Midterm Flashcards
Microeconomics studies the allocation of:
a. decision-makers.
b. scarce resources.
c. models.
d. unlimited resources.
b. scarce resources.
Managerial economics
a. describes how to pay for managers is set.
b. ensures managers always make good decisions.
c. helps managers make decisions in the face of scarcity.
d. explains which products consumers will buy.
c. helps managers make decisions in the face of scarcity.
Microeconomic models are used to
a. make predictions.
b. explain real-life phenomena.
c. evaluate production alternatives.
d. All of the above.
d. All of the above.
Managerial Economics as a specialized branch of Economics
a. Provide ready-made solutions to business problems
b. Provide logic and methodology to find solutions to business problems
c. provide alternative answers to specific business problems.
d. Provide a theoretical background to analyze business problems
b. Provide logic and methodology to find solutions to business problems
Managerial economics generally refers to the integration of economic theory with business
a. Management
b. All of the above
c. Practice
d. Ethics
c. Practice
A managerial decision is not profitable if
a. it increases some revenues more than it decreases others.
b. it increases revenue more than costs.
c. it decreases some cost more than it increases others.
d. it increases costs more than revenue
d. it increases costs more than revenue
According to the profit-maximization goal, the firm should attempt to maximize short-run profits since there is too much uncertainty associated with long-run profits.
a. False
b. True
a. False
Managerial economics is best defined as the economic study of:
a. how businesses can decide on the best use of scarce resources.
b. how businesses can sell the most products.
c. how businesses can make the most profits.
d. how businesses can operate at the lowest costs.
a. how businesses can decide on the best use of scarce resources.
Managerial economics:
a. explains which products consumers will buy.
b. helps managers make decisions in the face of scarcity.
c. ensures managers always make good decisions.
d. describes how pay for managers is set.
b. helps managers make decisions in the face of scarcity.
Microeconomics includes the study of the;
a. aggregate effects on the national economy.
b. nationwide unemployment rate.
c. recessions and inflation in the global economy.
d. choices made by individuals and businesses.
e. reasons why the government changes interest rates.
d. choices made by individuals and businesses.
The form of economics most relevant to managerial decision-making within the firm is:
a. welfare economics
b. macroeconomics
c. microeconomics
d. free-enterprise economics
c. microeconomics
CEOs should focus on
a. minimizing costs.
b. beating their competitors.
c. maximizing firm profits.
d. getting the best pay package for the senior management team.
c. maximizing firm profits
Golda Rush quit her job as a manager for Home Depot to start her own hairdressing salon, Goldilocks. She gave up a salary of $40,000 per year, invested her savings of $30,000 (which was earning 5 percent interest) and borrowed $10,000 from a close friend, agreeing to pay 5 percent interest per year. In her first year, Golda spent $18,000 to rent a salon, hired a part-time assistant for $12,000 and incurred another $15,000 on equipment and hairdressing material. Based on this information, what is the amount of her explicit costs?
a. $45,000
b. $45,500
c. $47,000
d. $87,000
b. $45,500
Economic costs include implicit costs but not explicit costs.
a. True
b. False
b. False
Table 12-1
Quantity Total Cost Variable Cost
(dollars) (dollars)
0 $1,000 $0
100 1,360 360
200 1,560 560
300 1,960 960
400 2,760 1,760
500 4,000 3,000
600 5,800 4,800
Table 12-1 shows the short-run cost data of a perfectly competitive firm that produces plastic camera cases. Assume that output can only be increased in batches of 100 units.
Refer to Table 12-1. What is the fixed cost of production?
a. $0
b. $500
c. $1,000
d. It cannot be determined.
c. $1,000
Table 12-1
Quantity Total Cost Variable Cost
(dollars) (dollars)
0 $1,000 $0
100 1,360 360
200 1,560 560
300 1,960 960
400 2,760 1,760
500 4,000 3,000
600 5,800 4,800
Refer to Table 12-1. If the market price of each camera case is $8, what is the profit-maximizing quantity?
a. 300 units
b. 400 units
c. 500 units
d. 600 units
b. 400 units
Table 12-1
Quantity Total Cost Variable Cost
(dollars) (dollars)
0 $1,000 $0
100 1,360 360
200 1,560 560
300 1,960 960
400 2,760 1,760
500 4,000 3,000
600 5,800 4,800
Refer to Table 12-1. If the market price of each camera case is $8, what is the firm’s total revenue?
a. $2,400
b. $3,200
c. $4000
d. $4,800
b. $3,200
Table 12-1
Quantity Total Cost Variable Cost
(dollars) (dollars)
0 $1,000 $0
100 1,360 360
200 1,560 560
300 1,960 960
400 2,760 1,760
500 4,000 3,000
600 5,800 4,800
Refer to Table 12-1. If the market price of each camera case is $8 and the firm maximizes profit, what is the amount of the firm’s profit or loss?
a. $0 (it breaks even)
b. loss of $1,000
c. profit of $440
d. loss of $440
c. profit of $440
Table 12-1
Quantity Total Cost Variable Cost
(dollars) (dollars)
0 $1,000 $0
100 1,360 360
200 1,560 560
300 1,960 960
400 2,760 1,760
500 4,000 3,000
600 5,800 4,800
Refer to Table 12-1. Suppose the fixed cost of production rises by $500 and the price per unit is still $8. What happens to the firm’s profit-maximizing output level?
a. It must fall.
b. It must rise to offset the increased cost.
c. It will remain the same.
d. The firm will shut down.
c. It will remain the same.
Table 12-1
Quantity Total Cost Variable Cost
(dollars) (dollars)
0 $1,000 $0
100 1,360 360
200 1,560 560
300 1,960 960
400 2,760 1,760
500 4,000 3,000
600 5,800 4,800
Refer to Table 12-1. The firm will not produce in the short run if the output price falls below
a. $8.
b. $4.
c. $3.20.
d. $2.80.
d. $2.80
Golda Rush quit her job as a manager for Home Depot to start her own hairdressing salon, Goldilocks. She gave up a salary of $40,000 per year, invested her savings of $30,000 (which was earning 5 percent interest) and borrowed $10,000 from a close friend, agreeing to pay 5 percent interest per year. In her first year, Golda spent $18,000 to rent a salon, hired a part-time assistant for $12,000 and incurred another $15,000 on equipment and hairdressing material. Based on this information, what is the amount of her implicit costs?
a. $80,000
b. $41,500
c. $42,000
d. $70,000
b. $41,500
Accounting costs exclude implicit costs.
a. True
b. False
a. True
Adam spent $10,000 on new equipment for his small business, “Adam’s Fitness Studio.” Membership at his fitness center is very low and at this rate, Adam needs an additional $12,000 per year to keep his studio open. Which of the following is true?
a. The variable cost of running the studio is $22,000.
b. The $10,000 Adam spent on equipment is the total cost of starting the business and the $12,000 he’ll need to continue operations is a marginal cost.
c. The fixed cost of running the studio is $22,000.
d. The $10,000 Adam spent on equipment is a fixed cost of business and the $12,000 he’ll need to continue operations is a variable cost.
d. The $10,000 Adam spent on equipment is a fixed cost of business and the $12,000 he’ll need to continue operations is a variable cost.
Table 11-7
Quantity Fixed Cost Variable Total Average
of (dollars) Cost Cost Total Cost
Lanterns (dollars) (dollars) (dollars)
75 200 170 370 4.93
80 200 230 430 5.36
90 200 7.67
100 200 810
115 200 11.8
117 200 1264 1464 12.5
120 200 1480
Table 11-7 shows cost data for Lotus Lanterns, a producer of whimsical night lights.
Refer to Table 11-7. What is the variable cost of production when the firm produces 115 lanterns?
a. $956
b. $1,157
c. $10.05
d. $1,556
b. $1,157
Table 11-7
Quantity Fixed Cost Variable Total Average
of (dollars) Cost Cost Total Cost
Lanterns (dollars) (dollars) (dollars)
75 200 170 370 4.93
80 200 230 430 5.36
90 200 7.67
100 200 810
115 200 1157 1357 11.8
117 200 1264 1464 12.5
120 200 1480
Table 11-7 shows cost data for Lotus Lanterns, a producer of whimsical night lights.
Refer to Table 11-7. What is the average total cost of production when the firm produces 120 lanterns?
a. $72
b. $1,680
c. $12.3
d. $14
d. $14
Table 11-7
Quantity Fixed Cost Variable Total Average
of (dollars) Cost Cost Total Cost
Lanterns (dollars) (dollars) (dollars)
75 200 170 370 4.93
80 200 230 430 5.36
90 200 7.67
100 200 810
115 200 1157 1357 11.8
117 200 1264 1464 12.5
120 200 1480 1680 14
Table 11-7 shows cost data for Lotus Lanterns, a producer of whimsical night lights.
Refer to Table 11-7. What is the average variable cost per unit of production when the firm produces 90 lanterns?
a. $490
b. $7.67
c. $33.67
d. $5.44
d. $5.44
Table 11-7
Quantity Fixed Cost Variable Total Average
of (dollars) Cost Cost Total Cost
Lanterns (dollars) (dollars) (dollars)
75 200 170 370 4.93
80 200 230 430 5.36
90 200 490 690 7.67
100 200 810 1010 10.01
115 200 1157 1357 11.8
117 200 1264 1464 12.5
120 200 1480 1680 14
Table 11-7 shows cost data for Lotus Lanterns, a producer of whimsical night lights.
Refer to Table 11-7. What is the marginal cost per unit of production when the firm produces 100 lanterns?
a. $8.1
b. $11.1
c. $420
d. $32
d. $32
Unlike an accountant, an economist measures costs on a(n) ________ basis.
a. explicit
b. replacement
c. conservative
d. historical
b. replacement
When an economist uses the term “cost” referring to a firm, the economist refers to the
a. cost that can be actually verified and measured.
b. explicit cost of producing a good or service but not the implicit cost of producing a good or service.
c. implicit cost of producing a good or service but not the explicit cost of producing a good or service.
d. the opportunity cost of producing a good or service, which includes both implicit and explicit costs.
e. price of the good to the consumer.
d. the opportunity cost of producing a good or service, which includes both implicit and explicit costs.
Accounting costs
a. usually include implicit costs.
b. usually include normal profits.
c. are replacements costs.
d. are historical costs.
d. are historical costs
A firm earns a normal profit when its total revenues just offset both the ________ cost and ________ cost.
a. accounting; replacement
b. explicit; accounting
c. accounting; opportunity
d. historical; replacement
c. accounting; opportunity
If Melissa owns a software company that incurs no fixed costs, then
a. her marginal cost must equal zero.
b. her total cost equals her total variable cost.
c. she will earn an economic profit.
d. her total variable cost is less than her total cost.
e. her total cost equals zero.
b. her total cost equals her total variable costs
In the short run, a firm cannot change the amount of capital it uses. Therefore the cost of capital is a
a. fixed cost.
b. marginal cost.
c. variable cost.
d. short-run cost.
e. productivity cost.
a. fixed cost
Because the amount of labor a firm employs can be changed, the cost of labor is known as
a. variable cost.
b. an unavoidable cost.
c. fixed cost.
d. minimum cost.
e. maximum c
a. variable cost
Marginal cost equals
a. the change in fixed cost that results from a one-unit increase in output.
b. total cost minus total variable cost.
c. total variable cost divided by total output.
d. total fixed cost divided by total output.
e. the change in total cost that results from a one-unit increase in output.
e. the change in total cost that results from a one-unit increase in output.
Lauren runs a chili restaurant in San Francisco. Her total revenue last year was $110,000. The rent on her restaurant was $48,000, her labor costs were $42,000, and her materials, food and other variable costs were $20,000. Lauren could have worked as a biologist and earned $50,000 per year. An economist calculates her implicit costs as
a. $50,000.
b. $110,000.
c. $63,000.
d. $150,000.
e. $0 because Lauren did not work as a biologist.
a. $50,000
A factor of production that can be easily changed in the relevant time period is called a:
a. variable input.
b. fixed input.
c. substitution input.
d. temporary input.
a. variable input.
If an increase in income leads to an increase in the demand for peanut butter, then peanut butter is
a. a neutral good.
b. a normal good.
c. a necessity.
d. a compliment.
b. a normal good
Elvira decreased her consumption of bananas when the price of peanut butter increased. For Elvira, peanut butter and bananas are
a. substitutes in consumption.
b. both inferior goods.
c. complements in consumption.
d. both luxury goods.
c. complements in consumption
A change in which variable will change the market demand for a product?
a. the price of the product
b. population
c. technology
d. the prices of substitutes in production
b. population
Suppose the value of the price elasticity of demand is -3. What does this mean?
a. A 1% increase in the price of the good causes the quantity demanded to increase by 3%.
b. A 1% increase in the price of the good causes quantity demanded to decrease by 3%.
c. A 3% increase in the price of the good causes quantity demanded to decrease by 1%.
d. A $1 increase in price causes quantity demanded to fall by 3 units.
b. a 1% increase in the price of the good causes quantity demanded to decrease by 3%.
If the cross-price elasticity of demand for computers and software is negative, this means the two goods are
a. substitutes.
b. complements.
c. inferior.
d. normal.
b. complements
Economists estimated that the price elasticity of beer is -0.30 and the income elasticity of beer is 0.09. This means that
a. an increase in the price of beer will increase the quantity demanded of beer and beer is a normal good.
b. an increase in the price of beer will lead to an increase in revenue for beer sellers and beer is a normal good.
c. a decrease in the price of beer will lead to an increase in revenue for beer sellers and beer is an inferior good.
d. an increase in the price of beer will lead to a decrease in the quantity demanded of beer and beer is a necessity.
b. an increase in the price of beer will lead to an increase in revenue for beer sellers and beer is a normal good.
Which of the following statements about the price elasticity of demand is correct?
a. The elasticity of demand for a good, in general, is equal to the elasticity of demand for a specific brand of the good.
b. The absolute value of the elasticity of demand ranges from zero to one.
c. Demand is more elastic in the long run than it is in the short run.
d. Demand is more elastic the smaller the percentage of the consumer’s budget the item takes up.
c. Demand is more elastic in the long run than it is in the short run.
Third-degree price discrimination exists whenever:
a. the seller knows exactly how much each a potential customer is willing to pay and will charge accordingly.
b. different prices are charged by blocks of services.
c. the seller can separate markets by geography, income, age, etc., and charge different prices to these different groups.
d. the seller will bargain with buyers in each of the markets to obtain the best possible price.
c. the seller can separate markets by geography, income, age, etc., and charge different prices to these different groups.
Charging a different price for tickets to movies at twilight than after 6 o’clock is an example of bundling.
a. True
b. False
b. False
Explanation: This does not group units. It is an example of third-degree price discrimination, however.
Suppose a used-car salesman asks you the most you would be able to pay for a car and, unthinkingly, you answer truthfully, $4,800. Suppose, amazingly, that $4,800 is exactly the price for the car that you are presently examining. Then, the used-car salesman has effectively used perfect price discrimination on you.
a. True
b. False
a. True
A sale on men’s slacks at T.J. Maxx, where if you buy the first pair at full price, you can buy the second pair at half price, is an example of differential pricing.
a. True
b. False
a. True
If an increase in income leads to a decrease in the demand for popcorn, then popcorn is
a. a necessity
b. a normal good.
c. a neutral good.
d. an inferior good.
d. an inferior good
Tomas increased his consumption of potato chips when the price of pistachios increased. For Tomas, potato chips and pistachios are
a. both luxury goods.
b. complements in consumption.
c. substitutes in consumption.
d. both inferior goods.
c. substitutes in consumption
The price elasticity of demand for Stork ice cream is -4. Suppose you’re told that following a price increase, the quantity demanded fell by 10 percent. What was the percentage change in price that brought about this change in quantity demanded?
a. 25 percent
b. 40 percent
c. 2.5 percent
d. 0.4 percent
c. 2.5 percent
Price Elasticity of Demand = %∆Q / %∆P
-4=-10/%∆P
%∆P=-10/-4=2.5
Consider the following pairs of items:
a. shampoo and conditioner
b. iPhones and earbuds
c. a laptop computer and a desktop computer
d. beef and pork
e. air-travel and weed killer
Which of the pairs listed will have a negative cross-price elasticity?
Select one:
a. c and d only
b. a and b only
c. a, b, and c only
d. e onlyb. a and b only
Explanation: When the cross elasticity of demand between two goods is negative then these goods are known as complementary goods. In the above case shampoo and conditioner, iPhones and earbuds are an example of complementary goods.
If a 5 percent increase in income leads to a 10 percent increase in quantity demanded for airline travel, then airline travel is
a. a necessity.
b. a substitute for another good.
c. a luxury.
d. an inferior good.
c. a luxury
The demand for gasoline in the short run is
a. unit-elastic because people tend to consume a
stable amount of gasoline per period.
b. elastic because people can easily switch to
public transportation.
c. inelastic because there are no good substitutes
for gasoline.
d. perfectly inelastic because people have no
choice but to buy gasoline.
c. inelastic because there are no good substitutes for gasoline.
For a price discriminating airline, if the demand for business travelers were to expand, a proactive price discriminator would expand the number of seat assignments to business travelers and likely raise business traveler ticket prices.
a. True
b. It is neither false nor true
c. False
d. It could be true or false
a. True
A restaurant in an isolated spot on the coast of Maine sells only complete meals at a fixed price (called prix fixe), with the opportunity to select à la carte choices. Which type of price discrimination is being practiced?
a. two-part tariffs
b. bundling
c. universal access
d. first-degree price discrimination
b. bundling
Selling tickets in the orchestra region of the Metropolitan Opera for $55 and selling tickets in the upper balcony for $28 to listen to Luciano Pavoratti describes which type of price discrimination?
Select one:
a. This is not necessarily pricing discrimination
b. bundling
c. third-degree price discrimination
d. first-degree price discrimination
c. third-degree price discrimination
If an economist says that firm practices price discrimination, that firm is:
a. Charging different prices for the same good or
service.
b. Exploiting the poor.
c. Producing two products, one with decreasing
returns to scale and the other with increasing
returns
d. Making great efforts to keep its costs as low as
possible.
a. Charging different prices for the same good or service.
Vacation tours to Europe invariably package visits to disparate regions: cities, mountains, and the seaside. Bundling, a type of second-degree price discrimination, is most profitable when:
a. preference for the seaside is always higher than
preferences for city excursions
b. a preference for cities is always higher than
preferences for mountain vistas.
c. preference rankings of vacationers traveling
together are positively correlated.
d. the preference rankings of vacationers traveling
together are negatively correlated.
d. the preference rankings of vacationers traveling together are negatively correlated.
Charging a different price for tickets to movies at twilight than after 6 o’clock is an example of bundling.
a. It can be true or false
b. It is impossible to determine the validity of the
statement based on the given information.
c. True
d. False
d. False
Suppose a used-car salesman asks you the most you would be able to pay for a car and, unthinkingly, you answer truthfully, $4,800. Suppose, amazingly, that $4,800 is exactly the price for the car that you are presently examining. Then, the used-car salesman has effectively used perfect price discrimination on you.
a. True
b. False
c. The validity of the statement cannot be
determined based on the given information.
d. The statement is neither true nor false
a. True
A sale on men’s slacks at T.J. Maxx, where if you buy the first pair at full price, you can buy the second pair at half price, is an example of differential pricing.
a. True
b. False
c. The statement can be either true or false
d. The validity of the statement cannot be
determined based on the given information.
a. True
Which of the statements about price discrimination is (are) false?
a. Public utilities practice first-degree price
discrimination.
b. It must be possible to segment the market.
c. It must be difficult to transfer the seller’s product
from one market segment to another.
d. There must be differences in the elasticity of
demand from one segment to another.
a. Public utilities practice first-degree price discrimination.
Suppose that when the price of strawberries decreases, Simone increases her purchase of whipped cream. To Simone
a. strawberries and whipped cream are
complements.
b. strawberries are a normal good and whipped
cream is an inferior good.
c. strawberries and whipped cream are normal
goods.
d. strawberries and whipped cream and substitutes.
a. strawberries and whipped cream are complements.
If the price of music downloads was to decrease, then
a. the demand for MP3 players would decrease.
b. the demand for MP3 players would increase.
c. the quantity demanded of MP3 players would
decrease.
d. the supply of MP3 players would increase.
b. the demand for MP3 players would increase.
A change in all of the following variables will change the market demand for a product except
a. tastes.
b. population and demographics.
c. the price of the product.
d. income.
c. the price of the product.
If the percentage increase in price is 15 percent and the value of the price elasticity of demand is -3, then quantity demanded
a. will decrease by 5 percent.
b. will increase by 5 percent.
c. will increase by 45 percent.
d. will decrease by 45 percent.
d. will decrease by 45 percent
Elasticity = % ∆ in quantity demanded ÷ % ∆ in price
-3 = % ∆ in quantity demanded / 15%
% ∆ in quantity demanded = -45%
Linesha, a college student working part-time receives a wage increase. An avid movie buff, she increased her purchases of Blu-ray discs and reduced her purchases of DVDs. Based on this information
a. DVDs and Blu-ray discs are substitutes.
b. DVDs and Blu-ray discs are normal goods.
c. the cross-price elasticity between DVDs and Blu-
ray discs are negative.
d. Blu-ray discs are normal goods and DVDs are
inferior goods.
d. Blu-ray discs are normal goods and DVDs are inferior goods.
Last year, Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was $30,000. This year, his household income fell to $20,000 and Sefton purchased 80 pounds of potatoes. All else constant, Sefton’s income elasticity of demand for potatoes is
a. negative, so Sefton considers potatoes to be a
normal good.
b. positive, so Sefton considers potatoes to be an
inferior good.
c. negative, so Sefton considers potatoes to be an
inferior good.
d. positive, so Sefton considers potatoes to be a
normal good and a necessity.
c. negative, so Sefton considers potatoes to be an inferior good.
If the price of steel increases drastically, the quantity of steel demanded by the building industry will fall significantly over the long run because
a. buyers of steel are less sensitive to a price
change if they have more time to adjust to the
price change.
b. sales revenue in the building industry will fall
sharply.
c. buyers of steel are more sensitive to a price
change if they have more time to adjust to the
price change.
d. profits will fall by a greater amount in the long run
than in the short run.
c. buyers of steel are more sensitive to a price change if they have more time to adjust to the price change.
Some electric utilities offer one rate to commercial users and a different rate to residential users. This is an example of:
a. bundling
b. peak-load pricing
c. third-degree price discrimination
d. universal access pricing
c. third-degree price discrimination
First (Perfect) degree price discrimination means that a firm charge:
a. Different prices to people of different racial or
ethnic backgrounds.
b. Different prices to different groups of buyers.
c. The maximum amount that buyers are willing to
pay for each unit.
d. One single price—the maximum possible—to all
of its buyers.
c. The maximum amount that buyers are willing to pay for each unit.
If a firm charges customers $200 per unit of the first unit purchased and $160 per unit for each additional unit purchased in excess of one unit. Then, what is the economic term of this strategy?
a. Second-degree price discrimination
b. Third -degree price discrimination
c. First-degree price discrimination
d. Profit maximization pricing
a. Second-degree price discrimination
