Deck 1: Managerial Economics

Question 1

A basketball manufacturer is considering a number of options for its new factory.Given the following costs and benefits of the four different factory configurations,what are the marginal costs and benefits of the Extra Large configuration relative to the Large configuration? ........................Total Cost......Total Benefit
Configuration A(Small)..................$45,000.........70,000
Configuration B(Medium)...............120,000.......170,000
Configuration C (Large)..............240,000.......300,000
Configuration D (Extra Large).........400,000.......420,000

A)Marginal cost of $160,000 and marginal benefit of $120,000.
B)Marginal cost of $400,000 and marginal benefit of $420,000.
C)Marginal cost of $120,000 and marginal benefit of $120,000.
D)Marginal cost of $160,000 and marginal benefit of $220,000.

Answer 1

A

Question 2

Of the following types of costs,which is most likely a fixed cost for a shoe manufacturer?

A)Inventory costs.
B)Cost of the leather used to produce shoes.
C)Electricity costs to run manufacturing equipment.
D)An NBA player's lump-sum royalty payment to endorse the shoe.

Answer 2

D

Question 3

A spirits manufacturer is considering two potential production investments: Option A costs an initial $2 billion and will involve variable costs (labor and material)of $5 per bottle of spirits.Option B costs an initial $4 billion and will involve variable costs (labor and material)of $3 per bottle of spirits.Assuming an annual capital charge equal to 10 percent of the initial costs,what is the average fixed cost at production level of 30,000,000 bottles per year for the Option A facility?

A)$10.00.
B)$5.00.
C)$6.00.
D)$6.67.

Answer 3

D

Question 4

A retailer has to pay $9 per hour to hire 13 workers.If the retailer only needs to hire twelve workers,a wage rate of $7 per hour is sufficient.What is the marginal cost of the 13th worker?

A)$117.
B)$9.
C)$33.
D)$84.

Question 5

A spirits manufacturer is considering two potential production investments: Option A costs an initial $2 billion and will involve variable costs (labor and material)of $5 per bottle of spirits.Option B costs an initial $4 billion and will involve variable costs (labor and material)of $3 per bottle of spirits.Assuming an annual capital charge equal to 10 percent of the initial costs,what is the average fixed cost at production level of 20,000,000 bottles per year for the Option B facility?

A)$3.
B)$20.
C)$23.
D)$10.

Question 6

Which of the following is NOT true if a firm shuts down and produces zero output in the short run?

A)Variable costs will be zero.
B)Losses will be incurred.
C)Fixed costs will be greater than zero.
D)Fixed costs will be less than zero.

Question 7

Which of the following would be considered an extent decision?

A)A business is considering diversifying into a new line of business.
B)A business is considering shutting down operations.
C)A business is considering the sale of an underperforming line of business.
D)A business manager is trying to decide how many workers to hire for a new line of business.

Question 8

Which of the following statements is true:

A)A firm's accounting costs are the same as its economic costs if the firm is earning a normal rate of return.
B)A firm's accounting costs are larger than its economic costs.
C)A firm's accounting costs take account of implicit costs of capital.
D)A firm's accounting costs are smaller than its economic costs.

Question 9

A computer manufacturer shares its production capacity across two separate products,computers and printers.If the profitability of selling printers decreases,then the company will find that the

A)cost of producing computers decreases.
B)cost of producing computers increases.
C)cost of producing computers is not affected.
D)profitability of producing computers increases.

Question 10

To maximize profits,you should produce at the point where

A)you maximize the amount by which marginal revenue exceeds marginal costs.
B)you minimize total costs.
C)you maximize total benefit.
D)marginal benefits and marginal costs are just equal.

Question 11

Buyers consider Marlboro cigarettes and Budweiser beer to be complements.If Marlboro just increased its prices,what would you expect to occur in the Budweiser market?

A)Demand would rise,and Budweiser would reduce price.
B)Demand would fall,and Budweiser would reduce price.
C)Demand would fall,and Budweiser would increase price.
D)Demand would rise,and Budweiser would increase supply.

Question 12

A basketball manufacturer is considering a number of options for its new factory.Given the following costs and benefits of the four different factory configurations,which Configuration should they select? ........................Total Cost......Total Benefit
Configuration A(Small)..................$45,000.........90,000
Configuration B(Medium)...............120,000.......180,000
Configuration C (Large)..............240,000.......290,000
Configuration D (Extra Large).........400,000.......420,000

A)Configuration A.
B)Configuration B.
C)Configuration C.
D)None of the Configurations.

Question 13

According to the law of demand,

A)when demand increases,prices go up.
B)when supply increases,demand increases a corresponding amount.
C)when supply decreases,demand decreases a corresponding amount.
D)when price decreases,quantity demanded increases.

Question 14

Christine has purchased five bananas and is considering the purchase of a sixth.It is likely she will purchase the sixth banana if

A)the marginal value she gets from the sixth banana is lower than its price.
B)the marginal benefit of the sixth banana exceeds its price.
C)the average value of the sixth bananas exceeds the price.
D)the total personal value of six bananas exceeds the total expenditure to purchase six bananas.

Question 15

A basketball company is considering purchasing a new machine that doubles capacity from 100 to 200 balls per day.The machine will occupy 1,000 square feet of unused space on the factory floor.Which costs are irrelevant in this decision to purchase a machine?

A)Rental expense associated with the 20,000 square foot factory.
B)Additional personnel required to operate the machine.
C)Additional electricity required to operate the machine.
D)Maintenance cost for routine cleaning of the machine.

Question 16

If Sam's,a local watering hole,increased the price of a pint of Guinness by 20%,it estimates the number of MBA students purchasing Guinness would decrease by 4%.Based on this data,

A)total revenues would increase because demand is elastic.
B)total revenues would decrease because demand is elastic.
C)total revenues would remain the same.
D)total revenues would increase because demand is inelastic.

Question 17

As a shoe company produces more shoes the average total cost of each shoe produced decreases.This is because

A)Total fixed costs are decreasing as more shoes are produced.
B)Average variable cost is decreasing as more shoes are produced.
C)There are scale economies.
D)Total variable cost is decreasing as more shoes are produced.

Question 18

A manufacturer produces 1,000 basketballs each day,which it sells to customers for $30 each.All costs associated with production and sales total $10,000; however,if the manufacturer were to produce one additional basketball per day,total costs would increase to $10,100.From these amounts,we can tell that

A)the firm has negative profit.
B)marginal cost equals $100.
C)marginal cost equals $150.
D)marginal cost equals marginal revenue.

Question 19

As a manufacturer increases output,which of the following costs should decrease?

A)Average total cost.
B)Average fixed cost.
C)Marginal cost.
D)Average variable cost.

Question 20

A computer manufacturer can produce 5 computers for $5,000 and 10 computers for $7,500.Based on this information,what is the marginal cost per computer of the 6^th through 10^th computers?

A)$500
B)$750
C)$1,000
D)$2,500

Question 21

The data below are for a competitive business (price-taker).If the market price is $1,100 per unit,the company should $\begin{array}{rrrrr}&\text { Average } & \text { Average } & \text { Average }\\\text { Output}& \text {Fixed Costs}& \text {Variable Costs}& \text {Total Costs} &\text {Marginal Cost }\\\hline0&\$ 3,000\\1 & \$ 3,000 & \$ 900 & \$ 3,900 & \$ 900 \\2 & \$ 1,500 & \$ 800 & \$ 2,300 & \$ 700 \\3 & \$ 1,000 & \$ 700 & \$ 1,700 & \$ 500 \\4 & \$ 750 & \$ 600 & \$ 1,350 & \$ 300 \\5 & \$ 600 & \$ 500 & \$ 1,100 & \$ 100 \\6 & \$ 500 & \$ 550 & \$ 1,050 & \$ 800 \\7 & \$ 429 & \$ 600 & \$ 1,029 & \$ 900 \\8 & \$ 375 & \$ 650 & \$ 1,025 & \$ 1,000 \\9 & \$ 333 & \$ 700 & \$ 1,033 & \$ 1,100 \\10 & \$ 300 & \$ 750 & \$ 1,050 & \$ 1,200\end{array}$

A)six units with profit of $300.
B)six units with profit of $3,300.
C)nine units with profit of $600.
D)nine units with profit of $3,600.

Question 22

The data below are for a competitive business (price-taker).If the market price is $800 per unit,the company should $\begin{array}{rrrrr}&\text { Average } & \text { Average } & \text { Average }\\\text { Output}& \text {Fixed Costs}& \text {Variable Costs}& \text {Total Costs} &\text {Marginal Cost }\\\hline0&\$ 3,000\\1 & \$ 3,000 & \$ 900 & \$ 3,900 & \$ 900 \\2 & \$ 1,500 & \$ 800 & \$ 2,300 & \$ 700 \\3 & \$ 1,000 & \$ 700 & \$ 1,700 & \$ 500 \\4 & \$ 750 & \$ 600 & \$ 1,350 & \$ 300 \\5 & \$ 600 & \$ 500 & \$ 1,100 & \$ 100 \\6 & \$ 500 & \$ 550 & \$ 1,050 & \$ 800 \\7 & \$ 429 & \$ 600 & \$ 1,029 & \$ 900 \\8 & \$ 375 & \$ 650 & \$ 1,025 & \$ 1,000 \\9 & \$ 333 & \$ 700 & \$ 1,033 & \$ 1,100 \\10 & \$ 300 & \$ 750 & \$ 1,050 & \$ 1,200\end{array}$

A)shut down (produce nothing).
B)produce four units.
C)produce six units.
D)produces as much as possible.

Question 23

A monopolistic firm (price searcher)can sell 10 units for $120 each.If the marginal revenue from selling the 11th unit is $87,what is the unit price at which 11 units can be sold?

A)$87.
B)$117.
C)$120.
D)$127.
E)impossible to determine.

Question 24

A mall movie theater is considering reducing its rates to increase attendance.Which of the following costs is not to that decision?

A)cost of rent payments.
B)cost of printing tickets.
C)cost of popping popcorn.
D)cost of post-show theater cleaning.

Question 25

Management at the East Alabama Motor Speedway estimates that the "Friday Night Fanatics" would continue to enthusiastically pack the house (every ticket would be sold)even after a 35% increase in the price of admission.Apparently the E.A.M.S is operating in the ______ portion of their ______ curve.

A)inelastic,supply.
B)elastic,supply.
C)inelastic,demand.
D)elastic,demand.

Question 26

If a business can sell 10 units at a price of $30 but has to reduce price to $29 in order to sell 11 units,which of the following can we conclude?

A)Marginal revenue is negative.
B)Marginal revenue is decreasing,but it is still higher than price.
C)Demand is elastic and marginal revenue is positive.
D)Total revenue increases,so demand must be inelastic.

Question 27

If demand for a product falls at the same time supply rises,which of the following might we expect?

A)Equilibrium price and quantity sold would fall.
B)Equilibrium price would fall,and equilibrium quantity could either rise or fall.
C)Both the equilibrium price and the equilibrium quantity could rise or fall.
D)Equilibrium price would rise,and the equilibrium quantity could rise or fall.

Question 28

Which of the following would most likely make the demand for an item more elastic?

A)Buyers perceive there to be few close substitutes for the item.
B)The item represents a small fraction of consumers' budgets.
C)There are no costs of switching to competitors' products.
D)Buyers have NOT had time to adjust to the price change.

Question 29

A monopolistic firm (price searcher)will set price

A)in the part of the demand curve where demand is elastic.
B)equal to its marginal cost.
C)equal to its average cost
D)in the part of the demand curve where demand is inelastic.

Question 30

Which of the following is the reason for the existence of consumer surplus?

A)Consumers can purchase goods that they "want" in addition to what 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 market price.

Question 31

When demand for a product falls,which of the following events would you NOT necessarily expect to occur?

A)a decrease in the quantity of the product supplied.
B)a decrease in its price.
C)a decrease in the supply of the product.
D)a leftward shift of the demand curve.

Question 32

A baseball manufacturer is currently producing 10,000 baseballs.At this production level,marginal cost is $2.50 and average total cost is $2.00.Baseballs sell for $3.00 at this production level,and marginal revenue is $2.25.From this information,we can conclude that

A)the manufacturer is a competitive firm (price taker).
B)the manufacturer is producing too many baseballs.
C)the manufacturer should produce more baseballs.
D)the manufacturer is maximizing profit at this production level.

Question 33

"Smitty's Hot Boiled Peanuts" recently reported that its revenue increased from the previous quarter,along with its profits.What is the most likely explanation for this change,if the only change Smitty's made was in its price?

A)Price decreased and demand was inelastic.
B)Price increased and demand was inelastic.
C)Demand was unit elastic.
D)Price decreased and demand was elastic.

Question 34

In the long-run,which of the following outcomes 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.

Question 35

Dr.Octavio is an Ophthalmologist who performs both cataract and Lasik surgeries.If a competitor starts offering Lasik surgery as well,causing a decrease in the price Dr.Octavio can charge for Lasik.This price decrease

A)increases the opportunity cost of performing cataract surgeries.
B)increases the demand for Lasik surgery.
C)reduces the opportunity cost of performing cataract surgeries.
D)increases the demand for cataract surgeries,if cataract and Lasik surgeries are substitutes.

Question 36

Which of the following will NOT cause the demand curve for turkey meat to shift?

A)rising chicken and pork prices.
B)recent news indicating cancer-fighting properties of turkey meat.
C)sudden decrease in price.
D)Thanksgiving.

Question 37

Bertha's Bait Shop sells cartons of worms for $4 each.Assuming Bertha is a monopolistic firm (price searcher),marginal revenue on the 10th carton sold is

A)$4.
B)less than $4.
C)greater than $4.
D)impossible to determine.

Question 38

Suppose a new manufacturing technology results in an expansion in the supply of golf balls in the United States of 15%.If the elasticity of demand of golf balls sold in the US is -0.4,the new equilibrium price will be

A)0.375% lower.
B)16% lower.
C)37.5% higher.
D)37.5% lower.

Question 39

The U.S.Government bought 112,000 acres of land in southeastern Colorado in 1968 for $17,500,000.The cost of using this land today exclusively for the reintroduction of the black-tailed prairie dog

A)is zero,because they already own the land.
B)is zero,because the land represents a sunk cost.
C)is equal to the market value of the land.
D)is equal to the total dollar value the land would yield if used for farming and ranching.
E)depends on the value to society of black-tailed prairie dogs.

Question 40

The data below are for a competitive business (price-taker).If the market price is $300 per unit,the company should $\begin{array}{rrrrr}&\text { Average } & \text { Average } & \text { Average }\\\text { Output}& \text {Fixed Costs}& \text {Variable Costs}& \text {Total Costs} &\text {Marginal Cost }\\\hline0&\$ 3,000\\1 & \$ 3,000 & \$ 900 & \$ 3,900 & \$ 900 \\2 & \$ 1,500 & \$ 800 & \$ 2,300 & \$ 700 \\3 & \$ 1,000 & \$ 700 & \$ 1,700 & \$ 500 \\4 & \$ 750 & \$ 600 & \$ 1,350 & \$ 300 \\5 & \$ 600 & \$ 500 & \$ 1,100 & \$ 100 \\6 & \$ 500 & \$ 550 & \$ 1,050 & \$ 800 \\7 & \$ 429 & \$ 600 & \$ 1,029 & \$ 900 \\8 & \$ 375 & \$ 650 & \$ 1,025 & \$ 1,000 \\9 & \$ 333 & \$ 700 & \$ 1,033 & \$ 1,100 \\10 & \$ 300 & \$ 750 & \$ 1,050 & \$ 1,200\end{array}$

A)produce as much as possible
B)shut down (produce nothing).
C)produce four units.
D)produce six units.

Question 41

A number of the costs of a manufacturing firm are fixed in the short run,like its building and machinery costs.Given these fixed costs,

A)if the manufacturer were to increase production,average fixed costs would increase.
B)these costs should be considered in a decision to increase short-run production levels.
C)if the manufacturer were to expand production,average fixed costs would decrease.
D)if the manufacturer decreased production,total costs would increase.

Question 42

If production exceeds the level at which marginal cost is equal to marginal revenue,

A)profitability is maximized.
B)production should be reduced.
C)production is not generating profits.
D)production should be increased.

Question 43

Mr.D's Barbeque of Pickwick,TN.produces 10,000 dry-rubbed rib slabs per year.Annually Mr.D's fixed costs are $50,000.The average variable cost per slab is a constant $2.Suppose Mr.D smoked 10% more ribs.

A)Total cost would fall,but by less than 10%.
B)Average total cost would drop.
C)Total costs would rise by 10%.
D)Marginal cost would be negative.

Question 44

A brewery is considering two potential production investments: Option A costs an initial $2 million and will involve constant marginal cost of $5
Option B costs an initial $4 million and will involve constant marginal cost of $3
In order to make the calculations simple,assume that the annual capital cost is 10% of the total investment.At what production quantity per year would the brewery be indifferent between these two investment opportunities?

A)20,000
B)100,000
C)200,000
D)150,000

Question 45

A yo-yo manufacturer is producing 5,000 yo-yos selling them for $1.50 each.At this level of output,marginal revenue is $1.50.From this information,we can conclude that the yo-yo manufacturer

A)is a competitive firm (price taker).
B)is a monopolistic firm (price searcher).
C)faces a perfectly inelastic demand curve.
D)faces a somewhat elastic demand curve.

Question 46

For a competitive firm (price-taker),

A)If it increased price,total revenues would rise.
B)If it increased price,total revenues would rise,but profits could fall.
C)If it increased price,both total revenues and profits would rise.
D)If it increased price,all revenues would disappear.

Question 47

In the spring and summer of 1993,Chronic Wasting Disease wiped out 25% of the elk herd in Wyoming,and the number of state hunting licenses issued was reduced accordingly.In order to compensate for the decrease in license issuances,Wyoming dramatically increased the price.Unfortunately,this strategy proved unsuccessful as the state reported a 50% decrease in total elk license revenues for '93.Which of the following most accurately describes this economic situation?

A)The demand for Wyoming elk hunting is price inelastic.
B)The demand for Wyoming elk hunting is price elastic.
C)The supply of Wyoming Elk hunting is price elastic.
D)The demand for Wyoming Elk hunting fell.

Question 48

A bidders' value for a good may be low ($2),medium ($5),or high ($7).There are an equal number of potential bidders having each value.Suppose two bidders show up for an auction at which the good is offered.What is the best estimate of the expected revenue from the auction assuming there is no minimum bid increment?

A)$4.11
B)$3.99
C)$3.56
D)$5.00

Question 49

If supply falls in a perfectly competitive market,we can expect all of the following EXCEPT

A)price to rise.
B)the equilibrium quantity bought and sold to fall.
C)quantity demanded to fall.
D)demand to fall.

Question 50

A company currently sells 60,000 units a month at $10 per unit.The marginal cost is constant at $6 up to 100,000 units per month.The company is considering raising the price by 10% to $11.If the price elasticity of demand is constant and ______ in that price range then profits would increase if they raise the price to $11.

A)equal to -3.0
B)equal to -2.8
C)between -2.8 and -2.5
D)greater than or equal to -2.2
E)none of the above

Question 51

Which of the following will not decrease the demand for jogging shoes?

A)Surgeon General's report indicating jogging causes cancer.
B)A decrease in the price of substitutes.
C)An increase in the price of jogging shoes.
D)An increase in the price of complements.

Question 52

If a firm's average cost is falling (economies of scale)with output,then

A)marginal cost is less than average cost.
B)marginal cost is rising.
C)marginal cost is greater than average cost.
D)average cost is rising as a function of output.

Question 53

Mr.D's Barbeque of Pickwick,TN produces 10,000 dry-rubbed rib slabs per year.Annually Mr.D's fixed costs are $50,000.The average variable cost per slab is a constant $2.The average total cost per slab then is

A)$7.
B)$2.
C)$5.
D)impossible to determine.

Question 54

The threat of new entrants would be higher under which of the following conditions?

A)access to distribution channels is hard to gain.
B)economies of scale in the industry are high.
C)product differentiation in the industry is low.
D)capital requirements in the industry are high.

Question 55

A firm is producing 10,000 units of output.Price at this output level is $16.00 for each unit,and marginal revenue is $13.00.Average per unit cost is $12.00,and marginal cost is $12.50.From this information,we can conclude that the business

A)enjoys economies of scale.
B)is maximizing profit at this level.
C)should produce less.
D)should produce more.

Question 56

A pencil manufacturer is in a perfectly competitive market.The firm can sell as much as it wants at a price of $1.50 per pencil.At some production levels,its average variable costs are less than $1.50,but there is not production level where its average total cost is equal or less than $1.50.What would be your recommendation to the pencil manufacturer.

A)Increase production to decrease fixed costs per unit.
B)Exit the business immediately.
C)Continue production in both the short and long runs.
D)Continue production in the short run,but exit the business in the long run unless prices are expected to rise or costs to fall.

Question 57

The Country Music Hall of Fame is considering lowering admission prices to increase gross revenue.This plan will work if the price elasticity of demand for tickets is

A)inelastic.
B)elastic.
C)unit elastic.
D)inverted.

Question 58

If a firm is earning an abnormally high rate of return on invested capital,

A)the firm is earning positive economic profits.
B)the firm has zero economic profits.
C)the firm's accounting and economic profits are equal.
D)the firm's accounting profits are zero.

Question 59

How much of a good will consumers who wish to maximize their net benefit (value less cost)purchase?

A)The amount where marginal value just equals the good's price.
B)The amount where average value just equals the good's price.
C)The amount where total value is maximized.
D)The amount where marginal value starts to fall.

Question 60

The Country Music Hall of Fame is considering increasing admission prices to increase gross revenue.If the price of admission rises from $20 to $30,and attendance drops from 3,000 to 1,500,what is the approximate elasticity of demand for admission tickets?

A)1.
B)100.
C)-1%.
D)-1.

Question 61

This question refers to the following game in strategic form,where each cell shows the profits accruing to Lightning Industries and Maximum Power: The Nash equilibrium of this game is:

A)Lighting builds new capacity,while Maximum Power does not
B)Both companies build new capacity
C)Maximum Power builds new capacity,while Lightning does note
D)Both companies don't build

Question 62

In the short term,a firm in a very competitive market

A)can never earn positive economic profits.
B)sets its price where marginal cost equals average total cost.
C)must set its price at the competitive equilibrium price even if it is below their minimum average cost.
D)maximizes its profits when it experiences economies of scale.

Question 63

The price elasticity of demand for bread is -0.5.If the price falls by 5%,the quantity demanded will change by:

A)-2.5%
B)+2.5%
C)-1.0%
D)+10%
E)none of the above.

Question 64

If you are planning a common value auction and suspect that collusion may occur,which of the following should you NOT do?

A)Hold one large auction instead of several small auctions.
B)Hold a sealed bid auction instead of an open auction.
C)Provide additional information about the products to the potential bidders.
D)Publish a list of the people that you expect to attend the auction.

Question 65

You are more likely to experience the "winner's curse" in which type of auction?

A)Oral Auction
B)Common Value Auction
C)Second-Price Auction
D)Sealed-bid Auction

Question 66

If you are an auctioneer in a common value action you should do all of the following except…

A)Encourage everyone to bid aggressively
B)Reduce the uncertainty of the value of the item
C)Hide adverse information that would devalue the item
D)Release as much information about the item as possible

Question 67

An oral auction with values of $4,$6,$9,$12,$13,and $15 is currently taking place.What will the winning bidder pay?

A)10
B)11
C)13
D)15

Question 68

Five bidders bidding for an item in an oral auction agree to collude.Their values are {$9,$8,$7,$3,$2}.Five bidders are not in the cartel and are bidding competitively.Their values are {$6,$5,$5,$2,$1}.What is the winning bid?

A)2
B)6
C)7
D)8

Question 69

It has been observed that,when the price of music CDs rose by 1%,the market quantity demanded fell by 1.83%.The price elasticity of market demand is:

A)1.83%
B)-1.83%
C)0.55%
D)-0.55%

Question 70

Which of the following conditions that must be satisfied by a successful price discrimination scheme?

A)The seller must have market power
B)The seller must be able to identify different customer groups with different demand elasticities
C)The seller must be able to prevent arbitrage between the two groups
D)All of the above

Question 71

If the people with values of $4,$12,$15 form a cartel during the auction in the previous problem (values for all participates are $4,$6,$9,$12,$13,and $15),how much money will the cartel save?

A)0
B)1
C)2
D)3

Question 72

If two firms producing substitutes agree to fix prices,then their prices will 1.____________ .If two firms producing complements agree to fix prices,then their prices will 2.____________ .

A)increase; 2.increase
B)decrease; 2.decrease
C)increase; 2.decrease
D)decrease; 2.increase

Question 73

The forces that create high rivalry within an industry include all of the following except:

A)numerous competitors.
B)high fixed costs.
C)fast industry growth.
D)low switching costs for buyers.

Question 74

A video store believes there are two equally sized consumer groups with different values for two DVDs as follows: segment 1 values DVD A at $10 and DVD B at $8
Segment 2 values DVD A at $4 and DVD B at $12.
There are estimated to be 50 consumers in each group.The store currently has 100 of each DVD on hand.It paid $10 for each DVD.If it is unable to sell them all it can return them to the distributor for $4 each.To maximize profit contribution from the sale (or return)of these DVDs the store should:

A)set a standard price of $8 for each DVD.
B)set a price of $10 for A and $12 for B.
C)offer A and B together for a price of $16.
D)offer A and B together for a price of $18.
E)none of the above

Question 75

The fixed cost of Boeing's new aircraft,the 797,is $6 billion.The average variable cost is $100,000,000.The sales price is $ 140,000,000.What is the projected breakeven volume?

A)100
B)125
C)150
D)175

Question 76

The demand for insurance arises from people who are:

A)Risk-seeking
B)Risk-neutral
C)Risk-averse
D)None of the above

Question 77

What is the definition of market equilibrium?

A)The price at which elasticity of demand is unit elastic
B)The price and quantity at which all consumer surplus is extracted from buyers
C)The price at which quantity supplied equals quantity demanded
D)All of the above

Question 78

Switching costs refer to the

A)cost to a producer to switch to new equipment when new technologies emerge.
B)cost of changing the firm's industry.
C)one-time costs suppliers incur when selling to a different customer.
D)one-time costs customers incur when buying from a different supplier.

Question 79

A company manufactures three products as shown below.It is considering a decision to discontinue the production of product C.Corporate overhead of $60,000 is allocated to each product in equal parts.If the company decides to discontinue product C,50% of its quantity demanded will shift to product A (i.e.,products A and C are substitutes).Product B is neither a substitute nor a complement for product A or product C. $\begin{array}{|l|r|r|r|}\hline &A&B&C\\\hline \text { Unit Price } & \$ 10.00 & \$ 15.00 & \$ 5.00 \\\hline \text { Marginal Cost } & \$ 5.00 & \$ 5.00 & \$ 3.00 \\\hline \text { Quantity Sold } & 10,000 & 2,000 & 3,000 \\\hline \text { Unit Margin } & \$ 5.00 & \$ 10.00 & \$ 2.00 \\\hline \text { Total Margin } & \$ 50,000.00 & \$ 20,000.00 & \$ 6,000.00 \\\hline \text { Overhead Allocation } & \$ 20,000.00 & \$ 20,000.00 & \$ 20,00.00 \\\hline \text { Accounting Profit } & \$ 30,000.00 & \$ 0.00 & -\$ 14,000.00\\\hline\end{array}$ The company should:

A)continue producing C because it has a positive unit margin.
B)continue producing C because the substitution effect does not compensate for the loss of profit contribution from product C.
C)discontinue producing C because this decision maximizes the total economic profit contribution generated by the company.
D)discontinue both B and C since neither has a positive contribution to economic profit.

Question 80

You are considering entry into a market in which there is currently only one producer (incumbent).Entry will require $20k in fixed costs per year (avoidable at the end of each year).If you enter,the incumbent can take one of two strategies,price low or price high.If they price high then you expect a $60k profit per year.If they price low then you expect a $20k loss per year.

A)You should enter if demand is inelastic
B)If you believe the probability that the incumbent will price low is greater than 0.75 then you should enter
C)If you believe the probability that the incumbent will price low is less than 0.75 then you should enter
D)The entry decision depends on the size of the market