question
Compensating wage differentials
answer
differences in wages that reflect differences in the inherent attractiveness of various professions or jobs (once equilibrium has been reached)
Wage differential is a term used in labor economics to analyze the relation between the wage rate and the unpleasantness, risk, or other undesirable attributes of a particular job. A compensating differential, which is also called a compensating wage differential or an equalizing difference, is defined as the additional amount of income that a given worker must be offered in order to motivate them to accept a given undesirable job, relative to other jobs that worker could perform.
Wage differential is a term used in labor economics to analyze the relation between the wage rate and the unpleasantness, risk, or other undesirable attributes of a particular job. A compensating differential, which is also called a compensating wage differential or an equalizing difference, is defined as the additional amount of income that a given worker must be offered in order to motivate them to accept a given undesirable job, relative to other jobs that worker could perform.
question
What 3 factors characterize a competitive industry?
answer
1. firms produce a product or service with very close substitutes (meaning demand is very elastic)
2. firms have many rivals and no cost advantage over those rivals
3. the industry has no barriers to entry or exit
2. firms have many rivals and no cost advantage over those rivals
3. the industry has no barriers to entry or exit
question
What do we know about competitive firms in the short and long run?
answer
short run: can earn positive or negative profit (until entry or exit occurs)
long run: earn only an average rate of return
long run: earn only an average rate of return
question
Indifference principle
answer
if an asset is mobile, then in long-run equilibrium, the asset will be indifferent about where it is used
(it will make the same profit no matter where it goes)
(it will make the same profit no matter where it goes)
question
For firms in long-run equilibrium, what is true about economic profit? Accounting profit? Price in relation to cost?
answer
-earn zero economic profit (including opportunity cost of capital)
-firms break even
-price equals average cost
(no one wants to leave or enter industry)
-firms break even
-price equals average cost
(no one wants to leave or enter industry)
question
Mean reversion
answer
performance eventually moves back toward the mean (regression toward the mean)
question
Monopoly
answer
a firm that is the single seller in its market. Monopolies have market power because they produce a product or service without close substitutes, they have no rivals, and barriers to entry prevent other firms from entering the industry
Monopoly firms can earn positive profit for a longer period of time than competitive firms
Monopoly firms can earn positive profit for a longer period of time than competitive firms
question
Risk premium
answer
Higher expected rates of return that compensate investors in risky assets. In equilibrium, differences in rate of return reflect differences in the riskiness of an investment.
question
In the long run, which of the following is most likely for a firm?
a) zero accounting profits but positive economic profits
b) zero accounting profits
c) positive accounting profits and positive economic profits
d) zero economic profits but positive accounting profits
a) zero accounting profits but positive economic profits
b) zero accounting profits
c) positive accounting profits and positive economic profits
d) zero economic profits but positive accounting profits
answer
d) zero accounting profits but positive accounting profits
question
At the individual firm level, which of the following types of firms faces a downward sloping demand curve?
a) both a perfectly competitive firm and a monopoly firm
b) neither a perfectly competitive firm nor a monopoly firm
c) a perfectly competitive firm but not a monopoly firm
d) a monopoly firm but not a perfectly competitive firm
a) both a perfectly competitive firm and a monopoly firm
b) neither a perfectly competitive firm nor a monopoly firm
c) a perfectly competitive firm but not a monopoly firm
d) a monopoly firm but not a perfectly competitive firm
answer
a) both a perfectly competitive firm and a monopoly firm
question
Which of the following types of firms are guaranteed to make positive economic profit?
a) both a perfectly competitive firm and a monopoly firm
b) neither a perfectly competitive firm nor a monopoly firm
c) a perfectly competitive firm but not a monopoly firm
d) a monopoly firm but not a perfectly competitive firm
a) both a perfectly competitive firm and a monopoly firm
b) neither a perfectly competitive firm nor a monopoly firm
c) a perfectly competitive firm but not a monopoly firm
d) a monopoly firm but not a perfectly competitive firm
answer
d) a monopoly firm but not a perfectly competitive firm
question
What is the difference between a competitive firm and a monopoly firm?
a) number of customers served by the firm
b) monopoly firms are more efficient and therefore have lower costs
c) monopoly firms can generally earn positive profits over a longer period of time
d) monopoly firms enjoy government protection from competition
a) number of customers served by the firm
b) monopoly firms are more efficient and therefore have lower costs
c) monopoly firms can generally earn positive profits over a longer period of time
d) monopoly firms enjoy government protection from competition
answer
c) monopoly firms can generally earn positive profits over a longer period of time
question
Which of the products below is closest to operating in a perfectly competitive industry?
a) Nike shoes
b) cotton
c) Perdue chicken
d) restaurants
a) Nike shoes
b) cotton
c) Perdue chicken
d) restaurants
answer
b) cotton
question
A firm in a perfectly competitive market faces what type of demand curve?
a) unit elastic
b) perfectly inelastic
c) perfectly elastic
d) none of the above
a) unit elastic
b) perfectly inelastic
c) perfectly elastic
d) none of the above
answer
c) perfectly elastic
question
A competitive firm's profit-maximizing price is $15. At MC=MR, the output is 100 units. At this level of production, average total costs are $12. The firm's profits are
a) $300 in the short and long run
b) 300 in the short and zero in the long run
c) 500 in the short and long run
d) 500 in the short and zero in the long run
a) $300 in the short and long run
b) 300 in the short and zero in the long run
c) 500 in the short and long run
d) 500 in the short and zero in the long run
answer
b) 300 in the short and zero in the long run
question
What would happen to revenues if a firm in a perfectly competitive industry raised price?
answer
Revenues would fall
question
If a firm in a perfectly competitive industry is experiencing average revenues greater than average costs, in the long run
a) some firms will leave the industry and price will rise
b) some firms will enter the industry and price will rise
c) some firms will leave the industry and price will fall
d) some firms will enter the industry and price will fall
a) some firms will leave the industry and price will rise
b) some firms will enter the industry and price will rise
c) some firms will leave the industry and price will fall
d) some firms will enter the industry and price will fall
answer
d) some firms will enter the industry and price will fall
question
A sudden decrease in the market demand in a competitive industry leads to
a) losses in the short run and average profits in the long run
b) above-average profits in the short run and average profits in the long run
c) new firms being attracted to the industry
d) demand creating supply
a) losses in the short run and average profits in the long run
b) above-average profits in the short run and average profits in the long run
c) new firms being attracted to the industry
d) demand creating supply
answer
a) losses in the short run and average profits in the long run
question
Constant returns to scale
answer
when average costs are constant with respect to output level
question
Decreasing returns to scale
answer
when average costs rise with output
also called diseconomies of scale
also called diseconomies of scale
question
Diseconomies of scope
answer
when the cost of producing two products jointly is more than the cost of producing those two products separately
question
Increasing returns to scale
answer
when average cost fall as output increases
also called economies of scale
economies of scale are the cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.
also called economies of scale
economies of scale are the cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.
question
Law of diminishing marginal returns
answer
as you try to expand output, your marginal productivity (the extra output associated with extra inputs) eventually declines
question
Learning curves
answer
current production lowers future costs
question
Economies of scope
answer
when the cost of producing two outputs jointly is less than the cost of producing them separately
Cost (Q1, Q2) < Cost(Q1) + Cost(Q2)
Cost (Q1, Q2) < Cost(Q1) + Cost(Q2)
question
Increasing marginal costs eventually cause _______ (increasing/decreasing) average costs and make it ______ (more/less) difficult to compute break-even prices
answer
1. increasing
2. more
2. more
question
Microsoft found that instead of producing a DVD player and a gaming system separately, it is cheaper to incorporate DVD playing capabilities in its new version of the gaming system. Microsoft is taking advantage of
a) economies of scale
b) learning curve
c) economies of scope
d) decreasing marginal costs
a) economies of scale
b) learning curve
c) economies of scope
d) decreasing marginal costs
answer
c) economies of scope
question
As a golf club production company produces more clubs, the average total cost of each club produced decreases. This is because
a) total fixed costs are decreasing as more clubs are produced
b) average variable cost is decreasing as more clubs are produced
c) there are scale economies
d) total variable cost is decreasing as more clubs are produced
a) total fixed costs are decreasing as more clubs are produced
b) average variable cost is decreasing as more clubs are produced
c) there are scale economies
d) total variable cost is decreasing as more clubs are produced
answer
a) total fixed costs are decreasing as more clubs are produced
Average fixed cost is a per-unit-of-output measure of fixed costs. As the total number of units of the good produced increases, the average fixed cost decreases because the same amount of fixed costs is being spread over a larger number of units of output.
Average fixed cost is a per-unit-of-output measure of fixed costs. As the total number of units of the good produced increases, the average fixed cost decreases because the same amount of fixed costs is being spread over a larger number of units of output.
question
Average cost curves initially fall due to
a) declining average FC
b) rising average FC
c) declining accounting costs
d) rising marginal costs
a) declining average FC
b) rising average FC
c) declining accounting costs
d) rising marginal costs
answer
a) declining average FC
question
What might you reasonably expect of an industry in which firms tend to have economies of scale?
a) exceptional competition among firms
b) a large number of firms
c) highly diversified firms
d) a small number of firms
a) exceptional competition among firms
b) a large number of firms
c) highly diversified firms
d) a small number of firms
answer
d) a small number of firms
question
A security system company's total production costs depend on the number of systems produced according to the following equation:
Total Costs = $20,000,000 +($4000*quantity produced)
Given these data, which of the following is false?
a) there are economies of scale
b) there are fixed costs associated with this business
c) there are diseconomies of scale
d) a firm that produces a larger output has a cost advantage over a smaller firm
Total Costs = $20,000,000 +($4000*quantity produced)
Given these data, which of the following is false?
a) there are economies of scale
b) there are fixed costs associated with this business
c) there are diseconomies of scale
d) a firm that produces a larger output has a cost advantage over a smaller firm
answer
c) there are diseconomies of scale
question
Following are the costs to produce Product A, Product B, and Products A and B together. Which of the following exhibits economies of scope?
a) 100, 150, 240
b) 100, 150, 250
c) 100, 150, 260
d) All of the above
a) 100, 150, 240
b) 100, 150, 250
c) 100, 150, 260
d) All of the above
answer
A) 100, 150, 240
question
According to the law of diminishing marginal returns, marginal returns
a) diminish always prior to increasing
b) diminish constantly
c) diminish never
d) diminish eventually
a) diminish always prior to increasing
b) diminish constantly
c) diminish never
d) diminish eventually
answer
d) diminish eventually
question
It costs a firm $90 per unit to produce product A and $70 per unit to produce product B individually. If the firm can produce both products together at $175 per unit of product A and B, what does this exhibit signs of?
answer
Diseconomies of scope
question
Once marginal costs rise above the average cost, average costs will _______
answer
increase
question
Individual demand
answer
How many units an individual will purchase at a given price
question
Aggregate demand
answer
also called market demand
the total number of units that will be purchased by a group of consumers at a given price
the total number of units that will be purchased by a group of consumers at a given price
question
What kind of decision is pricing?
answer
Extent decision
question
When should price be reduced? Increased?
answer
Reduce price (increase quantity) if MR > MC
Increase price (reduce quantity) if MR < MC
Increase price (reduce quantity) if MR < MC
question
What is the optimal price?
answer
Where MR = MC
question
Price elasticity of demand
answer
Measure of how responsive quantity demanded is to changes in price
Price elasticity of demand (e) = (% change in quantity demanded) / (% change in price)
if absolute value of e is >1 then demand is elastic
if absolute value of e is <1 then demand is inelastic
Estimated price elasticity = [(Qt-Q2)/(Q1+Q2)] / i(P1-P2)/(P1+P2)]
this equation is used to estimate demand from a price and quantity change
Price elasticity of demand (e) = (% change in quantity demanded) / (% change in price)
if absolute value of e is >1 then demand is elastic
if absolute value of e is <1 then demand is inelastic
Estimated price elasticity = [(Qt-Q2)/(Q1+Q2)] / i(P1-P2)/(P1+P2)]
this equation is used to estimate demand from a price and quantity change
question
What happens to revenue when prices increase in a product with elastic demand?
answer
Revenue decreases
question
What happens to revenue when prices increase in a product with inelastic demand?
answer
Revenue increases
question
The more elastic a product is the _____ the optimal price
answer
lower
question
The five factors that affect elasticity:
(answer "more" or "less")
1. Products with close substitutes have ____ elastic demand
2. Products with any complements have _____ elastic demand
3. Demand for brands is _____ elastic than industry demand
4. In the long run, demand becomes _____ elastic
5. As price increases, demand becomes _____ elastic
(answer "more" or "less")
1. Products with close substitutes have ____ elastic demand
2. Products with any complements have _____ elastic demand
3. Demand for brands is _____ elastic than industry demand
4. In the long run, demand becomes _____ elastic
5. As price increases, demand becomes _____ elastic
answer
1. more
2. less
3. more
4. more
5. more
2. less
3. more
4. more
5. more
question
What are three other measures of elasticity that affect demand?
answer
income elasticity
cross-price elasticity
advertising elasticity
cross-price elasticity
advertising elasticity
question
Stay-even analysis
answer
can be used to determine the quantity change required to offset a price change
%change quantity = %change price / (%change price + margin)
%change quantity = %change price / (%change price + margin)
question
When is a proposed price increase profitable? (regarding stay-even quantity)
answer
If the predicted quantity loss is less than the stay-even quantity
question
%change Revenue
answer
%change Revenue = %change Price + %change Quantity
question
How to use elasticity to forecast changes in demand
answer
%change Quantity = %change Price / (%change Price + margin)
question
Jim has estimated elasticity of demand for gasoline to be -0.7 in the short run and -1.8 in the long run. A decrease in taxes on gasoline would
a) lower tax revenue in both the short and long run
b) raise tax revenue in both the short and long run
c) raise tax revenue in the short run but lower tax revenue in the long run
d) lower tax revenue in the short run but raise tax revenue in the long run
a) lower tax revenue in both the short and long run
b) raise tax revenue in both the short and long run
c) raise tax revenue in the short run but lower tax revenue in the long run
d) lower tax revenue in the short run but raise tax revenue in the long run
answer
c) raise tax revenue in the short run but lower tax revenue in the long run
question
Which of the following is true?
a) Nike has a less elastic demand curve than shoes
b) the demand curve for gas is more elastic in the short run than in the long run
c) cigarettes have a more elastic demand than televisions
d) salt has a less elastic demand than ice cream
a) Nike has a less elastic demand curve than shoes
b) the demand curve for gas is more elastic in the short run than in the long run
c) cigarettes have a more elastic demand than televisions
d) salt has a less elastic demand than ice cream
answer
d) salt has a less elastic demand than ice cream
question
Jim recently graduated from college. His income increased tremendously from $5000 a year to $60000 a year. He decided instead of renting he will buy a house. What type of goods does this imply that houses are for Jim?
answer
normal goods
question
Which of the following goods has a negative income elasticity of demand?
a) cars
b) items from dollar stores
c) shoes
d) bread
a) cars
b) items from dollar stores
c) shoes
d) bread
answer
b) items from dollar stores
question
An economist estimated the cross-price elasticity for peanut butter and jelly to be 1.5. Based on this information, we know peanut butter and jelly are what type of goods?
answer
Complements
question
Christine has purchased five bananas and is considering purchasing a sixth. What must be true of the marginal benefit for her to purchase the extra banana?
answer
She will purchase if marginal benefit of the sixth banana exceeds the marginal price
question
Buyers consider Marlboro cigarettes and Budweiser beer to be complements. If Marlboro just increased prices, what do you expect will occur in the Budweiser market?
answer
Demand will fall and Budweiser would reduce prices
question
Which of the following is the reason for the existence of consumer surplus?
a) Consumers can purchase goods that they "want" in addition to goods they "need"
b) Consumers can occasionally purchase products for less than their production cost
c) Some consumers receive temporary discounts that result in below-market prices
d) Some consumers are willing to pay more than the price
a) Consumers can purchase goods that they "want" in addition to goods they "need"
b) Consumers can occasionally purchase products for less than their production cost
c) Some consumers receive temporary discounts that result in below-market prices
d) Some consumers are willing to pay more than the price
answer
d) Some consumers are willing to pay more than the price
question
A bakery currently sells chocolate chip cookies at a price of $16 per dozen. The MC per dozen is $8. The cookies are becoming more popular with customers and so the bakery owner is considering raising the price to $20/dozen. What percentage of customers must be retained to ensure that the price increase is profitable?
answer
33.3%
Use stay-even analysis:
%change quantity = %change price / (%change price + margin)
%change price = (20 - 16) / 16 = 1/4 = 25%
margin = (P-MC) / P = (16 - 8) / 16 = 1/2 = 50%
%change quantity = .25 / (.25 + .5) = .25 / .75 = .3333
Use stay-even analysis:
%change quantity = %change price / (%change price + margin)
%change price = (20 - 16) / 16 = 1/4 = 25%
margin = (P-MC) / P = (16 - 8) / 16 = 1/2 = 50%
%change quantity = .25 / (.25 + .5) = .25 / .75 = .3333
question
Suppose your firm adopts a technology that allows you to increase your output by 15%. If the elasticity of demand is -3, how should you adjust the price if you want to sell all of your output?
a) 5% lower
b) 0.5% lower
c) 15% higher
d) 15% lower
a) 5% lower
b) 0.5% lower
c) 15% higher
d) 15% lower
answer
a) 5% lower
Price elasticity of demand (e) = (% change in quantity demanded) / (% change in price)
-3 = 15% / % change price
15 / -3 = -5%
Price elasticity of demand (e) = (% change in quantity demanded) / (% change in price)
-3 = 15% / % change price
15 / -3 = -5%
question
Complement
answer
a good whose demand increases when the price of another good decreases
examples: parking lot and shopping mall, hamburger patty and hamburger bun
examples: parking lot and shopping mall, hamburger patty and hamburger bun
question
cross-price elasticity of demand
answer
the cross-price elasticity of demand for good A with respect to the price of Good B measures the percentage change in demand of good A caused by a percentage change in the price of good B
question
Elastic
answer
sensitive to price
question
First law of demand
answer
consumers demand (purchase) more as price falls, assuming all other factors are held constant
question
Income elasticity of demand
answer
measures the percentage change in demand arising from a percentage change in income
question
Inferior goods
answer
demand decreases as income increases
question
Marginal profit
answer
the extra profit from producing and selling one more unit (MR-MC)
question
Normal goods
answer
demand increases as income increases
question
Substitute
answer
a good whose demand increases when price of another good increases.
example: Pepsi and Coke
example: Pepsi and Coke
question
Avoidable Costs
answer
Costs that you get back if you shut down operations
question
Break-even price
answer
the price that you must charge to at least break even (make zero profit). It is equal to the average avoidable cost per unit.
Break even quantity (Q) = F/(P-MC)
Break even quantity (Q) = F/(P-MC)
question
Consumer surplus
answer
the difference between the buyer's value (what he is willing to pay) and the price (what he has to pay)
question
Contribution margin
answer
the amount that one unit contributes to profit.
CM = SP per unit - VC per unit
CM = SP per unit - VC per unit
question
NPV rule
answer
if the present value of the net cash flows is larger than zero, the project is profitable (earns more than the opportunity cost of capital)
question
Post-investment hold-up
answer
an attempt by a trading partner to renegotiate the terms of trade after one party has made a sunk cost or investment specific to the relationship
question
Relationship-specific investments
answer
investments that are less valuable outside of a particular relationship. They are similar to sunk costs in that the costs are sunk in the relationship.
question
Specific investment
answer
investment that is less valuable outside of a particular relationship. Similar to sunk costs in that the costs are sunk in the relationship.
question
Sunk costs
answer
costs that cannot be recovered. They are unavoidable even in the long run.
question
Discounting
answer
finding present value of future payment
PV = FV / (1+r)^k
r = rate
k = # of periods
PV = FV / (1+r)^k
r = rate
k = # of periods
question
Compounding
answer
finding future value of present payment
FV = PV * (1+r)^k
r= rate
k=# periods in future
FV = PV * (1+r)^k
r= rate
k=# periods in future
question
Which of the following will increase the break-even quantity?
a) decrease in overall fixed costs
b) decrease in marginal costs
c) decrease in price level
d) increase in price level
a) decrease in overall fixed costs
b) decrease in marginal costs
c) decrease in price level
d) increase in price level
answer
C) decrease in price level
question
The higher the discount rates
a) the more value individuals place on future dollars
b) the more value individuals place on current dollars
c) the more investments will take place
d) does not affect the investment strategy
a) the more value individuals place on future dollars
b) the more value individuals place on current dollars
c) the more investments will take place
d) does not affect the investment strategy
answer
a) the more value individuals place on future dollars
question
Assume a firm has the following cost and revenue characteristics at its current level of output:
price = $10
average variable cost = $8
average fixed cost = $4
The firm is
a) incurring a loss of $2 per unit and should shut down
b) realizing only a normal profit
c) realizing an economic profit of $2 per unit
d) incurring a loss per unit of $2 but should continue to operate in the short run
price = $10
average variable cost = $8
average fixed cost = $4
The firm is
a) incurring a loss of $2 per unit and should shut down
b) realizing only a normal profit
c) realizing an economic profit of $2 per unit
d) incurring a loss per unit of $2 but should continue to operate in the short run
answer
d) incurring a loss per unit of $2 but should continue to operate in the short run
question
Sarah's Machinery Company is deciding to dump their current technology A for a new technology B with smaller fixed costs but bigger marginal costs. The current technology has fixed costs of $500 and marginal costs of $50 whereas the new technology has fixed costs of $250 and marginal costs of $100. At what quantity is Sarah Machinery indifferent between the two technologies?
answer
Sarah Machinery is indifferent at 5 units
tech A: 500 + 50x
tech B: 250 + 100x
500 + 50x = 250 + 100x
250 = 50x
x = 5
tech A: 500 + 50x
tech B: 250 + 100x
500 + 50x = 250 + 100x
250 = 50x
x = 5
question
What is the NPV of a project that requires a $100 investment today and returns $50 at the end of the first year and $80 at the end of the second year? Assume a discount rate of 10%
answer
$11.57
PV = FV / (1+r)^k
PV = -100 + [50/(1+.1)^1] + [80/(1+.1)^2]
-100 + 45.45 + 66.12 = 11.57
PV = FV / (1+r)^k
PV = -100 + [50/(1+.1)^1] + [80/(1+.1)^2]
-100 + 45.45 + 66.12 = 11.57
question
You expect to sell 500 cell phones a month, which have a MC of $50. If your FC are $5000 per month, what is the break-even price?
answer
$60
BE (qty) = F / (P-MC)
500 = 5000 / (P-50)
500P - 25000 = 5000
500P = 30000
P = 60
BE (qty) = F / (P-MC)
500 = 5000 / (P-50)
500P - 25000 = 5000
500P = 30000
P = 60
question
You are considering opening a new business to sell dartboards. You estimate that your manufacturing equipment will cost $100,000, facility updates will cost $250,000 and on average it will cost you $80 (in labor and material) to produce a board. If you can sell dartboards for $100 each, what is your break even quantity?
answer
$17,500
BE (qty) = F / (P-MC)
(250,000 + 100,000) / (100 - 80)
350,000 / 20 = $17,500
BE (qty) = F / (P-MC)
(250,000 + 100,000) / (100 - 80)
350,000 / 20 = $17,500
question
Which of the following is not true if a firm shuts down and produces zero output in the short run?
a) VC will be zero
b) losses will be incurred
c) FC will be greater than zero
d) FC will be less than zero
a) VC will be zero
b) losses will be incurred
c) FC will be greater than zero
d) FC will be less than zero
answer
d) FC will be less than zero
question
What are some of the solutions for a hold-up problem?
a) mergers
b) contracts
c) exchange of "hostages"
d) all of the above
a) mergers
b) contracts
c) exchange of "hostages"
d) all of the above
answer
d) all of the above
question
Which of the following is classified as a sunk cost?
a) cost of the next-best alternative
b) additional cost of producing an additional unit
c) research costs to determine the implementation of a technology
d) total cost of producing a product
a) cost of the next-best alternative
b) additional cost of producing an additional unit
c) research costs to determine the implementation of a technology
d) total cost of producing a product
answer
c) research costs to determine the implementation of a technology
(because this cost cannot be recovered)
[ a) cost of the next-best alternative = opportunity cost
b) additional cost of producing an additional unit = marginal cost
d) total cost of producing a product -- not a sunk cost because cost can be recovered by selling the product ]
(because this cost cannot be recovered)
[ a) cost of the next-best alternative = opportunity cost
b) additional cost of producing an additional unit = marginal cost
d) total cost of producing a product -- not a sunk cost because cost can be recovered by selling the product ]
question
Average Cost
answer
the total cost of production (fixed and variable) divided by the number of units produced
question
Cost Center
answer
a division whose parent company rewards it for reducing the cost of producing a specified output
question
Extent Decision
answer
a decision regarding how much or how many of a product to produce
question
Marginal Cost/Revenue
answer
the additional cost/revenue incurred by producing and selling one more unit
question
Is average cost relevant to an extent decision?
answer
No!
question
When is profit maximized?
answer
When MR = MC
question
When should you sell more? less?
answer
Sell more when MR>MC
Sell less when MR<MC
Sell less when MR<MC
question
What effect does increasing marginal revenue or reducing marginal costs have on effort?
What effect do fixed fees have on effort?
What effect do fixed fees have on effort?
answer
Increasing MR or reducing MC will increase effort
Fixed fees have no effects on effort
Fixed fees have no effects on effort
question
What is an example of a good incentive compensation scheme that reflects effort?
answer
Pay for performance
question
When economists speak of "marginal" they mean
a) opportunity
b) scarcity
c) incremental
d) unimportant
a) opportunity
b) scarcity
c) incremental
d) unimportant
answer
c) incremental
question
Managers undertake an investment only if
a) marginal benefits of the investment are greater than zero
b) marginal costs of the investment are greater than marginal benefits of investment
c) marginal benefits are greater than marginal costs
d) investment decisions do not depend on marginal analysis
a) marginal benefits of the investment are greater than zero
b) marginal costs of the investment are greater than marginal benefits of investment
c) marginal benefits are greater than marginal costs
d) investment decisions do not depend on marginal analysis
answer
c) marginal benefits are greater than marginal costs
question
A firm produces 500 units per week. It hires 20 full-time workers (40 hours per week) at an hourly wage of $15. Raw materials are ordered weekly, and they cost $10 for every unit produced. The weekly cost of the rent payment for the factory is $2,250. How do the overall costs break down?
(total variable, total fixed, total cost)
(total variable, total fixed, total cost)
answer
Total VC $5,000
Total FC $14,250
Total Cost $19,250
Total FC $14,250
Total Cost $19,250
question
Total costs increase from $1,500 to $1,800 when a firm increases output from 40 to 50 units. If marginal cost is constant, what is the fixed cost?
answer
$300
(we know this because MC is constant)
(we know this because MC is constant)
question
A manager of a clothing firm is deciding whether to add another factory in addition to one already in production. The manager would compare
a) the total benefits gained from the two factories to the total costs of running the two factories
b) the incremental benefit expected from the second factory to the total costs of running the two factories
c) the incremental benefit expected from the second factory to the cost of the second factory
d) the total benefits gained from the two factories to the incremental costs of running the two factories
a) the total benefits gained from the two factories to the total costs of running the two factories
b) the incremental benefit expected from the second factory to the total costs of running the two factories
c) the incremental benefit expected from the second factory to the cost of the second factory
d) the total benefits gained from the two factories to the incremental costs of running the two factories
answer
c) the incremental benefit expected from the second factory to the cost of the second factory
question
A firm is thinking of hiring an additional worker to their organization who can increase total productivity by 100 units a week. The cost of hiring him is $1500 per week. The price of each unit is $12. Should the firm hire the workers?
answer
No because MB < MC
question
A retailer has to pay $9 per hour to hire 13 workers. If the retailer only needs to hire 12 workers, a wage rate of $7 per hour is sufficient. What is the marginal cost of the 13th worker?
answer
$33
9*13 = 117
7*12 = 84
117 - 84 = 33
9*13 = 117
7*12 = 84
117 - 84 = 33
question
If a firm's average cost is rising, what does this tell us about marginal cost?
answer
marginal cost is greater than average cost
question
After the first week of his MBA Managerial Economics class, one of your pharmaceutical sales representatives accuses you of committing the sunk-cost fallacy by refusing to allow him to reduce price to make what he considers to be a really tough sale. Which of the following suggests the sales representative may be right?
a) most of the costs of drug development are sunk, not fixed
b) sales reps are paid a sales commission on revenue, so they don't care about the costs of drug development
c) sales reps don't worry that a low price today may make it more difficult for the company's other sales representatives to charge higher prices to their customers tomorrow
d) sales reps think only about sales
a) most of the costs of drug development are sunk, not fixed
b) sales reps are paid a sales commission on revenue, so they don't care about the costs of drug development
c) sales reps don't worry that a low price today may make it more difficult for the company's other sales representatives to charge higher prices to their customers tomorrow
d) sales reps think only about sales
answer
a) most of the costs of drug development are sunk, not fixed
question
A company is producing 15,000 units. At this output level, MR is $22 and MC is $18. The firm sells each unit for $48 and average total cost is $40. What can we conclude from this information?
answer
The company needs to increase production because MR>MC
question
How is wealth created by voluntary transactions?
answer
By moving assets from lower- to higher-valued uses
question
What destroys wealth?
answer
Anything that impedes the movement of assets to higher-valued uses, such as:
-taxes
-subsidies
-price controls
-taxes
-subsidies
-price controls
question
A company can be thought of as a series of ______?
answer
transactions
question
What does a well-designed organization reward employees for?
answer
Identifying and consummating profitable transactions and/or stopping unprofitable transactions
question
An individual's value for a good or service is:
answer
the amount of money he or she is willing to pay for it
question
The biggest advantage of capitalism is that:
a) it generates equality
b) prices move from high- to low-value uses
c) it is fair
d) it creates wealth by letting a person follow his or her own self-interest
a) it generates equality
b) prices move from high- to low-value uses
c) it is fair
d) it creates wealth by letting a person follow his or her own self-interest
answer
d) it creates wealth by letting a person follow his or her own self-interest
question
Wealth-creating transactions are more likely to occur
a) with private property rights
b) with strong contract enforcement
c) with black markets
d) all of the above
a) with private property rights
b) with strong contract enforcement
c) with black markets
d) all of the above
answer
d) all of the above
question
Government regulation
a) provides incentives to conduct business in an illegal black market
b) plays no role in generating wealth
c) is the best way to eliminate poverty
d) does not enforce property rights
a) provides incentives to conduct business in an illegal black market
b) plays no role in generating wealth
c) is the best way to eliminate poverty
d) does not enforce property rights
answer
c) is the best way to eliminate poverty
question
Which of the following are examples of a price floor?
a) minimum wages
b) rent controls in New York
c) both A and B
d) none of the above
a) minimum wages
b) rent controls in New York
c) both A and B
d) none of the above
answer
a) minimum wages
question
What is a price ceiling?
answer
A government-set maximum price
question
Taxes
a) impede the movement of assets to higher-valued uses
b) reduce incentives to work
c) decrease the number of wealth creating transactions
d) all of the above
a) impede the movement of assets to higher-valued uses
b) reduce incentives to work
c) decrease the number of wealth creating transactions
d) all of the above
answer
d) all of the above
question
A consumer values a car at $30,000 and it costs a producer $20,000 to make the same car. If the transaction is completed at $24,000 what are the buyer and seller surpluses?
answer
Seller surplus: $4,000
Buyer surplus: $6000
Buyer surplus: $6000
question
A consumer values a car at $525,000 and a producer values the same car at $485,000. If sales tax is 8% and is levied on the seller, then the seller's bottom-line price is _____ . (Round to nearest thousand)
answer
$524,000
question
Efficiency implies opportunity
a) always
b) never
c) only if accompanied by secure property rights
d) none of the above
a) always
b) never
c) only if accompanied by secure property rights
d) none of the above
answer
b) never
question
Buyer surplus
answer
the difference between the buyer's value (what he is willing to pay) and the price (what he has to pay
question
When is an economy considered efficient?
answer
When all assets are employed in their highest valued uses
question
Two steps to problem solving
answer
1) figure out why mistakes are being made
2) figure out how to prevent future mistakes
2) figure out how to prevent future mistakes
question
rational-actor paradigm
answer
assumption that people act rationally, optimally and self-interestedly
question
To change behavior, what should you change?
answer
incentives
question
What is a good workplace incentive?
answer
rewarding good performance
question
What three questions should you ask to analyze a problem?
answer
1) Who is making the bad decision?
2) Does the decision maker have enough information to make a good decision?
3) Does the decision maker have the incentive to make a good decision?
2) Does the decision maker have enough information to make a good decision?
3) Does the decision maker have the incentive to make a good decision?
question
Why might performance compensation caps be bad?
answer
-Different pay rates promote dissent
-Compensation caps can discourage employees from being productive after the cap
-Compensation caps can discourage employees from being productive after the cap
question
What is a possible consequence of a performance compensation reward scheme?
answer
It creates harmful incentives
question
Why might it be bad for hotels to not charge higher prices when rooms are higher in demand?
answer
-Arbitrageurs might establish a black market by reserving rooms and then selling the reservations to customers
-Rooms may be rationed
-Without the profit form these high demand times, hotels would have less of an incentive to build or expand, making the long-run scarcity problem even worse
-Rooms may be rationed
-Without the profit form these high demand times, hotels would have less of an incentive to build or expand, making the long-run scarcity problem even worse
question
The rational-actor paradigms assumes that people do NOT
a) act rationally
b) use rules of thumb
c) act optimally
d) act self-interestedly
a) act rationally
b) use rules of thumb
c) act optimally
d) act self-interestedly
answer
b) use rules of thumb
question
The problem-solving principles analyze firm problems from whose point of view?
answer
The organization's and the manager's
question
Why might welfare for low-income households reduce the propensity to work?
answer
It reduces the incentive to work
question
Why might a bonus cap for executives be a bad policy for the company?
answer
It would encourage laziness after the executives reached the cap
question
What might happen if a car dealership is awarded a bonus by the manufacturer for selling a certain number of its cars monthly, but the dealership is just short of that quota near the end of the month?
answer
It may sell cars at a huge discount to hit the quota
question
Why might a supermarket advertise low prices on certain high-profile items and sell them at a loss?
answer
The store will sell other groceries to the same customers, often at a markup
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