000 car.
The more available are substitute goods, the less willing consumers will be to put up with increases in price for a particular product.
is correct
This is true because slope measures absolute changes in quantity and is sensitive to the units of measurement; in contrast, elasticity is not.
This is generally true. The higher the price, the less willing consumers will be to put up with increases in price for a particular product. For example, consumers might be willing to put up with a 100% price increase for a $1 candy bar, but not for a $20,000 car.
The more available are substitute goods, the less willing consumers will be to put up with increases in price for a particular product.
question
Which of the following events would, all else equal, cause a rightward shift of the demand curve for yachts?
answer
An increase in income would allow more households to be able to afford yachts, shifting the overall demand for yachts at any given price to the right.
The elimination of a regulation on boats would increase the demand for yachts to sail in previously forbidden waters.
Remember price of yachts doesn't matter
The elimination of a regulation on boats would increase the demand for yachts to sail in previously forbidden waters.
Remember price of yachts doesn't matter
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