Question 1

Sunk costs refer to:

Accepted Answer

A)  costs that were incurred in the past and cannot be recovered, and thus should not affect current decisions 
B)  all the costs that a firm must incur in the process of production 
C)  comparing the benefits and costs of choosing a little more or a little less of a good 
D)  whatever must be given up to obtain something that is desired 
A)  costs that were incurred in the past and cannot be recovered, and thus should not affect current decisions 
B)  all the costs that a firm must incur in the process of production 
C)  comparing the benefits and costs of choosing a little more or a little less of a good 
D)  whatever must be given up to obtain something that is desired A

Question 2

Marginal analysis refers to:

Accepted Answer

A)  points that lie on the budget set 
B)  costs that were incurred in the past and cannot be recovered, and thus should not affect current decisions 
C)  comparing the benefits and costs of choosing a little more or a little less of a good 
D)  whatever must be given up to obtain something that is desired 
A)  points that lie on the budget set 
B)  costs that were incurred in the past and cannot be recovered, and thus should not affect current decisions 
C)  comparing the benefits and costs of choosing a little more or a little less of a good 
D)  whatever must be given up to obtain something that is desired C

Question 3

The absolute value of the marginal rate of substitution measures the:

Accepted Answer

A)  slope of the budget constraint. 
B)  slope of an indifference curve. 
C)  relative price of two goods. 
D)  optimality of consumer consumption. 
A)  slope of the budget constraint. 
B)  slope of an indifference curve. 
C)  relative price of two goods. 
D)  optimality of consumer consumption. B

Question 4

The substitution effect:

Accepted Answer

A)  reduces the quantity demanded of a good when its price increases. 
B)  is equal to the income effect. 
C)  is always greater than the income effect. 
D)  is always smaller than the income effect. 
A)  reduces the quantity demanded of a good when its price increases. 
B)  is equal to the income effect. 
C)  is always greater than the income effect. 
D)  is always smaller than the income effect.

Question 5

If Larry starts a new pizza parlor and hires a manager for $30,000, this implies that:

Accepted Answer

A)  pizza parlor managers are inexpensive to hire. 
B)  Larry must value his labor at less than $30,000 per year. 
C)  Larry must value his labor at more than $30,000 per year. 
D)  the price of pizza would be increased if Larry worked in the parlor himself. 
A)  pizza parlor managers are inexpensive to hire. 
B)  Larry must value his labor at less than $30,000 per year. 
C)  Larry must value his labor at more than $30,000 per year. 
D)  the price of pizza would be increased if Larry worked in the parlor himself.

Question 6

Johnny consumes only bread and milk. When thinking of his budget constraint, assume that milk is on the horizontal axis. If the price of milk rises, his budget constraint will:

Accepted Answer

A)  shift outwards 
B)  shift inwards 
C)  pivot inwards along the horizontal axis 
D)  pivot inwards along the vertical axis 
A)  shift outwards 
B)  shift inwards 
C)  pivot inwards along the horizontal axis 
D)  pivot inwards along the vertical axis

Question 7

MACROSOFT decided to start developing the new word processor. After six months, the R&D phase is completed . If MACROSOFT's managers are risk-neutral, they should abandon the project if the expected revenues from sales of the new software are:

Accepted Answer

A)  $599,000. 
B)  $449,000. 
C)  $299,000. 
D)  $399,000. 
A)  $599,000. 
B)  $449,000. 
C)  $299,000. 
D)  $399,000.

Question 8

Assume the quantity of X is measured on the horizontal axis, and the quantity of Y is measured on the vertical axis. Assume the price of X is $3, and the price of Y is $6. If Amanda has $90 to spend on X and Y , then:

Accepted Answer

A)  she can buy at most 30 X. 
B)  her budget line has a slope of - 2. 
C)  her budget line has a slope of -3. 
D)  she can buy at most 15 X. 
A)  she can buy at most 30 X. 
B)  her budget line has a slope of - 2. 
C)  her budget line has a slope of -3. 
D)  she can buy at most 15 X.

Question 9

ABC Corp. has a bonus plan in place for its CEO, linking her pay to annual earnings. ABC will pay her $180,000 if earnings are high, $90,000 if they are normal, and $0 if they are low. Each event is estimated to have equal probability. Assume the CEO is indifferent between this bonus plan and receiving $75,000 with certainty. Which of the following is true?

Accepted Answer

A)  The CEO's expected bonus is $90,000. 
B)  The CEO is not willing to give up $15,000 in expected bonuses in order to avoid the risky scheme. 
C)  $85,000 is the CEO's certainty equivalent for the current bonus plan. 
D)  The CEO has no clue about risk management 
A)  The CEO's expected bonus is $90,000. 
B)  The CEO is not willing to give up $15,000 in expected bonuses in order to avoid the risky scheme. 
C)  $85,000 is the CEO's certainty equivalent for the current bonus plan. 
D)  The CEO has no clue about risk management

Question 10

George likes skiing, and needs one pair of bindings for each pair of skis he owns. George's indifference curves for skies and bindings:

Accepted Answer

A)  are approximately L-shaped. 
B)  are straight lines. 
C)  have a constant slope of -1. 
D)  are upward sloping 
A)  are approximately L-shaped. 
B)  are straight lines. 
C)  have a constant slope of -1. 
D)  are upward sloping

Question 11

Suppose a family's budget line is such that the horizontal axis shows the amount of food consumed, while the vertical axis has the consumption of all other goods. Suppose this family receives Food Stamps. Then this will cause the budget line to:

Accepted Answer

A)  pivot along the vertical axis 
B)  pivot along the horizontal axis 
C)  shifts right by the amount of food stamps, with the y-intercept a horizontal line at the original point 
D)  shift to the left 
A)  pivot along the vertical axis 
B)  pivot along the horizontal axis 
C)  shifts right by the amount of food stamps, with the y-intercept a horizontal line at the original point 
D)  shift to the left

Question 12

Patrick consumes only two goods: Celtic Music concerts and Celtic Springs Water. Patrick earns $100 per month at his part-time job in the library. The price of Celtic concerts is $10. The price of Celtic Springs Water is $2. Patrick currently goes to 5 Celtic concerts and consumes 25 bottles of Celtic Spring Water in a month.
(a) Draw Patrick's budget constraint and optimal consumption bundle. Please put Celtic concerts on the x-axis.
(b) In April Patrick receives a 5% pay increase. Inflation raises the price of concerts to $10.50 and the price of Celtic Springs Water to $2.10. Draw Patrick's new budget constraint and optimal consumption bundle. Please put Celtic concerts on the x-axis. How many Celtic concerts does he attend in April? How many bottles of water does he drink in April?

Accepted Answer

(a) @#IMG-DLM& (b) His budget constraint does not

Question 13

Stella Ann Freeman is having a difficult time deciding whether or not to purchase a new car. How would understanding the concept of opportunity costs help her make a decision?

Accepted Answer

Opportunity cost is the value

Question 14

The income effect means that when the price of a good rises:

Accepted Answer

A)  the buying power of your income has been reduced 
B)  consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price 
C)  your preferences also change 
D)  you buy more normal goods and fewer inferior goods 
A)  the buying power of your income has been reduced 
B)  consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price 
C)  your preferences also change 
D)  you buy more normal goods and fewer inferior goods

Question 15

Wanda Weeks has decided to stay in a lower-paid position with a local electric company rather than accept a much higher-paying job with a new information technology company. Use a risk model to explain her decision.

Accepted Answer

Wanda is exhibiting risk-aversion. The r

Question 16

If employees conform to the economist's view of behavior, managers will be most effective if they can:

Accepted Answer

A)  influence the costs and benefits of employee actions. 
B)  improve employee satisfaction with the job. 
C)  communicate goals and objectives effectively to their employees. 
D)  fire bad employees. 
A)  influence the costs and benefits of employee actions. 
B)  improve employee satisfaction with the job. 
C)  communicate goals and objectives effectively to their employees. 
D)  fire bad employees.

Question 17

Smith is given a voucher that can be spent only on textbooks. Smith has a budget constraint with textbooks on the horizontal axis and everything else on the vertical axis. Suppose everything else is comprised only of normal goods. Then:

Accepted Answer

A)  the voucher will result in Smith increasing his spending on textbooks by more than the amount of the voucher 
B)  Smith will most likely end up spending some more money on everything else after receiving the voucher 
C)  Smith will not buy any textbooks because he can use the voucher for all other goods 
D)  Smith will most likely end up spending less money on everything else after receiving the voucher 
A)  the voucher will result in Smith increasing his spending on textbooks by more than the amount of the voucher 
B)  Smith will most likely end up spending some more money on everything else after receiving the voucher 
C)  Smith will not buy any textbooks because he can use the voucher for all other goods 
D)  Smith will most likely end up spending less money on everything else after receiving the voucher

Question 18

Assume Janet is risk-averse. Which of the following bets is she more likely to accept, depending on the degree of risk aversion?

Accepted Answer

A)  Win $40, ¼ of the times; win $10, ½ of the times; and lose $40, ¼ of the times. 
B)  Win $40, ¼ of the times; break even ½ of the times; and lose $40 ¼ of the times. 
C)  Win $20, ¼ of the times; win $10, ½ of the times; and lose $20, ¼ of the times. 
D)  Win $20, ¼ of the times; win $10, ¼ of the times; and lose $20, ¼ of the times. 
A)  Win $40, ¼ of the times; win $10, ½ of the times; and lose $40, ¼ of the times. 
B)  Win $40, ¼ of the times; break even ½ of the times; and lose $40 ¼ of the times. 
C)  Win $20, ¼ of the times; win $10, ½ of the times; and lose $20, ¼ of the times. 
D)  Win $20, ¼ of the times; win $10, ¼ of the times; and lose $20, ¼ of the times.

Question 19

Assume Barbara likes driving fast, but hates getting injured. If Congress passes a law for mandatory airbags, Barbara is likely to experience an increased number of accidents. Why?

Accepted Answer

A)  The benefits of driving faster increase. 
B)  The expected cost of being in an accident at any given speed decreases. 
C)  Barbara will defy the law and not have airbags, since she thinks no one is going to enforce it 
D)  Barbara is confident that she can drive flawless, since others will have airbags 
A)  The benefits of driving faster increase. 
B)  The expected cost of being in an accident at any given speed decreases. 
C)  Barbara will defy the law and not have airbags, since she thinks no one is going to enforce it 
D)  Barbara is confident that she can drive flawless, since others will have airbags

Question 20

Marginal utility is the:

Accepted Answer

A)  total happiness obtained from a consumption bundle. 
B)  additional utility obtained by lower the price of a good. 
C)  additional utility obtained by consuming one additional unit. 
D)  total amount spent to purchase one additional unit. 
A)  total happiness obtained from a consumption bundle. 
B)  additional utility obtained by lower the price of a good. 
C)  additional utility obtained by consuming one additional unit. 
D)  total amount spent to purchase one additional unit.

Exam 2: Economists View of Behavior

Sunk costs refer to:

Marginal analysis refers to:

The absolute value of the marginal rate of substitution measures the:

The substitution effect:

If Larry starts a new pizza parlor and hires a manager for $30,000, this implies that:

Johnny consumes only bread and milk. When thinking of his budget constraint, assume that milk is on the horizontal axis. If the price of milk rises, his budget constraint will:

MACROSOFT decided to start developing the new word processor. After six months, the R&D phase is completed . If MACROSOFT's managers are risk-neutral, they should abandon the project if the expected revenues from sales of the new software are:

Assume the quantity of X is measured on the horizontal axis, and the quantity of Y is measured on the vertical axis. Assume the price of X is $3, and the price of Y is $6. If Amanda has $90 to spend on X and Y , then:

George likes skiing, and needs one pair of bindings for each pair of skis he owns. George's indifference curves for skies and bindings:

Suppose a family's budget line is such that the horizontal axis shows the amount of food consumed, while the vertical axis has the consumption of all other goods. Suppose this family receives Food Stamps. Then this will cause the budget line to:

Stella Ann Freeman is having a difficult time deciding whether or not to purchase a new car. How would understanding the concept of opportunity costs help her make a decision?

The income effect means that when the price of a good rises:

Wanda Weeks has decided to stay in a lower-paid position with a local electric company rather than accept a much higher-paying job with a new information technology company. Use a risk model to explain her decision.

If employees conform to the economist's view of behavior, managers will be most effective if they can:

Smith is given a voucher that can be spent only on textbooks. Smith has a budget constraint with textbooks on the horizontal axis and everything else on the vertical axis. Suppose everything else is comprised only of normal goods. Then:

Assume Janet is risk-averse. Which of the following bets is she more likely to accept, depending on the degree of risk aversion?

Assume Barbara likes driving fast, but hates getting injured. If Congress passes a law for mandatory airbags, Barbara is likely to experience an increased number of accidents. Why?

Marginal utility is the:

Introduction

Markets, Organizations, and the Role of Knowledge

Demand

Production and Cost

Market Structure

Pricing With Market Power

Economics of Strategy: Creating and Capturing Value

Economics of Strategy: Game Theory

Incentive Conflicts and Contracts

Organizational Architecture

Decision Rights: The Level of Empowerment

Decision Rights: Bundling Tasks Into Jobs and Subunits

Attracting and Retaining Qualified Employees

Incentive Compensation

Individual Performance Evaluation

Divisional Performance Evaluation

Corporate Governance

Vertical Integration and Outsourcing

Leadership: Motivating Change Within Organizations

Understanding the Business Environment: The Economics of Regulation

Ethics and Organizational Architecture

Organizational Architecture and the Process of Management Innovation

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