ECON 10544 - One lesson of business

Multiple Choice Questions

1. One lesson of business:?

	a.	?is tracing the consequences of a policy.
	b.	?promoting a policy change to eradicate inefficiencies.
	c.	?moving assets from lower to higher value uses, thereby creating wealth.
	d.	?None of the above

2. A price ceiling can often be viewed as:?

	a.	?the government setting price above market equilibrium price.
	b.	?an implicit tax on producers and an implicit subsidy to consumers.
	c.	?the government setting price below market equilibrium price.
	d.	?Both b and c.

3. ?A business incurs the following costs per unit: Labor $5/unit; Materials $3/unit and rent $5000/month. If the firm produces 1000 units a month, the total variable costs equals:

	a.	?$5,000
	b.	?$8,000
	c.	?$13,000
	d.	?$10,000

4. After graduating from college, Jim had two choices. He can either move to Florida, from Philadelphia, where he can work as an analyst and earn $60,000 or he can stay in Philadelphia and work in a car dealership earning $59,000. His opportunity cost of moving to Florida includes:

	a.	?The benefits he could have received from playing soccer
	b.	?$59,000
	c.	?both a and b
	d.	?none of the above

5. ?A manager invests $20,000 in equipment that would help the company reduce it’s per unit costs from $15 to $12. He expects the equipment to be in use for the next seven years. After two years, he realizes that if he outsourced the production, the unit cost would be $7 instead. At this point what should the senior manager do?

	a.	?Charge the manager for the next five years of depreciation
	b.	?Write off the equipment as sunk cost and allow for outsourcing since it is cheaper
	c.	?Not allow for outsourcing since the equipment is good for another five years
	d.	?None of the above

6. If a firm produces 8 units of output with average fixed cost=$40 and average variable cost=$25, what is its total cost?

	a.	?$200
	b.	?$1,000
	c.	?$520
	d.	?$320

7. At the current level of production, if the firm’s MR>MC, then the firm should?:

	a.	?produce more
	b.	?the company is maximizing profit at this output
	c.	?producing less
	d.	?None of the above

8. ?A publisher is deciding whether or not to invest in a new printer. The printer would cost $500, and it would increase cash flows by $600 for the next two years. What is the present value of the cash flows from the investment?

	a.	?$1100
	b.	?$541
	c.	?$600
	d.	?$1041

9.A firm sells 1000 units per week. It charges $70 per unit, the average variable costs are $25, and the average costs are $65. In the long run, the firm should

	a.	?Shut down since price is greater than average cost
	b.	?Continue operating price is higher than average cost, its making a profit
	c.	?Continue operating as the firm is covering all the variable costs and some of the fixed costs
	d.	?Shut-down because it is cost effective to pay off the remaining fixed costs

10. ?Jim saw a decrease in the quantity demanded for his firm’s product from 8000 to 6000 units a week when he raised the price of the product from $200 to $250. What is Jim’s own price elasticity of demand?

	a.	?1.29
	b.	?1
	c.	?0.25
	d.	?0.78

11. ?If potatoes are inferior goods, which of the following will increase the demand for potatoes?

	a.	?Increase in the price of a complement
	b.	?Decrease in income
	c.	?Decrease in the price of a substitute
	d.	?Increase in income

12. A research firm’s findings concluded that the demand for movie tickets is price elastic in the afternoon but inelastic in the evenings. Given this information, to increase overall revenue the theatre owners should:

	a.	?Reduce the ticket prices for the afternoon shows and reduce the ticket prices for the evening shows
	b.	?Increase the ticket prices for the afternoon shows and reduce the ticket prices for the evening shows
	c.	?Reduce the ticket prices for the afternoon shows and increase the ticket prices for the evening shows
	d.	?Increase the ticket prices for the afternoon shows and increase the ticket prices for the evening shows

13. ?If your income goes up by 2% and, in response, the quantity demanded of good x rises by 3%, good x can be considered:

	a.	?An inferior good
	b.	?A normal good
	c.	?A public good
	d.	?A private good

14. Diminishing marginal productivity can occur due to the following reason(s)?:

	a.	?the difficulty of monitoring and motivating larger workforces
	b.	?the increasing complexity of larger systems
	c.	?the “fixity” or permanence of some factor of production
	d.	?all of the above

15. Eddys’ Electronics found that instead of producing a dvd player and a gaming system separately, it is cheaper to incorporate dvd playing capabilities in their new version of the gaming system. Eddy’s is taking advantage of:

	a.	?Economies of Scale
	b.	?Learning curve
	c.	?Economies of Scope
	d.	?Decreasing marginal costs

16. ?If movie theatres decided to increase the price for the movie tickets, holding other factors constant, what would happen to the demand for popcorn in the theatres?

	a.	?the demand for popcorn would shift to the left because popcorn and movies are substitute goods.
	b.	?the demand for popcorn would shift to the left because popcorn and movies are complementary goods.
	c.	?the demand for popcorn would shift to the right because popcorn and movies are substitute goods.
	d.	?the demand for popcorn would shift to the right because popcorn and movies are complementary goods.

17. A recent medical study reports new benefits of cycling. Simultaneously, the price of the parts needed to make bikes falls. The demand curve would _________ and the supply curve would__________

	a.	?Shift to the right, shift to the left
	b.	?shift to the left, shift to the right
	c.	?shift to the left, shift to the left
	d.	?shift to the right, shift to the right

18. In the 1990s, many people had rising incomes. At the same time, there was a rise in the cost of lumber. This would cause the demand for houses to _________ and the supply for houses to_________.

	a.	?Increase, increase
	b.	?Increase, decrease
	c.	?Decrease, increase
	d.	?Decrease, decrease

19. Competitive firms can earn positive profits in the:

	a.	?Long run only
	b.	?Long run and the short run
	c.	?Short run only
	d.	?All of the above

20. In a monopoly?:

	a.	?the industry has high barriers to entry
	b.	?the industry has high barriers to exit
	c.	?the industry has high barriers to entry and exit
	d.	?the industry has no barriers to entry or exit

21. ?Which of the following can a firm use to reduce competition in the market?

	a.	?Locking in customers to long term contracts
	b.	?Seek an exclusive government contract
	c.	?Acquire patents
	d.	?All the above

22. ?Holding other things constant, an appreciation of the US Dollar relative to the Chinese Yuan causes the demand for the Yuan to _____________ and the supply for Yuan to __________.

	a.	?Increase; decrease
	b.	?Increase, increase
	c.	?Decrease; Increase
	d.	?Decrease; Decrease

23. ?An increase in the US demand for British pounds causes:

	a.	?An appreciation of the pound
	b.	?Depreciation of the dollar
	c.	?None of the above
	d.	?Both a and b

24. ?Public transit offers discounted monthly passes to students, which can only be bought and used with valid student IDs. The transit system is using:

	a.	?A direct discrimination scheme
	b.	?An indirect discrimination scheme
	c.	?The Robinson-Patman act
	d.	?None of the above

25. ?Expected values are:

	a.	?Values that you expect from an individual
	b.	?Mean values
	c.	?Weighted average outcomes
	d.	?Both B&C

Individual Problems:

1. Raymond decides to set up a lemonade stand every weekend for the next four weeks to save up for the latest x-men comic. He has to pay his brother Robert $10 as a one time payment for him to not bully Raymond or drive his customers away. The lemons and sugar cost him $10 (the water is free) and his dad offers to set up his stall for him. He ends up making $15 his first weekend. Frank, his father notices this and advises Raymond to shutdown the stall, while Marie his mother advises him not only to set up the stall next weekend but to increase production even more. Raymond is extremely confused. Who do you think he should listen to?

2. Last year, a toy manufacturer introduced a new toy truck that was a huge success. The company invested $2.5 million for a plastic injection molding machine (which can be sold for $2.0 million) and $100,000 in plastic injection molds specifically for the toy (not valuable to anyone else). Labor and the cost of materials necessary to make each truck is about $3. This year, a competitor has developed a similar toy that has significantly reduced demand for the toy truck. Now, the original manufacturer is deciding whether they should continue production of the toy truck. If the estimated demand is 100,000 trucks, what is the break-even price for the toy truck? Should you shut down?

3. The Burrito Barn is considering a price reduction on the Firegut Burrito, which currently sells for the price of $5.00. Giuseppe, the proprietor of Burrito Barn, knows the price elasticity for the Firegut is roughly equal to -2.3 over the range being considered for the price change. The Firegut has been selling at the brisk pace of 500 burritos per week. To increase market share, Giuseppe would like to increase sales to 750 per week. What price should Giuseppe set?

4. Utility companies can use a mix of plants different energy sources to produce electricity, mainly these are coal fired plants but increasingly they relying on gas turbines. Technological improvements in hydraulic fracturing, or “fracking,” have decreased the cost of extracting smaller pockets of natural gas. What affect does fracking have on supply and demand for coal?

5. You are considering launching a strategic alliance with a competitor to join your separate skills to develop a new jointly owned technology. Both you and your partner have the option of fully or partially supporting the alliance. Complete the payoff diagram to make this a Prisoner’s Dilemma.

	You fully support alliance	You partially support alliance
Partner fully supports alliance	You: 100 Partner: 100	You: 150 Partner: 50
Partner partially supports alliance	You: 50 Partner: 150	You: Partner:

Multiple Choice Extra Credit Questions

1. Acquiring a firm that sells a substitute good would make the demand curve for your original product

	a.	?More inelastic
	b.	?More elastic
	c.	?Unchanged
	d.	?None of the above

2. Amusement parks often offer coupons to the local market that are not available to tourists. This is an example of

	a.	?Direct discrimination scheme
	b.	?Indirect discrimination scheme
	c.	?Both of the above
	d.	?None of the above

3. The Nash equilibrium is

	a.	?a pair of strategies, one for each player , in which player A’s strategy is the best response while player B’s is not
	b.	?a pair of strategies, one for each player , in which player B’s strategy is the best response while player A’s is not
	c.	?a pair of strategies, one for each player, in which each player’s strategy is the best response to the other’s
	d.	?a pair of strategies, one for each player, in which neither strategy is a best response

4. Three possibilities have probabilities 0.5, 0.3 and 0.2 and values $10, $20, and $30 respectively. The expected value is:

	a.	?$15
	b.	?$16
	c.	?$17
	d.	?$18

5. All of the following can cause conflict between divisions EXCEPT

	a.	?Coordination between divisions does not benefit all divisions equally
	b.	?managers of profit centers care too little about the effects of their decisions on other divisions
	c.	?corporate executives reward managers based on firm profitability instead of divisional profitability
	d.	?corporate executives cannot tell when one divisional manager's decisions are appropriate or not