Managerial Economics Flashcards
Say the average price of a new home in Lampard City is $160,000. The local government has just passed new licensing requirements for housing contractors. Based on possible shifts in demand or supply and assuming that the licensing changes do not affect the quality of new houses, which of the following is a reasonable prediction for the average price of a new home in the future?
a.$140,000
b.$150,000
c.$160,000
d.$170,000
d.$170,000
Give the shape of the supply curve when price elasticity of supply is perfectly inelastic:
Vertical
the higher the discount rate, the ________LOWER/HIGHER the present value of the future cash flows.
Lower
Income elasticity, cross-price elasticity, and advertising elasticity are measures of how changes in these other factors affect demand. (True or False)
True
As price increases, demand becomes more elastic (True or False)
True
Suppose a recent and widely circulated medical article has reported new benefits of cycling for exercise. Simultaneously, the price of the parts needed to make bikes falls. If the change in supply is greater than the change in demand, the price will _________ and the quantity will _________.
a.rise, rise
b.rise, fall
c.fall, rise
d.fall, fall
c.fall, rise
In the (SHORT/LONG) _______ run: fixed are unavoidable and should not be included in the shutdown price
Short
Also known as market demand, which is the total number of units that will be purchased by a group of consumers at a given price.
Aggregate demand
In making investment decisions, choose only projects with a _____________ (POSITIVE/NEGATIVE) NPV.
Positive
Always remember the business maxim “look ahead and ___________.” This can help you avoid potential hold up.
Reason back
If you shut down, you lose your revenue, but you get back your __________ cost
Avoidable
Projects with negative NPV may create _________ profits, but not _____________ profit.
ACCOUNTING/ECONOMIC
ECONOMIC/ACCOUNTING
ACCOUNTING/ECONOMIC
A market has a 1) product, 2) geographic, and 3) time dimension. (True or False)
True
Total cost (fixed and variable) divided by total units produced.
Average cost (AC)
The additional cost incurred by producing and selling one more unit.
Marginal cost
The additional revenue gained from selling one more unit.
Marginal revenue
MR > MC
Produce more, reduce price
MR < MC
Produce less, increase price
MR = MC
Profits are maximized
Higher discount rate means dollars today are value comparatively more relative to future dollars. (True or False)
True
If price changes, quantity demanded increases or decreases (represented by a movement along the demand curve). (True or False)
True
WH Smith has recently reduced the price of its Kobo Mini Ereader from £60 to £40. They predict that sales of the E-reader will increase from 15,000 units a month to 25,000 a month.
What is the price elasticity of demand for this price change for the Kobo Mini-reader?
- % change in price = -33% % change in demand = +66% Coefficient of PED = 2 I.e. demand is price elastic
FV (1+ i) – n
Present Value of a lumpsum
PV (1 + I ) n
Future Value of a lumpsum
PMT [( 1- (1+i) –n]/i
Present Value of an ordinary Annuity
PMT [(1+ i)n – 1]/ i
Future Vaue of an ordinary Annuity
What is the net present value 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%.
$11.57
(50/(1.1)^1) + (80/(1.1)^2)
= 111.57 - 100
= 11.57
What is the net present value 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%.
$11.57
(50/(1.1)^1) + (80/(1.1)^2) = 111.57 - 100 = 11.57
If a factor other than price changes, we say that demand curve increases or decreases (a shift of demand curve). (True or False)
True
Demand for brands is less elastic than industry demand.(True or False)
False
You expect to sell 500 cell phones a month, which have an MC of $50. If your fixed costs are $5,000 per month, what is the break-even price?
BEP = (FC/Q) + MC
= (5,000/500) + 50
= 10 + 50
= 60
Describes how many units an individual will purchase at a given price.
Individual demand
Wealth-creating transactions occur when individuals with low discount rates (rate at which they value future vs. current dollars) lend to those with _______(HIGH/LOW) discount rates.
High
Amount you need to sell to just cover your costs
Break-even quantity
Formula for the break-even quantity.
Q = FC/(P - MC)
Formula for the contribution margin.
(P - MC)
Fixed costs / Selling price/unit – Variable cost/Unit) or Fixed Cost/Contribution Margin per unit
Break-even point
Common ownership of two firms in separate stages of the vertical supply chain that connects raw materials to finished goods
Vertical integration
Products with many complements have less elastic demand. (Ture or False)
True
One possible solution to post-investment hold-up is _______ (vertical/horizontal) integration.
Vertical
If average avoidable cost is ____(LESS/MORE) than price, shut down.
More
The increase in the efficiency of production due to the increase in size, output or activity level.
Economies of scale
The reduction in the average cost per unit, by increasing the variety of products produced.
Economies of scope
States that as you expand output, your marginal productivity (the extra output associated with extra inputs) eventually declines.
Law of diminishing marginal returns
Arise when more workers, or any variable input, must share a fixed amount of a complementary input
Bottlenecks
Average costs are constant with respect to output,
Constant returns to scale
Average costs rise with output,
Diseconomies of scale
When you produce more, you learn from the experience so that you produce at a lower cost in the future. Current cost lowers future cost
Learning curve
When the cost of producing two products together is higher than the cost of separate production.
Diseconomies of scope
A period in which all the inputs in production and the cost of production could be altered.
Long-run
Calculate the percentage increase / decrease in revenue for the following questions and why revenue did what it did:
1) Iris sets up a lemonade stall, one day she sells 43 glasses of lemonade at a price of 20p each. The next day she raises the price to 50p but only manages to sell 26 glasses.
+51.2%
Revenue pre price change:
P20 × 43 = P860
Revenue post price change:
P50 × 26 = P1300
% change (((1300/860) -1) × 100) = +51.2%
Revenue rose because when the price rose, demand fell less than proportionally.
Competition between market makers will force the bid-ask spread down to the cost of making a market. (True or False)
True
Calculate the percentage increase / decrease in revenue for the following questions and why revenue did what it did:
2) Nintendo have seen falling sales of their new console as a result they reduce the price of the console from £400 to £320. Subsequently, sales increase from 500,000 to 550,000.
-12%
Revenue pre price change:
£400 × 500,000 = £200m
Revenue post price change:
£320 × 550,000 = 176m
(((176/200) -1) × 100) = -12%
Price fell and demand rose less than proportionally, therefore revenue fell.
Reduce price (increase quantity) if MR > MC.(True or False)
True
Suppose there are nine sellers and nine buyers in a competitive market, each willing to buy or sell one unit of a good, with values {$10, $9, $8, $7, $6, $5, $4, $3, $2}. Assuming there are no transactions costs, what is the equilibrium price in this market?
a.$5
b.$6
c.$7
d.$8
b. $6
Avoidable costs can be recovered by shutting down. If the benefits of shutting down (you recover your avoidable costs) are larger than the costs (you forgo revenue), then shut down. The __________is average avoidable cost.
Break-even price
In the long run, demand becomes more elastic. (True or False)
True
Break-even quantity is a point where the contribution margin is equal to fixed cost.
True
Measures the responsiveness of the consumer demanded for one good for a change in price of another good.
XED; Cross-price elasticity of demand.
XED +
Positive cross-price elasticity. Substitute
XED -
Negative cross-price elasticity. Complementary
Functions that relate the price of a product to the quantity demanded by consumers.
Demand curves
MR > 0
Total revenue will increase if you sell one more.
MR > MC
Total profit will increase if you sell one more.
Price elasticity of demand equation
[(Q1 - Q2)/(Q1 + Q2)] * [(P1 - P2)/(P1 + P2)]
1/|e| means
Inverse elasticity
Measures the change in demand arising from a change in income.
Income elasticity
A proposed price increase is not profitable if the predicted quantity loss is less than the stay-even quantity. (True or False)
False
If average cost falls with output, then you have increasing returns to scale.
True
All investments represent a _________ between possible future gain and current sacrifice.
Trade-off
Projects with a positive NPV create ______profit.
Economic
Describe the behavior of sellers and tell you how much will be sold at a given price.
Supply curves
If a factor other than price (like income) changes, we say that demand curve increases or decreases.
A shift of a demand curve.\
The price at which quantity supplied equals quantity demanded.
Market equilibrium
Are a primary way that market participants communicate with one another
Prices
Something that affects demand that a company cannot control.
Uncontrollable factor
Something that affects demand that a company can control
Controllable factor
What is the slope of the supply curve if the higher the price, the higher the quantity supplied
Upward
In the __________(LONG-RUN/SHORT-RUN) fixed costs become avoidable so they are included
in the shutdown price
Long-run
__________ helps you figure out if future gains are larger than current sacrifice
Discounting
The future value of a series of equal cash flows received at equal intervals throughout the investment horizon.
Future Value of an Annuity
Inverse of compounding
Discounting
(future value, k periods in the future) /(1 + r)k
Present Value
The present value of a finite series of equal cash flows received on the last day of equal intervals throughout the investment horizon.
Present Value of Annuity
%ΔQ = (%ΔP)/(%ΔP + margin) or
%ΔQ = (%ΔP)/(%ΔP + P-MC/P) is the formula for
Stay-even quantity
Products with close substitutes (or distant complements) have more elastic demand. (True or False)
True
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.
c.A decrease in the supply of the product.
To get from present value to future value
Compounding
Figure out whether future benefits are more than current costs.
Discounting
Discount rate that sets NPV = 0
Internal rate of return
Sell more than break-even quantity, it is profitable (True or False)
True
Quantity that led to zero profit
Break-even quantity
VC > FC
Profit making
VC < FC
Loss making
Consumer purchases more as price falls.
Law of demand
A decision-making tool used to examine the additional benefit of an activity and the extra cost incurred.
Marginal analysis
Quantity changes more than price.
Elastic demand
Quantity changes less than price
Inelastic demand
Price elasticity is always positive. (True or False)
False
Change in price has no effect in quantity
Perfectly inelastic
Quantity is sensitive to a change in price.
Inelastic demand
Change in quantity is equal to a change in price.
Unit elastic demand
Quantity is insensitive to a change in price.
Elastic demand
Cannot change price or no one else will buy.
Perfectly elastic
Diminishing marginal productivity implies decreasing marginal cost. (True or False)
False
Increasing marginal cost eventually lead to increasing average costs. (True or False)
True
Adding an additional factor of production results in smaller increases in output. (True or False)
True
Sellers must compete with one another to sell to buyers.
Perfect competition
Refers to the changes in price lead to changes in quantity demand.
Movement along the demand curve.
The only one factor that affects demand.
Price
Describes the behavior of sellers.
Supply curve
Describes the behavior of the buyers.
Demand curve
The only way to represent a change in a third variable in the graph is with the shift of the demand curve. (True or False)
True
Quantity demanded is greater than quantity suppled.
Excess demand
Quantity supplied is greater than quantity demanded.
Excess supply
Changes in market that is easy to predict.
Qualitative changes
Changes in the market that is difficult to predict.
Quantitative changes
If price changes, quantity demanded increases or decreases. (True or False)
True
High prices tell buyers to buy more. (True or False)
False
High prices then sellers to increase supply. (True or False)
True
