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2019_SPR_IIG_Managerial Economics_20
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Week 4
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Take Test: Exam I
2019_SPR_IIG_Managerial Economics_20
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Multiple Attempts Not allowed. This test can only be taken once.
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QUESTION 1
1.
Which of the following describe the impact of taxes?
A. Impede the movement of assets to higher value uses
B. Reduce incentives to work
C. Decrease the number of wealth-creating transactions
D. All of the above
2 points
QUESTION 2
1.
A consumer values a car at $20,000, and it costs the manufacturer $15,000 to make the car. If the transaction is
completed at $18,000, the transaction will generate:
A. consumer surplus equal to $2,000 and producer surplus equal to $3,000
B. We need more information to answer this question
C. total surplus equal to $5,000, but we do not know how this amount is allocated to the buyer and seller
D. consumer surplus equal to $3,000 and producer surplus equal to $2,000
3 points
QUESTION 3
1.
A price floor imposed above the equilibrium market price leads to
A. Higher quantity demanded than quantity supplied
B. We need more information to answer this question
C. No impact on the market equilibrium
D. Higher quantity supplied than quantity demanded
2 points
QUESTION 4
1.
Suppose I value your business at $580,000, you value your business at $550,000, and I must pay an attorney
$40,000 to complete the required documents for the county government. What is the outcome from the
potential transaction?
A. The transaction does not occur because the transaction costs exceed the value created
B. The business is sold for $565,000
C. You buy the business from me at a price between $580,000 and $550,000
D. I buy the business from you at a price between $580,000 and $550,000
3 points
QUESTION 5
1.
Opportunity costs arise due to
A. lack of alternatives
B. scarcity of resources
C. abundance of resources
D. limited wants
3 points
QUESTION 6
1.
Suppose you are enrolled in an MBA program and your parents ask you how much the education will cost. Your
reply includes the tuition charges and book expenses, but you do not include the opportunity cost of your
time. Have you fallen into a logical trap?
A. Yes, the hidden-cost fallacy
B. No, the information is correct
C. Yes, you have violated the Law of Demand
D. Yes, the sunk-cost fallacy
2 points
QUESTION 7
1.
You advertise a used car for sale on a local electronic bulletin board. The best offer you receive is $4,000, but
you decline because you paid $6,000 for the car five years ago. Have you fallen into a logical trap?
A. Yes, hidden-cost fallacy
B. Yes, you are violating the first principle of economic profits
C. No, it is your car and you can do what you want
D. Yes, sunk-cost fallacy
3 points
QUESTION 8
1.
When are accounting profits equal to economic profits?
A. Explicit costs are zero
B. Accounting profits are zero
C. Implicit costs equal zero
D. Implicit costs are positive
2 points
QUESTION 9
1.
Your restaurant sells 300 pizzas in the typical day, and the total costs are $3,000 per day. If your fixed costs are
$1,200 per day, what is average variable cost?
A. $6
B. $4
C. $10
D. $8
2 points
QUESTION 10
1.
Which of the following statements is NOT true?
A. Accounting profit can be equal to economic profit
B. Accounting profit can be more than economic profit
C. Accounting profit can be positive while economic profit may be negative
D. Economic profit can be more than accounting profit
3 points
QUESTION 11
1.
Your pizza restaurant increases output by 5 pizzas per hour. Total variable costs and total costs increase by
$10 per hour. What is the change in marginal cost for the restaurant?
A. We do not have enough information to answer this question
B. MC increases by $10 per pizza
C. MC does not change
D. MC increases by $2 per pizza
2 points
QUESTION 12
1.
If average cost is rising as output increases, then we know that
A. Average total cost is less than average fixed cost
B. MC > AC
C. MC < 0 D. MC < AC 3 points QUESTION 13 1. Your local pizza restaurant sells each pizza for $12, and their marginal cost per pizza is $10. The restaurant could increase profits by A. Holding sales at the current level because profits are already maximized B. Selling less pizza C. Selling more pizza D. Closing the business 3 points QUESTION 14 1. How do fixed costs influence business decisions? A. They influence "should I stay in business" decision but not extent decisions B. They do not matter at all C. They influence "should I stay in business" decisions as well as extent decisions D. They only affect accounting profits but not economic profits 2 points QUESTION 15 1. If MC > MR, then we have
A. Negative marginal profits
B. Zero economic profits
C. Negative marginal revenue
D. An incentive to increase output
3 points
QUESTION 16
1.
Which of the following statements is NOT true?
A. Average fixed costs is constant as output increases if total fixed costs equal zero
B. Total costs increase as output increases
C. Average fixed costs can be constant as output increases if total fixed costs are positive
D. Average fixed costs always decline as output increases if total fixed costs are positive
2 points
QUESTION 17
1.
At the break-even quantity, we know that
A. the firm’s profits are maximized
B. the firm’s costs are minimized
C. the firm has zero economic profit
D. the firm is covering all of variable costs but only some of the fixed costs
3 points
QUESTION 18
1.
If the price received by a producer is less than average total cost but greater than average variable cost in the
short run, then the firm
A. should shut down immediately
B. should continue to produce
C. is earning zero economic profits
D. is earning positive economic profits
2 points
QUESTION 19
1.
Which discount rate represents the firm’s opportunity cost of capital for a net present value analysis?
A. Prime interest rate
B. Weighted average cost of capital (WACC)
C. Treasury rate on 10 year bonds
D. Fed funds rate
2 points
QUESTION 20
1.
A coffee house earns zero economic profits on its tall latte, which sells for $5 per serving and has average
variable cost equal to $3.00. What is the average total cost?
A. $2 per serving
B. $3 per serving
C. $4 per serving
D. $5 per serving
3 points
QUESTION 21
1.
An AI startup firm has fixed costs of $5 million and will produce an app that retails for $5 and has marginal
costs equal to $1 per download. What is the break-even quantity for this firm?
A. Q = 1 million units
B. Q = 1.25 units
C. P = $1.25
D. Q = 1.25 million units
3 points
QUESTION 22
1.
Suppose we invest in a new stock market information service that is sold by subscription to stock market
participants. Our investment will generate a stream of income from the subscription revenues collected in
future years. What happens to the net present value (NPV) of this investment if the discount rate increases?
A. NPV declines
B. NPV is unchanged
C. We do not have enough information to answer this question
D. NPV increases
2 points
QUESTION 23
1.
Which of the following will decrease the break-even quantity?
A. an increase in marginal costs
B. an increase in the price level
C. an increase in fixed costs
D. a decrease in the price level
3 points
QUESTION 24
1.
The cross-price elasticity of demand for tea with respect to the price of scones is 0.2. What do we know about
the economic relationship between these goods?
A. Complements
B. Substitutes
C. Tea and scones are independent goods with no cross-price relationshp
D. Both are normal goods
2 points
QUESTION 25
1.
The income elasticity of demand for pizza is 0.5 for US consumers as a group. Which of the following
statements is NOT true?
A. Pizza is a necessity for most US consumers
B. Pizza is a luxury good
C. Pizza consumption is expected to increase as US consumer incomes rise
D. Most US consumers view pizza as a normal good
2 points
QUESTION 26
1.
The short-run price elasticity of demand for gasoline in the US is roughly equal to -0.25, which tells us that
A. the short-run demand for gasoline is elastic
B. the short-run demand for gasoline is inelastic
C. gasoline is an inferior good in the US
D. gasoline consumers are completely unresponsive to price changes
3 points
QUESTION 27
1.
A new entrant has appeared in your market. What is the expected impact on the elasticity of demand for your
product?
A. We do not have enough information to answer this question
B. Entrants do not impact demand elasticities
C. Demand becomes more inelastic
D. Demand becomes more elastic
3 points
QUESTION 28
1.
Which is more elastic?
A. Demand for all coffee drinks
B. Demand for espresso-based coffee drinks
2 points
QUESTION 29
1.
The price elasticity of demand for online book buyers is -0.4 for Barnes and Noble customers and -1.2 for
Amazon customers. Based on this information, which firm can increase online book revenue by increasing book
prices?
A. Both firms
B. Amazon
C. Neither firm
D. Barnes and Noble
3 points
QUESTION 30
1.
The short-run price elasticity of demand for gasoline in the US retail market is -0.25. Which of the following
values would be a reasonable value for the long-run price elasticity of demand in this market?
A. -0.85
B. -0.15
2 points
QUESTION 31
1.
The less-than-load (LTL) freight business in the US has constant or flat average costs across all quantity
levels. What does this imply about the scale economies in this industry?
A. Business has diseconomies of scale
B. Business has economies of scale
C. Business has economies of scope but not economies of scale
D. Business has neither economies of scale or diseconomies of scale
2 points
QUESTION 32
1.
If marginal costs are less than average costs, we know that
A. Average costs are increasing
B. Average costs are sunk
C. Average costs are negative
D. Average costs are declining
3 points
QUESTION 33
1.
A U-shaped average cost curve exhibits
A. Both economies of scale and diseconomies of scale
B. Only economies of scale
C. Only diseconomies of scale
D. We do not have enough information to answer this question
2 points
QUESTION 34
1.
If a firm has an average cost curve that is downward sloping at all relevant quantities, then we know that
A. the firm enjoys positive economic profits
B. the firm should exit the business and shut down
C. the firm’s incentive is to increase output
D. the firm has diseconomies of scale
3 points
QUESTION 35
1.
A firm that can enjoy economies of scope has an incentive to
A. shut down
B. increase output of its main product as fast as possible
C. diversify its product line
D. focus on making one product
2 points
QUESTION 36
1.
An effective advertising campaign for Edy’s brand ice cream should:
A. shift the supply curve for Edy’s ice cream to the left
B. shift the demand curve for Edy’s ice cream to the right
C. shift the supply curve for Edy’s ice cream to the right
D. shift the demand curve for Edy’s ice cream to the left
3 points
QUESTION 37
1.
Suppose a profit-maximizing monopoly seller adopts new production technology that reduces their marginal
cost of production. What is the firm’s optimal response to this change?
A. Reduce the product price
B. Do not change the product price
C. We do not have enough information to answer this question
D. Increase the product price
3 points
QUESTION 38
1.
Your firm manufactures doors for the US home construction industry. A new federal regulation imposes strict
environmental protection rules on how these doors can be painted in order to reduce chemical emissions into
the air. As a result, the fixed costs of production increase sharply (MC does not change), and several competing
firms exit the business. What is your optimal response to the regulation change?
A. Demand becomes more elastic, so the firm can decrease prices
B. The firm should not respond because changes in fixed costs do not affect firm decisions
C. Demand becomes more inelastic, so the firm can increase prices
D. Demand becomes more inelastic, so the firm can decrease prices
3 points
QUESTION 39
1.
Suppose you invest $100 today in bonds that have an annual discount rate equal to -2% per year. At this time
next year, your investment will be worth:
A. $98
B. $100
C. $102
D. $104
2 points
QUESTION 40
1.
Suppose the market demand curve shifts rightward and the market price remains the same. What happens to
consumer surplus in this market?
A. We do not have enough information to answer this question
B. Increases
C. Does not change
D. Decreases
2 points
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Froeb
McCann
Shor
Wa r d
fif th e ditio n
Managerial
Economics
A PROBLEM SOLVING APPROACH
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fifth edition
Managerial
Economics
A PRO B LEM SOLV ING A P P RO ACH
Luke M. Froeb
Vanderbilt University
Mikhael Shor
University of Connecticut
Brian T. McCann
Vanderbilt University
Michael R. Ward
University of Texas, Arlington
Australia • Brazil • Mexico • Singapore • United Kingdom • United States
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Managerial Economics, Fifth Edition
© 2018, 2016 Cengage Learning®
Luke M. Froeb, Brian T. McCann,
Mikhael Shor, Michael R. Ward
Unless otherwise noted, all content is © Cengage
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copyright herein may be reproduced or distributed in any form
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Printed in the United States of America
Print Number: 01
Print Year: 2017
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
In loving memory of Lisa, and for our families: Donna,
David, Jake, Halley, Scott, Chris, Leslie, Jacob, Eliana,
Cindy, Alex, and Chris
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
BRIEF CONTENTS
Preface: Teaching Students to Solve Problems
SECTION I
Problem Solving and Decision Making
1

1 Introduction: What This Book Is About 3

2 The One Lesson of Business 15

3 Benefits, Costs, and Decisions 25

4 Extent (How Much) Decisions 37

5 Investment Decisions: Look Ahead and Reason Back
SECTION II
Pricing, Costs, and Profits
xiii
49
65

6 Simple Pricing 67

7 Economies of Scale and Scope 83

8 Understanding Markets and Industry Changes 95

9 Market Structure and Long-Run Equilibrium 113
10 Strategy: The Quest to Keep Profit from Eroding 125
11 Foreign Exchange, Trade, and Bubbles 137
SECTION III
Pricing for Greater Profit 151
12
13
14
SECTION IV
Strategic Decision Making 183
15
16
SECTION V
More Realistic and Complex Pricing 153
Direct Price Discrimination 163
Indirect Price Discrimination 171
Strategic Games 185
Bargaining 205
Uncertainty 215
17
18
19
20
Making Decisions with Uncertainty 217
Auctions 233
The Problem of Adverse Selection 243
The Problem of Moral Hazard 255
v
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
vi
BRIEF CONTENTS
SECTION VI
Organizational Design
21
22
23
SECTION VII
Getting Employees to Work in the Firm’s Best Interests 269
Getting Divisions to Work in the Firm’s Best Interests 283
Managing Vertical Relationships 295
Wrapping Up
24
267
Test Yourself
307
309
Epilogue: Can Those Who Teach, Do?
Glossary
Index
315
317
325
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CONTENTS
Preface: Teaching Students to Solve Problems
SECTION I
Problem Solving and Decision Making
CHAPTER 1
Introduction: What This Book Is About  3
1.1 Using Economics to Solve Problems
1.2 Problem-Solving Principles 4
1.3 Test Yourself 6
1.4 Ethics and Economics 7
1.5 Economics in Job Interviews 9
Summary & Homework Problems 11
End Notes 13
CHAPTER 2
xiii
1
3
The One Lesson of Business  15
2.1 Capitalism and Wealth 16
2.2 Does the Government Create Wealth? 17
2.3 How Economics Is Useful to Business 18
2.4 Wealth Creation in Organizations 21
Summary & Homework Problems 21
End Notes 23
CHAPTER 3
Benefits, Costs, and Decisions
25
3.1 Background: Variable, Fixed, and Total Costs 26
3.2 Background: Accounting versus Economic Profit 27
3.3 Costs Are What You Give Up 29
3.4 Sunk-Cost Fallacy 30
3.5 Hidden-Cost Fallacy 32
3.6 A Final Warning 32
Summary & Homework Problems 33
End Notes 36
CHAPTER 4
Extent (How Much) Decisions 37
4.1 Fixed Costs Are Irrelevant to an Extent Decision
4.2 Marginal Analysis 39
4.3 Deciding between Two Alternatives 40
38
vii
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
viii
CONTENTS
4.4 Incentive Pay 43
4.5 Tie Pay to Performance Measures That Reflect Effort
4.6 Is Incentive Pay Unfair? 45
Summary & Homework Problems 46
End Notes 48
CHAPTER 5
Investment Decisions: Look Ahead and Reason Back 49
5.1 Compoundi …
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