Test Bank for Managerial Economics and Strategy, 3rd edition By Jeffrey M. Perloff, James A. Brander

TEST BANK

Test Bank for Managerial Economics and Strategy Todd Fitch Managerial Economics and Strategy Third Edition

Jeff Perloff James Brander

Managerial Economics and Strategy, 3e (Perloff/Brander) Chapter 1 Introduction 1.1 Managerial Decision Making 1) Microeconomics studies the allocation of A) decision makers.

B) scarce resources.

C) models.

D) unlimited resources.

Answer: B Skill: Definition AACSB: Analytical Thinking Status: Old 2) Society faces trade-offs because of A) government regulations.

B) the profit motive.

C) price setting by firms.

D) scarcity.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: New 3) Managerial economics A) describes how 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.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 4) CEOs should focus on A) beating their competitors.

B) maximizing firm profits.

C) getting the best pay package for the senior management team.

D) minimizing costs.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old

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5) Profit is A) maximized when the marketing department coordinates with the production department.

B) maximized when revenue is maximized.

C) used to beat a company's rivals.

D) the difference between a firm's revenues and its costs.

Answer: D Skill: Definition AACSB: Analytical Thinking Status: Old 6) Firms face trade-offs because A) managers don't know which inputs to use.

B) inputs are scarce.

C) markets set prices of goods they sell.

D) marginal reasoning leads to uncertainty.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 7) A firm's managers are constrained by A) consumers.

B) workers.

C) government.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 8) A market A) always involves the personal exchange of goods for money.

B) allows interactions between consumers and firms.

C) always takes place at a physical location.

D) has no influence on prices.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old

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9) In a market, A) the primary participants are consumers and firms.

B) government policies play a very small part.

C) decision makers always maximize.

D) the goods sold are not closely related.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: New 10) Which of the following would NOT be considered part of a firm's strategy?

A) production levels B) which inputs to use C) sales strategy D) None of the above—all are part of a firm's strategy.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 11) What is the purpose of having a strategy?

Answer: A strategy defines for a manager the actions to be taken to maximize the firm's profits.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old 12) Explain what the statement "We can't have everything we want" means.

Answer: Because resources are scarce, we face tradeoffs. For example, a baker cannot use a piece of dough she has for both pizza and a croissant, so she has to decide which to make.

Skill: Conceptual AACSB: Reflective Thinking Status: Old 13) What is profit?

Answer: Profit is the difference between a firm's revenue or income and its costs or expenses.

Skill: Definition AACSB: Written and Oral Communication Status: Old 14) Give an example of a tradeoff a pizza restaurant might face.

Answer: Whether to make pepperoni or combination pizzas.

Skill: Definition AACSB: Analytical Thinking Status: Old

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15) Why might raising the price of a good by a dollar lead to lower profits?

Answer: If the extra profit margin made on the units sold does not cover the lost profit from selling fewer units, then profits will actually decrease if the price is raised.

Skill: Analytical AACSB: Analytical Thinking Status: Old 16) Why might raising the price of a good by a dollar lead to higher profits?

Answer: If the extra profit margin made on the units sold covers the profit lost from selling fewer units, then profits will increase if the price is raised.

Skill: Analytical AACSB: Analytical Thinking Status: Old 17) Raising the price of a good by one dollar A) increases profits.

B) decreases profits.

C) leaves profits unchanged.

D) leads to an indeterminant change in profits.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 18) Most private firms seek to A) maximize revenue.

B) maximize profit.

C) minimize headcount.

D) maximize employee salaries.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old For the following, please answer "True" or "False" and explain why.

19) Managers have to understand the decision making of others.

Answer: True. Other entities such as governments and rivals may undertake actions that constrain a firm. Consumers and workers make decisions on how to spend their scarce resources, such as budgets and time. To maximize profits, the manager must understand how these other entities will behave.

Skill: Conceptual AACSB: Analytical Thinking Status: Old

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1.2 Economic Models 1) The purpose of making assumptions in economic model building is to A) force the model to yield the correct answer.

B) minimize the amount of work an economist must do.

C) simplify the model while keeping important details.

D) express the relationship mathematically.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 2) Einstein was quoted saying "Everything should be made as simple as possible, but not simpler." When it comes to economic models this means that A) models shouldn't be too complex.

B) models shouldn't be too simple.

C) models should have a level of abstraction appropriate to the topic investigated.

D) All of the above.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 3) If a model's predictions are correct, then A) its assumptions must have been correct.

B) it is proven to be correct.

C) Both A and B above.

D) None of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 4) Economists tend to judge a model based upon A) the reality of its assumptions.

B) the accuracy of its predictions.

C) its simplicity.

D) its complexity.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old

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5) Economic models are most useful in A) explaining outcomes resulting from management decisions.

B) predicting the direction of the stock market.

C) explaining the future with the past.

D) generating untestable hypotheses.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 6) If an important assumption is omitted from an economic model, A) the model's predictions will only be accurate 50% of the time.

B) the model's predictions may be inaccurate.

C) the model will not predict anything.

D) the model is not simple enough.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 7) Economic models are most often tested A) using computer simulations.

B) using data from the distant past.

C) using data from the real world.

D) using logic alone.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 8) A microeconomic model CANNOT be used to A) evaluate the impact of a price change on a firm's revenue.

B) predict the impact of an increase in the minimum wage on unemployment.

C) evaluate the fairness of a proposal to nationalize health insurance.

D) evaluate the effect of an increase in stadium size on the price of a sport team's tickets.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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9) Economic models are only useful in analyzing government policy.

A) True, individuals are irrational and therefore economic models are useless.

B) False, economic models can be used to predict individual and firm behavior.

C) True, economists only model those questions for which they are hired.

D) False, economic models are not even useful in analyzing government policy.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 10) Microeconomic models are used to A) make predictions.

B) explain real-life phenomena.

C) evaluate production alternatives.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 11) If a theory's predictions are incorrect, A) then economists always reject it.

B) then the data used was clearly faulty.

C) then economists will likely reduce their confidence in the theory.

D) then the model must be too simple.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 12) Which of the following is an example of a normative statement?

A) A higher price for a good causes people to want to buy less of that good.

B) A lower price for a good causes people to want to buy more of that good.

C) To make the good available to more people, a lower price should be set.

D) If you decrease the amount of sugar in soda drinks, sales to children will decrease.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: New

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13) Which of the following is an example of a normative statement?

A) Since this food is bad for you, you should not consume it.

B) This food has negative health effects.

C) If you consume this food, you will get sick.

D) People usually get sick after consuming this food.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 14) Which of the following is an example of a positive statement?

A) Since this food is bad for you, you should not consume it.

B) If this food is bad for you, you should not consume it.

C) If you consume this food, you will get sick.

D) None of the above.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 15) Behavioral economics is the study of why people A) choose not to optimize.

B) optimize.

C) sometimes don't optimize.

D) behave badly when buying and selling.

Answer: C Skill: Definition AACSB: Analytical Thinking Status: New 16) Legislators argue that a minimum wage law is instituted to help poor people. Economists can attack the minimum wage law on two fronts. First, some argue that government should not help the poor. Second, some argue that minimum wage laws actually hurt the poor because it creates unemployment. Which argument is normative and which is positive?

Answer: An opinion about the role of government is a normative statement. An observation about the impact of a law is a positive statement.

Skill: Analytical AACSB: Analytical Thinking Status: Old

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17) Explain why a model that delivers good enough approximations is a good model.

Answer: Models make simplifying assumptions in order to make them less complex and complicated and therefore usable. But when we simplify, we do leave out parts of the real world that have an impact on the results. If a model gives predictions or approximations that are close to reality, then the model is useful.

Skill: Analytical AACSB: Analytical Thinking Status: New 18) Explain why economists might disagree on the content of a model.

Answer: Economists might have different theories or might make different simplifying assumptions.

Skill: Conceptual AACSB: Analytical Thinking Status: New For the following, please answer "True" or "False" and explain why.

19) Normative analysis offers decision makers the most valuable information when choosing among alternatives.

Answer: False. Normative analysis states subjective goals but not how those goals can be achieved. To choose among alternatives a decision maker uses positive analysis.

Skill: Analytical AACSB: Analytical Thinking Status: Old 20) If a model fits reality but doesn't generate testable predictions, it is of little value to economists.

Answer: True. If the model doesn't deliver testable predictions it cannot be tested against competing models.

Skill: Analytical AACSB: Analytical Thinking Status: Old 21) If actual experience supports two competing theories, then both theories are proven to be true.

Answer: False. Neither theory can be rejected but if they are competing, then the test is inconclusive.

Skill: Analytical AACSB: Analytical Thinking Status: Old

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Managerial Economics and Strategy, 3e (Perloff/Brander) Chapter 2 Supply and Demand 2.1 Demand 1) An increase in consumer incomes will lead to A) a rightward shift of the demand curve for plasma TVs. B) a movement upward along the demand curve for plasma TVs. C) a rightward shift of the supply curve for plasma TVs. D) no change of the demand curve for plasma TVs. Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 2) If the price of automobiles were to increase substantially, the demand curve for gasoline would most likely A) shift leftward.

B) shift rightward.

C) remain unchanged.

D) become steeper.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 3) If the price of automobiles were to decrease substantially, the demand curve for public transportation would most likely A) shift rightward.

B) shift leftward.

C) remain unchanged.

D) remain unchanged while quantity demanded would change.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 4) If the price of automobiles were to decrease substantially, the demand curve for pizza would most likely A) shift rightward.

B) shift leftward.

C) remain unchanged.

D) remain unchanged while quantity demanded would change.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 1 Copyright © 2020 Pearson Education, Inc.

5) Consumers have been buying fewer CDs as downloadable music has become easier to purchase and use. We would represent this as A) a leftward shift of the demand curve for CDs. B) a rightward shift of the demand curve for CDs. C) a change in the price of CDs. D) a leftward shift of the supply curve for downloadable music.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 6) As people have become more health-conscious and decided to eat food that is better for them, A) the demand curve for scooters has shifted to the right.

B) the demand curve for cupcakes has shifted to the right.

C) the demand curve for oranges and apples has shifted to the right.

D) None of the above.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 7) If a yet-to-be released video game receives a positive review in a popular gaming magazine, what happens to the demand curve for the video game?

A) The demand curve is expected to shift to the right.

B) The demand curve is expected to shift to the left.

C) The demand curve is not expected to change.

D) For those who read the review, demand shifts to the left. For those who don't read the review, demand shifts to the right.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 8) Which of the following cultural events likely increased the demand for the product highlighted in the event?

A) The banning of cigarette advertising on television.

B) The inclusion of Reese's Pieces in the movie E.T. C) Increased environmental awareness about the negative impacts of sport utility vehicles (SUVs).

D) Concerns over "Mad Cow" disease in beef.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: New

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9) Recently, many cities have attempted to pass laws taxing the sale of sugary drinks such as soda pop. If one of these laws passes, we would expect A) the supply curve for soda pop to shift to the right.

B) the supply curve for soda pop to become more vertical.

C) the demand curve for soda pop to shift to the right.

D) the demand curve for soda pop to shift to the left.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 10) If a city were to ban the use of automobiles within its city limits, we would expect A) the demand curve for automobiles to shift to the left.

B) people to move to another city.

C) the demand curve for bicycles to shift to the left.

D) the demand curve for automobiles to remain the same.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 11) The CB radio was very popular in the 1970s and 1980s for communicating while driving.

People bought them because other drivers had them too and they could therefore talk with many others on their trips. This illustrates A) that the demand curve for CB radios was inelastic.

B) the network effect.

C) that CB radios and gasoline are complementary goods.

D) the effects of mobile phones on the demand curve for CB radios.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 12) The quantity demanded for a good A) must equal the quantity actually sold.

B) can be less than the quantity actually sold.

C) can be greater than the quantity actually sold.

D) is always greater than the quantity actually sold.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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13) An individual who is only willing to pay a relatively low amount for a particular good A) would fall in the upper portion of the demand curve.

B) would fall in the middle portion of the demand curve.

C) would fall in the lower portion of the demand curve.

D) would not be considered part of the demand curve.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 14) Assume Joe is only willing to pay $5 for a Ferrari sports car.

A) Joe is not considered part of the demand for Ferraris.

B) Joe won't be sold a Ferrari.

C) Joe is not considered rational.

D) Joe's willingness to pay is not indicative of how much he values the Ferrari.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 15) A downward sloping demand curve indicates that A) individuals all have the same valuation of the same product.

B) individuals have different valuations of the same product.

C) individuals have no valuations of a particular product.

D) certain individuals are uninformed about certain aspects of the product.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 16) If the price is $5 and the quantity demanded is 100 units, then at a price of $10, the quantity demanded will be A) less than or equal to 100 units.

B) greater than or equal to 100 units.

C) greater than quantity supplied.

D) equal to 100 units.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old

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17) According to the Law of Demand, the demand curve for a good will A) shift leftward when the price of the good increases.

B) shift rightward when the price of the good increases.

C) slope downward.

D) slope upward.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 18) The law of demand A) was passed by the 102nd U.S. Congress.

B) is a natural law, much like the law of gravity.

C) is considered a "law" in economics because of the overwhelming empirical evidence that supports its logic.

D) is considered a "law" in economics in order to force economic models to operate fully.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 19) Which of the following would NOT change demand?

A) The price of the product.

B) Information about the product's health effects.

C) The income of the consumers.

D) The price of related products.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: New 20) If a demand curve shifts left, it implies A) as a group, consumers are willing and able to pay less for the product.

B) as a group, consumers are willing and able to pay more for the product.

C) government has regulated how many people can purchase the product.

D) the profit motive of the firms is making the price too high.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old

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21) An increase in the price of pork will lead to A) a movement up along the demand curve.

B) a movement down along the demand curve.

C) a rightward shift of the demand curve.

D) a leftward shift of the demand curve.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 22) Holding all other factors constant, consumers demand more of a good the A) higher its price.

B) lower its price.

C) steeper the downward slope of the demand curve.

D) steeper the upward slope of the demand curve.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 23) As the price of a good increases, the change in the quantity demanded can be shown by A) shifting the demand curve leftward.

B) shifting the demand curve rightward.

C) moving down along the same demand curve.

D) moving up along the same demand curve.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 24) A increase in quantity demanded as a result of a change in price A) is a rightward shift of the demand curve.

B) is a leftward shift of the demand curve.

C) leaves the demand curve unchanged.

D) is not possible.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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25) If the price of automobiles were to increase substantially, the demand curve for automobiles would most likely A) shift rightward.

B) shift leftward.

C) remain unchanged.

D) become steeper.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 26) If the price of a pizza were to increase to $50, many people would give up eating pizza while others would continue to eat it. This would indicate A) those who are buying pizza value it at least $50 per pizza.

B) those who are not buying pizza value it more than $50 per pizza.

C) only those who are extremely wealthy are buying pizza.

D) the price of pizza needs to be regulated by the federal government.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 27) Which of the following is NOT possible according to the law of demand?

A) a horizontal demand curve B) a vertical demand curve C) a downward-sloping supply curve D) an upward-sloping demand curve Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 28) A change in a relevant factor other than the price of the good itself causes a ________ the demand curve, and a change in a good's own price causes a ________ the demand curve.

A) shift of; shift of B) shift of; movement along C) movement along; shift of D) movement along; movement along Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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29) The above figure shows a graph of the market for pizzas in a large town. No pizzas will be demanded unless price is less than A) $0.

B) $5.

C) $12.

D) $14.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 30) The above figure shows a graph of the market for pizzas in a large town. If the price falls from $10 to $7 per pizza, the quantity of pizzas demanded will A) increase by 20.

B) decrease by 30.

C) increase by 30.

D) decrease by 10.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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31) Assume the price of a movie is $10. Jenna demands 2 movies per week, Sam demands 3 movies per week, and Jordan demands 8 movies per week. From this information we can conclude that A) the market quantity demanded at a price of $10 is at least 13 movies per week.

B) Jordan is obviously more wealthy than either Sam or Jeanna.

C) Sam is irrational compared to Jenna or Jordan.

D) the movie industry is unprofitable.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 32) To determine the total demand for all consumers, sum the quantity each consumer demands A) at a given price.

B) at all prices and then sum this amount across all consumers.

C) Both A and B will generate the same total demand.

D) None of the above.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old For the following, please answer "True" or "False" and explain why.

33) If a good is not produced, then there is no demand for it.

Answer: False. The demand for a product is independent of its supply. It is possible that people want to buy some of the product but at prices that are below what sellers would require to begin production.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 34) The quantity of a good that consumers demand depends only on the price of the good.

Answer: False. The quantity of a good demanded depends on many factors including: its own price, consumers' incomes, and the price of related goods.

Skill: Conceptual AACSB: Analytical Thinking Status: Old

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35) Suppose the demand for a particular product can be expressed as Q = 100/p. Calculate the total amount spent on this good when p = 10, 20, and 50. Can you make a generalization about the mathematical form of this demand curve and consumer behavior in this market?

Answer: In all cases, total expenditure equals 100 (since p * Q = 100). In general, a nonlinear demand curve of the form Q = A/p means that consumers wish to spend a total of A on this good regardless of its price.

Skill: Analytical AACSB: Analytical Thinking Status: Old 2.2 Supply 1) Technological innovation in the production of computers has led to A) a decrease in the quantity demanded for computers.

B) a rightward shift of the supply curve for computers.

C) a decrease in the quantity supplied of computers.

D) None of the above.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 2) The supply curve is influenced by A) the income of consumers.

B) the number of customers in the market.

C) the prices of the inputs required to produce the product.

D) the price of the product being produced.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) The price of crude oil rose to over $100 per barrel in early 2013. What would we expect to see happen to the supply of plastic, which is produced using crude oil?

A) The supply of plastic will increase.

B) The supply of plastic will decrease.

C) The supply of plastic will stay the same because the government requires plastic producers to meet statutory minimum production levels.

D) The supply of plastic will stay the same because of the profit motives of plastic producers.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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4) Government regulations A) have no impact on supply.

B) only change the quantity supplied, not the supply curve.

C) are generally ineffective due to lobbying by suppliers.

D) can change both quantity supplied as well as the supply curve.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) The supply curve A) represents the quantity supplied at any given price.

B) represents the quantity actually sold at any given price.

C) is the opposite of the demand curve.

D) always intersects the demand curve.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) Suppose the demand curve for a good shifts rightward, causing the equilibrium price to increase. This increase in the price of the good results in A) a rightward shift of the supply curve.

B) an increase in quantity supplied.

C) a leftward shift of the supply curve.

D) a downward movement along the supply curve.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 7) An increase in the price of oil will A) shift the supply curve of oil to the left.

B) shift the supply curve of oil to the right.

C) leave the supply curve of oil unchanged.

D) Not enough information to answer the question.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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8) The expression "increase in quantity supplied" is illustrated graphically as a A) leftward shift in the supply curve.

B) rightward shift in the supply curve.

C) movement up along the supply curve.

D) movement down along the supply curve.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 9) The Law of Supply states A) that supply curves slope upward.

B) that supply curves can be vertical or horizontal.

C) Both A and B. D) None of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 10) Supply curves A) slope upward.

B) slope downward.

C) are horizontal.

D) can have many shapes.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) If the supply curve of a product changes so that sellers are now willing to sell 2 additional units at any given price, the supply curve will A) shift leftward by 2 units.

B) shift rightward by 2 units.

C) shift vertically up by 2 units.

D) shift vertically down by 2 units.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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12) The above figure shows a graph of the market for pizzas in a large town. No pizzas will be supplied unless the price is above A) $0.

B) $5.

C) $12.

D) $14.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 13) Suppose there are 100 identical firms in the rag industry, and each firm is willing to supply 10 rags at any price. The market supply curve will be a A) vertical line where Q = 10.

B) vertical line where Q = 100.

C) vertical line where Q = 1000.

D) horizontal line where Q = 1000.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 14) The market supply curve is found by A) horizontally summing all individual supply curves at a price.

B) vertically summing all individual supply curves at a quantity.

C) either A or B above since they both give the same answer.

D) None of the above.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 13 Copyright © 2020 Pearson Education, Inc.

15) Suppose the following information is known about a market: 1. Sellers will not sell at all below a price of $2.

2. At a price of $10, any given seller will sell 10 units.

3. There are 100 identical sellers in the market.

Assuming a linear supply curve, use this information to derive the market supply curve.

Answer: First, Q = 100q since all firms are identical. This gives two points: (p = 2, Q = 0) and (p = 10, Q = 1000). From the first point, it is known that p = 2 + bQ. When Q = 1000, 10 = 2 + b(1000). Solving for b yields b = .008. Rearranging to solve for Q yields: Q = -250 + 125p or P = 2 + .008Q. Skill: Analytical AACSB: Analytical Thinking Status: Old 2.3 Market Equilibrium 1) Equilibrium is defined as a situation in which A) neither buyers nor sellers want to change their behavior.

B) no government regulations exist.

C) demand curves are perfectly horizontal.

D) suppliers will supply any amount that buyers wish to buy.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) A market equilibrium occurs A) only with government regulation.

B) only because of the profit motive of firms.

C) only because of the complacency of consumers.

D) through the interaction of self-interested buyers and sellers.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: New 3) A market is said to "clear" when A) sellers give up selling their goods because they can't find any buyers.

B) buyers and sellers are able to buy and sell as much as they want at the market price.

C) the government decides to shut it down.

D) sellers run out of goods to sell.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 14 Copyright © 2020 Pearson Education, Inc.

4) At equilibrium, quantity sold equals the quantity bought. This implies that A) to sell more, producers require more in payment than consumers are willing to pay.

B) government regulation is necessary.

C) to sell less would require a lower price but would yield greater profit.

D) those who don't buy have been treated unfairly.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

5) The above figure shows a graph of the market for pizzas in a large town. At a price of $10, there will be A) no pizzas supplied.

B) equilibrium.

C) excess supply.

D) excess demand.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: New 6) The above figure shows a graph of the market for pizzas in a large town. At a price of $5, there will be A) excess demand.

B) excess supply.

C) equilibrium.

D) zero demand.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 15 Copyright © 2020 Pearson Education, Inc.

7) The above figure shows a graph of the market for pizzas in a large town. What are the equilibrium price and quantity?

A) p = 8, Q = 60 B) p = 7, Q = 40 C) p = 7, Q = 70 D) p = 10, Q = 40 Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 8) The figure above shows a graph of the market for pizzas in a large town. What characterizes the equilibrium in this market?

A) There is excess supply at the equilibrium price of $7.

B) The government has selected the appropriate price for pizzas.

C) The quantity supplied equals the quantity demanded.

D) Supply equals demand.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 9) The above figure shows a graph of a market for pizzas in a large town. At a price of $7, what is the amount of excess demand?

A) 0; there is excess supply at $7.

B) 20 units C) 30 units D) 10 units Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 10) The above figure shows a graph of a market for pizzas in a large town. At a price of $10, the market A) is not in equilibrium.

B) has excess supply.

C) does not have excess demand.

D) All of the above.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old

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11) If Qs = -20 + 10p, and Qd = 400 - 20p, what is the equilibrium price?

A) 14 B) 42 C) 12.67 D) 38 Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 12) If Qs = -20 + 10p, and Qd = 400 - 20p, what is the equilibrium quantity?

A) 440 B) 146.6 C) 360 D) 120 Answer: D Skill: Analytical AACSB: Analytical Thinking Status: New 13) After tickets for a major sporting event are purchased at the official box office price, a market often develops whereby these tickets sell at prices well above the official box office price. Which of the following scenarios would NOT be able to explain this result?

A) The official price was below equilibrium from the moment the tickets were available.

B) Increased publicity causes the demand curve for the event to shift rightward.

C) The event was not a sellout.

D) Not everyone who wanted a ticket was able to buy one at the box office.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 14) According to Adam Smith's invisible hand A) markets need the government to intervene.

B) forces are constantly pushing markets out of equilibrium C) people and firms coordinate their activities, resulting in equilibrium in the market.

D) there is an invisible glove that restricts what markets can do.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: New

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15) A competitive equilibrium is described by A) a price only.

B) a quantity only.

C) the excess supply minus the excess demand.

D) a price and a quantity.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 16) If price is initially above the equilibrium level, A) the supply curve will shift rightward.

B) the supply curve will shift leftward.

C) excess supply exists.

D) all firms can sell as much as they want.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 17) If the price of a good is initially below the equilibrium level A) the supply curve will shift leftward.

B) the supply curve will shift rightward.

C) firms supply none of the good.

D) excess demand exists.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 18) In some markets, ________ act to adjust the price to bring the market into equilibrium.

A) bulls B) regulators C) market makers D) web sites Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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For the following, please answer "True" or "False" and explain why.

19) When a market is in disequilibrium consumers and producers change their behavior. As a result, the market reaches equilibrium.

Answer: True. For example, when a shortage exists at a given price consumers bid up the price and firms increase production until the equilibrium is reached.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 20) Explain why the equilibrium price is called the market clearing price.

Answer: At the equilibrium price, sellers want to sell the exact amount consumers want to buy.

There is no excess demand or excess supply. The market is exactly cleared of all goods.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 2.4 Shocks to the Equilibrium 1) Once an equilibrium is achieved, it can persist indefinitely because A) shocks that shift the demand curve or the supply curve cannot occur.

B) shocks to the demand curve are always exactly offset by shocks to the supply curve.

C) the government never intervenes in markets at equilibrium.

D) in the absence of supply/demand shocks no one applies pressure to change the price.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New 2) From the 1970s through the 1990s, the relative price of a college education has increased greatly. During the same time period, college enrollment has also increased. This evidence suggests that during this time period A) the demand curve for a college education has shifted leftward.

B) the demand curve for a college education has shifted rightward.

C) the supply curve for a college education has shifted leftward.

D) the supply curve for a college education has shifted rightward.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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3) Suppose a market with an upward-sloping supply curve were currently at equilibrium. A rightward shift of the demand curve would cause A) an increase in price but a decrease in quantity.

B) a decrease in price but an increase in quantity.

C) an increase in both price and quantity.

D) a decrease in both price and quantity.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: New 4) A rightward shift of the demand curve in a market with an upward-sloping supply curve will lead to a(n) A) increase in equilibrium price.

B) excess demand at the old equilibrium price.

C) increase in quantity supplied.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: New 5) A leftward shift of the demand curve in a market with an upward-sloping supply curve will lead to a(n) A) decrease in equilibrium price.

B) excess supply at the old equilibrium price.

C) decrease in quantity supplied.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: New 6) If pizza and tacos are substitutes, a decrease in the price of tacos would lead to a A) decrease in the demand curve for pizza.

B) decrease in the quantity demanded of pizza.

C) decrease in the price of pizza.

D) All of the above.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old

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7) Suppose a market with a downward-sloping demand curve were currently at equilibrium. A rightward shift of the supply curve would cause a(n) A) increase in price and a decrease in quantity.

B) decrease in price and an increase in quantity.

C) increase in both price and quantity.

D) decrease in both price and quantity.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: New 8) A rightward shift of the supply curve in a market with a downward-sloping demand curve will lead to a(n) A) decrease in equilibrium price.

B) excess supply at the old equilibrium price.

C) increase in quantity demanded.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: New 9) A leftward shift of the supply curve in a market with a downward-sloping demand curve will lead to a(n) A) increase in equilibrium price.

B) excess demand at the old equilibrium price.

C) decrease in quantity demanded.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New 10) If the demand curve is vertical a rightward shift of the supply curve will lead to A) an increase in quantity supplied.

B) an increase in quantity demanded.

C) a decrease in quantity demanded.

D) a decrease in price.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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11) If the demand curve is horizontal a rightward shift of the supply curve will lead to A) an increase in quantity supplied.

B) an increase in price.

C) a decrease in quantity demanded.

D) a decrease in price.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 12) A drought in the Midwest will raise the price of wheat because of a A) leftward shift in the supply curve.

B) rightward shift in the supply curve.

C) leftward shift in the demand curve.

D) rightward shift in the demand curve.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 13) The owner of a railroad that carries cargo should ________ supply when she foresees regulations that will ________ the cost of shipping cargo by truck.

A) decrease; increase B) decrease; leave unchanged C) increase; increase D) leave unchanged; increase Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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14) The above figure shows four different markets with changes in either the supply curve or the demand curve. Which graph best illustrates the market for coffee after severe weather destroys a large portion of the coffee crop?

A) Graph A B) Graph B C) Graph C D) Graph D Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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15) The above figure shows four different markets with changes in either the supply curve or the demand curve. Which graph best illustrates the market for tea after severe weather destroys a large portion of the coffee crop?

A) Graph A B) Graph B C) Graph C D) Graph D Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 16) The above figure shows four different markets with changes in either the supply curve or the demand curve. Which graph best illustrates the market for non-dairy coffee creamer after severe weather destroys a large portion of the coffee crop?

A) Graph A B) Graph B C) Graph C D) Graph D Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 17) The above figure shows four different markets with changes in either the supply curve or the demand curve. Which graph best illustrates the market for computers after technological advances in making computers occur?

A) Graph A B) Graph B C) Graph C D) Graph D Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 18) If oranges were found to cure cancer A) the equilibrium price of apples would likely fall.

B) the equilibrium price of oranges would likely increase in the near term.

C) the equilibrium quantity of oranges would likely increase.

D) All of the above.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old

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19) If the demand for eBook readers increases and the supply of eBook readers increases, then A) it is clear that prices will increase, the change in the quantity of eBook readers sold is ambiguous.

B) it is clear that prices will decrease, the change in the quantity of eBook readers sold is ambiguous.

C) it is clear that quantity sold will increase, the change in the price of eBook readers is ambiguous.

D) it is clear that quantity sold will decrease, the change in the price of eBook readers is ambiguous.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 20) If the demand for CD players decreases and the supply of CD players decreases, then A) it is clear that prices will decrease, the change in the quantity of CD players sold is ambiguous.

B) it is clear that prices will increase, the change in the quantity of CD players sold is ambiguous.

C) it is clear that quantity sold will decrease, the change in the price of CD players is ambiguous.

D) it is clear that change in quantity sold is ambiguous, the change in the price of CD players is ambiguous.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old For the following, please answer "True" or "False" and explain why.

21) During a severe winter, the price of home heating oil is expected to be more than it would be during a normal winter.

Answer: True. During a severe winter, people need to operate their furnace more often than in a normal winter. The demand for home heating oil lies to the right of where it would be under normal weather conditions. As a result, the price of oil rises.

Skill: Analytical AACSB: Analytical Thinking Status: New

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22) Suppose there is a linear downward-sloping demand curve and a linear upward-sloping supply curve for a good. The price of a substitute good increases and the price of an input to production also increases. Graph the original demand and supply curves, and the curves after the substitute good and input prices increase. How will the equilibrium price change after the substitute and input prices increase?

Answer:

See the above figure. The new demand curve will be to the right of the original demand curve and the new supply curve will be to the left of the original supply curve. The equilibrium price will increase. The change in equilibrium quantity cannot be determined and will depend on the relative magnitude of the supply and demand shifts.

Skill: Analytical AACSB: Analytical Thinking Status: Old 2.5 Effects of Government Interventions 1) Government actions can cause a A) shift in the supply curve.

B) shift in the demand curve.

C) reaction from firms in other countries.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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2) When an imported good has restrictions placed on it that limits the amount that can be imported and as a result the price of the good increases, the demand curve for that good will A) shift rightward.

B) shift leftward.

C) become steeper.

D) be unaffected.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: New 3) Government prohibition of advertising cigarettes on television would most likely result in A) a rightward shift in the demand curve for cigarettes.

B) a leftward shift in the demand curve for cigarettes.

C) a rightward shift in the demand curve for television advertising time.

D) no change in the market for either cigarette or television advertising.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 4) If a government-imposed price ceiling causes the observed price in a market to be below the equilibrium price, A) there will be excess demand.

B) there will be excess supply.

C) the curves will shift to make a new equilibrium at the regulated price.

D) None of the above.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 5) A price ceiling that is set above the equilibrium price A) causes suppliers to raise their prices.

B) is binding.

C) is non-binding.

D) creates a shortage.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old

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6) A price ceiling that is set below the equilibrium price A) causes suppliers to raise their prices.

B) is binding.

C) is non-binding.

D) creates a surplus.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 7) A price ceiling that is set below the equilibrium price A) causes suppliers to lose money.

B) creates a shortage.

C) is non-binding.

D) creates a surplus.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 8) Consumer groups tend to lobby for A) price floors.

B) price ceilings.

C) quantity quotas.

D) taxes.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 9) When there is a binding price ceiling, A) there is no equilibrium.

B) the quantity demanded does not equal the quantity supplied.

C) all potential customers are happy because they can buy the good at a lower price.

D) producers move production to another country.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old

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10) A restriction on the number of people allowed to be medical doctors in the United States would most likely A) increase doctors' fees.

B) decrease the demand for doctors.

C) decrease the demand for nurses.

D) decrease the number of people who get sick.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 11) In the labor market, if the government imposes a minimum wage that is below the equilibrium wage, then A) workers who wish to work at the minimum wage will have a difficult time finding jobs.

B) firms will hire fewer workers than without the minimum wage law.

C) some workers may lose their jobs as a result.

D) nothing will happen to the wage rate or employment.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 12) Agricultural price supports are A) price ceilings.

B) price floors.

C) quantity quotas.

D) taxes.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 13) Producer groups tend to lobby for A) price floors.

B) price ceilings.

C) quantity quotas.

D) taxes.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old

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14) When there is a binding price floor A) there is no equilibrium.

B) the quantity demanded does not equal the quantity supplied.

C) all potential producers are happy because they can sell the good at a higher price.

D) the government is helping consumers at the expense of producers.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 15) A price floor that is set below the equilibrium price A) causes suppliers to lower their prices.

B) is binding.

C) is non-binding.

D) creates a shortage.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 16) A price floor that is set above the equilibrium price A) causes suppliers to lower their prices.

B) is binding.

C) is non-binding.

D) creates a shortage.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 17) A price floor that is set above the equilibrium price A) causes suppliers to lose money.

B) creates a shortage.

C) is non-binding.

D) creates a surplus.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old

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18) The above figure shows the market for apples. If a consumer group convinces the government to set a maximum price of $2 per pound, then A) 300 pounds of apples will be sold at $2.

B) no apples will be supplied.

C) no apples will be demanded.

D) there will be a shortage of 100 pounds of apples.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 19) The above figure shows the market for apples. If apple farmers convince the government to set a minimum price of $4 per pound, then A) 100 pounds of apples will be sold at $4.

B) no apples will be supplied.

C) no apples will be demanded.

D) None of the above.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old

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20) The above figure shows a graph of the market for pizzas in a large town. Suppose that concern over dietary habits has led the government to impose a restriction that limits suppliers to produce no more than 40 pizzas. What will the price of pizza be as a result of this quota?

A) $2 B) $7 C) $8 D) $10 Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 21) The above figure shows a graph of the market for pizzas in a large town. Suppose that concern over dietary habits has led the government to impose a restriction that limits suppliers to produce only 40 pizzas. As a result, for prices greater than $7, the A) supply curve is unchanged.

B) supply curve is vertical.

C) demand curve becomes vertical.

D) demand curve becomes horizontal.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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22) The above figure shows a graph of the market for pizzas in a large town. As a result of concern over the affordability of pizza, the government restricts sellers from charging a price over $7. As a result, the quantity of pizzas consumed will A) increase.

B) decrease.

C) remain unchanged.

D) be indeterminable.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 23) A specific tax on sellers will A) shift the demand curve to the right.

B) shift the demand curve to the left.

C) shift the supply curve to the right.

D) shift the supply curve to the left.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 24) If the government places a $1.20 tax on each pizza sold, A) consumers will have to pay $1.20 more for each pizza they buy.

B) the supply curve will shift left by $1.20.

C) the demand curve will shift right by $1.20.

D) both the demand curve and the supply curve will shift by 60 cents each.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 25) If the government places a $1500 tax on each hybrid car sold, A) consumers will stop buying hybrid cars.

B) the demand curve will shift to the right by $1500.

C) the supply curve will shift to the right by $1500.

D) None of the above.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: New

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26) If the government institutes a specific tax for a good, A) the producer simply passes the entire tax on to the consumer.

B) the producer must absorb the entire tax.

C) the producer can generally only pass part of the tax onto the consumer.

D) the equilibrium price drops.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 2.6 When to Use the Supply-and-Demand Model 1) It is appropriate to use the supply-and-demand model if, in a market, A) everyone is a price taker with full information about the price and quality of the good.

B) firms sell identical products.

C) costs of trading are low.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) Consumers and firms are known as price takers only if A) no market exists to determine the equilibrium price.

B) they can set the market price.

C) they cannot unilaterally affect the market price.

D) excess demand exists.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 3) Costs that pertain to finding a trading partner and making a trade are called A) transaction costs.

B) transgression costs.

C) consumption costs.

D) transaction taxes.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old

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4) It is appropriate to use the supply-and-demand model in which of the following markets?

A) beer market B) car market C) wheat market D) market for breakfast cereal Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 5) It is appropriate to use the supply-and-demand model in which of the following markets?

A) beer market B) wine market C) real estate market D) market for gourmet pizza Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 6) Which of the following is NOT a characteristic of perfectly competitive markets?

A) There is free entry and exit.

B) All market participants are price-takers.

C) It is hard to find a trading partner.

D) All products are identical.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 7) Which of the following is NOT a characteristic of perfectly competitive markets?

A) The government restricts the number of producers through licensing requirements.

B) All market participants are price-takers.

C) It is easy to find a trading partner.

D) All products are identical.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old

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8) Which of the following is NOT a characteristic of perfectly competitive markets?

A) Transactions costs are a very small part of the sale.

B) All market participants are price-takers.

C) It is easy to find a trading partner.

D) Products are differentiated.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 9) Which of the following is NOT a characteristic of perfectly competitive markets?

A) Transactions costs are a very small part of the sale.

B) There are three suppliers that form an oligopoly.

C) It is easy to find a trading partner.

D) All products are identical.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 10) Which of the following is NOT a characteristic of perfectly competitive markets?

A) Transactions costs are a very small part of the sale.

B) Information about the product is difficult to find and understand.

C) It is easy to find a trading partner.

D) All products are identical.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 11) Which of the following is NOT a characteristic of perfectly competitive markets?

A) Buying the product requires you to hire a lawyer to write a contract.

B) All market participants are price-takers.

C) You are the only buyer of the product.

D) All products are identical.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old

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Managerial Economics and Strategy, 3e (Perloff/Brander) Chapter 3 Empirical Methods for Demand Analysis 3.1 Elasticity 1) The percentage change in the quantity demanded in response to a percentage change in the price is known as the A) slope of the demand curve.

B) excess demand.

C) price elasticity of demand.

D) All of the above.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 2) The elasticity of demand is A) measured in money (e.g., dollars).

B) measured in units of the good (e.g., slices of pizza).

C) a pure number (e.g. unitless).

D) measured in money/unit (e.g., 1.50 $/slice of pizza).

Answer: C Skill: Definition AACSB: Application of Knowledge Status: New 3) If the price of a slice of pizza rises from $2.50 to $3, and quantity demanded falls from 10,000 slices to 7,400 slices, calculate the arc price elasticity.

A) -1.92 B) -1.64 C) -4 D) -2 Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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4) If the price of a slice of pizza rises from $2.50 to $3, and quantity demanded falls from 10,000 slices to 7,400 slices, using the formula for arc price elasticity, what is the percentage change in price?

A) 18.18% B) 29.89% C) 20% D) 16.67% Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 5) If the price of a slice of pizza rises from $2.50 to $3, and quantity demanded falls from 10,000 slices to 7,400 slices, using the formula for arc price elasticity, what is the percentage change in quantity?

A) -18.18% B) -29.89% C) -26% D) -35.14% Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 6) To calculate the point elasticity of demand, a manager must know A) where the supply curve intersects the demand curve.

B) two points on the demand curve.

C) information about the entire demand curve.

D) whether or not the demand curve is linear.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 7) If the demand curve is given by Q = a + bp, then a is A) negative.

B) the quantity demanded when price is zero.

C) the slope of the demand curve.

D) measured in money.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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8) If the demand curve is given by Q = a + bp, then b is A) positive.

B) the quantity demanded when price is zero.

C) the change in quantity demanded if price changes by 1.

D) different at different points on the demand curve.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 9) If the demand curve for slices of pizza is given as Q = 300 - 16p, then the point elasticity of demand when price is $1.50 is A) -24.

B) -16.

C) -0.0054.

D) -0.087.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 10) If the elasticity of demand is -2.3 when calculated using the point elasticity method and -3.4 using the arc elasticity method, then A) you should use the point elasticity.

B) it is OK to use either one.

C) there must be a mistake in the calculations.

D) you should use the arc elasticity.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) Suppose the demand function for a good is expressed as Q = 100 - 4p. If the good currently sells for $10, then the point price elasticity of demand equals A) -1.5.

B) -0.67.

C) -4.

D) -2.5.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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12) If the price of orange juice rises 10%, and as a result the quantity demanded falls by 8%, the price elasticity of demand for orange juice is A) -1.25.

B) -80.0.

C) -0.80.

D) -10.0.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 13) The market demand for wheat is Q = 100 - 2p + 1pb, where pb is the price of barley. If the price of wheat is $2, the price elasticity of demand A) equals (-4/46).

B) equals (-46).

C) equals (-1).

D) cannot be calculated without more information.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 14) Elasticity along a downward sloping linear demand curve A) is constant and equal to the slope of the curve.

B) is constant and equal to the slope times the ratio of price to quantity.

C) changes along the curve.

D) does not vary with price unless the good is expensive.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 15) Horizontal and vertical demand curves A) have constant elasticities.

B) are not possible in the real world.

C) have elasticities that change with price.

D) cannot have their elasticities computed using the point method.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old

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16) The above figure shows the demand curve for crude oil. If the market price is $10 a barrel, what is the price elasticity of demand?

A) -.02 B) -1 C) -10 D) -500 Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 17) The above figure shows the demand curve for crude oil. The demand curve has unitary price elasticity when price equals A) $0.

B) $1.

C) $10.

D) $20.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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18) If the demand function for orange juice is expressed as Q = 2000 - 500p, where Q is quantity in gallons and p is price per gallon measured in dollars, then the demand for orange juice has a unitary elasticity when price equals A) $0.

B) $1.

C) $2.

D) $4.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 19) If the demand for orange juice is expressed as Q = 2000 - 500p, where Q is measured in gallons and p is measured in dollars, then at the price of $3, the demand curve A) is elastic.

B) has a unitary elasticity.

C) is inelastic.

D) is perfectly inelastic.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 20) If the demand curve for comic books is expressed as Q = 10,000 * p-1, then demand has a unitary elasticity A) only when p = 10,000.

B) only when p = 100.

C) always.

D) never.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 21) If the demand curve for a good always has unitary price elasticity, what does this imply about consumer behavior?

A) Consumers do not react to a price change.

B) Consumers will spend a constant total amount on the good.

C) Consumers are irrational.

D) Consumers do not obey the Law of Demand.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old

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22) If the price elasticity of demand for a good is greater than one in absolute value, economists characterize that demand is A) elastic.

B) inelastic.

C) perfect.

D) vertical.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 23) If the price elasticity of demand for a good is less than one in absolute value, economists characterize that demand is A) elastic.

B) inelastic.

C) perfect.

D) vertical.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: New 24) If the price elasticity of demand for a good is less than one in absolute value, economists would characterize consumers of this good A) as not very sensitive to price.

B) as not very sensitive to the quantity they demand.

C) as very sensitive to price.

D) as elastic.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 25) If the price of orange juice rises 10%, and as a result the quantity demanded falls by 8%, the price elasticity of demand for orange juice is A) -1.25.

B) inelastic.

C) Both A and B above.

D) Neither A nor B above.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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26) If the price of orange juice rises 10%, and as a result the quantity demanded falls by 8%, the price elasticity of demand for orange juice is A) -1.25.

B) elastic.

C) Both A and B above.

D) Neither A nor B above.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 27) A horizontal demand curve for a good could arise because consumers A) are irrational.

B) are not sensitive to price changes.

C) view this good as identical to another good.

D) have no equivalent substitutes for this good.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 28) On a linear demand curve, the lower the price A) the less elastic is demand.

B) the more elastic is demand.

C) the elasticity equals -1.

D) the elasticity equals zero.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 29) If demand is inelastic, A) then it changes very little in response to a price change.

B) then it changes significantly in response to a price change.

C) then demand is zero.

D) then demand is infinite.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old

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30) If demand is elastic, A) then it changes very little in response to a price change.

B) then it changes significantly in response to a price change.

C) then demand is zero.

D) then demand is infinite.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 31) If demand is inelastic, A) then a 1% increase in price leads to a fall in quantity of greater than 1%.

B) then a 1% increase in price leads to a fall in quantity of less than 1%.

C) then a 1% increase in price leads to a fall in quantity of 1%.

D) then a 1% increase in price leads to a rise in quantity of less than 1%.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 32) If demand is elastic, A) then a 1% decrease in price leads to a rise in quantity of greater than 1%.

B) then a 1% decrease in price leads to a rise in quantity of less than 1%.

C) then a 1% decrease in prices leads to a rise in quantity of 1%.

D) then a 1% decrease in price leads to a fall in quantity greater than 1%.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 33) If demand is perfectly elastic, A) then a 1% increase in price leads to a fall in quantity of greater than 1%.

B) then a 1% increase in price leads to a fall in quantity of less than 1%.

C) then a 1% increase in price causes quantity demanded to fall to zero.

D) then a 1% increase in price has no effect on quantity demanded.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old

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34) If demand is perfectly inelastic, A) then a 1% increase in price leads to a fall in quantity of greater than 1%.

B) then a 1% increase in price leads to a fall in quantity of less than 1%.

C) then a 1% increase in prices then quantity demanded falls to zero.

D) then a 1% increase in price has no effect on quantity demanded.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 35) A vertical demand curve A) is impossible.

B) reasonably represents demand for essential goods.

C) has a price elasticity of negative infinity since people will pay an infinite amount for the good.

D) represents a normal good.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 36) Which of the following is most likely to be TRUE about relative income elasticities of demand for oatmeal and diamond bracelets?

A) Income elasticity of demand for diamond bracelets exceeds that of oatmeal.

B) Income elasticity of demand for oatmeal exceeds that of diamond bracelets.

C) Income elasticity of demand for diamond bracelets equals that of oatmeal.

D) It is not possible to make any prediction about relative income elasticities.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: New 37) If a consumer increases her quantity of ice cream consumed by 100% when her income rises by 25%, then her income elasticity of demand for ice cream is A) 8.0 B) 4.0 C) 0.25 D) 0.08 Answer: B Skill: Analytical AACSB: Analytical Thinking Status: New

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38) A normal good has a ________ income elasticity of demand and quantity demanded ________ as income rises.

A) negative; increases B) negative; decreases C) positive; increases D) positive; decreases Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 39) An inferior good has a ________ income elasticity of demand and quantity demanded ________ as income rises.

A) negative; increases B) negative; decreases C) positive; increases D) positive; decreases Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 40) Ramen noodles are likely considered A) a normal good.

B) an inferior good.

C) to have inelastic demand.

D) to have perfectly elastic demand.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 41) Premium beer is likely considered A) a normal good.

B) an inferior good.

C) to have inelastic demand.

D) to have perfectly elastic demand.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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42) The market demand for wheat is Q = 100 - 2p + 1pb + 2Y. If the price of wheat, p, is $2, and the price of barley, pb, is $3, and income, Y, is $1000, the income elasticity of wheat is A) 2 ∗ (1000/2099).

B) 2.

C) 1/2 ∗ (1000/2099).

D) Cannot be calculated from the information provided.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 43) The cross price elasticity of demand for a good is the percentage change in the quantity demanded in response to a given percentage change in A) income.

B) the price of that good.

C) the price of another good.

D) the quantity demanded of another good.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 44) The market demand for wheat is Q = 100 - 2p + 1pb, where pb is the price of barley. The cross price elasticity of demand for wheat with respect to barley A) cannot be calculated from just the information provided.

B) is negative.

C) suggests that wheat and barley are complements.

D) equals 1.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 45) The cross price elasticity of demand between two goods will be positive if A) the two goods are complements.

B) the two goods are substitutes.

C) the two goods are luxuries.

D) one of the goods is a luxury and the other is a necessity.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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46) If the cross price elasticity of two goods is -3.5, then A) these two products are relatively elastic substitutes.

B) these two products are relatively inelastic substitutes.

C) these two products are relatively elastic complements.

D) these two products are relatively inelastic complements.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 47) If it is difficult to substitute for a good in the short run, but easy in the long run, then A) the elasticity of demand is more elastic in the short run.

B) the elasticity of demand is more elastic in the long run.

C) the good is an inferior good.

D) elasticity changes along the demand curve.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 48) The percentage change in the quantity supplied in response to a percentage change in the price is known as the A) slope of the supply curve.

B) excess supply.

C) price elasticity of supply.

D) All of the above.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 49) As prices change, the elasticity of supply describes the movement A) of a shift in the supply curve.

B) of the equilibrium price.

C) along the supply curve.

D) from a necessity to a luxury good.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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3.2 Regression Analysis 1) In regression analysis, the dependent variable A) is always quantity demanded.

B) is the variable whose variation is to be explained.

C) is one of the factors that explains what is happening with demand.

D) is represented by the inverse demand function.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 2) In regression analysis, the explanatory variables A) are always price and income.

B) are the variables whose variations are to be explained.

C) are the factors that are thought to affect the dependent variable.

D) are used to explain the random error term.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 3) An estimated demand curve does NOT necessarily match actual data perfectly because A) it is not possible to accurately calculate the coefficients of the curve.

B) some factors that are not measured or observed may affect the curve.

C) the random error term has too large of a range.

D) demand is unpredictable.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) The random error term ________ the effects of ________ influences on the dependent variable that are not included as explanatory variables.

A) captures; observed B) ignores; unobserved C) ignores; observed D) captures; unobserved Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old

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5) Ordinary Least Squares Regression analysis attempts to A) maximize the distance of each point from a regression line.

B) select a line that fits the data well.

C) maximize the residual.

D) change a multivariate problem into a single dimension.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 6) In Ordinary Least Squares Regression, the gap between the value of the dependent variable and the predicted value is called A) the error term.

B) the minimizing coefficient.

C) the residual.

D) the explanatory variable.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 7) When a variable is determined by a factor outside of the function or model being evaluated, it is said to be A) endogenous.

B) exogenous.

C) unexplained.

D) statistically insignificant.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 8) When a variable is determined by a factor inside of the function or model being evaluated, it is said to be A) endogenous.

B) exogenous.

C) unexplained.

D) statistically insignificant.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old

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9) The gap between the actual and predicted values of a dependent variable is called A) the error term.

B) an exogenous factor.

C) the residual.

D) an endogenous factor.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 10) A regression analysis with ________ explanatory variable(s) is called a ________.

A) two or less; limited regression B) exactly two; binomial least squares regression C) one; dependent regression D) two or more; multivariate regression Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 11) The goodness of the fit of a line is measured by the A) R2 statistic.

B) t-statistic.

C) unbiased coefficient.

D) standard error.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 12) An R2 close to 1 A) does not happen with real data.

B) indicates that almost all of the variation in the dependent variable is explained by the regression.

C) does not explain variation as well as an R2 that is above 2.

D) means that the regression line does not fit the data very well.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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13) If R2 is less than 1, A) the regression analysis is incorrect.

B) the observation data is suspect.

C) some observations do not lie on the regression line.

D) the probability of having the correct fit is very low.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 14) If an estimated regression explains none of the variation, R2 will be A) 0.

B) between 0 and 1.

C) 1.

D) unable to determine with the information given.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 3.3 Properties and Statistical Significance of Estimated Coefficients 1) An estimation method is unbiased if it produces a(n) ________ that equals the ________ on average.

A) R2; t-statistic B) estimated coefficient; true coefficient C) error term; standard error D) estimated coefficient; residual Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 2) If we have a small standard error, then A) the estimated coefficient is small.

B) the true demand function has imprecise coefficients.

C) the expected variation of the estimated coefficient is small.

D) the estimated coefficients are imprecise indicators of the true values.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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3) A 95% confidence interval A) indicates that there is 95% confidence that the value of the estimated coefficient is correct.

B) indicates that there is 95% confidence that the degrees of freedom explain the data correctly.

C) is a range of of values that gives a 95% probability that the true value of the coefficient is within the specified interval.

D) is the probability that we have obtained the true value of the coefficient with 95% accuracy.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 4) If you are testing the null hypothesis, you are testing A) the hypothesis that the coefficient for an explanatory variable is zero and therefore has no impact on your results.

B) whether or not price should be set to 0.

C) the relationship between the t-statistic and the standard error.

D) the hypothesis that setting a given price will yield no increase in profits.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) The t-statistic measures A) the efficiency of the t-test relative to the standard z-test.

B) the probability that the estimated coefficient is within the range of the standard error.

C) whether the estimated coefficient is independent of the standard error.

D) whether the estimated coefficient is large relative to the standard error.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 6) If you are using a 95% confidence interval and the absolute value of the t-statistic is larger than the critical value, then A) we accept the null hypothesis at a 95% confidence level.

B) we reject the null hypothesis at a 95% confidence level.

C) we will be wrong less than 5% of the time if we accept the null hypothesis.

D) we will be wrong 95% of the time if we reject the null hypothesis.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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3.4 Regression Specification 1) A regression specification must include A) the choice of the dependent variable.

B) the explanatory variable(s).

C) the functional relationship.

D) All of the above.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 2) A regression specification must include A) the functional relationship between dependent and explanatory variables.

B) the estimated coefficients.

C) the estimated t-statistic.

D) All of the above.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 3) When selecting explanatory variables to include in a regression, A) you should pick all observable variables available.

B) you should pick all observable variables that are likely to have a meaningful impact on the dependent variable.

C) ignore all variables that have t-statistics less than the critical value.

D) ignore variables that have an R2 less than 1.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) Two variables are said to be ________ if they move together.

A) procyclical B) spurious C) correlated D) co-dependent Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old

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5) If two variables B and V are negatively correlated, B ________ when V ________.

A) goes up; goes down B) goes up; goes up C) goes down; goes down D) remains unchanged; goes down Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) If two variables B and V are positively correlated, B ________ when V ________.

A) goes up; goes down B) goes up; goes up C) goes down; goes up D) remains unchanged; goes up Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 7) Which of the following statements is TRUE? A) If two variables X and Y are correlated, then X causes changes in Y. B) If two variables X and Y are correlated, then Y causes changes in X. C) If X causes changes in Y, then X and Y are correlated.

D) None of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) If there is a causal relationship between two variables X and Y, A) both should be used as explanatory variables.

B) then the causal variable should be used as the explanatory variable.

C) then they must be positively correlated.

D) one of them can be omitted from the analysis.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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9) Omitted variables A) can cause hypothesis tests to be unreliable.

B) require multiple regression analyses to find.

C) are usually those with t-statistics less than the critical value.

D) are usually outside the confidence interval.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 10) Demand curves and other economic relationships A) are always linear.

B) produce linear regression equations.

C) can take many different functional forms.

D) are dependent upon the type of advertising done.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) What is the meaning of the statement "correlation does not mean causation"?

Answer: Just because two variables are correlated, meaning that they move together, does not mean that one of the variables is the cause of movement in the other. For example, sales of gasoline and incidence of sunburn are strongly correlated in the U.S. However, this does not mean that sunburns cause people to buy more oil or that buying oil causes sunburns. There is another explanatory variable involved, namely the season of the year, since people both drive more and are outside in the sun more during the summer months.

Skill: Conceptual AACSB: Written and Oral Communication Status: New 3.5 Forecasting 1) Forecasts are A) generally incorrect.

B) predictions about the future.

C) explanations of past occurrences.

D) limited to short time periods.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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2) When using extrapolation to forecast, A) a time series of past observations is used.

B) there is a large error term in the results.

C) predictions can only be made about the future.

D) dummy variables can skew the results.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) Smoothing a time series of observations A) is a form of statistical cheating.

B) is used to reveal an underlying pattern in the data.

C) renders the resultant forecast unusable.

D) allows statisticians to use less data than would otherwise be required.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) Sometimes distinct patterns around a trend line can be caused by A) poor underlying data.

B) dummy variables.

C) seasonal variation.

D) statistical anomalies.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) Forecasts based on an economic theory as opposed to historical data are called A) causal econometric forecasts.

B) non-time-series forecasts.

C) dummy forecasts.

D) explanatory variable forecasts.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old

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Managerial Economics and Strategy, 3e (Perloff/Brander) Chapter 4 Consumer Choice 4.1 Consumer Preferences 1) Consumers allocate their budgets among bundles because A) more is not always better.

B) bundles are the most efficient way to package goods and services.

C) consumers face choices and trade-offs.

D) they want to minimize trips to the store.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) The assumption of completeness means that A) the consumer can rank all possible consumption bundles.

B) more of a good is always better.

C) the consumers can rank all affordable consumption bundles.

D) all preferences conditions are met.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 3) If a consumer prefers apples to bananas and prefers bananas to citrus fruit, in order to satisfy assumptions about preferences she has to prefer A) bananas to apples.

B) citrus fruit to bananas.

C) apples to citrus fruit.

D) citrus fruit to apples.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 4) If a consumer weakly prefers pizza to hot dogs, and weakly prefers hot dogs to chicken, then he ________ pizza ________ chicken.

A) likes; less than B) likes; at least as much as C) dislikes; more than D) dislikes; and is indifferent about Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 1 Copyright © 2020 Pearson Education, Inc.

5) The principle that "More is better" results in indifference curves A) sloping down.

B) not intersecting.

C) reflecting greater preferences the further they are from the origin.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) An indifference curve represents bundles of goods that a consumer A) views as equally desirable.

B) ranks from most preferred to least preferred.

C) prefers to any other bundle of goods.

D) All of the above.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: New 7) There is an indifference curve through every bundle because of the assumption of A) transitivity.

B) completeness.

C) rationality.

D) nonsatiation.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) Indifference curves are downward sloping because of the assumption of A) completeness.

B) transitivity.

C) more is better.

D) All of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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9) If two indifference curves were to intersect at a point, this would violate the assumption of A) transitivity.

B) completeness.

C) Both A and B above.

D) None of the above.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 10) Indifference curves close to the origin are ________ those farther from the origin because of ________.

A) better than; transitivity B) worse than; nonsatiation C) better than; completeness D) worse than; transitivity Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) A consumer's willingness to trade one good for another can be expressed by the consumer's A) indifference curve.

B) marginal rate of substitution.

C) Both A and B above.

D) None of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 12) Measuring "y" on the vertical axis and "x" on the horizontal axis, convexity of indifference curves implies that the MRS of "y" for "x" A) is decreasing as "x" increases.

B) is increasing as "x" increases.

C) is constant as "x" increases.

D) cannot be calculated for large levels of "x."

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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13) Convexity of indifference curves implies that consumers are willing to A) give up more "y" to get an extra "x" the more "x" they have.

B) give up more "y" to get an extra "x" the less "x" they have.

C) settle for less of both "x" and "y."

D) acquire more "x" only if they do not have to give up any "y."

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 14) For which of the following pairs of goods would most people likely have convex indifference curves?

A) nickels and dimes B) left shoes and right shoes C) movie tickets and concert tickets D) None of the above.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 15) If two goods are perfect substitutes, then the indifference curves for those two goods would be A) upward sloping and concave to the origin.

B) downward sloping and convex to the origin.

C) downward sloping and straight.

D) L-shaped.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 16) Perfect substitutes A) always have indifference curves with slopes of -1.

B) always have indifference curves with slopes of 1.

C) have fixed rates of trading off one good for another.

D) have horizontal indifference curves.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old

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17) The indifference curves for left shoes and right shoes would most likely be A) upward sloping and concave to the origin.

B) downward sloping and convex to the origin.

C) downward sloping and straight lines.

D) L-shaped.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old For the following, please answer "True" or "False" and explain why.

18) Indifference curves cannot intersect.

Answer:

True. As seen in the above figure, points a and c are on the same indifference curve and are therefore equally preferred. Points b and c are also on the same indifference curve and are therefore equally preferred. Transitivity implies that the consumer would be indifferent between a and b; however, since more is preferred to less, a is preferred to b. Thus, as a result of the assumption of transitivity and the assumption that more is preferred to less, indifference curves cannot intersect.

Skill: Analytical AACSB: Analytical Thinking Status: Old

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19) If more is better, how can you explain that more pollution doesn't violate this principle?

Answer: When dealing with a "bad," we recast it as a "good." In this case, we recast "pollution" as "clean air" which then allows us to state that more is better, thus upholding our assumptions about preferences.

Skill: Conceptual AACSB: Analytical Thinking Status: New 4.2 Utility 1) Utility is the set of numerical values that A) yields an absolute level of pleasure from a bundle of goods.

B) reflects the relative ranking of various bundles of goods.

C) describes how much more a consumer prefers one bundle to another.

D) yields a cardinal ranking of bundles.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 2) If two bundles are on the same indifference curve, then A) the consumer derives the same level of utility from each.

B) the consumer derives the same level of ordinal utility from each but not the same level of cardinal utility.

C) no comparison can be made between the two bundles since utility cannot really be measured.

D) the MRS between the two bundles equals one.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) Adrian's utilities of two consumption bundles are 50 and 100 respectively. This implies that A) Adrian prefers the first bundle.

B) Adrian prefers the second bundle.

C) Adrian likes the second bundle twice as much.

D) Adrian likes the first bundle twice as much.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: New

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4) Clifford lives by the motto "Eat, drink, and be merry today, for tomorrow doesn't matter." If today's consumption is represented by "x" and tomorrow's consumption is represented by "y," then which of the following best represents Clifford's utility function?

A) U = x - y B) U = x/y C) U = x D) U = y Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 5) If the utility function (U) between food (F) and clothing (C) can be represented as U = the marginal utility of food A) is not positive.

B) does not diminish as food increases.

C) is not affected by the amount clothing.

D) increases as one obtains more clothing.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 6) If Fred's marginal utility of pizza equals 10 and his marginal utility of salad equals 2, then A) he would give up 5 pizzas to get the next salad.

B) he would give up 5 salads to get the next pizza.

C) he will eat five times as much pizza as salad.

D) he will eat five times as much salad as pizza.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 7) If Fred's marginal rate of substitution of salad for pizza equals 5, then A) he would give up 5 pizzas to get the next salad.

B) he would give up 5 salads to get the next pizza.

C) he will eat five times as much pizza as salad.

D) he will eat five times as much salad as pizza.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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,

8) What is the difference between ordinal and cardinal measurement?

Answer: Prices are measured in money, which is a cardinal measure. When you have $100 you are twice as well off compared to having $50. With an ordinal measure like an exam grade you can say that an A is better than a B but not how much better it is.

Skill: Definition AACSB: Application of Knowledge Status: Old 4.3 The Budget Constraint 1) Joe's income is $500, the price of food (F, y-axis) is $2 per unit, and the price of shelter (S, xaxis) is $100. Which of the following represents his budget constraint?

A) 500 = 2F + 100S B) F = 250 - 50S C) S = 5 - .02F D) All of the above.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 2) Joe's income is $500, the price of food (F, y-axis) is $2 per unit, and the price of shelter (S, xaxis) is $100. Which of the following represents his marginal rate of transformation of food for shelter?

A) -5 B) -50 C) -.02 D) None of the above.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 3) Joe's budget constraint equals 500 = 2F + 100S, where $500 is Joe's income, $2 is the price of food (F, y-axis) and $100 is the price of shelter (S, x-axis). How much food can Joe buy if he buys one unit of shelter?

A) 2 units B) 200 units C) 250 units D) 400 units Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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4) Joe's income is $500, the price of food (F, y-axis) is $2, and the price of shelter (S, x-axis) is $100. Which of the following bundles is in Joe's opportunity set?

A) 50 units of food, 5 units of shelter B) 200 units of food, 2 units of shelter C) 100 units of food, 1 unit of shelter D) 150 units of food, 3 units of shelter Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 5) The marginal rate of transformation of y for x represents A) the slope of the budget constraint.

B) the rate at which the consumer must give up y to get one more x.

C) -Px/Py. D) All of the above.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 6) The marginal rate of transformation of y for x represents A) the slope of the budget constraint.

B) the rate at which the consumer must give up x to get one more y.

C) -Py/Px. D) All of the above.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 7) The rate at which a consumer must give up y to get one more x is equal to A) -Px/Py. B) -Py/Px. C) -MUx/MUy. D) MUy/MUx. Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old

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8) Betty consumes good x and good y. If the price of x = $3 and the price of y = $4, then A) an extra unit of x costs 4/3 units of y.

B) an extra unit of y costs 4/3 units of x.

C) an extra unit of x costs 3/4 units of y.

D) Both B and C. Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 9) If the price of one good increases while the price of the other good and the consumer's income remain unchanged, what will happen to the budget line?

A) The budget line rotates inward from the intercept on the axis of the good that did not change in price.

B) The budget line rotates outward from the intercept on the axis of the good that did not change in price.

C) The budget line shifts inward without a change in slope.

D) The budget line shifts outward without a change in slope.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 10) Lisa eats both pizzas and burritos. If the price of a pizza increases, Lisa's opportunity set A) becomes larger.

B) becomes smaller.

C) is unchanged.

D) cannot be determined without more information.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 11) If Toby buys two goods and the prices of both goods increase by 50%, A) the budget constraint will be unchanged.

B) the slope of the budget constraint stay the same.

C) the slope of the budget constraint will decrease.

D) the budget constraint will shift outward in a parallel fashion.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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12) If Isabella buys two goods and the prices of both goods decrease by 50%, A) the budget constraint will be unchanged.

B) the slope of the budget constraint will increase.

C) the slope of the budget constraint will decrease.

D) the budget constraint will shift outward in a parallel fashion.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 13) If the consumer's income increases while the prices of both goods remain unchanged, what will happen to the budget line?

A) The budget line rotates inward from the intercept on the horizontal axis.

B) The budget line rotates outward from the intercept on the vertical axis.

C) The budget line shifts inward without a change in slope.

D) The budget line shifts outward without a change in slope.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 14) If the consumer's income decreases while the prices of both goods remain unchanged, what will happen to the budget line?

A) The budget line rotates inward from the intercept on the horizontal axis.

B) The budget line rotates outward from the intercept on the vertical axis.

C) The budget line shifts inward without a change in slope.

D) The budget line shifts outward without a change in slope.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: New 15) A consumer buys food (F) and shelter (S). If the consumer's income rises and there is no change in the prices of F or S, the marginal rate of transformation of F for S will A) increase.

B) decrease.

C) stay the same.

D) change, but there is not enough information to know how.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old

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16) What is the intuition that an expansion of an individual's budget set represents a gain?

A) More options are preferred to less.

B) Money is the root of all happiness.

C) Information is power.

D) Scarcity is avoidable with prosperity.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 4.4 Constrained Consumer Choice 1) Economists assume consumers select a bundle of goods that maximizes their well-being subject to A) their budget constraint.

B) their wealth.

C) relative prices.

D) their marginal rate of substitution.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) An optimum that occurs as a corner solution A) includes only one good.

B) cannot be an equilibrium.

C) cannot exhaust the budget constraint.

D) includes the exact same amounts of each good.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) An interior solution to a consumer's utility maximization problem implies A) consuming a positive amount of one good and a negative amount of the other good.

B) consuming negative amounts of all goods.

C) consuming optimal amounts of all goods.

D) consuming less than an optimal amount of at least one good.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: New

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4) A consumer's utility-maximizing bundle contains positive amounts of both goods. This implies A) there is an interior solution.

B) there is a corner solution.

C) MRT does not equal MRS. D) the budget constraint is not tangent to the indifference curve.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: New 5) The consumer is in equilibrium when A) MRT = MRS. B) Px/Py = MUx/MUy. C) the budget line is tangent to the indifference curve at the bundle chosen.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 6) By selecting a bundle where MRS = MRT, the consumer is A) achieving a corner solution.

B) reaching the highest possible indifference curve she can afford.

C) not behaving in an optimal way.

D) All of the above.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 7) By selecting a bundle where MRS = MRT, the consumer is saying A) "I value my last unit of each good equally."

B) "I am willing to trade one good for the other at the same rate that I am required to do so."

C) "I will equate the amounts spent on all goods consumed."

D) All of the above.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old

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8) Assume the price of beer is $4, the price of pizza is $10 and the consumer's income is $250.

Which consumption bundle will NOT be the consumers choice?

A) 5 beers, 5 pizzas B) 0 beers, 25 pizzas C) 25 beers, 15 pizzas D) None of the bundles will be chosen.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 9) With respect to consuming food and shelter, two consumers face the same prices and both claim to be in equilibrium. We therefore know that A) they both have the same marginal utility for food.

B) they both have the same marginal utility for shelter.

C) they both have the same MRS of food for shelter.

D) All of the above.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 10) If a company offers a "buy one, get one free" (BOGO) promotion A) consumers will buy enough units of the good to get the free units.

B) the consumer's budget constraint will not be a straight line.

C) the company would be better off just reducing the price by 50%.

D) All of the above.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: New

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4.5 Deriving Demand Curves

1) The above figure shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks assuming he has $20 to spend on these goods. Which of the following points are on Bobby's price-consumption curve?

A) 10 snacks and 20 juices B) 10 snacks and 0 juices C) 10 snacks and 5 juices D) 10 snacks and 15 juices Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 2) The above figure shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks assuming he has $20 to spend on these goods. Which of the following points are on Bobby's demand curve for snacks?

A) p = 2, q = 10 B) p = 2, q = 13 C) p = 2, q = 5 D) p = 1, q = 20 Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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3) The above figure shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks. As the price of snacks rises, Bobby's utility A) stays the same.

B) increases.

C) decreases.

D) might change, but there is not enough information to determine.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 4) The above figure shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks. Bobby's demand for snacks is A) unit elastic.

B) elastic.

C) inelastic.

D) perfectly elastic.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 5) The above figure shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks. As the price of snacks rises, the price for juice A) stays the same.

B) increases.

C) decreases D) might change, but there is not enough information to determine.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 6) An individual's demand curve for a good can be derived by measuring the quantities selected as A) the price of the good changes.

B) the prices of substitute goods change.

C) income changes.

D) All of the above.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: New

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7) As the price of a good rises, the consumer will experience A) a desire to consume a different bundle.

B) a decrease in utility.

C) a downward or leftward movement on the indifference map.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) As the price of a good falls, the consumer will experience A) a desire to consume a different bundle.

B) an increase in utility.

C) an upward or rightward movement on the indifference map.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New 9) An increase in the price of a good causes A) a change in the slope of the budget line.

B) an increase in the consumption of that good.

C) a rightward shift of the demand curve for that good.

D) a parallel rightward shift of the budget line.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 10) A decrease in the price of a good causes A) a change in the slope of the budget line.

B) a decrease in the consumption of that good.

C) a leftward shift of the demand curve for that good.

D) a parallel leftward shift of the budget line.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: New

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4.6 Behavioral Economics 1) Behavioral economics extends traditional economic models by A) including insights from psychology and human cognition models.

B) modeling behavior rather than prices.

C) admitting that individuals are irrational.

D) admitting that incentives are very important.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 2) Which is a behavioral economics justification for limiting advertising directed towards children?

A) Children have no money.

B) Children pester their parents too much.

C) Children have no memory.

D) Children do not always have transitive preferences.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 3) In behavioral economics, the endowment effect refers to the fact that A) most people believe that most wealthy people inherit their wealth.

B) many people would be indifferent between being endowed with money or knowledge.

C) many people place a higher value on what they own than the same item they are considering purchasing.

D) most people respond to tax incentives to provide an endowment for their children.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 4) Which of the following might explain the evidence of an endowment effect in behavioral economics?

A) government regulation B) knowledge and experience C) the federal tax code D) class envy Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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5) In Spain, people are considered organ donors unless they explicitly indicate they do not want to be. In the United States, people are only considered organ donors if they explicitly indicate they wish to be. Behavioral economics would suggest that everything else equal, A) the opt-in system of Spain would generate more organ donors. as a percentage of the adult population.

B) the opt-in system of the United States would generate more organ donors as a percentage of the adult population.

C) the opt-out system of Spain would generate more organ donors. as a percentage of the adult population.

D) the opt-out system of the United States would generate more organ donors as a percentage of the adult population.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: New 6) In behavioral economics, the term salience refers to A) relevance to the problem being investigated.

B) people only considering information when it is conveyed in a subtle manner.

C) how an experiment is designed.

D) people considering information when it is presented in an "eye grabbing" manner.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: New 7) In behavioral economics, salience is best exemplified by A) consumers responding differently when posted prices increase rather than when prices increase because of sales tax increases.

B) consumers responding the same regardless of how prices change.

C) the end of a controlled experiment.

D) consumers responding differently when income increases permanently rather than temporarily.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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8) Bounded rationality suggests that A) individuals might make "incorrect" decisions because they are unable to consider all possible options.

B) individuals would rather have less choice to more choice.

C) rational decisions can only be made when choices are restricted.

D) individuals are happier when their choices are restricted or "bounded."

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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Managerial Economics and Strategy, 3e (Perloff/Brander) Chapter 5 Production 5.1 Production Functions 1) Which of the following statements best describes a production function?

A) The maximum profit generated from given levels of inputs.

B) The maximum level of output generated from given levels of inputs.

C) All levels of output that can be generated from given levels of inputs.

D) All levels of inputs that could produce a given level of output.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: New 2) A production function tells the firm A) the maximum output it can expect to produce with a given mix of inputs.

B) the average output it can expect to produce with a given mix of inputs.

C) the minimum output it can expect to produce with a given mix of inputs.

D) the average level of production for other firms in the industry.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 3) Which of the following is NOT a factor of production?

A) labor B) capital C) money D) materials Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) Which of the following is least likely to be considered a capital input?

A) a sewing machine B) a tractor C) a telephone D) a ten dollar bill Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old

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5) Which of the following is least likely to be considered an input to production?

A) a supervisor's time B) an integrated circuit fabrication plant C) wind D) None of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 6) Which of the following is an input to the production process?

A) a janitor's time B) a cement mixer C) Both A and B. D) None of the above.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 7) Which of the following is an output of production?

A) a haircut B) a U.S. savings bond C) a share of Acme Corporation stock D) None of the above.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 8) Which of the following is NOT an output of the production function?

A) a haircut B) a share of Acme Corporation stock C) a case of soda pop D) an extra-large pepperoni pizza Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old

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9) A firm engaging in efficient production, using current technology, ________ produce its current level of production with ________ inputs.

A) could; fewer B) cannot; fewer C) cannot, more D) cannot; different Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 10) A firm that engages in efficient production A) cannot produce the same output with fewer inputs.

B) could produce the same output with fewer inputs if it wanted to.

C) is not interested in profit maximization.

D) uses old technology to minimize costs.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 11) With respect to production, the short run is best defined as a time period A) lasting about six months.

B) lasting about two years.

C) in which all inputs are fixed.

D) in which at least one input is fixed.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 12) In the long run, all factors of production are A) variable.

B) fixed.

C) materials.

D) rented.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old

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13) A factor of production that cannot be easily changed in the relevant time period is called a A) short-run factor.

B) fixed input.

C) variable input.

D) production anchor.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 14) A factor of production that can be easily changed in the relevant time period is called a A) fixed input.

B) temporary input.

C) variable input.

D) substitution input.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 15) Which of the following is likely to have the shortest long run?

A) a nail salon B) a construction firm C) an electric company D) a container ship operations company Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 16) Which of the following is likely to have the longest long run?

A) a beauty salon.

B) a pizza parlor.

C) a road construction firm.

D) an airline.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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17) Which of the following statements is TRUE? A) Labor is always a variable input.

B) Capital is always a fixed input.

C) Materials are always variable inputs.

D) None of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 18) Which of the following statements is TRUE? A) Labor is always a variable input, whereas Capital is always a fixed input.

B) Labor is always a fixed input, whereas Capital is always a variable input.

C) Labor can be a fixed input., and Capital can be a variable input.

D) Labor can be a fixed input, and Capital is always a fixed input.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 19) Which of the following statements is TRUE in the short run?

A) Generally, labor is a fixed input.

B) Generally, capital is a fixed input.

C) Raw materials are generally considered to be fixed inputs.

D) None of the above.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 20) Which of the following statements is TRUE in the short run?

A) Generally, labor is a variable input.

B) Generally, capital is a variable input.

C) Raw materials are generally considered to be fixed inputs.

D) Whether or not an input is considered fixed is dependent on the price paid for the input.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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21) Which of the following inputs is normally considered to be variable in the short run?

A) labor B) capital C) money D) time Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 22) Which of the following inputs is normally considered to be fixed in the short run?

A) labor B) capital C) money D) All of the above.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 23) Which of the following inputs is normally considered to be variable in the short run?

A) labor B) raw materials C) capital D) Both A and B Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 24) Joey cuts grass during the summer. He owns one lawn mower. For him, the short run is equal to A) the amount of time it takes to acquire more customers.

B) the amount of time it takes to hire an additional employee.

C) the amount of time it takes to hire an additional employee and buy another lawn mower.

D) the amount of time it takes to mow one lawn.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old

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25) Joey cuts grass during the summer. He rents a lawn mower from his dad. Which of the following statements best illustrates the difference between the short run and the long run for Joey?

A) Joey's friends say they will help him, but when he calls them, they say they have other things to do.

B) When Joey acquires more customers, he responds by working more hours. Next year, he will buy a lawn mower and split the work with his brother.

C) Some customers pay Joey immediately; others wait till the following week.

D) Joey has had to turn away some customers because he is already too busy.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 26) The length of the short run is the same for all firms.

Answer: False. Firms differ in their ability to change the amount of capital they employ.

Therefore, the short-run period is likely different for firms in different industries.

Skill: Analytical AACSB: Analytical Thinking Status: Old 27) Explain why labor might not always be a variable input.

Answer: In the real world, units of labor are not identical. Many firms employ highly specialized units of labor. Their supply might be very inelastic so that the firm cannot easily increase the amount of this type of labor.

Skill: Analytical AACSB: Analytical Thinking Status: Old 5.2 Short-Run Production 1) Total Product is A) the change in total product resulting from an extra unit of labor, holding other factors constant.

B) the ratio of output to the number of workers used to produce that output.

C) the amount of output that can be produced by a given amount of labor.

D) equal to the marginal product of labor when the average product is increasing.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old

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2) The Marginal Product of Labor is A) the change in total product resulting from an extra unit of labor, holding other factors constant.

B) the ratio of output to the number of workers used to produce that output.

C) the amount of output that can be produced by a given amount of labor.

D) equal to the marginal product of labor when the average product is increasing.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 3) Given the production function q = 4L + K, what is the marginal product of labor when capital is fixed at 50?

A) 54 B) 4 C) 50 D) 250 Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 4) Given the production function q = 4L + K, what is formula for the marginal product of labor?

A) 4 B) 4 + K C) 4K D) Cannot be determined with the information given.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 5) Given the production function q = 4LK, what is the marginal product of labor when capital is fixed at 25?

A) 4K B) 100 C) 100K D) 100L Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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6) Given the production function q = 1.37LK, what is the marginal product of labor?

A) 1.37 B) 0 C) 1.37K D) Cannot be determined with the information given.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 7) At any given point on the curve, the slope of the total product curve always equals A) the ratio of the marginal product and the average product.

B) the change in input divided by the change in output.

C) the average product of the input.

D) the marginal product of the input.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 8) Jennifer is the only employee of her sole proprietorship. She is entertaining the idea of hiring an additional employee. She knows that on her own she can produce 100 units per day. Jennifer figures that Applicant A will help her produce 175 units per day whereas Applicant B will help her produce 155 units per day. Which of the following statements is MOST accurate?

A) Applicant B has a marginal product of 75 units.

B) Applicant B has an average product of 77.5 units.

C) Applicant A has a marginal product of 75 units.

D) Applicant A has an average product of 87.5 units.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 9) The Average Product of Labor is A) the change in total product resulting from an extra unit of labor, holding other factors constant.

B) the ratio of output to the number of workers used to produce that output.

C) the amount of output that can be produced by a given amount of labor.

D) equal to the marginal product of labor when the average product is increasing.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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10) Average product will fall as long as A) marginal product is falling.

B) it exceeds marginal product.

C) it is less than marginal product.

D) the number of workers is increasing.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: New 11) If the average product of labor equals the marginal product of labor, then A) the average product of labor is at a maximum.

B) the marginal product of labor is at a maximum.

C) Both A and B above.

D) Neither A nor B above.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 12) If the marginal product of labor is constant for all levels of output, then the average product of labor A) is constant.

B) equals the marginal product of labor.

C) Both A and B above.

D) Either A or B above but not both.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old

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13) The above table shows a short-run production function for Albert's Pretzels. The marginal product of labor A) rises then falls as the amount of capital increases.

B) falls then rises as the amount of labor increases.

C) is greater than or equal to the average product of labor for all amounts of labor.

D) is less than or equal to the average product of labor for all amounts of labor.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 14) The above table shows the short-run production function for Albert's Pretzels. The marginal product of labor for the third worker is A) 6.

B) 8.

C) 24.

D) not known from the information provided.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 15) The above table shows the short-run production function for Albert's Pretzels. The marginal product of labor equals the average product of labor A) for all levels of labor.

B) at none of the levels of labor.

C) only for the first worker.

D) only for the fifth worker.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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16) The above table shows the short-run production function for Albert's Pretzels. The law of diminishing marginal product A) appears with the second worker.

B) has not yet appeared for any of the levels of labor.

C) first appears with the fifth worker.

D) is refuted by this evidence.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 17) The above table shows the short-run production function for Albert's Pretzels. The average product of labor A) increases first and then decreases.

B) decreases first and then increases.

C) decreases throughout.

D) increases throughout.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 18) Which situation is most likely to exhibit diminishing marginal returns to labor?

A) a factory that obtains a new machine for every new worker hired B) a factory that hires more workers and never increases the amount of machinery C) a factory that increases the amount of machinery and holds the number of workers constant D) None of these situations will result in diminishing marginal returns to labor.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 19) Which of the following statements best summarizes the law of diminishing marginal returns?

A) In the short run, as more labor is hired, output diminishes.

B) In the short run, as more labor is hired, output increases at a diminishing rate.

C) In the short run, the amount of labor a firm will hire diminishes as output increases.

D) As more labor is hired, the length of time that defines the short run diminishes.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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20) Diminishing marginal returns lead to diminishing returns A) when marginal returns fall but remain positive.

B) only in theory.

C) when marginal returns become negative.

D) when labor exceeds capital.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 21) The law of diminishing marginal returns A) implies that the marginal product of labor must fall.

B) requires using superior technology to increase output.

C) means that total output will always fall.

D) None of the above.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 22) Joey cuts lawns during the summer. Let q equal the number of acres mowed per day, and let L equal the number of hours worked per day. Joey never works more than eight hours per day, and during that time his short-run production function is q = 0.2 ∗ L. Which of the following statements is FALSE? A) Joey's marginal product equals his average product.

B) Joey's marginal product diminishes by 0.2 for each additional hour worked.

C) Joey's average product is constant.

D) Joey's marginal product is constant.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 23) Thomas Malthus' prediction of mass starvation resulting from diminishing marginal returns has NOT been fulfilled because A) the law of diminishing marginal returns did not hold in this case.

B) Malthus ignored other factors like technological change.

C) relative to Malthus' day, a larger percentage of today's labor force works in the agricultural sector.

D) All of the above.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old

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For the following, please answer "True" or "False" and explain why.

24) The actual time length of the short run is determined by when diminishing marginal returns start.

Answer: False. The actual time length of the short run is a function of how long it would take to adjust all inputs.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 25) If marginal productivity is decreasing as more labor is hired, then average productivity must be decreasing as well.

Answer: False. The change in average productivity is not determined by the change in marginal productivity. Average productivity can be increasing even when marginal productivity is decreasing. Average productivity can only be decreasing when marginal productivity is below average productivity.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 26) Explain the difference between diminishing returns to labor and diminishing marginal returns to labor.

Answer: Diminishing returns to labor means that an increase in the number of labor units will decrease the amount of output. Diminishing marginal returns means that additional units of labor increase output at a decreasing rate.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 27) Suppose the production function for T-shirts can be represented as q = L0.25K0.75. Show that the marginal productivity of labor diminishes in the short run.

Answer: In the short run, MPL = 0.25 ∗ (q/L). The change in MP with respect to L equals d(MPL)/dL = -0.25 ∗ q/L2. Thus, for all levels of labor hired, MPL falls as L increases.

Skill: Analytical AACSB: Analytical Thinking Status: Old

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5.3 Long-Run Production 1) An isoquant represents levels of capital and labor that A) have constant marginal productivity.

B) yield the same level of output.

C) incur the same total cost.

D) All of the above.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 2) If capital is fixed, but a firm varies labor A) the firm stays on the same isoquant.

B) the firm moves to a new isoquant.

C) the firm might move to a new isoquant, depending on how much labor is added.

D) the firm's output will be dependent on the marginal rate of technical substitution.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) The slope of an isoquant tells us A) how much output increases when both inputs are increased.

B) the increase in MPL when capital increases.

C) the decrease in capital necessary to keep output constant when labor increases by one unit.

D) the decrease in capital necessary to keep MPL constant when labor increases by one unit.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 4) The steeper an isoquant is A) the greater is the marginal product of labor relative to that of the marginal product of capital.

B) the greater is the substitutability between capital and labor.

C) the greater is the need to keep capital and labor in fixed proportions.

D) the greater is the level of output.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old

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5) Isoquants A) hold utility constant.

B) hold capital constant.

C) hold labor constant.

D) hold output constant.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 6) Which of the following is NOT a property of isoquants?

A) They do not cross.

B) The closer they are to the origin, the higher the level of output.

C) They have a downward slope.

D) They are "thin."

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 7) With capital on the vertical axis and labor on the horizontal axis, vertical isoquants imply that A) capital and labor are perfect substitutes.

B) capital and labor must be used together in a fixed proportion.

C) capital is not productive.

D) labor is not productive.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 8) Isoquants that are downward-sloping straight lines imply that the inputs A) are perfect substitutes.

B) are imperfect substitutes.

C) cannot be used together.

D) must be used together in varying proportions.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old

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9) L-shaped isoquants imply that production requires that the inputs A) are perfect substitutes.

B) are imperfect substitutes.

C) cannot be used together.

D) must be used together in a certain proportion.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 10) Which of the following is an example of a production function with fixed proportions?

A) putting orange juice into cartons B) mowing lawns C) cutting hair D) teaching economics Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) If you are running a winery and you need one bottle for every 750ml of wine, then your production function A) is inefficient.

B) is considered "fixed-proportion."

C) will have a diminishing marginal rate of technical substitution.

D) has downward-sloping, straight line isoquants.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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12) At Joey's Lawncutting Service, a lawn mower cannot cut grass without a laborer. A laborer cannot cut grass without a lawn mower. Which graph in the above figure best represents the isoquants for Joey's Lawncutting Service when units of capital per day is on the vertical axis and units of labor per day is on the horizontal axis?

A) Graph A B) Graph B C) Graph C D) Graph D Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 13) In the above figure, Graph D with units of capital on the vertical axis and units of labor on the horizontal axis implies that A) the marginal product of labor is increasing as more labor is employed.

B) the marginal product of labor is decreasing as more labor is employed.

C) the capital and labor are perfect substitutes.

D) capital and labor have to be employed in fixed proportions.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old

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14) Lectures in microeconomics can be delivered either by an instructor (labor) or a movie (capital) or any combination of both. Each minute of the instructor's time delivers the same amount of information as a minute of the movie. Which graph in the above figure best represents the isoquants for lectures in microeconomics when units of capital per day is on the vertical axis and units of labor per day is on the horizontal axis?

A) Graph A B) Graph B C) Graph C D) Graph D Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 15) Lectures in microeconomics can be delivered either by an instructor (labor) or a movie (capital) or any combination of both. Yet, it gets harder and harder to substitute more movies for an instructor the more movies are already used. Which graph in the above figure best represents the isoquants for lectures in microeconomics when units of capital per day is on the vertical axis and units of labor per day is on the horizontal axis?

A) Graph A B) Graph B C) Graph C D) Graph D Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 16) Which graph in the above figure represents the isoquants where, as the amount of labor used increases and the amount of capital used decreases, the marginal product of labor rises (units of capital per day is on the vertical axis and units of labor per day is on the horizontal axis)?

A) Graph A B) Graph B C) Graph C D) Graph D Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old

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17) The slope of an isoquant A) gives the substitutability of inputs while keeping output constant.

B) shows how output varies while keeping inputs constant.

C) is independent of the marginal product of capital.

D) shows the firm's returns to scale.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 18) The marginal rate of technical substitution always equals A) the slope of the total product curve.

B) minus the ratio of the marginal products of inputs.

C) the change in output due to a change in the amount of one input.

D) the distance between two isoquants.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 19) The marginal rate of technical substitution shows A) how many machines can be replaced by computers, keeping output constant.

B) how many computers are needed to replace workers so that output can increase.

C) the rate at which technology advances change marginal productivity.

D) how many workers can do the job of one computer, keeping output constant.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 20) To say that isoquants are convex is to say that A) the marginal rate of technical substitution falls as labor increases.

B) capital and labor are perfect substitutes.

C) labor, but not capital, is subject to the law of diminishing marginal returns.

D) there are constant returns to scale.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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21) One way to explain the convexity of isoquants is to say that A) as labor increases and capital decreases, MPL rises while MPK falls.

B) as labor increases and capital decreases, MPL falls while MPK rises.

C) as labor increases and capital decreases, MPL and MPK both fall.

D) as labor increases and capital decreases, MPL and MPK both rise.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 22) If a firm hires one worker and eliminates four units of capital, and hires one more worker and replaces three more units of capital, keeping output constant, then A) workers and capital are perfect substitutes.

B) the firm is operating inefficiently because capital is more efficient than workers.

C) the firm is experiencing a diminishing marginal rate of technical substitution.

D) there are decreasing returns to scale.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 23) If a firm fired one worker and lost 12 units of production and decides to add one more unit of capital, then to remain on the same isoquant what must be TRUE? A) The MPK of the next unit of capital added equals 12.

B) The firm must force the other workers to work more.

C) The firm will experience a decline in output.

D) The marginal rate of technical substitution is greater than 12.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 24) If capital increases by two units, and MRTS is 1, then what is the MPL? A) 2 B) 1/2 C) 1 D) Not enough information given.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old

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25) If MPK = 3, and MRTS = -4, what is MPL? A) 12 B) -12 C) 4/3 D) -4/3 Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 26) If MPL = 3, and MRTS = -4, what is MPK? A) 12 B) -12 C) 3/4 D) -3/4 Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old For the following, please answer "True" or "False" and explain why.

27) Unlike indifference curves, isoquants can intersect.

Answer: False. By the same logic as with indifference curves, the intersection implies the same level of output. Since output increases as one moves toward the northeast on the isoquant map, moving from the intersection one isoquant shows higher output and the other shows lower. This is contradictory.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 28) Suppose that additional units of capital affect the marginal productivity of labor. This is not unrealistic. Word processors increase the marginal productivity of secretaries. On the other hand, robotic equipment can completely replace a worker and, thereby, lower the marginal productivity of labor. Given this possibility, determine the conditions under which isoquants will not be convex (i.e., concave).

Answer: The slope of the isoquant equals -MPL/MPK. To be concave, the slope of the isoquant becomes steeper as L increases. For this to be the case, MPL would have to increase more than MPK as labor increases and capital falls. That means the decrease in capital causes MP L to rise more than the increase in labor causes MPL to fall. The large inverse relationship implies that capital is replacing labor for this to be the case.

Skill: Conceptual AACSB: Analytical Thinking Status: Old

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29) During the "computer revolution" of the 1980s and 1990s, many firms replaced old technology with new technology. What might explain why firms don't change technology as quickly today?

Answer: The marginal rate of technical substitution of old technology for new technology was low in the past, but the marginal rate of technical substitution of new technology for newer technology is higher today.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 5.4 Returns to Scale 1) Returns to scale refers to the change in output when A) all inputs increase proportionately.

B) labor increases holding all other inputs fixed.

C) capital equipment is doubled.

D) specialization improves.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 2) Returns to scale is a concept that operates A) only in the short run.

B) only in the long run.

C) in both the long run and the short run.

D) in either the long run or the short run depending on the industry of the firm.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 3) If a firm doubles inputs and produces three times the output, then there are A) constant returns to scale.

B) increasing marginal returns.

C) decreasing returns to scale.

D) increasing returns to scale.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: New

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4) If a firm cuts inputs in half, and output falls by more than half, then there are A) increasing returns to scale.

B) decreasing returns to scale.

C) constant returns to scale.

D) decreasing marginal returns.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 5) If a firm triples inputs and produces twice the output, then there are A) constant returns to scale.

B) no returns to scale.

C) decreasing returns to scale.

D) increasing returns to scale.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: New 6) If a firm triples inputs and produces three times the output, then there are A) constant returns to scale.

B) varying returns to scale.

C) decreasing returns to scale.

D) increasing returns to scale.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: New 7) Decreasing returns to scale may occur because increasing the amount of inputs used A) increases specialization.

B) always increases the amount of output produced.

C) may cause coordination difficulties.

D) increases efficiency.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old

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8) The table in the above figure shows the levels of output resulting from different levels of inputs. Which of the following conclusions can be drawn from this information?

A) Increasing returns to scale exist between 100 and 200 units of output.

B) Constant returns to scale exist throughout all levels of production.

C) Labor is subject to diminishing marginal productivity in the short run.

D) No firm conclusions can be drawn.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 9) The table in the above figure shows the levels of output resulting from different levels of inputs. Returns to scale are greatest at which level of output?

A) 100-200 units B) 200-400 units C) 400-600 units D) There is insufficient information to answer the question.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 10) The table in the above figure shows the levels of output resulting from different levels of inputs. At which level of input are there constant returns to scale?

A) 400-600 units B) Constant returns to scale exist throughout all levels of production.

C) Constant returns to scale do not exist at any level of production.

D) No firm conclusions can be drawn.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old

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11) The above figure shows the isoquants for producing steel. Increasing returns to scale are A) present when producing less than 10,000 tons.

B) present when producing less than 20,000 tons.

C) present when producing less than 30,000 tons.

D) never present.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 12) The above figure shows the isoquants for producing steel. Decreasing returns to scale are A) present when producing more than 10,000 tons.

B) present when producing more than 20,000 tons.

C) present when producing more than 30,000 tons.

D) never present.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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13) The above figure shows the isoquants for producing steel. Constant returns to scale are A) present when producing less than 10,000 tons.

B) present when producing between 10,000 and 20,000 tons.

C) present when producing more than 20,000 tons.

D) never present.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 14) The above figure shows the isoquants for producing steel. When producing more than 20,000 tons, there are A) increasing returns to scale.

B) decreasing returns to scale.

C) constant returns to scale.

D) economies of scale.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 15) The above figure shows the isoquants for producing steel. When producing less than 10,000 tons, there are A) increasing returns to scale.

B) decreasing returns to scale.

C) constant returns to scale.

D) diseconomies of scale.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 16) The above figure shows the isoquants for producing steel. When producing between 10,000 and 20,000 tons, there are A) increasing returns to scale.

B) decreasing returns to scale.

C) constant returns to scale.

D) economies of scale.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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Product Tobacco products Paper products Transportation equipment Furniture Electronic equipment Petroleum Food Clothing Primary metal

Labor

Capital

0.18

0.33

0.44

0.65

0.44

.048

0.60

0.40

0.49

0.51

0.30 0.43 0.70 0.51

0.88 0.48 0.30 0.73

17) According to the table above, paper product production exhibits A) decreasing returns to scale.

B) constant returns to scale.

C) increasing returns to scale.

D) varying returns to scale.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 18) According to the table above, clothing production exhibits A) decreasing returns to scale.

B) constant returns to scale.

C) increasing returns to scale.

D) varying returns to scale.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 19) According to the table above, transportation equipment production exhibits A) decreasing returns to scale.

B) constant returns to scale.

C) increasing returns to scale.

D) varying returns to scale.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old

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20) According to the table above, which of the following exhibit decreasing returns to scale?

A) tobacco products and clothing, but not furniture B) transportation equipment and food, but not paper products C) transportation equipment, food, and paper products D) furniture and electronic equipment, but not tobacco products Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 21) If a Cobb-Douglas production function has alpha = 0.34 and beta = 0.42, then a 1% increase in inputs results in a(n) ________ change in output.

A) 0.8% B) 8% C) 0.76% D) -0.76% Answer: C Skill: Analytical AACSB: Analytical Thinking Status: New 22) Let the production function be q = ALaKb. The function exhibits increasing returns to scale if A) a + b = 1.

B) a + b > 1.

C) a + b < 1.

D) Cannot be determined with the information given.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 23) Let the production function be q = ALaKb. The function exhibits decreasing returns to scale if A) a + b = 1.

B) a + b > 1.

C) a + b < 1.

D) Cannot be determined with the information given.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old

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24) Let the production function be q = ALaKb. The function exhibits constant returns to scale if A) a + b = 1.

B) a + b > 1.

C) a + b < 1.

D) Cannot be determined with the information given.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 25) Suppose the production of DVD players can be represented by the following production function: q = L0.4K0.4. Which of the following statements is (are) TRUE? A) The production function has decreasing returns to scale.

B) The marginal productivity of labor falls as labor increases in the short run.

C) Capital and labor can be substituted for one another.

D) All of the above.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 26) Suppose the production of DVD players can be represented by the following production function: q = L0.4K0.4. Which of the following statements is TRUE? A) The production function has decreasing returns to scale.

B) The production function has increasing returns to scale.

C) The production function has constant returns to scale.

D) Returns to scale vary with the level of output.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old

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27) Suppose the production of DVD players can be represented by the following production function: q = L0.4K0.4. The firm currently produces q1 units. If all inputs doubled, the new level of output will equal A) 20.4 ∗ q1.

B) 20.8 ∗ q1.

C) 0.8 ∗ q1.

D) 1.6 ∗ q1.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 28) Which of the following statements is TRUE? A) A Cobb-Douglas production function can have different returns to scale at different output levels.

B) It is impossible to have increasing returns to scale for one output level, and decreasing returns to scale for a different output level.

C) It is possible to have increasing returns to scale for one output level, and decreasing returns to scale for a different output level.

D) None of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 29) Returns to specialization can occur when A) increasing the amount of labor allows workers to specialize.

B) the exponents of the Cobb-Douglas production function are greater than 1.

C) a firm doubles its inputs.

D) the average cost curve is above the marginal costs curve.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old For the following, please answer "True" or "False" and explain why.

30) Cobb-Douglas production functions can never possess varying returns to scale.

Answer: True. The Cobb-Douglas function takes the form q = LαKβ, where the exponents are constant parameters. The returns to scale equals α + β which is constant for all q.

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31) Show that increasing returns to scale can co-exist with diminishing marginal productivity.

Answer: The production function below illustrates this point. Diminishing marginal productivity describes what happens to output when only labor increases; returns to scale describes what happens to output when both capital and labor increase.

The first three rows illustrate diminishing marginal returns. Comparing rows 1 and 4 shows increasing returns to scale.

Skill: Analytical AACSB: Analytical Thinking Status: Old

32) The above figure shows the isoquants for the production of steel. In which regions of production are there increasing, decreasing, and constant returns to scale?

Answer: When output is less than 10,000 tons, there are increasing returns to scale. Between 10,000 and 20,000 tons, there are constant returns to scale. For output greater than 20,000 tons, there are decreasing returns to scale.

Skill: Analytical AACSB: Analytical Thinking Status: Old

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5.5 Innovation 1) All of the following are considered process innovation EXCEPT A) neutral technical progress.

B) labor saving technical progress.

C) organizational innovation.

D) nonneutral technical progress.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 2) Neutral technical progress allows a firm to A) produce more output with the same inputs.

B) use less capital to produce more output.

C) use less labor to produce more output.

D) produce the same amount of output with the same inputs.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 3) Capital saving nonneutral technical progress allows a firm to A) produce more output with the same inputs.

B) use less capital and the same amount of other inputs to produce the same level of output.

C) use more capital to produce the same level of output.

D) use less capital and more of other inputs to produce the same level of output.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 4) Labor saving nonneutral technical progress allows a firm to A) produce more output with the same inputs.

B) use less labor and the same amount of other inputs to produce the same level of output.

C) use more labor to produce the same level of output.

D) use less labor and more of other inputs to produce the same level of output.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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5) If production function q1 = f(L, K), which of the following production functions illustrates neutral technical progress?

A) q2 = f(1.25L, 1.25K) B) q2 = f(1.25L, K) C) q2 = f(L, 1.25K) D) q2 = 1.25 ∗ f(L, K) Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) Technical and organizational change A) typically reduces prices by increasing the supply of the product, ceteris paribus.

B) typically reduces prices by decreasing the demand for the product, ceteris paribus.

C) typically increases prices by increasing the demand for the product, ceteris paribus.

D) typically increases prices by decreasing the supply for the product, ceteris paribus.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 7) Joey's lawncutting service recently traded in its push mowers for gasoline-powered mowers.

Joey still requires one worker per lawnmower; however, more grass is now cut in the same amount of time as before. This is an example of A) labor-saving technical change.

B) non-neutral technical change.

C) neutral technical change.

D) organizational change.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) Over a five-year span, the ABC Co. reduced the amount of labor it hired. At the same time, the marginal productivity of labor increased. Which of the following COULD explain this observation?

A) the law of diminishing marginal returns B) labor saving technical change C) organizational innovation D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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9) The implementation of the assembly line is an example how A) changes in the organization of production improve productivity.

B) neutral technical change improves productivity.

C) non-neutral technical change can decrease productivity.

D) labor saving technical change increases economy-wide unemployment.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 10) Amazon.com purchased Kiva Systems, intending to use its robots in warehouses. This is an example of A) neutral technical change.

B) labor-saving technical change.

C) division of labor.

D) economies of scale.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) The use of robots in agriculture is an example of A) organizational changes leading to increased productivity.

B) decreasing returns to scale.

C) neutral technical change leading to increases in productivity.

D) nonneutral technical progress.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old For the following, please answer "True" or "False" and explain why.

12) Changing how production is organized cannot result in changes in productivity.

Answer: False. Henry Ford assembly line is an example of how changes in the organization of production increased productivity.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 13) Explain how firms that each produce as efficiently as they can may not be equally productive.

Answer: Firm-specific characteristics may vary the level of productivity for firms even if all firms operate as efficiently as each possibly can.

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Managerial Economics and Strategy, 3e (Perloff/Brander) Chapter 6 Costs 6.1 The Nature of Costs 1) Economic costs of an input include A) only implicit costs.

B) only explicit costs.

C) both implicit and explicit costs.

D) whatever management wishes to report to the shareholders.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 2) Which of the following is NOT an explicit cost?

A) $200 to hire 2 gardeners for landscaping work B) $1500 to buy bricks for the driveway of your house C) $25 for lunch to serve to your workers D) the $100 in interest you lost by using your CD funds to pay for a new pizza oven Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New 3) Sarah earns $40,000 per year working for a large corporation. She is thinking of quitting this job to work full time in her own business. She will invest her savings of $50,000 (which currently has an annual 10% rate of return) into the business. Her annual opportunity cost of this new business is A) $0.

B) $40,000.

C) $45,000.

D) $90,000.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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4) The Nifty Gum Co. has purchased a large parcel of land for $1 million. The company recently discovered that the land is contaminated and is worthless to all possible buyers. The opportunity cost of the land is A) $0.

B) $1 million.

C) some amount greater than $0 but less than $1 million.

D) equal to the cost of the factory that was planned to be built there.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 5) If a firm buys a building so as to have office space for its workers, the monthly opportunity cost of the building is best measured as A) the monthly mortgage payment the firm must pay.

B) the price the firm paid divided by twelve.

C) zero.

D) the rent the firm could earn if it rented the building to another firm.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) Sue is taking an accounting job she was offered that pays $67,000 per year. She also had two other offers, a sales job paying $71,000 per year and a marketing job paying $65,000 per year.

What is Sue's opportunity cost of taking the accounting job?

A) $65,000 B) $67,000 C) $71,000 D) $136,000 Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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7) Tom is going to quit his job to pursue his PhD in economics, which will take him 6 years to complete. He currently makes $55,000 per year as a high school teacher. While going to school, he will receive a stipend of $24,000 per year plus $6,000 per year to help cover food and rent.

His living expenses are the same regardless of what he does. What is Tom's opportunity cost of pursuing his PhD? A) $150,000 B) $180,000 C) $186,000 D) $330,000 Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 8) Manisha could work for another firm making $10,000 per month, but she decides to open her own gourmet cheese store and pay herself $2,000 per month. In her first month of operations, she spends $6,000 on cheese, $1,000 on other items, and $2,500 on rent. She had a great opening month and brought in revenues of $14,500. What are Manisha's economic profits?

A) $3,000 B) $4,000 C) -$5,000 D) -$6,000 Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 9) Manisha could work for another firm making $10,000 per month, but she decides to open her own gourmet cheese store and pay herself $2,000 per month. In her first month of operations, she spends $6,000 on cheese, $1,000 on other items, and $2,500 on rent. She had a great opening month and brought in revenues of $14,500. According to her accountant, what are Manisha's profits?

A) $3,000 B) $4,000 C) -$5,000 D) -$6,000 Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old

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10) An old friend takes you out to dinner and pays for your meal. Which of the following best represents your opportunity cost?

A) The amount of money you would have spent to pay for the dinner yourself.

B) The money your friend could have made buying a winning lottery ticket.

C) The money you could have made working overtime at your job.

D) Both A and C Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: New 11) An old friend takes you out to dinner and pays for your meal. Which of the following best represents your opportunity cost?

A) Going to the beach.

B) Attending a concert.

C) Studying for your next microeconomics exam.

D) Unable to determine with the information given.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New 12) Why might a police officer NOT pull over someone speeding two miles over the speed limit?

A) The explicit costs of stopping the driver are too high.

B) The opportunity costs of stopping the driver are too high.

C) The opportunity costs of stopping he driver are too low.

D) The explicit costs of stopping the driver are too low.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 13) A durable good is product that A) holds up well under abuse.

B) has had the same design over a long period of time.

C) is purchased only once.

D) is usable over a long period of time.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old

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14) One problem with measuring a durable good's cost is A) how to allocate the initial purchase cost.

B) how to account for depreciation of the good.

C) that the good may break before the end of its estimated useful life.

D) when to decide to throw it away for a newer model even if the cost has not been accounted for.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 15) One problem with measuring a durable good's cost is A) how to account for depreciation of the good.

B) how to handle the cost if the value changes over time.

C) that the good may break before the end of its estimated useful life.

D) when to decide to throw it away for a newer model even if the cost has not been accounted for.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 16) You purchase a pizza oven that is expected to last 10 years for $15,000. How do you account for the economic cost of the oven?

A) Expense the oven, taking a write-off for the entire price in the first year.

B) Amortize the cost over the 10-year life of the oven, resulting in a cost of $1,500 per year.

C) Calculate the value of renting the oven to someone else and use that as your cost.

D) The cost is the price of the oven minus any revenue made selling pizzas made in the oven.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 17) Which of the following is most likely to have declining opportunity costs?

A) A delivery van.

B) An apartment building in Manhattan.

C) An acre of land in San Francisco.

D) A park in downtown London.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: New

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18) Which of the following is most likely to have increasing opportunity costs?

A) A riding lawnmower.

B) An office building in Tokyo.

C) A large copy machine.

D) A pizza oven.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: New 19) A sunk cost is A) the cost for drilling certain types of wells, such as a well for water.

B) a past cost that cannot be recovered.

C) a cost that is highly relevant for decision-making.

D) an opportunity cost.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 20) If a firm buys a delivery van for $18,000 and can resell it in 2 years for $7,500, the opportunity cost of using the van is A) $10,500.

B) $7,500.

C) $18,000.

D) $3,750.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 21) If a firm buys a delivery van for $18,000 and can resell it in 2 years for $7,500, the sunk cost is A) $10,500.

B) $7,500.

C) $18,000.

D) $0.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old

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22) If a firm buys a specialized metal stamping machine that will last 4 years for $125,000 and cannot resell it, the sunk cost is A) $0.

B) $31,250.

C) $125,000.

D) $93,750.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: New 23) If a firm buys a specialized metal stamping machine that will last 4 years for $125,000 and cannot resell it, the opportunity cost is A) $0.

B) $31,250.

C) $125,000.

D) $93,750.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: New For the following, please answer "True" or "False" and explain why.

24) When buying a piece of equipment, it is always best for the firm to pay cash instead of borrowing the funds since this renders the equipment less costly.

Answer: False. It depends. The opportunity cost of the capital when paying cash is the interest the firm receives on its cash reserves. This is an implicit cost. The opportunity cost of the capital when the funds are borrowed is the interest the firm must pay to the lender. This is an explicit cost. If the rate the firm receives on its cash reserves exceeds the rate at which it borrows, the firm is better off borrowing the funds to buy the equipment.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 25) Four years after graduating from college you must decide if you want to go on as an accountant (your college major) or if you want to make a career change and become a singer.

The cost of your education will matter for your decision.

Answer: False. At this point the cost of your education represents a sunk cost and therefore should not figure into your decision. You incur it no matter what decision you make.

Skill: Conceptual AACSB: Analytical Thinking Status: Old

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26) An accountant may amortize the expense of a durable good by dividing the total amount spent on the good by the number of years the good is expected to last. An economist may amortize the expense of a durable and never fully account for the total expense.

Answer: True. The accountant uses a set of predetermined rules to amortize the total expense of the good. The economist amortizes based on the opportunity cost of the good, which may never sum to the total expense of the good.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 27) You have two career options. You can work for someone else for $50,000 a year, or, you can run your own business, with an annual revenue of $100,000, and explicit costs of $40,000 annually. Explain which career option a profit-maximizer would select and why.

Answer: In the absence of other implicit costs a profit-maximizer will run their own business.

The business owner will receive $100,000 - $40,000 = $60,000. The opportunity cost is only $50,000.

Skill: Analytical AACSB: Analytical Thinking Status: Old 6.2 Short-Run Costs 1) Fixed costs are A) a production expense that does not vary with output.

B) a production expense that changes with the quantity of output produced.

C) equal to total cost divided by the units of output produced.

D) the amount by which a firm's cost changes if the firm produces one more unit of output.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 2) Fixed costs A) are always sunk.

B) are avoidable.

C) are sometimes sunk.

D) sunk in the short run, but not in the long run.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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3) Variable costs are A) a production expense that does not vary with output.

B) a production expense that changes with the quantity of output produced.

C) equal to total cost divided by the units of output produced.

D) the amount by which a firm's cost changes if the firm produces one more unit of output.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 4) Average fixed cost (AFC) A) is the fixed cost divided by the average sales price of the final good.

B) is the fixed cost divided by the quantity of output produced.

C) is $0 when no output is produced.

D) is always less than average variable cost (AVC).

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 5) Average fixed cost (AFC) A) rises as output rises.

B) rises as output falls.

C) falls as output falls.

D) is always fixed across all output ranges for the given production function.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) Average variable cost (AVC) A) is the variable cost divided by the average sales price of the final good.

B) is the variable cost divided by the quantity of output produced.

C) is equal to average fixed cost (AFC) when no output is produced.

D) is always less than average fixed cost (AFC).

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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7) Variable costs A) decrease with increasing output.

B) increase with decreasing output.

C) decrease with decreasing output.

D) might increase or decrease with increasing output.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) Average variable cost (AVC) A) always increases with increased output.

B) always decreases with increased output.

C) are always flat.

D) may either increase, decrease, or remain flat with increased output.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 9) Which of the following statements is NOT true?

A) AC = AFC + AVC B) C = F + VC C) AVC = wage/MPL D) AFC = AC - AVC Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 10) A firm's marginal cost can always be thought of as the change in total cost if A) the firm produces one more unit of output.

B) the firm buys one more unit of capital.

C) the firm's average cost increases by $1.

D) the firm moves to the next highest isoquant.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old

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11) Joey's Lawncutting Service rents office space from Joey's dad for $300 per month. Joey's dad is thinking of increasing the rent to $400 per month. As a result Joey's marginal cost of cutting grass will A) increase by $100 divided by the amount of grass cut.

B) increase by $100.

C) decrease by $100.

D) not change.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 12) When a firm produces one unit, the variable cost is $3. When the firm produces two units, the variable cost is $6. What is the marginal cost associated with two units of production?

A) $2 B) $0.5 C) $6 D) $3 Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 13) Marginal cost is A) positive or zero.

B) negative or zero.

C) positive or negative but not zero.

D) positive, negative, or zero.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 14) Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q. The marginal cost of the 5th T-shirt is A) 2.

B) 10.

C) 12.

D) 60.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old

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15) Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q. The average cost of the 5th T-shirt is A) 2.

B) 12.

C) 52.

D) 60.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 16) Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q. Which of the following statements is TRUE at all levels of production?

A) MC = AVC B) MC = AC C) MC > AFC D) All of the above.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 17) If average cost is decreasing, A) marginal cost equals average cost.

B) marginal cost exceeds average cost.

C) marginal cost is less than average cost.

D) Not enough information is given.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 18) If average cost is positive, A) marginal cost equals average cost.

B) marginal cost exceeds average cost.

C) marginal cost is less average cost.

D) Not enough information is given.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old

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19) If the average cost of producing a good is increasing as a firm produces more of the good, then which of the following must be TRUE? A) AFC is falling.

B) AVC is rising.

C) MC > AVC. D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 20) Assume baseball player salaries are fully determined before the season starts. From the point of view of the baseball team owner, player salaries during the course of the season are then A) variable costs.

B) marginal costs.

C) fixed costs.

D) average costs.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 21) A firm's cost curve is determined by A) congressional laws.

B) whether the firm hires engineers or not.

C) natural laws.

D) the firm's production function.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 22) Suppose the short-run production function is q = 10 ∗ L. If the wage rate is $10 per unit of labor, then AVC equals A) q.

B) q/10.

C) 10/q.

D) 1.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old

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23) Suppose the short-run production function is q = 10 ∗ L. If the wage rate is $10 per unit of labor, then MC equals A) q.

B) q/10.

C) 10/q.

D) 1.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 24) Suppose the short-run production function is q = L0.5. If the marginal cost of producing the tenth unit is $5, what is the wage per unit of labor?

A) $1 B) $0.5 C) $0.25 D) It cannot be determined without more information.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 25) Suppose the short-run production function is q = 10 ∗ L. If the wage rate is $10 per unit of labor, then AFC equals A) 0.

B) 1.

C) 10/q.

D) It cannot be determined from the information provided.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 26) Suppose a firm can only vary the quantity of labor hired in the short run. An increase in the cost of capital will A) increase the firm's marginal cost.

B) decrease the firm's marginal cost.

C) have no effect on the firm's marginal cost.

D) More information is needed to answer the question.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old

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27) In the short run, the point at which diminishing marginal returns to labor begin is the point at which the marginal cost curve A) peaks.

B) bottoms out.

C) is upward sloping.

D) is downward sloping.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 28) If the marginal cost of producing a good is increasing as a firm produces more of the good, then which of the following must be TRUE? A) AFC is rising.

B) AVC is rising.

C) MC > AVC. D) MPL is falling.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 29) If a particular production process is subject to diminishing marginal returns to labor at every level of output, then at every level of output A) AC is upward sloping.

B) MC exceeds AVC. C) AFC is constant.

D) None of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 30) When you have diminishing marginal returns to labor, A) variable costs remain constant as more output is produced.

B) variable costs fall as more output is produced.

C) variable costs rise as more output is produced.

D) fixed costs rise as more output is produced because you have to buy more equipment to compensate.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old

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31) If the average cost of producing a good is increasing as a firm produces more of the good, then which of the following must be TRUE? A) AFC is falling.

B) AVC is rising.

C) MC > AVC. D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 32) Which of the following will cause the marginal cost curve of making cigarettes to shift?

A) a $5 million penalty charged to each cigarette maker B) a $1 per pack tax on cigarettes C) a $1 million advertising campaign by the American Cancer Society D) All of the above.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 33) Which of the following will cause the average cost curve of making cigarettes to shift?

A) a $5 million penalty charged to each cigarette maker B) a $1 per pack tax on cigarettes C) a $1 an hour wage increase paid to all cigarette production workers D) All of the above.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 34) Which of the following will cause the average fixed cost curve of making cigarettes to shift?

A) a $5 million penalty charged to each cigarette maker B) a $1 per pack tax on cigarettes C) a $3 per hour wage increase D) an increase in the demand for cigarettes Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old

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35) A specific tax of $1 per unit of output will affect a firm's A) average total cost, average variable cost, average fixed cost, and marginal cost.

B) average total cost, average variable cost, and average fixed cost.

C) average total cost, average variable cost, and marginal cost.

D) marginal cost only.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 36) Assume Congress decides that oil companies are making too much profit and decides to tax oil companies for each gallon of gasoline produced. This would A) shift the marginal cost curve up.

B) shift the marginal cost curve down.

C) shift the average fixed cost curve up.

D) shift the average fixed cost curve down.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 37) Assume Congress decides that oil companies are making too much profit and decides to increase the tax on oil companies for each gallon of gasoline produced. This would A) guarantee a decrease in profits.

B) guarantee an increase in profits.

C) guarantee an increase in tax revenues.

D) None of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 38) The Cobb-Douglas production function for a beer manufacturer is q=1.52L0.6K0.4. If we assume that the firm's capital is fixed at 250 units and the rental rate of capital is $5 per unit, then average fixed cost is A) $1250.

B) $1250/q.

C) 1.52L0.6(250)0.4.

D) Unable to determine with information given.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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39) The Cobb-Douglas production function for a beer manufacturer is q=1.52L0.6K0.4. Assume that the firm's capital is fixed at 250 units, the rental rate of capital is $5 per unit, and the wage rate is $10 per hour. The amount of labor needed to produce q units of output is A) 0.0124q.

B) 13.832q0.6.

C) 0.0124q1.67.

D) 13.832q1.67.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old For the following, please answer "True" or "False" and explain why.

40) The marginal cost curve intersects the average fixed cost curve at its minimum.

Answer: False. Marginal cost intersects average variable cost (and average cost) at its minimum.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 41) A consumer purchases a book by driving across town to a bookstore, standing in line for five minutes to pay the cashier, and then pays $5. The same book is purchased by another consumer who spends 2 minutes placing the order over the Internet for $10. The book necessarily cost the first consumer less.

Answer: False. The opportunity cost of driving across town and standing in line may have raised the total cost of the book to the first consumer to more than $10.

Skill: Analytical AACSB: Analytical Thinking Status: Old 6.3 Long-Run Costs 1) In the long run, fixed costs are A) sunk.

B) avoidable.

C) larger than in the short run.

D) not included in production decisions.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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2) A pizza parlor's rent is A) sunk in the long run.

B) fixed in the long run.

C) avoidable in the short run.

D) variable in the short run.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 3) Which of the following is NOT true?

A) Rental costs for a building are sunk in the short run and fixed in the long run.

B) Rental costs for a building are avoidable in the long run.

C) Variable costs, such as ingredients for a pizza, are avoidable in the long run and the short run.

D) Rental costs for a building are fixed in the short run and sunk in the long run.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 4) Isoquant lines represent ________, whereas isocost lines represent ________.

A) technical efficiency; economic efficiency B) economic efficiency; technical efficiency C) economic efficiency; marginal costs D) input trade-offs; economic trade-offs Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) Isocost lines A) represent the combinations of inputs that have the same marginal cost.

B) represent the combinations of inputs that have the same total cost.

C) are the inverse of the isoquant lines.

D) represent supply and demand for inputs at a given cost.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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6) Isocost lines A) are dependent upon the technical efficiency of the production function.

B) are dependent upon the quantity of goods a firm wants to produce.

C) are dependent upon the costs of a firm's inputs.

D) are the same as budget lines.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 7) The slope of the isocost line tells the firm how much A) capital must be reduced to keep total cost constant when hiring one more unit of labor.

B) capital must be increased to keep total cost constant when hiring one more unit of labor.

C) more expensive a unit of capital costs relative to a unit of labor.

D) the isocost curve will shift outward if the firm wishes to produce more.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) When the isocost line is tangent to the isoquant, then A) MRTS = -w/r.

B) the firm is producing that level of output at minimum cost.

C) the last dollar spent on capital yields as much extra output as the last dollar spent on labor.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 9) When the isocost line is tangent to the isoquant, then A) MPL = MPK. B) the firm is producing that level of output at minimum cost.

C) the firm has achieved the right economies of scale.

D) All of the above.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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10) If the isoquants are straight lines or L-shaped, then a cost-minimizing firm will A) not be able to minimize costs.

B) find the lowest isocost line touching the relevant isoquant.

C) find the highest isocost line touching the relevant isoquant.

D) choose not to produce any output.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) If an isocost line crosses the isoquant twice, a cost minimizing firm will A) use a different isocost line to select the bundle of inputs.

B) use the input bundle associated with the intersection on the higher point of the isoquant.

C) use the input bundle associated with the intersection on the lower point of the isoquant.

D) Both B and C. Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 12) The slope of the isoquant tells the firm how much A) output increases when labor increases by one unit.

B) output increases when capital and labor are doubled.

C) capital must decrease to keep output constant when labor increases by one unit.

D) a unit of capital costs relative to the cost of labor.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 13) If the marginal rate of technical substitution for a cost minimizing firm is 10, and the wage rate for labor is $5, what is the rental rate for capital?

A) $0.5 B) $1 C) $2 D) $10 Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old

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14) Suppose MPL = 0.5 ∗ (q/L) and MPK = 0.5 ∗ (q/K). In the long run, the firm will hire equal amounts of capital and labor A) all of the time.

B) only when w = r.

C) only when w = 0.5 ∗ r.

D) at no point in time.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 15) A firm can minimize cost by A) picking the bundle of inputs where the lowest isocost line touches the isoquant.

B) picking the bundle of inputs where the isoquant is tangent to the isocost line.

C) picking the bundle of inputs where the last dollar spent on one input gives as much extra output as the last dollar spent on any other input.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 16) If the cost of labor increases the isocost line will A) stay the same.

B) shift outward in parallel fashion.

C) rotate inward around the point where only capital is employed in production.

D) shift inward in parallel fashion.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 17) If the cost of labor decreases, the isocost line will A) stay the same.

B) shift outward in parallel fashion.

C) rotate outward around the point where only capital is employed in production.

D) shift inward in parallel fashion.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old

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18) If the cost of capital increases, the isocost line will A) stay the same.

B) shift outward in parallel fashion.

C) rotate inward around the point where only labor is employed in production.

D) shift inward in parallel fashion.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 19) If the cost of capital decreases, the isocost line will A) stay the same.

B) shift outward in parallel fashion.

C) rotate outward around the point where only labor is employed in production.

D) shift inward in parallel fashion.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 20) Suppose that each worker must use only one shovel to dig a trench, and shovels are useless by themselves. In the long run, an increase in the price of shovels will result in A) fewer shovels being purchased to produce the same number of trenches.

B) more workers being hired to produce the same number of trenches.

C) the firm wishing to produce more trenches.

D) no change in the firm's input mix.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 21) A change in relative factor prices will always result in A) a change in the slope of the isoquants.

B) a tangency between the new isocost line and a new isoquant.

C) a rotation of the isocost lines.

D) All of the above.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old

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22) Which of the following is a form of outsourcing?

A) Changing your own oil.

B) Washing your clothes.

C) Getting your fruits and vegetables from the farmers' market.

D) Studying for your economics exam.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: New 23) Which of the following is NOT a form of outsourcing?

A) Hiring an accountant to do your taxes.

B) Replacing the windshield wipers on your car.

C) Paying your son to mow the lawn.

D) Taking a taxi to the airport.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: New 24) Which of the following does NOT represent a possible shape of the long-run average cost curve?

A) downward-sloping B) upward-sloping C) U-shaped D) vertical Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 25) A cost function has economies of scale if A) average fixed costs fall as production increases.

B) total costs fall as production increases.

C) the average total cost falls as production increases.

D) it is less expensive to produce goods jointly rather than separately.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old

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26) If producing more output has no effect on average cost then A) there are diseconomies of scale.

B) there are economies of scope.

C) there are diseconomies of scope.

D) there are no economies of scale.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 27) If producing more output increases average cost then A) there are diseconomies of scale.

B) there are economies of scope.

C) there are diseconomies of scope.

D) there are no economies of scale.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 28) Suppose that capital and labor must be kept in a fixed proportion to produce a particular good. For example, digging a trench requires one worker who has one shovel. What does this imply about returns to scale?

A) There are constant returns to scale.

B) There are increasing returns to scale.

C) There are decreasing returns to scale.

D) Nothing.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 29) The production of cigarettes is highly automated; however, a worker is required to monitor each machine. Machines and workers do not interact with one another. Given this information, there are most likely A) economies of scale.

B) economies of scope.

C) constant returns to scale.

D) increasing returns to scale.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old

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30) Suppose that each worker must use only one shovel to dig a trench, and shovels are useless by themselves. In the long run, the firm will experience A) increasing returns to scale.

B) constant returns to scale.

C) decreasing returns to scale.

D) The returns to scale cannot be determined from the information provided.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 31) The long run average cost curve may initially slope downward due to A) decreasing average fixed costs.

B) increasing marginal returns.

C) economies of scale.

D) All of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 32) If there are diseconomies of scale within a given range of output, which of following is(are) TRUE? A) The short-run average cost curve must be upward sloping within that range of output.

B) The long-run average cost curve must be upward sloping within that range of output.

C) Long-run average cost must equal short-run average cost.

D) All of the above.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 33) The total cost of producing one unit is $50. The total cost of producing two units is $75. At a production level of two units, the cost function exhibits A) economies of scale.

B) rising average costs.

C) increasing marginal costs.

D) constant returns to scale.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old

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34) Long-run average cost is never greater than short-run average cost because in the long run, A) capital costs equal zero.

B) the firm can move to the lowest possible isocost curve.

C) wages always increase over time.

D) wages always decrease over time.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old For the following, please answer "True" or "False" and explain why.

35) If increasing returns to scale are present, the long-run average cost increases as more output is produced.

Answer: False. Increasing returns to scale imply that with a doubling of inputs, output more than doubles. Since average cost is the ratio of total cost divided by output, this increase in inputs will cause the numerator to be just double the old value while the new denominator is more than double the old value. As a result, long-run average cost falls as more output is produced.

Skill: Analytical AACSB: Analytical Thinking Status: Old 36) Economies of scale and Increasing Returns to Scale are the same thing looked at from either the production or cost perspective.

Answer: False. Increasing returns to scale imply economies of scale but the reverse is not true.

A firm can experience economies of scale for other reasons (without increasing returns to scale) Skill: Conceptual AACSB: Analytical Thinking Status: Old 37) What are the functions for MC and AC if TC = 100q + 100q2? Are the returns to scale increasing, decreasing, or constant?

Answer: MC = 100 + 200q AC = 100 + 100q Since AC increases with an increase in output, there are decreasing returns to scale.

Skill: Analytical AACSB: Analytical Thinking Status: Old

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38) Explain how a firm can have constant returns to scale in production and economies of scale in cost.

Answer: A firm can have constant returns to scale in production at every output level. If the firm doubled all inputs the output would double. However, the firm may also more than double one input and double its output. Therefore, in this way, as output doubles, the total cost might be less than doubling, resulting in a decreasing average cost, which is known as economies of scale.

Skill: Conceptual AACSB: Application of Knowledge Status: Old 39) A firm pays $5 for each unit of capital. Labor costs $5 per hour for the first 10 hours and $10 per hour for every hour thereafter. Draw the isocost curves for total costs of $50 and $100.

Answer:

See the above figure.

Skill: Analytical AACSB: Analytical Thinking Status: Old 40) "If the wage rate paid to one form of labor is twice the cost of another form of labor, the first type of labor must be twice as productive." Comment.

Answer: This is true. Firms minimize cost by setting the ratio of marginal productivity per unit cost equally across all inputs. If one form of labor is twice as expensive as another, the firm will want the MP of the first type of labor to be twice that of the second.

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41) Suppose capital and labor are perfect substitutes resulting in a production function of q = K + L. That is, the isoquants are straight lines with a slope of -1. Derive the long-run total cost function TC = C(q) when the wage rate is w and the rental rate on capital is r.

Answer: The firm will always hire the input that is cheapest. So, the function is If w < r, TC = wq.

If w > r, TC = rq.

If w = r, either equation works.

Skill: Analytical AACSB: Analytical Thinking Status: Old 6.4 The Learning Curve 1) Learning by doing will result in A) an upward sloping long-run average cost curve.

B) a long-run marginal cost that is larger than long-run average cost.

C) a rotation in the isocost curves.

D) long-run average costs that are lower than short-run average costs.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) Learning by doing is represented by A) a decrease in the average total cost curve.

B) an increase in the average total cost curve.

C) no change in the average total cost curve.

D) an increase in the average total cost curve and a decrease in the marginal cost curve.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) Why do many people choose NOT to read the manuals included with their new computer?

A) They perceive that learning by doing decreases costs faster than learning by reading.

B) They perceive that learning by doing is more enjoyable than learning by reading.

C) They perceive that learning by reading is not sophisticated.

D) They believe that the manuals are not accurate.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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4) Learning by doing, which leads to lower costs in the long run, is often A) increased when new machinery is brought into the production process.

B) a function of cumulative output, that is producing more of the good or service.

C) improved through better use of computers in the production process.

D) not very important to most firms.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 6.5 Costs of Producing Multiple Goods 1) Economies of scope exist between book publishing and magazine publishing if A) the cost of publishing a magazine is lower for book publishers than for other firms.

B) the cost of publishing a magazine is lower for firms that publish many magazines than for firms that publish only one magazine.

C) the cost of publishing a book falls over time as the publisher acquires more experience.

D) the cost of a publishing a book is not subject to diminishing marginal returns.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 2) Suppose the cost of producing two goods, x and y, can be represented as C = ax + by + cxy. If there are economies of scope, then which of the following must be TRUE? A) c > 0 B) a + b = -c C) c = 0 D) c < 0 Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 3) Suppose the cost of producing two goods, x and y, can be represented as C = ax + by + cxy. If there are diseconomies of scope, then which of the following must be TRUE? A) a = b B) a + b = -c C) c > 0 D) c < 0 Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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4) Travel websites such as Travelocity tend to offer reservation services for multiple travel modes. This is because A) the firms have contractual obligations to offer reservations for airlines and railroads, for example.

B) the firms have statutory obligations to offer reservations for airlines and railroads, for example.

C) once the firm has the reservation technology for airlines, there are economies of scale in offering the same service for railroads.

D) once the firm has the reservation technology for airlines, there are economies of scope in offering the same service for railroads.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old

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Managerial Economics and Strategy, 3e (Perloff/Brander) Chapter 7 Firm Organization and Market Structure 7.1 Ownership and Governance of Firms 1) In which governance form do shareholders own the company?

A) Public sector B) State-owned enterprise C) Corporation D) Non-profit Answer: C Skill: Definition AACSB: Application of Knowledge Status: New 2) Which of the following generally does NOT seek to maximize profit?

A) Public sector companies B) Corporations C) Partnerships D) Sole proprietorships Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: New 3) A mixed enterprise is one A) where the government has significant ownership in a private company.

B) in which the company has more than one legal structure, such as limited liability and sole proprietorship.

C) that combines for-profit activities with education.

D) that has both for-profit and non-profit operations.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 4) A ________ is a governance structure where owners are not personally liable.

A) sole proprietorship B) partnership C) mixed enterprise D) corporation Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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5) An organization that converts inputs (like Labor, Capital etc.) into output can be a A) firm.

B) sole proprietorship.

C) corporation.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) Limited liability is a benefit available only to A) sole proprietorships.

B) partnerships.

C) corporations.

D) All of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 7) What is one of the biggest differences between a sole proprietorship and a corporation?

A) Sole proprietorships offer stock.

B) Corporation shareholders elect the managers of the firm.

C) Sole proprietorships have limited liability.

D) Corporations are the only profitable firms.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) Which entity produces the greatest proportion of U.S. gross domestic product?

A) government B) non-profit organizations such as hospitals C) firms D) universities Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: New

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9) The board of a U.S. corporation usually includes A) outside directors.

B) executives of competitors.

C) non-executive employees of the corporation.

D) All of the above.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 10) The board of a U.S. corporation usually includes A) outside directors.

B) company executives.

C) former politicians.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) U.S. corporations can A) be publicly held and traded.

B) be closely held.

C) convert from publicly held to closely held.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New 7.2 Profit Maximization 1) Economists typically assume that the owners of firms wish to A) produce efficiently.

B) maximize sales revenues.

C) maximize profits.

D) All of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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2) If a firm makes zero economic profit, then the firm A) has total revenues greater than its economic costs.

B) must shut down.

C) can be earning positive accounting profit.

D) must have no fixed costs.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: New 3) A firm's profit is A) usually negative when opportunity costs are included.

B) the difference between marginal revenue and marginal cost.

C) the opportunity cost of the firm's shareholders.

D) the difference between revenue and cost.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 4) A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.

A) $20,000, $20,000 B) $20,000, -$5,000 C) $25,000, -$5,000 D) $25,000, $20,000 Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 5) A small business owner earns $75,000 in revenue annually. The explicit annual costs equal $40,000. The owner could work for someone else and earn $20,000 annually. The owner's accounting profit is ________ and owner's economic profit is ________.

A) $10,000, $10,000 B) $35,000, $10,000 C) $35,000, $55,000 D) $10,000, $55,000 Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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6) If a firm traded on the New York Stock Exchange posts an accounting profit of $10 million, then the firm is making a positive economic profit A) only if the Securities and Exchange Commission (SEC) approves the accounting report.

B) only if the firm's opportunity cost is less than $10 million.

C) only if the firm's opportunity benefit is more than $10 million.

D) only if the firm's management receives stock compensation.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 7) If a firm goes out of business because of negative economic profits, its books A) might indicate a positive accounting profit.

B) might indicate that opportunity costs were zero.

C) might indicate that taxes are too high.

D) might suggest a mistaken value of explicit costs.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 8) A firm sets its output where A) marginal profit is zero.

B) marginal revenue is maximized.

C) marginal profit equals marginal revenue.

D) marginal profit is maximized.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 9) A firm sets its output where A) marginal profit minus marginal cost equals zero (Mπ - MC = 0).

B) marginal revenue minus marginal profit equals zero (MR - Mπ = 0).

C) marginal revenue minus marginal cost equals zero (MR - MC = 0).

D) marginal revenue minus marginal cost is greater than zero (MR - MC > 0).

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: New

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10) If marginal revenue equals marginal cost, the firm is maximizing profits as long as A) the resulting profits are positive.

B) marginal cost exceeds marginal revenue for greater levels of output.

C) the average cost curve lies above the demand curve.

D) All of the above are required.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 11) If a firm is operating at an output level where losses are minimized, the firm A) has no incentive to stay in the industry.

B) is better of exiting the industry.

C) is maximizing profits.

D) will shut down.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old

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12) The above figure shows the cost curves for a competitive firm. If the firm is to earn economic profit, price must exceed A) $0.

B) $5.

C) $10.

D) $11.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 13) The above figure shows the cost curves for a competitive firm. The firm will incur economic losses if the price is less than A) $0.

B) $5.

C) $10.

D) $11.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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14) The above figure shows the cost curves for a competitive firm. If the market price is $15 per unit, the firm will earn profits of A) $0.

B) $4.

C) $40.

D) $160.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 15) If a competitive firm maximizes short-run profits by producing some quantity of output, which of the following must be TRUE at that level of output?

A) p = MC B) MR = MC C) p ≥ AVC D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 16) If a competitive firm maximizes short-run profits by producing some quantity of output, which of the following must be TRUE at that level of output?

A) p > MC B) MR > MC C) p ≥ AVC D) All of the above.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 17) If a profit-maximizing firm finds that, at its current level of production, MR > MC, it will A) earn greater profits than if MR = MC. B) increase output.

C) decrease output.

D) shut down.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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18) If a profit-maximizing firm finds that, at its current level of production, MR < MC, it will A) decrease output.

B) increase output.

C) shut down.

D) operate at a loss.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 19) If a manager is unsure what the entire profit function looks like, then she can A) decrease output slightly to see if profits increase.

B) increase output slightly to see if profits increase.

C) Both A and B. D) None of the above.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 20) A firm should always shut down if its revenue is A) declining.

B) less than its average fixed costs.

C) less than its total costs.

D) less than its avoidable costs.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 21) A firm will shut down in the short run if A) total fixed costs are too high.

B) total revenue from operating would not cover all costs.

C) total revenue from operating would not cover variable costs.

D) total revenue from operating would not cover fixed costs.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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22) If a competitive firm cannot earn a profit at any level of output during a given short-run period, then which of the following is FALSE? A) It will shut down in the short run and wait until the price increases sufficiently.

B) It will exit the industry in the long run.

C) It will operate at a loss in the short run.

D) It will minimize its loss by decreasing output so that price exceeds marginal cost.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 23) In deciding whether to operate in the short run, the firm must consider the relationship between price and A) total cost.

B) average variable cost.

C) total fixed cost.

D) the number of buyers.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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24) The above figure shows the cost curves for a competitive firm. If the firm is to operate in the short run, price must exceed A) $0.

B) $5.

C) $10.

D) $11.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 25) The above figure shows the cost curves for a competitive firm. If the profit-maximizing level of output is 40, price is equal to A) $0.

B) $15.

C) $10.

D) $11.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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26) The above figure shows the cost curves for a competitive firm. The firm will shut down in the short run if price falls below A) $5.

B) $10.

C) $11.

D) $15.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 27) If a short-run fixed cost is sunk, then A) losses can be minimized by shutting down.

B) the firm should keep producing to cover the sunk cost.

C) the cost cannot be avoided by shutting down.

D) Both B and C. Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 28) By shutting down, a firm A) stops receiving revenue but continues to pay variable costs.

B) stops receiving revenue and is stuck with its fixed costs.

C) avoids its sunk costs as well as its variable costs.

D) can avoid paying taxes on its previously earned profits.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 29) A firm bought a pizza oven for $13,500 and if it shut down now, could sell the oven for $9,500. Which of the following statements is TRUE? A) The relevant cost of the oven when considering shutting down is $13,500.

B) The relevant cost of the oven when considering shutting down is $9,500.

C) The relevant cost of the oven when considering shutting down is $4,000.

D) The cost of the oven does not matter when deciding whether or not to shut down.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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30) Strategic ESG is intended to A) increase profits while doing something good at the same time.

B) follow Milton Friedman's guidance on firm behavior.

C) be purely altruistic in nature.

D) avoid the legal and ethical obligations managers have to shareholders.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: New 31) Corporate Social Responsibility A) is illegal in most countries.

B) minimizes conflict between owners and managers.

C) is the pursuit of social objectives by corporations.

D) disputes the stakeholder theory of R. Edward Freeman.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: New 32) Ronald McDonald Houses are an example of A) altruistic corporate social responsibility.

B) reduction in shareholder value.

C) vertical integration.

D) strategic corporate social responsibility.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New 33) A company that undertakes an activity so that it can "do well by doing good" is practicing A) strategic corporate social responsibility.

B) altruistic corporate social responsibility.

C) profit sharing.

D) the survivor principle.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: New

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34) The survival principle states that A) firms must undertake social objectives to survive.

B) the only firms that survive are those that maximize profits.

C) the only firms that survive are those that maximize revenue.

D) managers who fail to maximize profits should be disciplined.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: New 35) According to the survivor principle A) firms will get taken over by their larger rivals over time.

B) only firms that maximize profits survive in highly competitive markets.

C) managers only work hard if they are threatened with their survival at the firm.

D) eventually all firms merge to become one large monopoly.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: New 36) Firm managers use poison pills to A) make economics losses.

B) acquire controlling interest in another firm.

C) make the firm less attractive as a takeover target.

D) force faster turnover on the board of directors.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: New For the following, please answer "True" or "False" and explain why.

37) Even though fixed costs do not affect the output decision, an increase in fixed costs results in a wider range of prices for which the firm operates at a loss.

Answer: True. An increase in fixed costs will shift AC upward but leave AVC unchanged. The gap between AVC and AC represents prices at which the firm will operate at a loss.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 38) If a firm sets marginal revenue equal to marginal cost it will make an economic profit.

Answer: False. When a firm sets MR = MC it maximizes profits, but the profit-maximizing level of output might still be negative (the smallest loss possible).

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39) If a firm doesn't make an economic profit, it will shut down.

Answer: False. The firm compares its losses from operating with its losses when shutting down and will shut down if the latter loss is less.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 40) If a firm cannot earn profits in the short run, it will shut down.

Answer: False. A firm will operate at a loss if the loss incurred from production is less than the loss incurred from shutting down. Even if the firm shuts down, it still must pay its fixed costs because, in the short run, going out of business is not an option.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 41) If the market price in a competitive market is below the minimum of average variable cost, the firm will shut down.

Answer: True. At this price total fixed costs are smaller than the operating loss. It pays for the firm to shut down.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 7.3 Profits Over Time 1) If the present value of all future profit is positive, then A) the firm should remain operating, even if it earns negative profit in the short run.

B) the firm should shut down if it is earning a negative profit in the short run.

C) the firm should shut down if it cannot cover its fixed costs in the short run.

D) None of the above.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) If the present value of all future revenue is positive, then A) the firm should remain operating, even if it earns negative profit in the short run.

B) the firm should shut down if it is earning a negative profit in the short run.

C) the firm should shut down if it cannot cover its fixed costs in the short run.

D) Unable to determine with the information given.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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3) The present value of a loan is the A) amount of money the firm borrows today.

B) amount of money the firm must earn to pay off the loan.

C) future value plus interest.

D) compounded value of the interest payments.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: New 4) The future value of a loan is the A) present value plus the interest rate.

B) amount of money the firm repay.

C) value of the profits the firm will earn from investing the loan.

D) compounded value of the interest payments.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: New 5) The present value and future value of a loan A) have no relationship.

B) are connected through compounding.

C) represent the difference between income flows over time.

D) are connected through the interest rate.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New 6) If a firm can borrow money at 0% interest, then A) the lender is irrational.

B) its business investment is guaranteed to be profitable.

C) present value and future value are equal.

D) interest payments are deferred.

Answer: C Skill: Analytical AACSB: Application of Knowledge Status: New

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7) If interest rates are high, A) money significantly in the future is worth very little today.

B) money significantly in the future is worth a lot today.

C) stock investors will not invest.

D) firms will have low profits.

Answer: A Skill: Analytical AACSB: Application of Knowledge Status: New 7.4 The Make or Buy Decision 1) A firm's vertical dimension refers to A) its ability to grow its profits.

B) the size of its headquarters building.

C) the degree to which it participates in the various stages of producing the products and services it sells.

D) the downstream stages of production.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) A firm's horizontal dimension refers to A) its size in its primary market.

B) its size in all markets in which is competes.

C) the level of supply chain integration the firm undertakes.

D) the number of stages in the production process that are upstream from the stages the firm undertakes.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) Supply chain management refers to A) the contracts put in place to manage a firm's suppliers.

B) the decisions around which stages of production to handle internally and which to buy from others.

C) how the firm compensates the employees who work on the firm's internal stages of production.

D) the 19th century practice of having barges move downstream with the flow of the river.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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4) A firm that backward vertically integrates A) moves downstream in the production process.

B) requires that the production process be relatively simple.

C) has to merge with another firm.

D) may be producing its own inputs.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) A firm that is vertically integrated A) participates in more than one successive stage of production.

B) has higher profits than firms that are not vertically integrated.

C) produces all of its own inputs.

D) relies on other firms to market its products.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) A McDonald's franchise is an example of A) horizontal integration.

B) quasi-vertical integration.

C) a vertical merger.

D) None of the above.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 7) Vertical restraints in a contract A) are generally illegal in the U.S. B) usually benefit the firm that produces the raw inputs to the production process.

C) are used in vertical mergers.

D) can approximate the outcome of a vertical merger.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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8) Vertical integration A) is always driven by profitability concerns.

B) results in lower transaction costs.

C) may be undertaken to avoid government regulations.

D) hampers timely delivery of inputs into the production process.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 9) Vertical integration can A) lower transaction costs due to lower costs of writing and enforcing contracts.

B) increase management costs and complexity.

C) reduce problems between owners and managers.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 10) Toyota's just-in-time system is an example of A) backward (upstream) integration.

B) quasi-vertical integration.

C) using transfer pricing to avoid price controls.

D) horizontal, downstream integration.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) Opportunistic behavior may occur when A) a firm buys its inputs from multiple suppliers.

B) firms incur significant transaction costs when negotiating contracts.

C) a firm backwards vertically integrates.

D) a firm can buy a key component from only one supplier.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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12) Vertically integrated firms can use transfer pricing A) to avoid government price controls.

B) as a way to compensate managers for transferring among departments in a vertically integrated firm.

C) to avoid paying market prices for inputs.

D) to shift profit.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 13) Firms might vertically disintegrate when A) it becomes more profitable for a firm to specialize.

B) the IRS cracks down on transfer pricing.

C) the industry becomes too large to support itself.

D) the industry shrinks in size.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 7.5 Market Structure 1) Market structure depends upon A) the ease of entry and exit.

B) the ability of firms to differentiate their goods and services.

C) the number of firms in the market.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) According to economists, competitive firms A) compete for the same customers.

B) are price takers.

C) differentiate their products.

D) are able to change output and affect the market price.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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3) Under perfect competition A) information about prices is hard to obtain.

B) there is a maximum number of firms that can enter the market.

C) if a firm exits the market, price will rise.

D) transaction costs are low.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) A monopoly A) must have a patent to protect its products.

B) is a price taker.

C) produces the market output.

D) doesn't lose any sales when it raises its price.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) An oligopoly A) requires government licensing.

B) has relatively few firms, but they are still price takers.

C) always collude to keep prices high.

D) has barriers to entry.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) All of the following are characteristics of an oligopolistic market EXCEPT A) firms must consider the actions of their rivals.

B) cartels eventually form to keep prices high.

C) firms have the ability to influence prices.

D) firms earn lower profits than a monopoly.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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7) In a monopolistically competitive market A) firms are price setters.

B) barriers to entry are high.

C) firms earn positive economic profit in the long run.

D) products are undifferentiated.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) Disruptive innovations A) are created exclusively by start-up companies.

B) can create new industries or destroy old ones.

C) create oligopolies.

D) are always based on sophisticated advances in technology.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: New

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Managerial Economics and Strategy, 3e (Perloff/Brander) Chapter 8 Competitive Firms and Markets 8.1 Perfect Competition 1) Economists define a market to be competitive when the firms A) spend large amounts of money on advertising to lure customers away from the competition.

B) watch each other's behavior closely.

C) are price takers.

D) All of the above.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 2) A market's structure is described by A) the number of firms in the market.

B) the ease with which firms can enter and exit the market.

C) the ability of firms to differentiate their product.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) Firms that exhibit price-taking behavior A) wait for other firms to set price, take it as given, and charge a higher price.

B) have outputs that are too small to influence market price and thus take it as given.

C) take pricing behavior in their own hands.

D) are independently capable of setting price.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) If consumers view the output of any firm in a market to be identical to the output of any other firm in the market, the demand curve for the output of any given firm A) will be identical to the market demand curve.

B) will be horizontal.

C) will be vertical.

D) cannot be determined from the information given.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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5) A horizontal demand curve for a firm implies that A) the firm is a monopoly.

B) the market the firm is operating in is not competitive.

C) the firm is selling in a competitive market.

D) the products of that firm are very different from other firms' products.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) In the absence of any government regulation on price, if a firm has no power to set price on its own, one can safely conclude A) the demand curve for the firm's product is horizontal.

B) there aren't many firms in the industry.

C) the market is in long-run equilibrium.

D) the firms in this industry are not profitable.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 7) In a perfectly competitive market A) firms can freely enter and exit.

B) firms sell a differentiated product.

C) transaction costs are high.

D) All of the above.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 8) If all conditions for a perfectly competitive market are met A) firms face sunk cost when entering the market.

B) firms' demand curves are horizontal.

C) the market demand curve is horizontal.

D) the firms' demand curves are downward sloping.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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9) In a perfectly competitive market A) buyers are price-takers.

B) buyers view products from different firms as differentiated.

C) individual buyers have horizontal demand curves.

D) firms' demand curves are vertical.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 10) In a competitive market, if buyers did not know all the prices charged by the many firms A) all firms still face horizontal demand curves.

B) firms sell a differentiated product.

C) demand curves can be downward sloping for some or all firms.

D) the number of firms will most likely decrease.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) Which of the following are NOT characteristics of a competitive market?

A) There is freedom of entry and exit.

B) There are zero transaction costs.

C) There are only one or two sellers.

D) Buyers and sellers have complete information.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 12) Which of the following products would be sold in a competitive market?

A) Smartphones B) Shoes C) Brent crude oil D) Motorcycles Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: New

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13) If a firm operates in a perfectly competitive market, then it will most likely A) advertise its product on television.

B) take the price of its product as determined by the market.

C) have a difficult time obtaining information about the market price.

D) have an easy time keeping other firms out of the market.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 14) If a firm happened to be the only seller of a particular product, it might behave as a price taker as long as A) buyers have full information about the firm's price.

B) the transaction costs of doing business with this firm are low.

C) there are many buyers.

D) there is free entry and exit.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 15) The perfectly competitive model makes a lot of fairly unrealistic assumptions. Why do economics text books still talk a lot about this model?

A) Many markets are close to being perfectly competitive.

B) It is an important model to use as a benchmark to compare other markets structures to.

C) Perfectly competitive markets maximize societal welfare.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 16) The model of perfect competition is valuable for A) prediction.

B) comparison to other markets.

C) Either A or B. D) None of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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8.2 Competition in the Short Run 1) The short run is A) usually 3-6 months.

B) dependent on the characteristics of the industry.

C) when a firm has to decide whether or not to exit.

D) identical to the long run for most firms.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) The short run is A) a period of time in which at least one input cannot be varied.

B) when firms are stuck with sunk costs, unlike the long run.

C) treated the same way as the long run.

D) a period of time when no inputs can be varied.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 3) In the short run A) firms will shut down if operating at a loss.

B) profit maximizing firms have identical short run supply curves.

C) firms may choose to operate at a loss.

D) most firms have short run supply curves that are the same as their long run supply curves.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) If a firm is a price taker, then its marginal revenue will always equal A) price.

B) total cost.

C) zero.

D) one.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old

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5) Which of the following statements about profit maximizing firms in a competitive market is FALSE? A) Firms earn no economic profit in the long run.

B) Marginal revenue does not have to equal marginal cost.

C) p - MC = 0.

D) Price equals marginal revenue.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) A profit maximizing firm selects output such that A) average profit is maximized.

B) total profit is maximized.

C) marginal profit is maximized.

D) Both A and B. Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 7) An increase in the cost of an input will result in A) a leftward shift in the firm's supply curve.

B) an upward shift of the firm's marginal cost curve.

C) a leftward shift of the market supply curve.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) If a specific (per unit) tax is implemented A) the firm's average cost curve shifts up, resulting in lower profits.

B) the after-tax marginal cost curve shifts, resulting in lower quantity produced.

C) there is less profit per unit sold.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New

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9) A firm should always shut down if its revenue is A) declining.

B) less than its average fixed costs.

C) less than its total costs.

D) less than its avoidable costs.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 10) If a competitive firm finds that it maximizes short-run profits by shutting down, which of the following must be TRUE? A) p < AVC for all levels of output.

B) p < AVC only for the level of output at which p = MC. C) p < AVC only if the firm has no fixed costs.

D) The firm will earn zero profit.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 11) In deciding whether to operate in the short run, the firm must be concerned with the relationship between price of the output and A) total cost.

B) average variable cost.

C) total fixed cost.

D) the number of buyers.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 12) If a competitive firm cannot earn profit at any level of output during a given short-run period, then which of the following is LEAST likely to occur?

A) It will shut down in the short run and wait until the price increases sufficiently.

B) It will exit the industry in the long run.

C) It will operate at a loss in the short run.

D) It will minimize its loss by decreasing output so that price exceeds marginal cost.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old

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13) If the market price is above a firm's average cost at the quantity produced, A) the firm operates and makes a profit.

B) the firm operates and makes zero economic profit.

C) the market price of the firm's inputs will rise.

D) total profit is maximized.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: New 14) If market price is greater than or equal to the minimum of AVC but below the minimum of AC, then A) the firm will shut down.

B) the firm will operate because its loss is less than if it shuts down.

C) revenue is lower than variable costs.

D) profit is positive and so the firm will operate.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: New 15) If market price is greater than the minimum of AVC but below the minimum of AC, then A) the firm will shut down.

B) revenue covers variable costs and some of the fixed costs and profit is positive.

C) revenue covers variable costs and some of the fixed costs, although profit is negative.

D) economic profit is zero.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 16) The competitive firm's supply curve is equal to A) its marginal cost curve.

B) the portion of its marginal cost curve that lies above AC. C) the portion of its marginal cost curve that lies above AVC. D) the portion of its marginal cost curve that lies above AFC. Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old

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17) There are currently N identical firms in a market. If it is a perfectly competitive market, the short-run market supply curve at any given price A) is N times the supply of an individual firm.

B) is N - 1 times the supply of an individual firm.

C) is N plus the supply of an individual firm.

D) cannot be determined from the information provided.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: New 18) In a perfectly competitive market with 100 identical firms producing at market price p1 A) the supply curve is flatter than if there were only 50 identical firms.

B) the supply curve is more elastic than if there were only 50 identical firms.

C) the firms have identical marginal costs.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 19) If firms in a competitive market have different cost functions, then A) there is no short run market supply curve.

B) the market supply curve reflects those firms' operating envelopes, even in the short run.

C) some of the firms will shut down because their costs are too high to compete.

D) the firms' marginal costs will be different at the market price.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 20) In a perfectly competitive market with 75 non-identical firms producing at market price p1 A) the supply curve is flatter than if there were only 35 identical firms.

B) the supply curve is more elastic than if there were only 25 identical firms.

C) the supply curve is more inelastic than if the firms were identical.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old

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21) A "stair-like" market supply curve is the result of A) higher cost firms charging a higher price for their products.

B) firms having different costs.

C) firms shutting down in the long run.

D) average variable costs that are higher than average fixed costs.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old

22) The above figure shows the cost curves for a typical firm in a market and three possible market supply curves. If there are 100 identical firms, the market supply curve is best represented by A) curve A. B) curve B. C) curve C. D) either curve A or B, but definitely not C. Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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23) In a short run competitive equilibrium A) the market demand curve is horizontal.

B) the market demand curve is downward sloping.

C) the market demand curve is perfectly inelastic.

D) All of the above are possible.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old For the following, please answer "True" or "False" and explain why.

24) If a firm cannot earn profits in the short run, it will shut down.

Answer: False. A firm will operate at a loss if the loss incurred from production is less than the loss incurred from shutting down. Even if the firm shuts down, it still must pay its fixed costs because, in the short run, going out of business is not an option.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 25) A competitive firm's supply curve is identical to its marginal cost curve.

Answer: False. The statement is only partly correct. The supply curve is only that portion that lies above AVC. Skill: Conceptual AACSB: Analytical Thinking Status: Old 26) Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q2. Derive the market supply curve.

Answer: For each MC = 2q and AVC = q. Thus MC > AVC for all levels of output. The firm sets p = 2q or q = 0.5p. Since there are 1000 firms each producing q, market supply equals Q = 500p.

Skill: Analytical AACSB: Analytical Thinking Status: Old 27) Suppose there are 1000 identical wheat farmers. For each, TC = 10 + q2. Market demand is Q = 600,000 - 100p. Derive the short-run equilibrium Q, q, and p. Does the typical firm earn a short-run profit?

Answer: The firm's supply is q = 0.5p; market supply is Q = 500p. Market equilibrium can be found as 500p = 600,000 - 100p, or 600p = 600,000, so p = 1,000 and Q = 500,000. q = 0.5p = 500. Profit = (500 ∗ 1,000) - (10 + 250,000) = 249,990. Each firm earns a profit.

Skill: Analytical AACSB: Analytical Thinking Status: Old

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8.3 Competition in the Long Run 1) In the long run, profits will equal zero in a competitive market because of A) constant returns to scale.

B) identical products being produced by all firms.

C) the availability of information.

D) free entry and exit.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) In the long run A) the firm shuts down if revenue is less than its avoidable costs.

B) marginal profit is greater than zero.

C) if economic profit is zero.

D) supply curves are identical to the short run supply curves.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) Assuming a horizontal long-run market supply curve, which of the following statements is (are) TRUE about competitive firms in the long run?

A) p = MC B) p = AC C) profit = 0 D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) Which is an important aspect of the perfectly competitive market that leads to long run equilibrium?

A) perfect information B) freedom of entry and exit C) price taking behavior D) homogeneous products Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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5) Like the short run A) the long run supply curve is the sum of the individual firms' supply curves.

B) the maximum number of firms in the market is fixed.

C) firms operate only if they make a positive profit.

D) All of the above.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) If firms in a competitive market are NOT identical, then an increase in cost will A) shift marginal cost to the right.

B) push the most inefficient firms out of the market.

C) push the most efficient firms out of the market.

D) Need more information.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 7) A firm will enter a competitive market when A) it can gather market share at the expense of incumbent firms.

B) it would not be the last firm entering.

C) it can earn a positive long-run profit.

D) the long-run supply curve is upward sloping.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 8) A firm will exit a competitive market when A) costs force the marginal cost curve to shift to the left.

B) the long-run profit would be negative.

C) it can earn only earn a zero long-run profit.

D) Both B and C. Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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9) If firms in a competitive market are identical, then the long-run market supply curve will be A) horizontal.

B) upward sloping.

C) downward sloping.

D) undetermined.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 10) Long-run market supply curves are upward sloping if A) firms are identical.

B) the number of firms is restricted in the long run.

C) input prices fall as the industry expands.

D) All of the above.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) If firms in a competitive market are NOT identical, then the long-run market supply curve will be A) horizontal.

B) upward sloping.

C) downward sloping.

D) undetermined.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 12) Long-run market supply curves are downward sloping if A) firms are identical.

B) the number of firms is restricted in the long run.

C) input prices fall as the industry expands.

D) All of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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13) Long-run market supply curves are upward sloping if A) firms are identical.

B) the number of firms is unrestricted in the long run.

C) input prices rise as the industry expands.

D) All of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: New 14) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at $0.20 per pound when 500 pounds are grown. If the long-run supply curve is horizontal, then A) some firms will enjoy long-run profits because they operate at minimum average cost.

B) the long-run price will be $0.20 per pound.

C) each consumer will purchase $100 worth of potatoes.

D) the long-run price will be set just above $0.20 per pound.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 15) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at $0.20 per pound when 500 pounds are grown. The demand for potatoes is Q = 10,000/p. If the long-run supply curve is horizontal, then how much will consumers spend, in total, on potatoes?

A) $0 B) $500 C) $10,000 D) $50,000 Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 16) Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at $0.20 per pound when 500 pounds are grown. The demand for potatoes is Q = 10,000/p. If the long-run supply curve is horizontal, then how many pounds of potatoes will be consumed in total?

A) 0 B) 500 C) 10,000 D) 50,000 Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 15 Copyright © 2020 Pearson Education, Inc.

17) With identical firms, constant input prices, and all the other characteristics of a competitive market A) the long run equilibrium price is the minimum of the average cost curve.

B) a shift in demand will change the equilibrium price and quantity.

C) the long run and short run equilibria are identical.

D) Both A and B. Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 18) With identical firms, constant input prices, and all the other characteristics of a competitive market A) a shift in demand has no effect on the long-run average cost and so there is no change in equilibrium price and quantity.

B) a shift in demand will change the equilibrium price and quantity.

C) a shift in demand has no effect on the long-run average cost, resulting in a change in equilibrium quantity but not price.

D) a shift in demand has no effect on the long-run average cost, resulting in a change in equilibrium price but not quantity.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 19) In the long run, firms in a competitive market A) shut down because profit goes to zero.

B) lose money.

C) are not profit maximizing.

D) earn zero economic profit.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old For the following, please answer "True" or "False" and explain why.

20) The long-run supply curve in a competitive market is upward-sloping.

Answer: False. The shape of the long-run supply curve will depend on how similar the firms are and on the relationship between factor prices and total industry output.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old

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21) If the shutdown rule, p < AVC, is the same in the short run and the long run, explain why the shutdown prices may be different.

Answer: In the short run there are fixed costs, but in the long run all costs are variable. In the long run the average variable cost is usually higher than in the short run.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old 8.4 Competition Maximizes Economic Well-being 1) Government intervention in a perfectly competitive market A) reduces economic well-being.

B) is an illustration of the "invisible hand theorem."

C) increases economic well-being.

D) guarantees maximized well-being.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) If a market is NOT perfectly competitive, then government intervention A) is always justifiable.

B) will usually decrease economic well-being.

C) guarantees that societal well-being will be maximized.

D) may increase economic well-being.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) Consumers seek to maximize A) profits.

B) expected consumer surplus.

C) expenditures.

D) choice.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: New

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4) Consumer surplus A) is the difference between what a consumer pays for a good and the producer's cost.

B) is the extra money a consumer pays above the minimum necessary price for the producer to produce it.

C) is the difference between what a consumer would willingly pay for a good and the price actually paid.

D) equals zero in the long run.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 5) A consumer's marginal willingness to pay A) changes with price.

B) is equal to the marginal value to the consumer of the last unit of output.

C) is the minimum price a consumer will pay for the last unit of output.

D) is the first derivative of the demand curve.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 6) Assume a consumer has a horizontal demand curve for a product. His consumer surplus from buying the product A) is maximized.

B) can't be calculated.

C) equals zero.

D) Need more information.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old

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7) The above figure shows the market demand curve for mobile telecommunications (time spent on a mobile phone). The current price is $0.35 per minute. If the price were to increase by ten cents per minute, consumer surplus would A) fall to $820.

B) fall by $84.

C) fall by $58.

D) fall to $369.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 8) The above figure shows the market demand curve for mobile telecommunications (time spent on a mobile phone). At the current price of $0.35 per minute, consumer surplus equals A) $301.00.

B) $924.50.

C) $1,225.50.

D) $1,250.00.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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9) The above figure shows the market demand curve for mobile telecommunications (time spent on a mobile phone). If the price were zero, consumer surplus would equal A) $301.00.

B) $924.50.

C) $1,225.50.

D) $1,250.00.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: New 10) The above figure shows the market demand curve for mobile telecommunications (time spent on a mobile phone). If the price were $2.50, consumer surplus would equal A) $301.00.

B) $924.50.

C) $1,225.50.

D) $0 Answer: D Skill: Analytical AACSB: Analytical Thinking Status: New 11) Market consumer surplus A) is the area under the demand curve and above market price, up to the quantity actually bought.

B) is equal to total market revenue minus cost.

C) does not depend on the quantity sold.

D) is the area under the market price and above the marginal cost curve.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 12) Mary purchased a stuffed animal toy for $5. After a few weeks, someone offered her $100 for the toy. Mary refused. One can conclude that Mary's consumer surplus from the toy is A) less than $5.

B) at least $95.

C) at least $100.

D) $105.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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13) Mister Jones was selling his house. The asking price was $220,000, and Jones decided he would take no less than $200,000. After some negotiation, Mister Smith purchased the house for $205,000. Smith's consumer surplus is A) $5,000.

B) $15,000.

C) $20,000.

D) not able to be calculated from the information given.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 14) Currently, when a consumer purchases a "green" automobile, the U.S. government gives the consumer a rebate. When the rebate program expires, we would expect A) producer surplus to increase.

B) consumer surplus to drop.

C) consumer surplus to remain unchanged, since they pay the price and only get the rebate later.

D) producers to stop making "green" automobiles.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 15) Producer surplus is equal to A) the area under the supply curve.

B) the difference between price and average cost for all units sold.

C) the difference between price and marginal cost for all units sold.

D) the firm's profit when fixed costs exist.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 16) Producer surplus equals A) total revenue minus total variable cost.

B) total revenue minus the sum of all marginal cost.

C) profit plus fixed cost.

D) All of the above.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old

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17) Producer surplus A) is the minimum amount a firm must receive to engage in trade.

B) is a measure of what a firm gains from trade.

C) represents the opportunity cost of the firm.

D) determines whether or not a firm will produce in the long run.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: New 18) Suppose the market supply curve is p = 5 + Q. At a price of 10, producer surplus equals A) 50.

B) 25.

C) 12.50.

D) 10.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 19) Suppose the market supply curve is p = 5Q. At a price of 10, producer surplus equals A) 50.

B) 25.

C) 12.50.

D) 10.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 20) The difference between producer surplus and profit is always the associated A) opportunity costs.

B) total costs.

C) variable costs.

D) fixed costs.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old

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21) Assume government policy increases the demand for corn.

A) The consumer surplus of corn buyers will increase.

B) The producer surplus of corn growers will decrease.

C) The producer surplus of corn growers will increase.

D) The producer surplus of corn growers will not change.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 22) Total surplus A) is maximized under perfect competition.

B) represents the gains from trade to market participants.

C) treats consumer and producer surplus equally.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 23) If a market produces a level of output below the competitive equilibrium, then A) social welfare is not maximized.

B) consumer surplus might still be maximized.

C) the actual price will be below the equilibrium price.

D) social welfare might still be enhanced if a price ceiling keeps price below the competitive price.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 24) If in a market the last unit of output was sold at a price higher than marginal cost A) producer is better off producing more.

B) consumers are better off if less of the product is sold.

C) social welfare is not maximized.

D) the unit increased total profit.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old

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25) If a market produces a level of output that exceeds the competitive equilibrium output, then A) social welfare will be higher.

B) producer surplus will be higher.

C) marginal cost will exceed price.

D) All of the above.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 26) Deadweight loss occurs when A) producer surplus is greater than consumer surplus.

B) the maximum level of total welfare is not achieved.

C) consumer surplus is reduced.

D) an inferior good is consumed.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 27) Deadweight loss occurs when A) consumer surplus is greater than producer surplus.

B) surplus losses to one group due to intervention are not offset by surplus gains to another.

C) consumer surplus is reduced.

D) consumer surplus is negative.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 28) The deadweight loss associated with output less than the competitive level can be determined by A) subtracting the competitive level producer surplus from the producer surplus associated with less output.

B) subtracting the consumer surplus from the producer surplus associated with less output.

C) summing the consumer and producer surplus associated with less output.

D) summing the change in the total consumer and producer surplus from moving from the competitive level of output to less output.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old

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29) Giving presents at Christmas does NOT generate a deadweight loss if A) all gifts are money.

B) everybody gets exactly want she wants.

C) nobody can be made better off by returning the gift and purchasing a different one.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 30) What is one reason activists might lobby the government for regulation limiting the production of a product to less than would normally be produced in a perfectly competitive market?

A) They value consumer surplus more than producer surplus.

B) They value producer surplus more than consumer surplus.

C) They seek to avoid future regulation.

D) They seek to minimize total surplus.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 31) What is one reason activists might lobby the government to force firms to produce more output than they normally would in a perfectly competitive market?

A) They value consumer surplus more than producer surplus.

B) They value producer surplus more than consumer surplus.

C) They seek to avoid future regulation.

D) They seek to minimize total surplus.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 32) Price floors and price ceilings A) always reduce total surplus.

B) reduce consumer surplus and increase producer surplus.

C) reduce producer surplus and increase consumer surplus.

D) Not enough information to determine.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old

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33) When is the profit a firm earns equal to the producer surplus? Explain.

Answer: Profit equals producer surplus when the firm has no fixed costs. Producer surplus can be thought of as the gains from trade. In the short run, if the firm produces any output, it earns profit equal to revenue minus variable costs minus fixed costs. If the firm shuts down, it loses the fixed costs. The producer surplus equals the profit from trading minus the profit or loss from not trading, revenue minus variable costs. If no fixed costs exist, then profit will equal the producer surplus.

Skill: Conceptual AACSB: Analytical Thinking Status: Old For the following, please answer "True" or "False" and explain why.

34) As the quantity produced of a good increases, the social welfare generated by that good increases.

Answer: False. This only takes consumer surplus into account. Beyond the competitive equilibrium, additional units of output have less value than the cost to make them. Thus, beyond the competitive equilibrium, social welfare declines as the quantity of a good increases.

Skill: Conceptual AACSB: Analytical Thinking Status: Old

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Managerial Economics and Strategy, 3e (Perloff/Brander) Chapter 9 Monopoly 9.1 Monopoly Profit Maximization 1) The monopoly maximizes profit by setting A) price equal to marginal cost.

B) price equal to marginal revenue.

C) marginal revenue equal to marginal cost.

D) revenue equal to zero.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) A profit maximizing monopolist A) is guaranteed to lose money because of a lack of competition.

B) is not guaranteed to make a positive profit.

C) is guaranteed to make a positive profit, hence the desire to be a monopolist.

D) is guaranteed to make a non-negative profit, otherwise government would step in to assist.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) One difference between a monopoly and a competitive firm is that A) a monopoly is a price taker.

B) a monopoly maximizes profit by setting marginal revenue equal to marginal cost.

C) a monopoly faces a downward-sloping demand curve.

D) None of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) For a monopoly, marginal revenue is less than price because A) the demand for the firm's output is downward sloping.

B) the firm has no supply curve.

C) the firm can sell all of its output at any price.

D) the demand for the firm's output is perfectly elastic.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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5) The monopolist's marginal revenue curve A) doesn't exist.

B) lies below the demand curve.

C) is identical to the demand curve.

D) lies above the demand curve.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 6) When a monopoly lowers its price to increase quantity A) it is not maximizing its profit.

B) it will increase its profit.

C) it will make less money on the units it would have originally sold.

D) the quantity produced drives down marginal revenue.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 7) If the inverse demand function for a monopoly's product is p = a - bQ, then the firm's marginal revenue function is A) a.

B) a - (1/2)bQ. C) a - bQ. D) a - 2bQ. Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 8) If the inverse demand function for a monopoly's product is p = 100 - 2Q, then the firm's marginal revenue function is A) -2.

B) 100 - 4Q. C) 200 - 4Q. D) 200 - 2Q. Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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9) If the inverse demand curve a monopoly faces is p = 100 - 2Q, then profit maximization A) is achieved when 25 units are produced.

B) is achieved by setting price equal to 25.

C) is achieved only by shutting down in the short run.

D) cannot be determined solely from the information provided.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 10) If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then profit maximization A) is achieved when 21 units are produced.

B) is achieved by setting price equal to 21.

C) is achieved only by shutting down in the short run.

D) cannot be determined solely from the information provided.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 11) If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then profit maximization is achieved when the monopoly sets price equal to A) 16.

B) 21.

C) 25.

D) 58.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 12) If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then maximum profit A) equals $336.

B) equals $882.

C) equals $1,218.

D) cannot be determined solely from the information provided.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old

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13) A monopolist that chooses price A) necessarily produces less than a monopolist that chooses quantity, hence the laws against price fixing.

B) produces the same amount as a monopolist that chooses quantity.

C) produces more than a monopolist that chooses quantity, thus the irony of laws against price fixing.

D) can set price higher than the demand curve and earn additional profits, whereas a firm that chooses quantity cannot.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 14) Which of the following statements is TRUE? A) A monopoly cannot set price and quantity such that the point lies above the demand curve.

B) A monopoly can charge whatever it wants.

C) Profit maximization occurs by setting price first.

D) Both A and B. Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 15) A profit-maximizing monopolist will never operate in the portion of the demand curve with price elasticity equal to A) -3.

B) -1.

C) -1/3.

D) None of the above—the price elasticity does not matter.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 16) When the marginal revenue curve intersects the horizontal axis A) demand is relatively elastic.

B) demand is relatively inelastic.

C) demand is perfectly elastic.

D) demand is unitary elastic.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old

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17) Marginal Revenue is A) the increase in total revenue from selling one more unit of output.

B) equal to P(1 + 1/e) C) equal to P when the price elasticity of demand is infinite.

D) All of the above.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 18) A monopoly that is maximizing profits operates in the ________ portion of the demand curve.

A) unitary elastic B) elastic C) inelastic D) horizontal Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 19) A monopoly that is maximizing profits never operates in the ________ portion of the demand curve.

A) unitary elastic B) elastic C) inelastic D) horizontal Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 20) A monopoly shuts down when A) the short run price is below its average variable costs.

B) the long run price is below its average variable costs.

C) the average cost is less than price.

D) never, because it can raise its prices as high as necessary to keep operating and maximize profits.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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21) The monopolist's supply curve A) doesn't exist.

B) is the region of its marginal cost curve above average cost.

C) is identical to the demand curve.

D) is the region of its marginal cost curve that lies above the marginal revenue curve.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 22) The fact that a monopoly has to take the shapes of marginal cost AND marginal revenue into account when making decisions is reflected in the fact that monopolies A) don't have a supply curve.

B) have shifting demand curves.

C) have the same supply curve as perfectly competitive firms.

D) are subject to market failure.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: New 23) If a monopoly's demand curve shifts to the right, the monopoly A) will charge a higher price.

B) will charge a lower price.

C) will sell more.

D) decision cannot be determined.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 24) If the demand for a monopoly's output shifts rightward, the change in quantity produced is A) positive.

B) negative.

C) zero.

D) not predictable.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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25) If the demand for a monopoly's output shifts rightward, the change in quantity produced is NOT predictable because A) the monopoly is a profit maximizer.

B) the monopoly is a price taker.

C) the monopoly has no supply curve.

D) the monopoly's marginal cost curve might not be upward sloping.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 26) If the demand for a monopoly's output shifts leftward, the change in quantity produced is NOT predictable because the monopoly A) is a profit maximizer.

B) is a price taker.

C) has no supply curve.

D) has a marginal cost curve that might not be upward sloping.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: New For the following, please answer "True" or "False" and explain why.

27) Since there are no close substitutes for the monopoly's product, the monopoly can charge any price it wishes.

Answer: False. The monopoly is still constrained by the demand curve, which reflects the price that people are willing to pay for the quantity produced.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 28) Since a monopoly can set any price it wants, it always makes a profit?

Answer: False. The profit-maximizing price can result in a loss.

Skill: Conceptual AACSB: Analytical Thinking Status: Old

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29) In a recent court case, an expert witness defined a monopoly as a firm that can "raise price without reducing its total revenue." What does this imply about the elasticity of demand? Would this definition hold for a profit-maximizing monopoly? Explain.

Answer: If the firm raises price, the quantity sold will decrease. If total revenue is not reduced by this, then marginal revenue is not positive. This implies demand either is price inelastic or has unitary elasticity. This would not hold for a profit-maximizing monopoly. A profit maximizer sets MR = MC. This definition implies that MR is zero or negative, and MC cannot be negative.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 30) Suppose a monopolist has TC = 100 + 10Q + 2Q2, and the demand curve it faces is p = 90 2Q. What will be the price, quantity, and profit for this firm?

Answer: First, determine MR = 90 - 4Q. Second, MC = 10 + 4Q. Setting MR = MC yields 90 4Q = 10 + 4Q. Rearranging yields 80 = 8Q or Q = 10. Price equals 90 - 2(10) = 70. Total revenue = 70 ∗ 10 = 700. Total cost equals 100 + 10(10) + 2(102) = 400. Profit equals 700 - 400 = 300.

Skill: Analytical AACSB: Analytical Thinking Status: Old 9.2 Market Power 1) A firm that has market power A) can charge whatever it wants for its product.

B) can charge a price above marginal cost.

C) has positive economic profits.

D) does not lose sales when increasing price.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) Market power guarantees profit.

A) True, which is why firm's locate as far away from each other as possible.

B) False, market power guarantees price greater than marginal cost.

C) True, market power guarantees price greater than average cost.

D) False, market power guarantees price equal to average cost.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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3) Market power is illegal.

A) True, no one is allowed to charge a price greater than marginal cost.

B) False.

C) True, no one is allowed to charge a price greater than average cost.

D) False, because market power guarantees price equal to average cost.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) The ability of a monopoly to charge a price that exceeds marginal cost depends on the A) price elasticity of supply.

B) price elasticity of demand.

C) slope of the demand curve.

D) shape of the marginal cost curve.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) The more elastic the demand curve, a monopoly will A) have a larger Lerner Index.

B) face a lower marginal cost.

C) earn more profit.

D) lose more sales as it raises its price.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: New 6) The more inelastic the demand curve, a monopoly will A) have a smaller Lerner Index.

B) face a lower marginal cost.

C) earn less profit.

D) lose fewer sales as it raises its price.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: New

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7) A monopoly sets a price of $50 per unit for an item that has a marginal cost of $10. Assuming profit maximization, the implicit demand elasticity is A) -0.2.

B) -0.8.

C) -1.25.

D) -5.0.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 8) A monopoly incurs a marginal cost of $1 for each unit produced. If the price elasticity of demand equals -2.0, the monopoly maximizes profit by charging a price of A) $1.00.

B) $1.50.

C) $2.00.

D) $3.00.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 9) The Lerner Index is A) the ratio of the difference between price and marginal cost to price.

B) equal to (Price - MC)/Price C) a measure of market power.

D) All of the above.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 10) If the demand for a firm's output is perfectly elastic, then the firm's Lerner Index equals A) zero.

B) one.

C) infinity.

D) one-half.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old

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11) If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then the firm's Lerner Index equals A) 58/16.

B) 16/42.

C) 58/42.

D) 42/58.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 12) If a monopoly can produce a good at zero marginal cost, then its Lerner Index is A) zero.

B) one.

C) infinity.

D) undetermined.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 13) If a monopoly's Lerner Index exceeds 1, then A) it is earning maximum profit.

B) it has ultimate market power.

C) it must be pricing below marginal cost.

D) marginal revenue is negative.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 14) As other firms enter a monopoly's market, the monopoly's market power A) is unaffected.

B) declines.

C) increases.

D) increases according to the Lerner Index but decreases according to the price/marginal cost ratio.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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15) As other firms enter a monopoly's market, the demand curve a monopoly faces A) is unaffected.

B) becomes more inelastic.

C) becomes more elastic.

D) may become more or less elastic, depending on its Lerner Index.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 16) Which of the following would force a monopoly to charge a lower price?

A) A new firm selling the same product enters the market.

B) A new firm selling the same product locates close to the monopoly.

C) A new firm introduces a better substitute for the firm's product.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New For the following, please answer "True" or "False" and explain why.

17) The less elastic is the demand for a firm's product, the greater is that firm's market power.

Answer: True. The less elastic the demand for the firm's product, the greater is the firm's ability to set price over marginal cost.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 18) When would a profit-maximizing monopolist that operates with no government intervention choose to produce the competitive level of output?

Answer: A monopolist that faces a perfectly elastic demand curve sets its price equal to marginal cost and produces the competitive level of output.

Skill: Conceptual AACSB: Analytical Thinking Status: Old

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9.3 Market Failure Due to Monopoly Pricing 1) The loss associated with the fact that at the profit-maximizing quantity consumers value the goods more than it cost to produce them is called A) deadweight loss.

B) comparative loss.

C) Lerner Loss.

D) Consumer Value Loss.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 2) A market failure occurs when A) price equals marginal cost.

B) there is a non-optimal allocation that leads to an inefficient market.

C) deadweight loss is maximized.

D) a firm shuts down.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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3) The above figure shows the demand and marginal cost curves for a monopoly. The deadweight loss of this monopoly equals A) h.

B) c.

C) c + f.

D) c + d + e + f.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 4) The above figure shows the demand and marginal cost curves for a monopoly. Under monopoly, consumer surplus equals A) a + b.

B) a + b + c.

C) a + b + c + d + e + f.

D) None of the above.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old

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5) If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then the deadweight loss from monopoly equals A) $21.

B) $441.

C) $882.

D) $1,764.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

6) The above figure shows the demand and cost curves facing a monopoly. The deadweight loss of this monopoly is A) $100.

B) $250.

C) $1,250.

D) $2,500.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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7) The above figure shows the demand and cost curves facing a monopoly. A $100 per unit tax would raise price by A) $100.

B) $50.

C) $25.

D) $0.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 8) The above figure shows the demand and cost curves facing a monopoly. If a $100 per unit tax is charged, what is the incidence of the tax on consumers?

A) 100% B) 50% C) 25% D) 0% Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 9) The above figure shows the demand and cost curves facing a monopoly. If a $100 per unit tax is charged, the loss in welfare resulting from the tax is A) $250.

B) $312.50.

C) $1,250.

D) $1,562.50.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 10) In a monopoly market, total surplus A) cannot be determined because there is no supply curve.

B) is less than in a competitive market.

C) is equal to consumer surplus.

D) is completely captured by the monopolist.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: New

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9.4 Causes of Monopoly 1) Which of the following could create a cost advantage for a monopoly?

A) Better technology B) Lower friction due to better organization C) Standardization D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: New 2) A flour mill holding exclusive contracts to 95% of the wheat in a large geographic area may operate as a flour producing monopoly locally because A) the mill has a very inelastic supply curve.

B) the mill is a natural monopoly.

C) the mill controls a key input.

D) the government will declare it a monopoly.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) The situation in which one firm can produce the total output of the market at lower cost than several firms is called A) natural monopoly.

B) pure monopoly.

C) ruling monopoly.

D) cost monopoly.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 4) Which of the following total cost functions suggests the presence of a natural monopoly?

A) TC = 2Q B) TC = 100 + 2Q C) TC = 100 + 2Q2 D) All of the above.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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5) Which of the following average cost functions suggests the presence of a natural monopoly?

A) AC = 2 B) AC = 100/Q + 2 C) TC = 100/Q + 2Q D) All of the above.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 6) All of the following government actions create barriers to entry EXCEPT A) limiting the number of airlines that may operate at an airport.

B) granting a patent to a drug company.

C) requiring a pizza parlor to get a business license.

D) giving a power company exclusive use of the city's transmission lines.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 7) Limited government licenses that create a monopoly do so because A) the license generates a marginal cost advantage.

B) the monopoly will become a natural monopoly.

C) a barrier to enter the market exists.

D) All of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) Government actions that create monopolies A) spur product innovation by the monopoly.

B) create deadweight loss.

C) result in lower average costs of production.

D) ensure that firms price at marginal cost.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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9) Privatization of a state-owned monopoly can A) allow governments to capture future monopoly earnings.

B) allow governments to be more efficient.

C) reduce bribery of government officials.

D) increases chances of reelection for politicians.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: New 10) An exclusive right to sell a new and useful product, process, substance, or design for a fixed period of time is called a A) patent.

B) barrier to entry.

C) monopoly.

D) research disincentive.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 11) A patent A) always gives rise to a monopoly.

B) may not provide a barrier to entry.

C) allows the patent owner to capture all of the consumer surplus.

D) increases total welfare.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 9.5 Advertising 1) The monopoly can shift the demand for its product rightward by A) accommodating entry.

B) advertising new uses for its product.

C) moving along the learning curve.

D) All of the above.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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2) A monopoly advertises A) to raise its profit.

B) to decrease costs.

C) to dissuade entry by other firms.

D) to reduce deadweight loss.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) If a monopoly can advertise and as a result the demand curve will become more inelastic, the monopoly A) should always engage in the advertising.

B) should engage in the advertising until the demand curve becomes more elastic.

C) will earn higher gross profit if it advertises.

D) None of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) A firm will increase its spending on advertising until A) it has monopolized the market.

B) it has deterred all future entry.

C) the marginal benefit of advertising is zero.

D) the marginal benefit of advertising equals the marginal cost of advertising.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 9.6 Internet Monopolies: Network Effects and Scale Economies 1) The situation where one person's demand for a good depends on the consumption of the good by others is called a A) network externality.

B) network internality.

C) consumption externality.

D) production externality.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old

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2) For network externalities to occur, A) the government has to create new laws.

B) deadweight loss must be minimized.

C) there must be a critical mass of users.

D) there must be a positive benefit to society.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) For there to be positive network externalities, A) there must be a direct size effect.

B) there must be an indirect size effect.

C) introductory prices are required.

D) None of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) Which of the following products benefits from network externalities?

A) Cable TV service B) Fashion clothing C) All-electric cars D) High-speed trains Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: New 5) Which of the following products benefits from network externalities?

A) Microwave ovens B) Diamond rings C) Twitter D) Concert tickets Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: New

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6) The situation in which a person places greater value on a good as more and more people possess it is called the A) Bandwagon Effect.

B) Greater Value Effect.

C) Snob Effect.

D) Behavioral Effect.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 7) The situation in which a person places greater value on a good as fewer and fewer people possess it is called the A) Bandwagon Effect.

B) Greater Value Effect.

C) Snob Effect.

D) Behavioral Effect.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 8) A monopoly can be formed by a bandwagon effect. Which of the following products would most closely match the bandwagon effect?

A) The Atlanta Braves baseball club B) The Dell Computer C) The Apple Watch D) The Chevrolet Corvette Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 9) Two-sided markets A) have twice as many users as one-sided markets.

B) have two or more user groups that provide each other with network externalities.

C) require the internet to function properly.

D) are more efficient than other market types.

Answer: B Skill: Definition AACSB: Analytical Thinking Status: New

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Managerial Economics and Strategy, 3e (Perloff/Brander) Chapter 10 Pricing with Market Power 10.1 Conditions for Price Discrimination 1) Price discrimination A) is illegal in the U.S. B) is a form of pricing where consumers pay different prices for a good.

C) allows firms to set a single intermediate price between consumers' low and high willingness to pay.

D) is when consumers use prices to discriminate between different quality products.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 2) Price discrimination A) is a type of nonuniform pricing.

B) is a way to legally charge a higher price to people you don't like.

C) forces producers to make a tradeoff between charging low prices or high prices.

D) works because consumers are ignorant about the practice.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 3) Without price discrimination, a firm A) faces a tradeoff when pricing a good that has customers with different willingness to pay.

B) cannot maximize profit.

C) has no market power.

D) does not get any producer surplus, with all of the surplus going to consumers.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) Why do firms engage in price discrimination?

A) to decrease cost B) to increase profits C) to increase consumer surplus D) to prohibit the resale of their products Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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5) When firms price discriminate, they turn ________ into ________.

A) producer surplus; revenue B) consumer surplus; profit C) revenue; producer surplus D) producer surplus; consumer surplus Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) When firms price discriminate, they A) get additional surplus from consumers who would have bought at the profit-maximizing uniform price but lose sales because of the higher prices.

B) maintain surplus from existing consumers but pick up additional consumers that would not have bought at the profit-maximizing uniform price.

C) get additional surplus from consumers who would have bought at the profit-maximizing uniform price.

D) None of the above.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 7) When firms price discriminate, they A) sell to new consumers who would not have bought at the profit-maximizing uniform price but lose sales to existing consumers because of the higher prices.

B) sell to new consumers that would not have bought at the profit-maximizing uniform price.

C) lose surplus from consumers who would have bought at the profit-maximizing uniform price.

D) None of the above.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 8) Disneyland price discriminates because A) everyone loves going to The Happiest Place on Earth, so they'll pay whatever Disneyland wants to charge.

B) children are cheaper to service, so Disneyland can charge lower prices for a children's ticket.

C) only a certain number of people can get into Disneyland at any given time, limiting supply, and the market demand curve is nearly completely inelastic.

D) local residents likely wouldn't go to the park at prices Disneyland can charge for tourists, which would reduce Disneyland's profits.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 2 Copyright © 2020 Pearson Education, Inc.

9) All firms can increase profits using price discrimination.

A) True, because market demand curves are downward sloping B) True, because firms can sell different versions of a product that is just right for an individual consumer C) False, because consumers aren't forced to buy a firm's products D) False, because some firms are in competitive markets Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 10) Which of the following conditions must be TRUE so that a firm can profitably price discriminate?

A) There are no other firms in the market.

B) The good is a non-durable.

C) The good cannot be easily resold.

D) All of the above.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 11) If a firm faces a flat demand curve, A) it cannot engage in price discrimination.

B) it can only engage in two-part tariffs.

C) it can only engage in perfect price discrimination.

D) None of the above.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 12) Which of the following conditions must be TRUE so that a firm can profitably price discriminate?

A) The firm must be able to identify individual or groups of consumers with different demand curves.

B) The firm must be able to identify how its consumers' demand curves differ.

C) The good cannot be easily resold.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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13) Which of the following conditions must be TRUE so that a firm can profitably price discriminate?

A) The firm must have market power.

B) The firm must be able to identify how its consumers' demand curves differ.

C) The firm must be able to limit or prevent resale.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 14) If resale is easy, then A) price discrimination won't work, because then only low-priced goods are sold.

B) consumers' demand curves will shift to the low-priced good.

C) firms will stop providing the good.

D) price discrimination results in lower consumer surplus.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 15) Resale is difficult when A) the good is light-weight.

B) the good is expensive.

C) transaction costs are high.

D) transaction costs are negligible.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 16) Which of the following is likely hardest to resell?

A) An Apple iPod B) A discount airline ticket you bought with your frequent flyer miles C) A used car D) The free spa treatment you won at a raffle Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old

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17) Why might luxury-goods retailers limit purchases on a good by consumers "due to popular demand"?

A) Because they are worried about running out of supply, leaving some of their customers unhappy that they can't buy the good.

B) Because they are trying to use scarcity as a way to improve the brand image of the good.

C) Because they are limiting the possibility of arbitrage, where consumers buy in a low price area and resell in a higher price area.

D) Because they are worried that they'll run out of the good during the all-important holiday season.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 18) At many municipal golf courses, local residents pay a lower fee to play than other golfers do.

One necessary condition for the golf course to be able to successfully price discriminate according to residency is that A) they can check the identification cards of golfers.

B) local resident golfers and other golfers have the same price elasticity of demand to play at the municipal course.

C) there are many golf courses nearby from which golfers can choose.

D) they require all golfers to rent a cart.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 19) Charging a higher price for a motel room to customers with dogs or cats than to customers with no pets is most likely an example of A) first-degree price discrimination.

B) second-degree price discrimination.

C) third-degree price discrimination.

D) actual cost differences.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old For the following, please answer "True" or "False" and explain why.

20) Firms price discriminate to maximize total revenue.

Answer: False. Firms price discriminate to increases profit.

Skill: Conceptual AACSB: Analytical Thinking Status: Old

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21) Explain why a firm can earn more profit by price discrimination than from setting a uniform price.

Answer: First, price discrimination allows a firm to charge a higher price to customers who are willing to pay more than the uniform price. The firm captures more of the consumer surplus.

Second, a price-discriminating firm can sell to additional customers who were unwilling to pay the uniform price.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 10.2 Perfect Price Discrimination 1) A consumer's reservation price is the A) amount she will pay for a hotel or airline reservation.

B) minimum amount she will pay for a good or service.

C) price that maximizes her surplus.

D) maximum amount she will pay for a good or service.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 2) A perfect price discriminator A) charges each buyer her reservation price.

B) charges different prices to each customer based upon different costs of delivery.

C) generates a deadweight loss to society.

D) charges lower prices to customers who buy greater quantities.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) A perfect price discriminating equilibrium maximizes A) consumer surplus.

B) the associated deadweight loss.

C) the market inefficiency.

D) total welfare.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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4) A perfect price discriminating monopoly A) captures all consumer surplus.

B) creates deadweight loss.

C) increases market inefficiency.

D) decreases total welfare.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) For a perfect-price-discriminating monopoly, the marginal revenue curve A) lies below the demand curve.

B) is the demand curve.

C) varies for each consumer.

D) is the same as the monopolist's marginal revenue curve.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) The deadweight loss generated by a perfect-price-discriminating monopoly A) equals the deadweight loss of a single-price monopoly.

B) is greater than the deadweight loss of a single-price monopoly.

C) equals zero.

D) equals the sum of all lost consumer surplus.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 7) When a firm has a monopoly in a market and also perfectly price discriminates, total welfare A) is maximized.

B) is lower than in a perfectly competitive market.

C) is higher than in a perfectly competitive market.

D) is minimized.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old

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8) If a market is controlled by a perfect-price-discriminating monopoly, then A) a deadweight loss is generated.

B) there is no consumer surplus.

C) consumer surplus is the same as under perfect competition.

D) output is less than that of a single-price monopoly.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

9) The above figure shows the market for a particular good. If the market is controlled by a perfect-price-discriminating monopoly, consumer surplus equals A) A. B) A + B + C. C) C. D) zero.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 10) The above figure shows the market for a particular good. If the market is controlled by a perfect-price-discriminating monopoly, social welfare equals A) A. B) A + B + C. C) A + B + C + D + E. D) zero.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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11) The above figure shows the market for a particular good. If the market is controlled by a perfect-price-discriminating monopoly, producer surplus equals A) A + B + C + D + E. B) D + E. C) E. D) zero.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 12) The above figure shows the market for a particular good. If the market is controlled by a perfect-price-discriminating monopoly, the deadweight loss equals A) C + E. B) A + B + C. C) C. D) zero.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 13) A good example of perfect price discrimination is A) selling concert tickets to individuals on the street corner.

B) buying concert tickets at the ticket window.

C) selling concert tickets at the ticket window.

D) buying a concert ticket on the street corner.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 14) Assume you have four tickets to a U2 concert. You decide to sell each of them separately on an auction site such as eBay. Your auctions represent A) price differentiation.

B) perfect price discrimination amongst those who bid for your tickets.

C) perfect price discrimination amongst all people who buy tickets for the concert.

D) maximization of U2's producer surplus.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old

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15) A difference between a perfectly competitive market equilibrium and a perfect price discrimination equilibrium is that in a competitive market ________, whereas in perfect price discrimination ________.

A) all units are sold where p = MC; only the last unit sold is at p = MC B) consumers receive some surplus; producers take all the surplus C) consumers are better off; income is redistributed away from consumers to producers D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 16) A difference between a perfectly competitive market equilibrium and a perfect price discrimination equilibrium is that in a competitive market ________, whereas in perfect price discrimination ________.

A) all units are sold where P = MC; only the last unit sold is at P = MC B) deadweight loss varies depending on the shape of the MC curve; deadweight loss increases C) consumers are better off; producers lose some sales due to high prices.

D) All of the above.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 17) Consumers who put a high value on a service A) are better off with perfect price discrimination.

B) are better off under a single-price monopoly.

C) are indifferent between perfect price discrimination and a single-price monopoly.

D) incur deadweight loss under either single-price monopoly or perfect price discrimination.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 18) Consumers are better off with pricing in the following order: 1)________; 2)________; 3)________.

A) competitive market; perfect price discrimination; single-price monopoly B) competitive market; single-price monopoly; perfect price discrimination C) single-price monopoly; competitive market; perfect price discrimination D) Unable to determine.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old

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19) Consumers who place a high value on a good are better off with pricing in the following order: 1)________; 2)________; 3)________.

A) competitive market; perfect price discrimination; single-price monopoly B) competitive market; single-price monopoly; perfect price discrimination C) single-price monopoly; competitive market; perfect price discrimination D) Unable to determine.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 20) Which of the following sellers is most able to perfectly price discriminate?

A) a college or university B) the post office C) a clothing store D) a grocery supermarket Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 21) What is one reason car dealerships might move away from perfect price discrimination to uniform pricing?

A) Perfect price discrimination doesn't work.

B) Transaction costs erode the profit of perfect price discrimination.

C) Consumers are ill-informed and tend to complain too much.

D) Uniform pricing is always more profitable and more fair as well.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 22) A monopoly will NOT be able to perfectly price discriminate if A) obtaining information about each buyer's reservation price is too costly.

B) demand is very elastic.

C) demand is very inelastic.

D) resale is impossible.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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23) A monopoly will NOT be able to perfectly price discriminate if A) each consumer does not reveal her reservation price.

B) demand is very elastic.

C) the firm's marginal cost curve is upward sloping.

D) All of the above.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 24) Which of the following helps a monopoly perfectly price discriminate?

A) Product demand is known for each consumer.

B) The product is perishable.

C) The product is personalizable.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New 25) Individual price discrimination is used when A) firms are dealing with individual consumers, such as in a line at the coffee shop.

B) firms cannot easily determine consumers' reservation prices.

C) firms are selling to non-local buyers.

D) salespeople are in a difficult industry, such as auto sales.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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26) The above figure shows the market for a given product. Defining welfare as consumer surplus plus producer surplus, calculate the social welfare associated with perfect competition, single-price monopoly, and a perfect-price-discriminating monopoly. Which market structure(s) maximize(s) social welfare?

Answer: Social welfare equals Perfect competition: A + B + C + D + E Single-price monopoly: A + B + D Perfect-price-discriminating monopoly: A + B + C + D + E Social welfare is greatest under either perfect competition or perfect price discrimination.

Skill: Analytical AACSB: Analytical Thinking Status: Old 27) Explain using welfare measures whether consumers prefer a single price monopoly or a perfectly price discriminating monopoly.

Answer: Consumers prefer a single price monopoly because they gain some consumer surplus.

No consumer surplus exists with a perfectly price discriminating monopoly.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old 10.3 Group Price Discrimination 1) A firm engaging in group price discrimination A) divides customers into groups and then charges each customer within each group a different price, similar to perfect price discrimination.

B) divides customers into groups and then charges each group a different price.

C) bundles products into groups and sells the groups at different prices.

D) finds the average reservation price for a group of customers and sell its goods at that price.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 13 Copyright © 2020 Pearson Education, Inc.

2) Price discrimination reveals A) the inherent greed of Western culture.

B) the inability for regulators to stop unethical practices.

C) that individuals have different willingness to pay.

D) that individuals have the same willingness to pay.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) Unlike perfect price discrimination, group price discrimination does NOT require A) firms to have market power.

B) the ability to distinguish between groups with different reservation prices.

C) the ability to limit or prevent resale.

D) None of the above.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 4) Which of the following is an example for group price discrimination?

A) A BMW selling for more than a VW. B) Local residents receiving a discount at the local golf course.

C) The fact that a razor is cheap and blades are expensive.

D) A hotel charging more for a room if the customers bring pets.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: New 5) If people posing as vacationers were able to purchase large numbers of airline tickets from the airlines and later resell them to business travelers, A) group price discrimination on the part of airlines would no longer be profitable.

B) group price discrimination on the part of airlines would no longer be profit maximizing.

C) the airlines would respond by raising the price charged to business flyers even more.

D) the people reselling would not earn any economic profit.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: New

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6) Airlines offer lower prices to vacationers than to business travelers because A) of government regulations requiring them to do so.

B) business travelers do not care at all about costs.

C) business travelers are less flexible in their travel plans than vacationers are.

D) airlines know that business travelers enjoy flying more than vacationers do.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 7) Why doesn't a firm price discriminate based on income levels?

A) It would be nearly impossible to conveniently confirm any individual's income level.

B) It is illegal to ask someone their income level.

C) It is immoral to price discriminate based on income levels.

D) They do: It is common practice for firms to price discriminate based on income.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: New 8) Pizza joints often offer substantially lower prices for pizza picked up at the shop than for delivered pizzas even though they charge a delivery fee. This may be an attempt at A) perfect price discrimination.

B) group price discrimination.

C) quantity discrimination.

D) second-degree price discrimination.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 9) What is one reason online prices might be considerably lower than brick-and-mortar prices?

A) Online retailers engage in more price discrimination.

B) Brick-and-mortar retailers engage in more price discrimination.

C) Brick and mortar retailers may have higher costs.

D) Online retailers are more likely to have steep demand curves.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old

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10) A firm practicing group price discrimination that has constant marginal cost will A) maximize total profit by maximizing profit for each group separately.

B) charge the same price to all groups.

C) act like a monopoly and treat all groups the same.

D) set p = MC. Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 11) A firm practicing group price discrimination across two countries sets MR = common MC and therefore A) price will be the same in both countries.

B) price will be twice MR. C) profit will be the same in both countries.

D) price will likely be different in each country.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old

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12) Bob is the only carpet installer in a small isolated town. The above figure shows the demand curves of two distinct groups of customers-residential and business. If the marginal cost of installing carpet is a constant $1 per sq yard, what price does Bob charge each segment?

A) $1 in each market B) $5.50 in the residential market and $8 in the business market C) $1 in the residential market and $5 in the business market D) $10 in the residential market and $15 in the business market Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 13) Bob is the only carpet installer in a small isolated town. The above figure shows the demand curves of two distinct groups of customers-residential and business. Bob is likely to price discriminate because A) elasticities differ across markets.

B) the installation of carpets cannot be resold.

C) Bob can probably identify which consumers belong to which segment.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old

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14) If two identifiable markets differ with respect to their price elasticity of demand and resale is impossible, a firm with market power will A) set a higher price in the market that is more price elastic.

B) set a lower price in the market that is more price elastic.

C) set price so as to equate the elasticity of demand across markets.

D) set price equal to marginal cost in both markets.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 15) If two identifiable markets differ with respect to their price elasticity of demand and resale is impossible, a firm with market power will A) set a higher price in the market that is more price inelastic.

B) set a lower price in the market that is more price inelastic.

C) set price so as to equate the elasticity of demand across markets.

D) set price equal to marginal cost in both markets.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 16) A group price discriminator sells its product in Florida for three times the price it sells it in New York. Assuming the firm faces the same constant marginal cost in each market and the price elasticity of demand in New York is -2.0, the demand in Florida A) has an elasticity of -6.0.

B) is more price elastic than the demand in New York.

C) has an elasticity of -1.2.

D) has an elasticity of -0.67.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 17) Suppose group price discrimination is possible but a firm chooses not to and sets the same price in each market. As a result A) price elasticity of demand is the same in each market.

B) the price-inelastic market will buy zero units.

C) marginal revenue in the more price-elastic market exceeds marginal revenue in the less priceelastic market.

D) the deadweight loss is less than if the firm price discriminated.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old

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18) If the demand for air travel were to change so that business travelers and vacationers have the same price elasticity of demand for air travel, A) airlines would charge the same price to each type of flyer.

B) airlines would still charge business flyers a higher fare since the traveler's employer pays anyway.

C) airlines would be driven out of business.

D) airlines would counter by charging vacationers a higher fare.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 19) Suppose a profit-maximizing monopoly is able to employ group price discrimination. The marginal cost of providing the good is constant and the same in both markets. The marginal revenue the firm earns on the last unit sold in the market with the lower price will be A) greater than the marginal revenue the firm earns on the last unit sold in the market with the higher price.

B) less than the marginal revenue the firm earns on the last unit sold in the market with the higher price.

C) equal to the marginal revenue the firm earns on the last unit sold in the market with the higher price.

D) greater than the marginal cost of the last unit.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 20) If a firm offers a senior citizen discount, A) the firm expects the average senior citizen to have a lower price elasticity of demand.

B) the firm expects the average senior citizen to have a higher price elasticity of demand.

C) senior citizens may be offended.

D) it may be prosecuted for discrimination.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 21) If the price of business broadband is greater than that of residential broadband, all else equal A) business has greater price elasticity than residential.

B) residential has greater price elasticity than business.

C) both have inelastic demand curves.

D) generally speaking, broadband is equally priced.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 19 Copyright © 2020 Pearson Education, Inc.

22) Firms use various methods for identifying customers such as ________ and ________.

A) observable characteristics such as willingness to wait in long lines; their actions such as whether or not they live a long time B) observable characteristics such as age; their actions such as willingness to wait in long lines C) the color of their hair; whether or not they roll their eyes at high prices D) None of the above.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 23) What is a primary difference between rebates and coupons?

A) Coupons allow individuals to sort themselves into the high-elasticity group after the sale.

B) Neither coupons nor rebates are redeemed in high numbers.

C) Rebates allow individuals to sort themselves into the high-elasticity group after the sale.

D) Coupons are legal and rebates are illegal.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: New 24) Coupons represent a form of price discrimination because they offer a low-cost way for firms to A) identify customers with apparently more elastic demand and offer them a lower price.

B) retain loyal customers who are not price sensitive.

C) offer discounts to consumers who buy larger quantities.

D) perfectly price discriminate.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 25) Reverse auctions A) require customers to fly at unpopular times.

B) allow firms to identify customers that have very elastic demand curves.

C) are used to keep high paying customers from spending too little money.

D) Both A and B. Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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26) Firms are better off using rebates rather than just lowering the price of a good because A) people view the firm in a positive light because now poorer people will be able to afford their good.

B) customers overestimate the value of the rebate and so buy more of the good, making profits higher than if they just lowered the price.

C) only those who place a low value on their time or are price sensitive actually redeem the rebate, making profits higher than if they just lowered the price.

D) lowering the price is inefficient and creates additional deadweight loss.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 27) Relative to a single-price monopoly, the effect of group price discrimination on social welfare is A) beneficial.

B) detrimental.

C) neutral.

D) ambiguous.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 28) Group price discrimination results in social welfare that ________ under a single-price monopoly.

A) is greater than B) is lower than C) is the same as D) might be greater or might be lower than Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 29) Group price discrimination has ________ consumer surplus than under ________.

A) more; perfect competition B) less; perfect competition C) more; an elastic demand curve D) less; single-price monopoly Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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For the following, please answer "True" or "False" and explain why.

30) A firm that practices group price discrimination will set the lower price in the market that has the most elastic demand.

Answer: True. The firm will equate marginal revenue across markets. Since MR = p(1 + 1/elasticity), markets with greater elasticity require lower prices.

Skill: Conceptual AACSB: Analytical Thinking Status: New 31) While price discrimination is possible between two markets it is not possible in more than two.

Answer: False. The number of markets does not matter. All that is required is that markets differ in their respective price elasticity of demand.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 32) A specialized rice grower sells rice in two markets, the United States and Japan, and the marginal cost is the same in both markets. The price elasticity of demand in the United States is 2.0, and the price elasticity of demand in Japan is -1.5. If the grower practices group price discrimination, which country's consumers will pay a higher price and by how much?

Answer: PUS(1 + 1/-2) = PJ(1 + 1/-1.5). Rearranging yields PUS = (2/3)PJ. The price in the United States will be 2/3 the price in Japan.

Skill: Analytical AACSB: Analytical Thinking Status: New 33) A weapons producer sells guns to two countries that are at war with each other. The guns can be produced at a constant marginal cost of $10. The demand for guns from the two countries can be represented as: QA = 100 - 2p QB = 80 - 4p Why is the weapons producer able to price discriminate?

What price will it charge to each country?

Answer: The firm can price discriminate because there are two identifiable segments with different elasticities. Since the two countries are at war, resale is doubtful. To solve, find marginal revenue for each and set equal to marginal cost of $10.

MRB = 20 - (1/2)QB = 10 or QB = 20 and pB = 15.

MRA = 50 - QA = 10 or QA = 40 and pA = 30.

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34) If a firm sells to two distinct identifiable markets and resale is impossible, why is price discrimination more profitable than setting a single price?

Answer: If the firm charges a single price on the two different markets, marginal revenue in one market will exceed marginal revenue in the other. Without changing output level, the firm could raise its profit as follows. The firm could sell one less unit in the low MR market and sell that unit in the higher MR market. As long as MR's differ, the firm can increase profit by changing sales in this direction. As this happens price is increasing in the market where sales are falling, and price is falling in the market where sales are increasing.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 35) A hotel with market power charges customers who check in before 5:00 pm more than those who check in after 5:00 pm. Those who check in early are much more likely to use the hotel's pool. Explain why this price difference may not be price discrimination.

Answer: The marginal cost of providing a hotel stay to those who check in early may be greater than the marginal cost of providing a stay to those who check in after 5:00 pm. Those who check in early are more likely to use more towels, soap, shampoo, bathing caps, etc., than those who arrive after 5:00 pm. The difference in costs may explain the hotel price differences.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 10.4 Nonlinear Price Discrimination 1) Customers are usually more willing to pay more for the first unit of a good they purchase than for the second, third, or subsequent units. This implies that A) typical consumers are irrational.

B) firms are using non-linear price discrimination.

C) firms are unable to determine their customers' reservation prices.

D) typical consumers have a downward-sloping demand curve.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) Nonlinear price discrimination A) sets the price consumers pay based on quantity purchased.

B) is where the firm sets prices in geometrically or exponentially decreasing price points.

C) is used in situations where consumers have no reservation prices.

D) eliminates deadweight loss.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old

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3) What is one reason consumers might demand a discount for quantity purchases?

A) higher storage costs B) lower marginal cost C) lower marginal benefit D) price gouging Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) What is one reason suppliers might offer a discount for quantity purchases?

A) reduced storage costs B) lower marginal cost C) lower marginal benefit D) price gouging Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) Purchasing a season pass to the local symphony A) is an example of first degree price discrimination.

B) is an example of second degree price discrimination.

C) is an example of third degree price discrimination.

D) All of the above.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) If you purchase one pound of apples the price is $1.50 per pound. If you buy a five pound bag of apples, the cost is $5.00. This is most likely an example of A) quantity discounts.

B) lower marginal cost.

C) lower marginal benefit.

D) price gouging.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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7) If a monopoly charges higher prices to consumers who buy smaller quantities than to consumers who buy larger quantities, then A) consumer surplus is larger than under single-price monopoly.

B) social welfare is larger than under perfect competition.

C) the monopoly's profits are larger than under single-price monopoly.

D) the monopoly's profits are larger than under perfect price discrimination.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) If a monopoly charges higher prices to consumers who buy smaller quantities than to consumers who buy larger quantities, then A) consumers who buy larger quantities have a higher price elasticity of demand.

B) consumers who buy larger quantities have a lower price elasticity of demand.

C) consumers who buy smaller quantities have a lower price elasticity of demand.

D) Both A and C. Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 9) Block pricing A) is a form of nonlinear price discrimination.

B) is pricing where one price is charged for the first block of units purchased, and different prices for subsequent blocks.

C) can either use increasing or decreasing prices for blocks purchased.

D) All of the above.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 10) An electricity provider charges consumers $0.20 per kWh for the first 100 kWh, $0.25 per kWh for the next 50 kWh, and $0.27 per kWh for all subsequent kWH of usage. This would be considered A) an antitrust violation.

B) an example of increasing-block pricing.

C) bad business practices.

D) an example of three-part pricing.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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11) During a hot summer weekend, the only supermarket near the beach decides to charge consumers $6.50 for the first 12-pack of soda pop, $5.50 for the second and third 12-packs, and $5.25 for all subsequent purchases during the same shopping trip. This would be considered A) an example of declining-block pricing.

B) not very smart since consumers will buy soda pop regardless of the price.

C) an example of monopoly pricing.

D) an example of an inelastic demand curve.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 12) Declining-block quantity discrimination makes sense if A) buyers of smaller quantities are more price sensitive than buyers of larger quantities.

B) buyers of smaller quantities are less price sensitive than buyers of larger quantities.

C) demand for the good is perfectly elastic.

D) the lower price for larger quantities encourages all consumers to purchase the larger quantity.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 13) The more block prices a monopoly can set instead of setting a single price, the A) smaller the deadweight loss.

B) the more producer surplus.

C) the larger the total welfare.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old For the following, please answer "True" or "False" and explain why.

14) A mail-order clothing company offers a discount if customers purchase two shirts instead of only one. This is necessarily an example of quantity discrimination.

Answer: False. The shipping cost per item is less for two shirts than for one. This cost difference may explain the discount.

Skill: Definition AACSB: Analytical Thinking Status: Old

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10.5 Two-Part Pricing 1) With two-part pricing A) the consumer puts down a deposit and then pays the rest when she picks up the goods purchased.

B) the average price paid varies with the number of units purchased.

C) the consumer is limited in the number of units that can be purchased.

D) consumers are required to buy two units of a good.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 2) Two-part pricing offers a mechanism whereby the firm can A) charge two different prices to distinct groups of customers.

B) collect two times as much from consumers as a single-price monopoly can.

C) capture some or all of the consumer surplus.

D) reduce some of its fixed costs.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) In two-part pricing A) consumers pay a lump-sum for all the goods purchased.

B) the consumer must pay a lump sum if he buys more than a certain number of units of a good.

C) a firm charges more for units purchased on the weekend than for those purchased during the week.

D) the average price paid per unit is higher with a small number of units purchased than if a large number of units is purchased.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) With two-part pricing, a firm A) charges a lump-sum fee that gives the consumer the right to buy a good or service.

B) must have market power.

C) must be able to prevent resale.

D) All of the above.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old

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5) Many theme parks charge an entrance fee and a per-ride fee equal to zero. This is an example of A) bundling.

B) two-part pricing.

C) multi-market price discrimination.

D) perfect price discrimination.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) Many college football teams require a "donation" in order to purchase season tickets. This is an example of A) price gouging.

B) tie-in sale.

C) two-part pricing.

D) anti-competitive behavior.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 7) Stores such as Costco and Sam's Club require an annual membership before you can shop there. This is a form of A) two-part pricing.

B) price gouging.

C) tie-in sales.

D) anti-competitive behavior.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) To buy season tickets at the new Levi's Stadium, 49ers fans have to buy a Personal Seat License (PSL) that then allows them to buy season tickets for the next 30 years. This is an example of A) why the NFL shouldn't have anti-trust exemptions.

B) two-part pricing, where the PSL is the lump-sum payment.

C) pure bundling pricing.

D) positively correlated pricing.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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9) Consider a car dealership that advertises a three-year lease at $250 per month. When you arrive to apply, you discover that the lease requires a down payment of $3600 dollars. You will undertake the lease if A) you value the lease at least $350 per month.

B) you value the lease at least $250 per month, the $3600 is a sunk cost.

C) you value the lease less than $350 per month.

D) you value buying a new car at $400 per month.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 10) Suppose all individuals are identical, and their monthly demand for Internet access from a certain leading provider can be represented as p = 5 - (1/2)q where p is price in $ per hour and q is hours per month. The firm faces a constant marginal cost of $1. Potential consumer surplus equals A) $4.

B) $8.

C) $16.

D) $32.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 11) Suppose all individuals are identical, and their monthly demand for Internet access from a certain leading provider can be represented as p = 5 - (1/2)q where p is price in $ per hour and q is hours per month. The firm faces a constant marginal cost of $1. The profit-maximizing twopart tariff yields total revenue of A) $24.

B) $40.

C) $16.

D) $32.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old

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12) Suppose all individuals are identical, and their monthly demand for Internet access from a certain leading provider can be represented as p = 5 - (1/2)q where p is price in $ per hour and q is hours per month. The firm faces a constant marginal cost of $1. The profit maximizing twopart tariff results in the firm selling A) 4.5 hours.

B) 10 hours.

C) 5 hours.

D) 8 hours.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 13) Suppose all individuals are identical, and their monthly demand for Internet access from a certain leading provider can be represented as p = 5 - (1/2)q where p is price in $ per hour and q is hours per month. The firm faces a constant marginal cost of $1. If the firm will charge a monthly access fee plus a per hour rate, the monthly access fee will equal A) $1.

B) $5.

C) $8.

D) $16.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 14) In two-part pricing with identical consumers, a firm A) charges a lump-sum fee equal to the consumer surplus.

B) sets unit price below marginal cost.

C) should go with single-price monopoly pricing to maximize profits.

D) Both A and B. Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 15) In two-part pricing with identical consumers, a firm at least A) charges a lump-sum fee equal to the producer surplus.

B) sets unit price equal to marginal cost.

C) cannot maximize profit compared to single-price monopoly pricing.

D) Both A and B. Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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16) At the current price of a good, Al's consumer surplus equals 15 and Ben's consumer surplus equals 15. By using two-part pricing, a monopolist could increase his profit by A) 8.

B) 16.

C) 15.

D) 30.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 17) At the current price of a good, Al's consumer surplus equals 8 and Ben's consumer surplus equals 15. By using two-part pricing, a monopolist could increase his profit by A) 8.

B) 16.

C) 15.

D) 30.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 18) If a firm is to capture all consumer surplus with two-part pricing when customers are different, A) it must be able to charge different access fees.

B) it cannot charge different prices for access fees.

C) it must set unit price below marginal cost.

D) it must set unit price above marginal cost.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old For the following, please answer "True" or "False" and explain why.

19) Two-part pricing allows the monopoly firm to capture all of the potential consumer surplus generated by the sale of its product.

Answer: False. This is only the case if all consumers are identical. If consumers differ, no single price can capture all the consumer surplus.

Skill: Conceptual AACSB: Analytical Thinking Status: Old

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20) For a theme park two-tier pricing can include a positive admission price and a zero per-ride fee.

Answer: True. Both fees do not have to be positive. The firm will choose the combination of fee and per-ride price that maximizes profits.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 21) Each identical consumer has the following demand for golf, q = 100 - p, where q is the number of rounds of golf played per year and p is the price per round. The only golf course in an isolated town incurs a marginal cost of $10 per round of golf. It wishes to charge a membership fee and a fee per round of golf. What price will it set for each fee?

Answer: At a price of $10, consumer surplus is $4,050. The firm maximizes profit by setting the annual fee equal to $4,050 and charging a $10 per round fee.

Skill: Analytical AACSB: Analytical Thinking Status: Old 22) Explain why a monopoly that knows the demand curve of identical consumers can set a twopart price with the lump sum tariff equal to the total amount of potential consumer surplus.

Answer: The producer wants to set the lump sum price equal to the competitive level of consumer surplus. This maximizes the producer surplus. The consumer surplus measures the difference between the consumer's value of the good and the price paid for each unit. Thus, the consumers are willing to pay up to the total amount of consumer surplus.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old 10.6 Bundling 1) Bundling A) is when firms sell multiple separate goods together for a single price.

B) is where a firm wraps its fragile goods in special packaging and charges a higher price than if the goods are put into regular packaging.

C) increases transaction costs for consumers.

D) is illegal in most U.S. states.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old

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2) Which of the following is an example of bundling?

A) A pair of pants B) A pizza and beer lunch combo C) A bicycle D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: New 3) The sales of shoes that include shoelaces is a tie-in sale that most likely A) greatly increases the shoe producer's profit.

B) increases transactions costs.

C) increases efficiency.

D) None of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) Which of the following is an example of pure bundling?

A) A pair of pants B) A pizza and beer lunch combo C) An automobile D) All of the above.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: New 5) Which of the following is an example of mixed bundling?

A) A suit jacket B) Dinner at a buffet restaurant C) A desktop computer and monitor D) All of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: New

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6) If Ben values good X more than good Y and Catherine values good Y more than good X, a firm can increase its profits by A) charging the same price for both goods.

B) bundling the goods.

C) selling the goods in a competitive market.

D) charging one price per good.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 7) Tie-in sales are most advantageous to the seller when A) the demands for the two goods are negatively correlated.

B) the demands for the two goods are positively correlated.

C) the demands for the two goods are unrelated.

D) there are economies of scope.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) A firm that holds a monopoly in both goods stands to gain from a tie-in sale.

A) True.

B) False.

C) True, which is why anti-trust laws exist.

D) False, there are no dual monopolies.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 9) Why don't we see firms tie-in the sales of fish filets with the sales of pencils?

A) because the demands for these two goods are positively correlated B) because the demands for these two goods are negatively correlated C) because the demands for these two goods are independent D) It violates the Clean Food Act of 1908.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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10) If reservation prices are positively correlated, then A) pure bundling cannot increase a firm's profit.

B) pure bundling can increase a firm's profit.

C) it is unclear whether or not pure bundling can increase a firm's profit.

D) consumers lose leverage over firms.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) A photograph processing machine company requiring customers who buy a processing machine to purchase chemicals and photographic paper from it is an example of A) bundling.

B) a requirement tie-in sale.

C) quantity discrimination.

D) a two-part tariff.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 12) What is one way firms can enforce tie-in sales?

A) One of the goods has no close substitutes.

B) Through contractual arrangements C) Information asymmetry D) Any of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 13) What is the primary difference between bundling and tie-ins?

A) Bundling is typically a one-off purchase.

B) Contractual arrangements C) Tie-ins are one-off purchases.

D) Bundling is illegal and tie-ins are legal.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old

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10.7 Peak-Load Pricing 1) Peak-load pricing A) charges more for a good during periods of high demand.

B) charges more for a hotel room the higher up the mountain it is.

C) charges less for a good during periods of high demand, because of regulatory reasons.

D) is generally used during January and February.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 2) Which of the following is an example of peak-load pricing?

A) Charging less for vacations to Hawaii during December and January.

B) Charging more for electricity on hot days.

C) Setting price equal to marginal cost when there is a capacity constraint.

D) Selling excess capacity at lower prices.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: New 3) When there is a capacity constraint, A) firms face sunk costs when deciding whether or not to expand.

B) consumers will avoid the producer and go with a firm that has extra capacity.

C) firms are not maximizing their profits during high season.

D) firms can use peak-load pricing to increase profits during periods of high demand.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) When a firm uses surge or dynamic pricing, A) it changes price in "real time" according to market demand.

B) consumers pay less during peak times.

C) the firm sets the price based on the previous day's demand.

D) it commits to a set pattern of pricing.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: New

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For the following, please answer "True" or "False" and explain why.

5) Firms can only use one form of price discrimination.

Answer: False. Firms often combine different forms of price discrimination in order to maximize profits. For example, a ski resort often uses peak-load pricing because skiing is more popular during the high season when the snow is better. It may also charge locals less than tourists for lift tickets. And it may also use group price discrimination, discriminating based on age.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old

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Managerial Economics and Strategy, 3e (Perloff/Brander) Chapter 11 Oligopoly and Monopolistic Competition 11.1 Cartels 1) A cartel is a group of firms that attempts to A) maximize joint revenue.

B) maximize joint profit.

C) behave independently.

D) increase consumer surplus.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 2) Each member of a cartel A) agrees to produce output lower than it would if it were acting independently.

B) is operating illegally in every country in which it is doing business.

C) sets output independently of the impact on other members.

D) makes less money than it otherwise would.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: New 3) When deciding on output levels, members of a cartel A) set their output where MR = MC. B) produce the same level of output as if they were in a competitive market.

C) take into account the impact of changes on members' profits.

D) act as if they were monopolies.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) Which of the following statements is FALSE? A) Cartels only form among members of an oligopoly.

B) A cartel might form if members believe they can increase profits by coordinating activity.

C) Members of a cartel produce less output than that produced in a competitive market.

D) Cartel members often have an incentive to cheat.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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5) The Organization of Petroleum Exporting Countries (OPEC) is an example of a(n) A) oil monopoly.

B) cartel.

C) competitive arrangement.

D) prisoner's dilemma.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) When the market demand curve is relatively inelastic, A) it is unrealistic for a cartel to form because profits will be lower.

B) penalties for forming an illegal cartel will be relatively low.

C) the lower the price the cartel sets, the greater the benefits to the cartel.

D) the higher the price the cartel sets, the greater the benefits to the cartel.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 7) A cartel might fail because A) it does not control enough of the output in a market to raise prices enough.

B) there is an incentive for members to cheat.

C) too many firms leave the cartel, causing the cartel price to fall.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) If a cartel is unable to monitor its members and punish those firms that violate their agreement, then A) the member firms will each act as price setters.

B) the cartel will prosper in the long run.

C) the market will become a monopoly.

D) the cartel will fail.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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9) In a sense, a cartel is self-destructive because A) it reduces consumer surplus.

B) it sets price above marginal cost.

C) each cartel member has the incentive to cheat on the cartel.

D) each cartel member earns economic profit.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 10) Which of the following conditions can help prolong the life of a cartel?

A) There are only a few firms in the market, and they all belong to the cartel.

B) There are many firms in the market that are not members of the cartel.

C) It is difficult to know what price any cartel member is actually charging.

D) The cartel has no ability to punish members who cheat on the cartel.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 11) A typical firm in a cartel will hold which of the following attitudes?

A) If everyone cheats, I'm better off, and so is everyone in the cartel.

B) If I alone cheat, I'm better off; if everyone cheats, I'm worse off.

C) I can never do better for myself than following agreed-upon cartel rules.

D) If I suspect others are planning to cheat, I'll do best for myself by deciding not to cheat.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 12) Cartels can detect cheating by A) reporting each other to government authorities.

B) keeping two sets of accounting books, one for internal use and one for sharing with the cartel.

C) dividing the market by region so that each cartel member is the only seller in a particular region.

D) All of the above.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: New

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13) The use of "most-favored-customer" clauses is an example of A) incenting members to maintain the cartel, because if they lower the price for one customer, they have to lower it for previous customers as well.

B) incenting members to maintain the cartel, because if they raise the price for one customer, they have to raise it for previous customers as well.

C) giving customers special perks for purchasing goods from members of the cartel.

D) selling higher quality goods and services to favorite customers.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 14) Which of the following is a current example of a government-granted cartel?

A) The "Big Three" accounting firms B) The U.S. automobile industry C) U.S. professional baseball D) The U.S. airline industry Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: New 15) Television stations have seemingly synchronized their commercial breaks. This is likely an example of A) implicit collusion.

B) explicit collusion.

C) mixed strategies.

D) pure strategies.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: New For the following, please answer "True" or "False" and explain why.

16) Cartels are inherently self-destructive because each member firm has the incentive to cheat on the cartel agreement.

Answer: True. Unless the cartel can establish mechanisms to detect and punish cheaters, the agreement will fail.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old

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17) Explain why gasoline stations across the street from each other with large signs displaying their prices may "legally" jointly set monopoly prices.

Answer: A gasoline station posts its prices on a large sign. The other station can view the prices.

The two stations may be able to set monopoly prices without an explicit agreement. These firms may tacitly collude.

Skill: Conceptual AACSB: Analytical Thinking Status: Old 11.2 Cournot Oligopoly 1) The specific oligopolistic model used in a market A) depends on the pricing structure of the good or service sold.

B) depends on the characteristics of the market, such as time horizon for competition.

C) is usually a Cournot model, unless cartels are illegal.

D) All of the above.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) Which of the following does NOT influence the type of oligopoly that forms?

A) Whether firms act sequentially or simultaneously.

B) Whether firms set price or quantity.

C) The type of demand curve the firms face.

D) The time horizon over which firms will be in competition.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) The Cournot Model of Oligopoly assumes that A) firms decide what quantity to produce.

B) firms make their decisions simultaneously.

C) firms do not cooperate.

D) All of the above.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old

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4) Compared to a cartel, firms in a Cournot Oligopoly A) make more joint profit.

B) sell less output.

C) make less joint profit.

D) act independently.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) A Nash equilibrium occurs when A) players choose their best strategy given the strategies chosen by others.

B) the efficient allocation of resources is achieved by setting marginal revenue equal to marginal cost.

C) a monopolist is forced to produce the efficient level of output.

D) oligopolists cooperate with each other.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 6) If, holding the strategies of all other firms constant, no firm can obtain a higher profit by choosing a different strategy, then A) the firms are using the Cournot model.

B) the firms' strategies are a Nash equilibrium.

C) the firms must have formed a cartel.

D) the firms are using the Bertrand model.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 7) In the simplest version of the Cournot model, we assume the firms A) set price independently and simultaneously.

B) set price independently and sequentially.

C) have identical costs.

D) are in a Nash equilibrium.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: New

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8) In the simplest version of the Cournot model, we assume the firms A) set price independently and simultaneously.

B) set quantities independently and sequentially.

C) sell identical products.

D) are in a Nash equilibrium.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 9) In the simplest version of the Cournot model, we assume the firms A) set quantities independently and simultaneously.

B) set quantities independently and sequentially.

C) set price independently and simultaneously.

D) are not in a Nash equilibrium.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 10) In the simplest version of the Cournot model, we assume A) the firms set quantities independently and simultaneously.

B) the firms have identical costs and sell identical products.

C) there are a small number of firms, and no other firm can enter the market.

D) All of the above.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 11) In the Cournot model, a firm maximizes profit by selecting A) its output, assuming that other firms keep their output constant.

B) its price, assuming that other firms keep their price constant.

C) its output, assuming that other firms will retaliate.

D) its price, assuming that other firms will retaliate.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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12) In the Cournot model, if one firm increases its output A) the market will not clear because now there is a surplus.

B) the market price drops, reducing the revenues received by the other firms.

C) the others will kick it out of the oligopoly.

D) the other firms are unaffected.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 13) In the Cournot model A) market price is unaffected by the actions of any individual firm.

B) firms do not have to worry about the strategies of the other firms.

C) firms' profits are independent.

D) firms' profits are interdependent.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

14) The above figure shows the reaction functions for two pizza shops in a small isolated town.

The Cournot equilibrium is at point A) a.

B) b.

C) c.

D) d.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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15) The above figure shows the reaction functions for two pizza shops in a small isolated town.

Collusion would result in A) each firm producing 25 pizzas.

B) each firm producing 40 pizzas.

C) the firms splitting the production of 100 making 50 pizzas each.

D) firm A monopolizing the market by selling 50 pizzas.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 16) The above figure shows the reaction functions for two pizza shops in a small isolated town.

The perfect competitive outcome is that A) each firm produces 40 pizzas.

B) each firm produces 50 pizzas.

C) the firms split the production of 200 pizzas.

D) each firm produces 200 pizzas.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 17) The above figure shows the reaction functions for two pizza shops in a small isolated town.

Firm B producing 100 pizzas and firm A producing 50 pizzas is NOT a Cournot equilibrium because A) Cournot duopolists agree to share the market equally.

B) firm B is not on its best-response function.

C) firm A is not on its best-response function.

D) neither firm is on its best-response function.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 18) The market demand that is NOT met by other sellers in a market is known as a firm's A) excess demand curve.

B) market demand curve.

C) residual demand curve.

D) leftover demand curve.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old

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19) Suppose two Cournot duopolist firms operate at zero marginal cost. The market demand is p = a - bQ. Firm 1's best-response function is A) q1 = (a - bq2)/2b.

B) q1 = (a - 2bq2)/2b.

C) q1 = a/b.

D) q1 = a/2b.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 20) If a firm is selling a quantity that is NOT on its best-response curve, it A) will go out of business.

B) is in a Nash equilibrium.

C) will want to change its behavior.

D) is operating in a duopoly.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 21) In the Cournot model, the output that a firm chooses to produce increases as A) the total output of other firms increases.

B) the number of firms in the market increases.

C) the number of firms in the market decreases.

D) its marginal cost increases.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 22) If a firm's marginal costs ________, then ________.

A) fall; its best-response curve shifts B) rise; it is forced out of the oligopoly C) rise; its output increases D) fall; its price falls Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old

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23) In the Cournot model, if the products are differentiated A) this reduces the pressure of one firm's decisions on the other.

B) this increases the pressure of one firm's decisions on the other.

C) there is no difference between this model and one with homogeneous goods.

D) marginal costs are necessarily different.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 24) In the Cournot model, if the products are differentiated, A) the firm can shift its demand curve to the right and make it less elastic.

B) the firm's demand curve shifts to the left and becomes less elastic.

C) the firm's demand curve shifts to the right and becomes more elastic.

D) None of the above.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 25) If differentiation makes the market demand curve less elastic, then A) consumer surplus increases.

B) the market structure changes into a monopoly.

C) price markup over marginal cost is lower than when products are identical.

D) price markup over marginal cost is higher than when products are identical.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 26) A product can be differentiated through A) physical changes to the product.

B) marketing.

C) creating barriers to entry.

D) Both A and B. Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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27) Mergers may result in A) anticompetitive behavior.

B) more efficient production.

C) fewer firms in a market.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 28) Mergers are closely scrutinized by the government because A) they might allow the firms involved to dominate the market and act as a legalized cartel (monopoly).

B) they always result in a more efficient market.

C) they always result in lower joint profits of the firms involved.

D) all mergers are undesirable.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 29) Mergers often increase profit by A) producing economies of scale.

B) producing economies of scope.

C) increasing efficiency of the firm.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 30) A merger between a firm and one of its suppliers would be called A) a horizontal merger.

B) a vertical merger.

C) an anti-trust violation.

D) a Cournot merger.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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31) A merger between two firms that produce identical goods would be called A) a horizontal merger.

B) a vertical merger.

C) a Lerner merger.

D) a duopoly.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old For the following, please answer "True" or "False" and explain why.

32) The Cournot model assumes that firm A maximizes its profit, holding firm B's output constant.

Answer: True. Even though firm B does react to changes in firm A's output, firm A assumes that firm B does not react but instead holds its output constant.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old 33) Suppose the demand for pizza in a small isolated town is p = 10 - Q. There are only two firms, A and B, and each has a cost function TC = 2 + q. Determine the Cournot equilibrium.

Answer: Firm A's profit is π = [10 - (qA + qB)]qA - 2 - qA. Maximizing with respect to its own output yields qA = 4.5 - qB/2. Similarly, firm B's best response is qB = 4.5 - qA/2. The equilibrium occurs when both firms produce 3 units. Price is 10 - 3 - 3 = 4.

Skill: Analytical AACSB: Analytical Thinking Status: Old 11.3 Bertrand Oligopoly 1) Price and quantity in Bertrand and Cournot models A) are the same.

B) are different.

C) might be the same depending on whether the products are identical or differentiated.

D) are the same as in a duopoly.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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2) In a Bertrand model with identical products, A) price is the same as in a competitive market equilibrium.

B) price and quantity are the same as in a monopoly.

C) price and quantity are the same as in a duopoly.

D) None of the above.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 3) In a Bertrand model with identical products, A) price is set above marginal cost.

B) marginal revenue is above marginal cost.

C) price is equal to marginal cost.

D) None of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) The Bertrand model of price setting assumes that a firm chooses its price A) independently of what price other firms charge.

B) subject to what price rival firms are charging.

C) so that joint profits are maximized.

D) without considering the shape of the demand curve.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) Assuming a homogeneous product, the Bertrand duopoly equilibrium price is A) the same as the Cournot equilibrium price.

B) less than the Cournot equilibrium price.

C) greater than the Cournot equilibrium price.

D) equal to the monopoly price.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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6) Assuming a homogeneous product, the Bertrand equilibrium price is A) independent of the number of firms.

B) independent of the firm's marginal costs.

C) equal to the Cournot equilibrium price.

D) equal to the monopoly price.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 7) One criticism of the Bertrand pricing model is that A) the model is implausible when there is product differentiation.

B) when there is an oligopoly with no product differentiation, the model's prediction is inconsistent with reality.

C) the model's predicted price is solely a function of demand conditions.

D) the model's predicted price is dependent on the number of firms.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) In a Bertrand model with identical firms and a non-differentiated product, price will increase in response to A) an increase in the number of firms.

B) a decrease in the number of firms.

C) an increase in marginal cost.

D) a decrease in marginal cost.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 9) Two identical firms that share a market and produce a homogeneous good will find which of the following market outcomes LEAST desirable?

A) Bertrand Oligopoly B) Cournot Oligopoly C) Cartel D) All are equally preferable.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old

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10) Two identical firms that share a market and produce a homogeneous good will find the Bertrand Oligopoly LEAST attractive because A) Cartels generate the highest joint profit.

B) a Cournot Oligopoly will generate more profit than a Bertrand Oligopoly.

C) they want to avoid a price war that leads to profit erosion and P = MC. D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 11) The Bertrand model is a more plausible model of firm behavior than the Cournot model A) when firms set the quantity to be sold.

B) when firms sell a differentiated product.

C) because firms that sell a non-differentiated product typically act as price takers.

D) because the Bertrand model predicts that firms will price at marginal cost.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 12) In a Bertrand model, market power is a function of A) marginal cost.

B) the number of firms.

C) price elasticity of supply.

D) product differentiation.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 13) In a Bertrand model with differentiated products, A) firms can set price above marginal cost.

B) firms set price at marginal cost.

C) price is independent of marginal cost.

D) firms set price independently of one another.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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14) Product differentiation A) may allow firms to price above a competitive level.

B) generates value as consumers value more choices.

C) depends on perceived differences between products.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 15) An example of a market where a Bertrand model would be plausible is the market for A) oil.

B) wheat.

C) beer.

D) sugar.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 16) An example of a market where a Bertrand model would be NOT be plausible is the market for A) pizza.

B) sweaters.

C) motorcycles.

D) toothpicks.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 17) In a Bertrand duopoly with product differentiation, explain how a change in one firm's marginal cost can have an effect on the price charged by the other firm.

Answer: Each firm's price is a function of the other firm's price. If one incurs an increase in marginal cost, it raises its price. This, in turn, causes the other firm to raise its price.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old

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11.4 Monopolistic Competition 1) In monopolistically competitive markets A) price is greater than it would be in perfect competition.

B) price is less than it would be in perfect monopoly.

C) quantity is greater than it would be in perfect monopoly.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) Monopolistically competitive firms A) have market power because they face downward sloping demand curves.

B) have no market power because they earn zero economic profit.

C) have no market power because of free entry.

D) have no market power because price equals marginal cost.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) Monopolistically competitive firms face downward sloping residual demand curves because these firms A) have relatively few rivals (compared to competition).

B) sell differentiated products.

C) A and/or B. D) None of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) A monopolistically competitive firm has the free entry characteristics of ________ and the price setting characteristics of ________.

A) an oligopolistic market; perfect competition B) perfect competition; a monopoly C) a monopolistic market; a cartel D) perfect competition; perfect competition Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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5) Firms in a monopolistically competitive market face ________ demand curves and earn ________ economic profits in the long run.

A) downward-sloping; zero B) downward-sloping; positive C) horizontal; zero D) horizontal; negative Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 6) In the long run, firms in markets that are ________ earn zero economic profits.

A) perfectly competitive B) monopolistically competitive C) monopolies D) Both A and B. Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 7) In the long run, a monopolistically competitive firm A) earns zero economic profit.

B) produces at minimum average cost.

C) operates at full capacity.

D) All of the above.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) Firms seek to differentiate their product A) to avoid state and federal regulation.

B) to create an illusion of value.

C) to strengthen their demand and to make it more inelastic.

D) to strengthen their demand and to make it more elastic.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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9) The market for electricians in a small town might have a different structure than in a large city because A) cartels are legal in large cities but not in small towns.

B) the small town market can only support a few electricians.

C) unions are stronger in large cities than in small towns.

D) None of the above.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 10) In the long run, a monopolistic competitor A) sets MR = MC. B) produces where P = AC. C) sets P > MC. D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) The number of firms in a monopolistically competitive market will be smaller if A) the market demand curve shifts rightward.

B) minimum efficient scale is lower.

C) fixed costs are smaller.

D) fixed costs are larger.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 12) If AC < p where MR = MC, A) firms earn positive profits and new firms will enter.

B) firms earn negative profits and existing firms will leave.

C) firms earn zero profits and new firms will not enter and no existing firms will leave.

D) None of the above.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old

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13) If AC > p where MR = MC, A) firms earn positive profits and new firms will enter.

B) firms earn negative profits and existing firms will leave.

C) firms earn zero profits and new firms will not enter and no existing firms will leave.

D) None of the above.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 14) Suppose a monopolistically competitive industry evolved into a perfectly competitive industry. Which of the following statements is correct?

A) The industry would produce more output and charge a lower price after the change.

B) The industry would produce at decreasing returns to scale.

C) Elasticity of demand for the firm's product would remain the same after this change occurred.

D) This industry would produce the same level of output at lower prices in the long run than before the change.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 15) Minimum efficient scale refers to the lowest level of output at which A) the firm can earn a profit.

B) average cost is minimized.

C) the firm will operate.

D) the average cost curve is downward sloping.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old For the following, please answer "True" or "False" and explain why.

16) The ability to set a price greater than marginal cost guarantees an economic profit for the monopolistic competitor (assuming P > AC).

Answer: False. Although the firm is a price setter entry in the long run will drive price down until no economic profit exists.

Skill: Conceptual AACSB: Analytical Thinking Status: Old

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17) Is it true that in the long run, a monopolistically competitive firm has market power but earns no profit? Explain.

Answer: As strange as it sounds, yes. The firm earns zero profit because p = AC. The firm has market power because p > MC. One way to explain this is that the firm has market power to set price, but has no power to prevent entry.

Skill: Conceptual AACSB: Analytical Thinking Status: Old

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Managerial Economics and Strategy, 3e (Perloff/Brander) Chapter 12 Game Theory and Business Strategy 12.1 Oligopoly Games 1) Firms in an oligopolistic market ________ because they are ________.

A) attempt to predict the behavior of other firms; strategically interdependent B) form cartels; unable to predict the behavior of other firms C) ignore other firms' actions; strategically independent D) advertise; unable to differentiate their products Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) A game in economics is defined as A) something that is shown on ESPN. B) competition in which strategic decision making is integral.

C) competition in general.

D) an actual strategy chosen by one or more economic agents.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 3) A game includes A) a strategy.

B) payoffs.

C) rules.

D) All of the above.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 4) In game theory, a strategy A) is useless, because firms are subject to bounded rationality.

B) is useful in static games, but not in dynamic games.

C) defines the specific actions a firm will make.

D) determines the payoff matrix of the game.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old

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5) Common knowledge in game theory A) is information known by all players.

B) is required for static games.

C) does not impact the outcome of the game, since everyone has the information.

D) Both A and B. Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 6) Common knowledge in game theory A) is information known to be known by all players.

B) is required for dynamic games.

C) is complete.

D) Both A and B. Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 7) In a static game, firms A) compete multiple times until there is a winner.

B) compete only once.

C) must have complete information.

D) act sequentially.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) A payoff matrix A) shows the payoffs (i.e. bribes) required to government officials for firms undertaking specific actions.

B) details the actions each firm takes.

C) shows the payoffs to each firm for each possible outcome.

D) is optional in game theory.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old

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9) Which of the following is a simultaneous decision game?

A) Tic-tac-toe B) Chess C) Poker D) Rock-paper-scissors (Roshambo) Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New 10) Rock-paper-scissors (Roshambo) is an example of a ________ game.

A) simultaneous B) sequential C) dominant strategy D) weakly dominant Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 11) A strategy is dominant if A) it yields a greater payoff than any other player receives.

B) it yields a payoff at least as large as that from any other strategy, regardless of the actions of other players.

C) the player cannot gain by changing strategy, assuming that no other player changes strategy.

D) it is part of a Nash equilibrium.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 12) Dominant strategies A) are always present in simultaneous games.

B) result in a prisoners' dilemma.

C) result in one firm winning and the other losing.

D) None of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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13) A dominated strategy A) exists when one firm is weaker than another.

B) only occurs in a mixed strategy scenario.

C) is one that is never used by a rational actor.

D) is a characteristic of games with multiple Nash equilibria.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 14) When both firms have dominant strategies A) the outcome is called a dominant strategy solution.

B) joint profits are maximized.

C) there are multiple Nash equilibria.

D) there is a prisoners' dilemma.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 15) One interesting feature of a prisoner's dilemma game is that A) non-cooperative behavior leads to lower payoffs than cooperative behavior.

B) there is never a dominated strategy.

C) individuals behave irrationally when they behave non-cooperatively.

D) cooperative behavior leads to lower payoffs than non-cooperative behavior.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 16) Mutually Assured Destruction was a standing policy during the Cold War, in which the United States and the USSR maintained and expanded nuclear arsenals beyond practical levels.

What could explain such a phenomenon?

A) Insane public officials who were bent on world domination.

B) A prisoner's dilemma.

C) A leader-follower type game.

D) Tacit collusion.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: New

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17) The term prisoners' dilemma refers to a game in which A) there are no Nash equilibria.

B) there are no dominant strategies.

C) the payoff from both players playing their dominant strategies is the same for each player.

D) the payoff from both players playing their dominant strategies is not the highest payoff possible.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 18) A player's best response is A) the strategy that maximizes his payoff given what he thinks the other player will do.

B) a dominant strategy.

C) impossible to find when there isn't a Nash equilibrium.

D) a way to avoid the prisoners' dilemma.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 19) A dominant strategy A) maximizes the joint profit of the players in the game.

B) is the player's best response to all possible strategies of the other player.

C) cannot exist when there is a Nash equilibrium.

D) only exists when the game is limited to two players.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 20) A Nash equilibrium occurs when A) players choose their best strategy given the strategies chosen by others.

B) the efficient allocation of resources is achieved by setting marginal revenue equal to marginal cost.

C) a monopolist is forced to produce the efficient level of output.

D) oligopolists cooperate with each other.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old

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21) If each player in a game uses a strategy that results in a Nash equilibrium outcome, the players are most likely to say A) "I don't like my choice, because I think I could have done better."

B) "Given the strategies chosen by the other players in the game, I probably could have done better if I had more time."

C) "Given the strategies chosen by the other players in the game, I made the best possible choice."

D) "There was no real strategy on my part, I basically made an educated guess."

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 22) Which of the following statements is TRUE? A) If a game has one or more Nash equilibria, then it's not really a game since the solution is known.

B) A game can either have a Nash equilibrium or a dominant strategy solution.

C) If a game has a Nash equilibrium, the game must have a dominant strategy solution.

D) If a game has a dominant strategy solution, the solution must also be a Nash equilibrium.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 23) In a two-player simultaneous game, if player A has a dominant strategy and player B does not, player B will A) employ a mixed strategy.

B) choose his best strategy assuming that player A plays her dominant strategy.

C) not achieve a Nash equilibrium.

D) assume that player A does not choose her dominant strategy.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 24) A single-period duopoly firm can choose output level A or B. The firm decides it will produce level A regardless of what the other firm produces. This decision may occur because A) producing the output level A is a dominant strategy.

B) this firm has simply decided to always produce at level A. C) Both A and B are possible.

D) None of the above.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old

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25) If the payoff to the United States to pursuing nuclear weapons is 100 if the USSR does not pursue nuclear weapons and 50 if the USSR does, and the payoff to the USSR to pursuing nuclear weapons is 80 if the USA doesn't pursue nuclear weapons and 30 if the USA does, what is the non-cooperative equilibrium?

A) The USA pursues nuclear weapons; the USSR does not.

B) The USA pursues nuclear weapons; the USSR pursues nuclear weapons.

C) The USA does not pursue nuclear weapons; the USSR does not pursue nuclear weapons.

D) The USA does not pursue nuclear weapons; the USSR does pursue nuclear weapons.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

26) The above figure shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, which one of the following statements is TRUE? A) Firm A does not have a dominant strategy.

B) Firm B does not have a dominant strategy.

C) Neither firm entering is a Nash equilibrium.

D) The outcome of the game is unpredictable.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 27) The above figure shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, which one of the following statements is TRUE? A) Firm A has a dominant strategy.

B) Firm B has a dominant strategy.

C) Neither firm entering is a Nash equilibrium.

D) The outcome of the game is unpredictable.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 7 Copyright © 2020 Pearson Education, Inc.

28) The above figure shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, which one of the following statements is TRUE? A) Only firm A will enter the market.

B) Only firm B will enter the market.

C) Neither firm entering is a Nash equilibrium.

D) The outcome of the game is unpredictable.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 29) The above figure shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, which one of the following statements is TRUE? A) Since firm B has no dominant strategy, its decision is unpredictable.

B) Since firm B's decision is unpredictable, firm A's decision is unpredictable.

C) Neither firm entering is a Nash equilibrium.

D) Firm B will not enter because it knows firm A will.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 30) The above figure shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, what will happen if the government offers a $30 subsidy to airlines that serve this route?

A) Both firms will enter profitably.

B) Firm A will decide not to enter since firm B will.

C) Firm B is still better off not entering.

D) Neither firm will have a dominant strategy.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 31) The above figure shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, what happens if the government imposes a $20 per firm tax on firms that service this route?

A) Neither firm has a dominant strategy.

B) Not entering is a dominant strategy for both firms.

C) Neither firm entering is a Nash equilibrium.

D) Only firm A will enter.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old

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32) The above figure shows the payoff to two airlines, A and B, of serving a particular route. If the two airlines must decide simultaneously, and the government imposes a $20 per firm tax on firms that service this route, which of the following maximizes the firms' joint profits?

A) Neither firm services the route.

B) Firm A offers firm B $20 to not enter.

C) Both firms will service this route.

D) Firm B offers firm A $30 to not enter.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

33) The above figure shows a payoff matrix for two firms, A and B, that must choose between a high-price strategy and a low-price strategy. For firm B A) setting a high price is the dominant strategy.

B) setting a low price is the dominant strategy.

C) there is no dominant strategy.

D) doing the opposite of firm A is always the best strategy.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 34) The above figure shows a payoff matrix for two firms, A and B, that must choose between a high-price strategy and a low-price strategy. The Nash equilibrium in this game A) does not exist.

B) occurs when both firms set a low price.

C) occurs when both firms set a high price.

D) occurs when firm A sets a high price and firm B sets a low price.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 9 Copyright © 2020 Pearson Education, Inc.

35) The above figure shows a payoff matrix for two firms, A and B, that must choose between a high-price strategy and a low-price strategy. Both firms setting a high price is NOT a Nash equilibrium because A) setting a high price is the dominant strategy for each firm.

B) neither firm can improve its payoff by setting a low price given that the other firm is setting a high price.

C) there is no dominant strategy for either firm.

D) both firms can improve their payoff by setting a low price given that the other firm is setting a high price.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old

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36) The above figure shows a payoff matrix for two firms, A and B, that must choose between selling basic computers or advanced computers. Firm B's dominant strategy A) is to make basic computers.

B) is to make advanced computers.

C) is to adopt firm A's strategy.

D) does not exist in this game.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 37) The above figure shows a payoff matrix for two firms, A and B, that must choose between selling basic computers or advanced computers. How many Nash equilibria are there?

A) 0 B) 1 C) 2 D) 4 Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 38) The above figure shows a payoff matrix for two firms, A and B, that must choose between selling basic computers or advanced computers. Which of the following is a Nash equilibrium?

A) Both firms make advanced computers.

B) Both firms make basic computers.

C) Firm A makes basic computers and firm B makes advanced computers.

D) There are no Nash equilibria.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 11 Copyright © 2020 Pearson Education, Inc.

39) Which of the following statements is TRUE about a non-cooperative game?

A) When two players each have a dominant strategy, joint profits may not be maximized.

B) When two players each have a dominant strategy, joint profits are maximized.

C) When players use their best responses, joint profits are maximized.

D) None of the above.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 40) Strategic advertising in the cola market A) significantly expands the size of the market.

B) brings in few new customers and primarily shifts market share among rivals.

C) shifts market demand to the right, increasing quantity sold and decreasing prices.

D) has no impact on the market.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old For the following, please answer "True" or "False" and explain why.

41) If neither firm has a dominant strategy, a Nash equilibrium cannot exist.

Answer: False. Even if a firm has no strategy that dominates all others, it may still have a strategy that is the best given what the other firm is doing. When this is true for both firms for the same strategy pair, a Nash equilibrium exists.

Skill: Analytical AACSB: Analytical Thinking Status: Old

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42) The above figure shows the payoffs to two airlines, A and B, of serving a particular route. Is there a Nash equilibrium? What is it? Explain.

Answer: Firm A entering and firm B not entering is the Nash equilibrium. Entering is firm A's dominant strategy. It will enter no matter what firm B does. Firm B does not have a dominant strategy but is always better off doing the opposite of firm A. Put in another way, given firm A's decision, if firm B enters, it will incur a loss.

Skill: Analytical AACSB: Analytical Thinking Status: Old

43) The above figure shows the payoff for two firms, A and B, that must each choose to sell either at a high or low price. Determine the dominant strategies for each firm (if any) and the Nash equilibria (if any).

Answer: For both firms the dominant strategy is to price low. Thus, the Nash equilibrium is for both firms A and B to price their product low. Note that the total profit is less than if they had both priced the product at a high price.

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12.2 Types of Nash Equilibria 1) In the following game, how many Nash equilibria are

there?

A) 0 B) 1 C) 2 D) unable to determine Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 2) Communication between players prior to the start of a game that does NOT affect the payoffs is called A) cheap talk.

B) ineffective bargaining.

C) a binding verbal contract.

D) pareto efficient.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 3) "Cheap talk" is considered cheap because A) communications via phone or email these days has a cost that is close to zero.

B) a firm can say anything, but may actually do something different.

C) the cost of talking is far outweighed by the gains to be made in coordinating efforts.

D) firms avoid the costs of hiring lawyers.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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4) Cheap talk A) is never credible.

B) is illegal.

C) generally affects the game's payoffs.

D) can be credible when both firms have an incentive to be truthful.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) A coordination game A) is a game with multiple Nash equilibria where players can credibly coordinate to select one of the equilibria.

B) is a game where players coordinate to maximize joint profits.

C) cannot be solved with cheap talk.

D) always has one Nash equilibrium and no dominated strategies.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 6) Not all games with two or more Nash equilibria can be solved with pre-play communication because A) cheap talk may be illegal under anti-trust laws.

B) if there's an incentive for one or more players to lie, then cheap talk lacks credibility.

C) Pareto Criterion might not be defined.

D) Both A and B Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 7) When firms select the solution that is better for all parties, the ________ is satisfied.

A) Nash equilibrium condition B) Pareto Criterion C) coordination game requirement D) pure strategy requirement Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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8) Which of the following can always be used to determine the outcome when there are multiple Nash equilibria?

A) the Pareto Criterion B) cheap talk C) Both A and B D) None of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 9) A strategy in which a player uses probabilities to decide which strategy to use is called a A) pure strategy.

B) mixed strategy.

C) Pareto strategy.

D) coin flip strategy.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 10) A mixed strategy may A) be part of a Nash equilibrium.

B) be a set of probabilities of selecting each possible action.

C) lead identical firms to choose different actions.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) When neither player has a dominant strategy, A) game theory will not provide information.

B) no Nash equilibrium exists.

C) at least one Nash equilibrium exists.

D) the game cannot be analyzed.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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12) After analyzing his opponent, a tennis player decides to serve 10% of his serves to the left, 50% of his serves to the right, and 40% of his serves at the body of his opponent. This illustrates a A) deterministic strategy.

B) dominant strategy.

C) mixed strategy.

D) non-game theoretic problem.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 13) What is the primary difference between a mixed strategy and a pure strategy?

A) Pure strategies are always dominated strategies.

B) Mixed strategies call for randomizing over possible actions, pure strategies do not.

C) Pure strategies are much more common than mixed strategies.

D) Mixed strategies are not optimal whereas pure strategies are.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 14) If a game has a pure strategy Nash equilibrium, then A) it might also have a mixed strategy equilibrium.

B) it does not have a mixed strategy equilibrium.

C) at least one player has a dominant strategy.

D) no player has a dominant strategy.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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15) Suppose two firms, A and B, are simultaneously considering entry into a new market. If neither enters, both earn zero. If both enter, they both lose 100. If one firm enters, it gains 50 while the other earns zero. Set up the payoff matrix for this game and determine if any Nash equilibria exist. Can you predict the outcome? What if firm A gets to decide first?

Answer:

See the above figure. There are two Nash equilibria; either firm A is a natural monopoly or firm B is a natural monopoly. It is difficult to predict the outcome since the firms decide simultaneously. If firm A has the opportunity to choose first, it will enter, and firm B will not.

Skill: Analytical AACSB: Analytical Thinking Status: Old 12.3 Information and Rationality 1) In game theory, we usually assume that all players A) act rationally.

B) use the information available to them to decide on a best strategy.

C) know about the payoffs of the other players.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) One reason that it might be difficult for a player to determine his best strategy is that A) he might have limited ability to calculate the possible outcomes.

B) he is irrational.

C) there is no pure strategy.

D) there are multiple Nash equilibria.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 18 Copyright © 2020 Pearson Education, Inc.

3) If a firm does NOT know its rival's profit function, then we consider that information to be A) irrelevant in deciding its best strategy.

B) private.

C) common knowledge.

D) Pareto sub-optimal.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 4) If a game contains private information, then A) the game's outcome is affected.

B) firms will engage in cheap talk to coordinate their actions.

C) players will decide not to play the game.

D) third-party negotiations are necessary to resolve the information gap.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) In the example of coordination problems between Google and Motorola Mobility, one method to solve the problems was A) to undertake a merger or acquisition.

B) form a joint venture.

C) for one firm to subcontract with the other.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) If the managers of your firm have bounded rationality, then A) the firm should fire them and hire more competent managers.

B) a Nash equilibrium does not exist.

C) they are limited in their ability to calculate and may not succeed in maximizing profits.

D) it is not possible to maximize profits.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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7) If decision makers have limited ability to calculate profits from all possible combinations of options, they are said to have A) dementia.

B) bounded rationality.

C) Pareto inefficiency.

D) a maximin problem.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 8) A maximin strategy A) maximizes the minimum payoff.

B) minimizes the maximum payoff.

C) maximizes the payoff of one player, but minimizes the payoff of the other.

D) maximizes the minimum joint profits of the players.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 9) If you take a maximin strategy, A) you are irrational according to economic definition.

B) you are ensuring that the other player gets the worst possible outcome.

C) you are getting the best possible outcome given that the other player does the thing that's worst for you.

D) then both players are doing the best they can given the payoffs in the game.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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10)

In the above table, if the players use a maximin strategy, A) the equilibrium is for both firms to produce.

B) the equilibrium choice is the same as using a regular, best response strategy.

C) the equilibrium is for A to produce and B not to produce.

D) the equilibrium is for B to produce and A not to produce.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 11)

In the above table, if the players use a maximin strategy, A) firm A produces a High Quality product and firm B produces a Low Quality product.

B) the equilibrium choice is the same as using a regular, best response strategy.

C) both firms produce a High Quality product.

D) firm A produces a Low Quality product and firm B produces a High Quality product.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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12.4 Bargaining 1) Bargaining does NOT normally occur in A) vertical business relationships.

B) wages and working conditions under a union contract.

C) posted price markets.

D) the legal system.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) In a bargaining game, players A) are forced to negotiate, as in a mediation.

B) voluntarily negotiate.

C) are engaging in illegal activity.

D) Both B and C Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) A Nash bargaining solution A) is not the same as a Nash equilibrium.

B) is derived from a Nash equilibrium.

C) gives a solution in both cooperative and non-cooperative games.

D) None of the above.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) A disagreement point is A) an item of contention between the two bargaining players.

B) a way of keeping score in a negotiation.

C) the point in a negotiation where the players cannot reach an agreement.

D) the outcome that occurs if there is no agreement in a bargain.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old

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5) In a bargaining solution, a player's net surplus is A) the amount of total surplus minus any deadweight loss.

B) the difference between what the player receives in the final bargain minus what she would have gotten from the disagreement point.

C) the amount of consumer surplus she receives minus any deadweight loss.

D) always maximized.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) When a bargaining solution is reached, A) each player receives a net surplus greater than or equal to zero.

B) we have a Nash equilibrium.

C) the sum of the net surpluses is the Nash product.

D) Both A and C. Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

7) In the above figure, the Nash product is A) 20.

B) 40.

C) 100.

D) 400.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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8) One possible source of inefficiency in bargaining is A) that there are multiple Nash equilibria.

B) bounded irrationality.

C) that the Nash product may be indeterminant.

D) that the bargaining process takes time.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 12.5 Auctions 1) A sale in which property or a service is sold to the highest bidder is called a(n) A) auction.

B) bidder sale.

C) competitive market.

D) Austrian bundle.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 2) An auction in which the price announced by the auctioneer DESCENDS is called a(n) A) Dutch Auction.

B) English Auction.

C) Sealed Bid Auction.

D) Descending Option Auction.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 3) In an English auction A) the price decreases until someone bids.

B) the price increases until nobody else will raise the bid.

C) bidders put their bids in a sealed envelope.

D) the winning bidder pays the amount bid by the person with the second highest bid.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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4) The individual with the highest valuation of the good will win in which of the following auctions?

A) English Auction B) Dutch Auction C) Sealed Bid Auction D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) In a first-price sealed-bid auction, the winner pays A) its own, highest bid.

B) the amount bid by the runner-up.

C) the average of the three highest bids.

D) the common value.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 6) In a second-price auction, the winner pays A) the second-to-last bid it made.

B) the average of the top two bids.

C) the amount bid by the runner-up.

D) None of the above.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 7) A private auction is an auction in which A) individuals know their own value of the good and everyone else's valuation, too.

B) individuals have their own valuation of the good but don't know everyone else's.

C) many auctions are auctioned off at the same time.

D) only one good is auctioned off.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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8) In the reality TV show Storage Wars, people bid on the contents of repossessed storage units without being able to evaluate the contents. This is an example of a ________ auction.

A) common value B) private value C) Dutch D) second-price Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 9) In a sealed-bid, second-price auction, you should bid A) your estimate of what others value the good at.

B) one dollar more than your estimate of what the second-highest bid will be.

C) your highest value.

D) the common value of the good.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 10) The winner's curse occurs when A) bidders "shade" their bids.

B) the winning bid is higher than the good's common value.

C) the winner buys something he didn't need.

D) the winning bid is higher than the private value of the good.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old For the following, please answer "True" or "False" and explain why.

11) In auctions, the winner always pays a price equal to the highest (his) bid.

Answer: False. There are also second-price auctions in which the winner pays a price equal to the second highest bid.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old 12) In Dutch or first-price sealed-bid auctions, participants will bid less than their highest valuation.

Answer: True. They do so because they have to balance the benefit of paying less with the cost of not getting the good.

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13) Explain why it is unwise to bid more than your valuation of the good in a sealed bid secondprice auction.

Answer: Assume you have a valuation of the good equal to $50. The price the winning bidder pays is equal to the second highest bid. If you bid $70 and win, you will pay less than $50 if the second-highest bid (SHB) is less or equal to $50. In this case you are as well off as bidding $50.

If you end up paying more, you lose because you are paying more than your valuation of the good. So you are either as well off or worse off than bidding your highest valuation.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old

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Managerial Economics and Strategy, 3e (Perloff/Brander) Chapter 13 Strategies Over Time 13.1 Repeated Games 1) A dynamic game is a game A) in which the players are highly animated.

B) that is sequential or repeated.

C) where the payoffs change frequently.

D) that has actions instead of strategies.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 2) Which of the following is a dynamic game?

A) Rock-paper-scissors (Roshambo) B) Flipping pennies C) Chess D) None of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: New 3) Dynamic and static games have outcomes that A) may be different.

B) are always different.

C) are not Nash equilibria.

D) result from dominant strategies.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) In a repeated prisoners' dilemma game A) the players act sequentially.

B) the outcomes are the same as in a static prisoners' dilemma game.

C) firms' choices are not influenced by their opponents' actions.

D) cooperation may result if the game is played indefinitely.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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5) In an indefinitely repeated game, a firm might use a ________ to ________ a rival that defects from a cooperative strategy.

A) trigger strategy; threaten B) trigger strategy; punish C) legal maneuver; sue D) tacit threat; dissuade Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) If firms adopt a strategy that triggers a permanent punishment, the result in an indefinitely repeated game is A) undefined.

B) the noncooperative Nash equilibrium.

C) the collusive Nash equilibrium.

D) economically inefficient.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 7) If firms execute a strategy that triggers a permanent punishment, the result in an indefinitely repeated game is A) undefined.

B) the non-cooperative Nash equilibrium.

C) the collusive Nash equilibrium.

D) economically inefficient.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 8) The trench warfare case during World War I is an example of a(n) A) tit-for-tat strategy.

B) explicit agreement.

C) non-cooperative Nash equilibrium.

D) None of the above.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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9) In a tit-for-tat strategy, a player A) randomly punishes its rival.

B) ensures that the joint profit is maximized in each round.

C) copies the action of its rival's prior move in the subsequent rounds.

D) maximizes the joint profit in the game.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 10) Implicit collusion, where players do NOT have an explicit agreement, A) is strictly prohibited under antitrust laws.

B) is not strictly prohibited under antitrust laws.

C) results in cheating.

D) maximizes total surplus in the market.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) Repeated games are conducive to A) explicit cooperation.

B) tacit cooperation.

C) corruption.

D) failing to have a Nash equilibrium.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 12) In a finitely repeated prisoners' dilemma game, A) firms will only cooperate if they each adopt a tit-for-tat strategy.

B) firms cooperate and achieve the collusive Nash equilibrium for all rounds.

C) firms cooperate for most of the rounds, but switch to the non-cooperative outcome in the final couple of rounds.

D) firms do not cooperate and the static game Nash equilibrium is the outcome for each round.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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13) When a prisoners' dilemma game is repeated a finite number of times (T), A) cooperation unravels during the first round of the game, resulting in the static game Nash equilibrium.

B) cooperation continues until the T-2 round, where the players will switch to a non-cooperative Nash equilibrium.

C) firms cooperate and achieve the collusive Nash equilibrium for all rounds.

D) None of the above.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 14) When there's uncertainty as to the length of a game, A) cooperation still does not occur, because cooperation unravels at the beginning of the game.

B) cooperation can potentially occur if trigger strategies are adopted.

C) firms will cooperate because they treat the game as one that is infinitely repeated.

D) firms will randomly pick among the Nash equilibria.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 13.2 Sequential Games 1) Which of the following is a sequential game?

A) Rock-paper-scissors (Roshambo) B) Paintball C) Monopoly D) Boxing Answer: C Skill: Definition AACSB: Application of Knowledge Status: New 2) An example of a game in which a leader moves first, and then the other rivals follow is a ________ game.

A) Stackelberg model B) Cournot model C) finite move D) tit-for-tat Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old

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3) In a Stackelberg oligopoly A) the leader moves first, and the follower chooses its price in the second stage of the game.

B) the leader moves first, and the follower chooses its output in the second stage of the game.

C) both firms act simultaneously, but one chooses price and the other output level.

D) there is no Nash equilibrium.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 4) The Cournot and Stackelberg models are similar, EXCEPT Cournot ________ and Stackelberg ________.

A) sets price; sets output B) sets output; sets price C) is dynamic; is static D) is static; is dynamic Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 5) In the Stackelberg model, the leader has a first-mover advantage because it A) has lower costs than the follower.

B) chooses its output to manipulate the follower to produce the output that most benefits the leader.

C) reacts to the follower's decision.

D) differentiates its output.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) A sub-game perfect Nash equilibrium is defined as A) a set of strategies that are a Nash equilibrium in every subgame of a static game.

B) a set of strategies that are a Nash equilibrium in every subgame of a dynamic game.

C) a set of strategies that are a Nash equilibrium in a single subgame of a dynamic game.

D) the game within the game.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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7) In a dynamic game, rational players A) will reject outcomes that are not subgame perfect.

B) use backward induction to determine best responses.

C) have strategies that select a Nash equilibrium in the game as a whole.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) A player that starts at the end of the game and progresses to the first move to determine best responses A) doesn't understand how to play a game.

B) is acting irrationally.

C) is using backward induction.

D) is using the Stackelberg Strategy.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 9) If a Cournot duopolist announced that it will double its output, A) it becomes the leader.

B) the other firm does not view the announcement as credible.

C) the other firm will shut down.

D) the other firm will double output also.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 10) If a Cournot duopolist announced that it will double its output, the other firm does not view the announcement as credible because A) the announcing firm's profits will fall if it carries out the threat.

B) the other firm's profits will fall if the announcing firm carries out the threat.

C) the other firm's profits will rise if the announcing firm carries out the threat.

D) the other firm will double output also.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old

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11) An incumbent announces it will significantly increase output in the next period, but only has contracts for the amount produced this period. The announcement is a A) credible threat.

B) non-credible threat.

C) commitment.

D) mixed strategy.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

12) The above figure shows the payoff to two gasoline stations, A and B, deciding to operate in an isolated town. If firm A chooses its strategy first, then A) firm A will not enter.

B) firm B's entry is blockaded.

C) both firms will enter.

D) firm A will enter and firm B will not.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 13) The above figure shows the payoff to two gasoline stations, A and B, deciding to operate in an isolated town. Suppose a $60 fee is required to enter the market. If firm A chooses its strategy first, then A) firm A will not enter.

B) neither firm will enter.

C) both firms will enter.

D) firm A will enter and firm B will not.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 7 Copyright © 2020 Pearson Education, Inc.

14) The above figure shows the payoff to two gasoline stations, A and B, deciding to operate in an isolated town. Suppose a $30 fee is required to enter the market. If firm A chooses its strategy first, then A) firm A will not enter.

B) neither firm will enter.

C) both firms will enter.

D) firm A will enter and firm B will not.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 13.3 Deterring Entry 1) In a Stackelberg game, a monopolist could deter entry from a potential rival by A) telling the potential rival not to enter.

B) strategically moving first.

C) moving to a Bertrand model.

D) None of the above.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) With regard to preventing entry, if identical firms act simultaneously, A) they cannot credibly threaten each other.

B) they will all incur losses.

C) only one firm will enter the market.

D) none of them will enter the market.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) The ability to deter entry requires A) a credible threat that if entry occurs the firm is willing to produce more than they would otherwise.

B) a credible threat that if entry occurs the firm will not produce more than they would otherwise.

C) a good lawyer.

D) a clever accounting department.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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4) Deterring entry might require a firm to A) price their product closer to the competitive price than to the monopoly price.

B) price their product closer to the monopoly price than to the competitive price.

C) drop output almost to zero to show the consumers "who's boss."

D) drop price almost to zero to get price below marginal cost.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old

5) The above figure shows the payoff matrix facing an incumbent firm and a potential entrant.

The potential entrant cannot earn a profit if the incumbent A) chooses the Cournot level of output.

B) chooses the Stackelberg leader level of output.

C) shuts down.

D) deters entry.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 6) The above figure shows the payoff matrix facing an incumbent firm and a potential entrant.

Assuming a fixed cost of entry, the incumbent will deter entry because A) it is more profitable than accommodating entry.

B) it increases consumer surplus.

C) the potential entrant winds up with zero profit.

D) the incumbent would earn zero profit if it accommodated entry.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old

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7) The above figure shows the payoff matrix facing an incumbent firm and a potential entrant.

Assuming a fixed cost of entry, the outcome will be that the incumbent A) deters entry.

B) chooses the Stackelberg leader level of output but the potential entrant does not enter anyway.

C) chooses the Stackelberg leader level of output and the potential entrant enters.

D) deters entry and earns zero profit.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 8) An exclusion contract A) is a form of entry deferral.

B) gives a firm the right to be the exclusive provider of a good in a particular market.

C) may not always be profitable for the incumbent.

D) All of the above.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 9) In the mini-case on pay-for-delay, A) incumbents are attempting to delay entry of generic drugs.

B) the deals incumbents made with potential entrants may be illegal.

C) the deals are only profitable for approximately six months.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 10) An incumbent firm uses limit pricing A) to set price below a potential rival's marginal cost, thus making entry unprofitable.

B) to set one price for a quantity of a good below a certain limit, and a second price for purchases above the limit.

C) when it has no other advantages over a potential rival.

D) if it is limited in the quantity of inputs it can purchase to produce output.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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11) An incumbent's threat to use limit pricing if a firm enters the market A) is credible if the firms have identical costs and market demand supports both firms.

B) is credible if the firms have different costs and market demand won't support both firms.

C) is not credible if the firms have different costs and market demand won't support both firms.

D) is cheap talk, because the other firm will enter, and the incumbent will still be able to charge monopoly pricing.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 12) If firms have different costs and market demand only supports the quantity the incumbent produces, then the incumbent's threat to use limit pricing A) is credible.

B) is not credible.

C) would be illegal.

D) is unable to be determined with the information given.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 13) In a repeated game, deterring entry A) is not possible.

B) is not a rational strategy if money is lost fighting the first potential entrant.

C) may require losing money fighting the first potential entrant.

D) cannot form a subgame perfect Nash equilibrium.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 14) An incumbent's threat to retaliate after a potential competitor enters the market will be taken seriously by potential competitors if A) the incumbent can still earn a profit after carrying out the threat.

B) the incumbent earns greater profit carrying out the threat than by accommodating entry.

C) the potential entrant cannot earn a profit if the threat is carried out.

D) the potential entrant's profit exceeds the incumbent's if the threat is carried out.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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15) With regard to preventing entry, if identical firms act simultaneously, A) they cannot credibly threaten each other.

B) they will all incur losses.

C) only one firm will enter the market.

D) none of them will enter the market.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 13.4 Cost and Innovation Strategies 1) If a monopolist faces entry by a potential rival, investing to lower its marginal cost A) is a credible way to deter entry.

B) is not a credible threat.

C) is credible but will not deter entry.

D) will not occur, even when there are no barriers to entry.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) If there are low barriers to entry, a monopolist A) might undertake investment to lower marginal cost in the face of a potential rival.

B) will undertake investment to lower marginal cost in order to increase profits.

C) will not undertake investment to lower marginal cost under any circumstances because profits are lower.

D) Both A and B. Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) An incumbent monopolist producing more output than necessary might be able to keep potential rivals from entering A) by flooding the market with products below its marginal cost in the short run.

B) if learning by doing reduces marginal cost.

C) if the long-run marginal cost can be lowered below the potential entrant's short-run marginal cost.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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4) Incumbents are unaffected by fixed costs of entry while potential entrants are affected by them because A) for potential entrants the cost is avoidable, while for the incumbent, it is not.

B) fixed costs will be greater for the potential entrant than for the incumbent.

C) fixed costs are zero for the incumbent.

D) incumbents will act to prevent entry at all costs.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) Regarding fixed costs of entry A) both incumbents and potential entrants are affected by them.

B) potential entrants are affected by them while incumbents are not.

C) neither incumbents nor potential entrants consider them.

D) incumbent's decisions are affected by them, while the potential entrant ignores them.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) Assume a firm is a monopoly and enjoys $10 million in profits per year. The firm lobbies to have a moratorium passed by Congress on new firms in its market for the next 25 years. If there is no discount rate, how much would the firm be willing to pay to deter entry?

A) $250 million B) $25 million C) $100 million D) $250 billion Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 7) Assume a firm is a monopoly and enjoys $10 million in profits per year. The firm lobbies to have a moratorium passed by Congress on new firms in its market for the next 25 years. If there is no discount rate, how much would any firm(s) arguing against the moratorium be willing to spend to block it?

A) something less than $250 million B) $250 million C) $251 million D) $250 billion Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old

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8) Which of the following is a way to deter entry?

A) increase costs through legislation that affects only new entrants B) raise switching costs for customers that use your products C) obtain a patent so that others must license your invention D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 9) Designing your products with proprietary technology, is a way to A) protect intellectual property.

B) increase switching costs for your customers.

C) grandfather in your products.

D) decrease your marginal cost.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 13.5 Disadvantages of Moving First 1) A specific investment A) is one that can only be used in a transaction with a single firm.

B) is an investment that cannot be physically moved, such as an oil refinery.

C) reduces the possibility of a holdup occurring.

D) is more expensive than a general investment.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 2) A holdup problem occurs A) when a financial institution undertakes too little investment in security.

B) when one firm must make a specific investment and a second firm takes advantage of it.

C) if the firm that moves second in a Stackelberg game chooses the incorrect output level.

D) if you are entering into a contract with a government entity.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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3) If Intel moves first and makes a large investment in a chip fabrication plant in Bolivia in exchange for tax credits, Intel has made ________ and Bolivia ________.

A) a tactical error; will nationalize the plant B) a specific investment; will create the tax credit C) a specific investment; has a hostage D) a general investment; no longer has to grant the tax credits Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 4) One way to avoid holdups is to A) use contracts.

B) vertically integrate.

C) use multiple sources.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) By vertically integrating, two firms can A) increase market share.

B) avoid holdup problems.

C) limit the problems inherent in moving too quickly.

D) avoid antitrust issues.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) A disadvantage of moving too quickly is that A) costs of entry are higher.

B) consumers aren't loyal.

C) firms are subject to holdup problems.

D) All of the above.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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7) A disadvantage of moving too quickly is that A) costs of entry are higher.

B) the likelihood of misunderstanding the demand is greater.

C) followers gain an advantage by learning from the first-mover.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 13.6 Behavioral Game Theory 1) Behavioral game theory assumes A) people act rationally.

B) people are subject to biases that cause them to act irrationally.

C) that people behave differently when playing games than when "playing for real."

D) people optimize using all available information.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 2) Behavioral game theory assumes A) people act rationally.

B) people have limited calculation capability or psychological biases that cause them to act irrationally.

C) that people behave differently when playing games than when "playing for real."

D) people overcome their psychological biases.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 3) In an ultimatum game A) non-profit-maximizing behavior often occurs.

B) players move simultaneously.

C) players act in an economically rational way.

D) one player receives nothing.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old

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4) In an ultimatum game where the payoff totals $100 and is split in $1 increments, the rational amount for the proposer to offer and the responder to take is A) $0.

B) $1.

C) $50.

D) $100.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 5) In the ultimatum game, one reason players don't choose the rational offer is A) that there are too many possible outcomes to reasonably consider.

B) they are worse off by taking the offer.

C) they prefer to sacrifice to punish "unfair" behavior.

D) that it is not a Nash equilibrium.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) In the ultimatum game, one reason players don't choose the rational offer is A) that there are too many possible outcomes to reasonably consider.

B) they are worse off by taking the offer.

C) most people believe in reciprocity, and will therefore get even if the prosper treats them badly.

D) that it is not a Nash equilibrium.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 7) In the beauty contest where players predict the outcome of players choosing a number between 0 and 100 A) the Nash equilibrium is 0.

B) your prediction should be based on what you think the winning number will be.

C) the Nash equilibrium is 33.

D) there is no Nash equilibrium because people are not rational.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old

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8) In a beauty contest game such as predicting the average of respondents choosing a number between 0 and 100 A) the outcome is not normally the Nash equilibrium for the game.

B) the winner usually exhibits level-3 reasoning.

C) the winner must understand the non-rationality of the players.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old

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Managerial Economics and Strategy, 3e (Perloff/Brander) Chapter 14 Managerial Decision-Making Under Uncertainty 14.1 Assessing Risk 1) Probability A) is a number between 0 and 1, inclusive.

B) indicates how likely an outcome is to occur.

C) is larger the more likely the event is to occur.

D) All of the above.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 2) If an event is certain to occur, it has a probability (pr) of A) 0.

B) 0 < pr < 1.

C) 1.

D) Not enough information to determine.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 3) If an event will NOT occur, it has a probability (pr) of A) 0.

B) 0 < pr < 1.

C) 1.

D) Not enough information to determine.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 4) If an event is unlikely to occur, which probability is a reasonable estimate?

A) 0 B) 0.23 C) 0.82 D) Not enough information to determine.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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5) If an event is likely to occur, which probability is a reasonable estimate?

A) 0.32 B) 0.79 C) 1 D) Not enough information to determine.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 6) If there are 10,000 people in your age bracket, and 10 of them died last year, an insurance company believes that the probability of someone in that age bracket dying this year would be A) 0.

B) .001.

C) .0001.

D) 1,000.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 7) People in a certain group have a 0.3% chance of dying this year. If a person in this group buys a life insurance policy for $3,300 that pays $1,000,000 to her family if she dies this year and $0 otherwise, what is the expected value of a policy to the insurance company?

A) $0 B) $300 C) $3,000 D) $3,300 Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 8) Which of the following sets of outcomes is mutually exclusive?

A) win, lose, tie B) employed full-time, employed part-time, unemployed C) married, single, widowed D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old

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9) Which of the following sets of outcomes is exhaustive?

A) win, lose, tie B) employed full-time, employed part-time, unemployed C) married, single, widowed D) All of the above.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 10) If outcomes are ________, exactly one of the outcomes will occur and the probabilities add up to ________.

A) probabilistic; between 0 and 1 B) exhaustive and mutually exclusive; 1 C) exhaustive; 1 D) mutually exclusive; between 0 and 1 Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) You draw colored balls out of a bag. You draw a red ball 30% of the time and a blue ball 70% of the time. For each draw, the blue outcome and the red outcome are A) mutually exclusive.

B) exhaustive.

C) Both A and B. D) None of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 12) Best guesses of an event occurring in the future are based on A) estimates derived from the frequency of the event occurring in the past.

B) coin flips.

C) subjective probability.

D) the wisdom of crowds.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old

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13) Although he is very poor, Al plays the million-dollar lottery everyday because he is certain that one day he will win. Al makes this calculation based upon A) the frequency of past outcomes.

B) subjective probability.

C) knowledge of all possible outcomes.

D) tossing a coin.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 14) Your friend Dimitre tells you that he thinks that his favorite basketball team has a 70% chance of winning the next game. This is an example of a(n) A) objective probability.

B) subjective probability.

C) risk-averse statement.

D) Friedman-Savage preference.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 15) A(n) ________ relates each possible outcome to its probability of occurrence.

A) probability distribution B) frequency C) expected value D) coin toss Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 16) Expected value represents A) the actual payment one expects to receive.

B) the average of all payments one would receive if one undertook the risky event many times.

C) the payment one receives if he or she makes the correct decision.

D) the payment that is most likely to occur.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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17) On any given day, a salesman can earn $0 with a 20% probability, $100 with a 40% probability, or $300 with a 20% probability. His expected earnings equal A) $0.

B) $100 because that is the most likely outcome.

C) $100 because that is what he will earn on average.

D) $200 because that is what he will earn on average.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 18) On any given day, a salesman can earn $0 with a 30% probability, $100 with a 20% probability, or $300 with a 50% probability. His expected earnings equal A) $0.

B) $100.

C) $150.

D) $170.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 19) On any given day we know a salesman can earn $0 with a 30% probability, $100 with a 20% probability or $300 with 40% probability. His expected earnings equal A) $0.

B) $140.

C) $300.

D) It cannot be determined from the available information.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 20) Sarah buys little stuffed animals for $5 each. They come in different varieties. If the producer stops making (retires) a certain variety, a stuffed animal of that variety will be worth $100; otherwise it is worth $0. There is 50% chance that any variety will be retired. When Sarah buys her next stuffed animal, the expected value is A) $50.

B) $47.50.

C) $45.00.

D) $0.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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21) Sarah buys little stuffed animals for $5 each. They come in different varieties. If the producer stops making (retires) a certain variety, a stuffed animal of that variety will be worth $100; otherwise it is worth $0. There is 50% chance that any variety will be retired. For the purchase of an individual stuffed animal, what is the value to Sarah of knowing ahead of time whether the variety will be retired?

A) $50 B) $5 C) $2.50 D) $0 Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 22) From the expected value of a game, we A) cannot determine the risk.

B) can determine the risk.

C) can determine exactly how much a player will receive.

D) can infer the subjective probabilities of each possible outcome.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 23) Variance is a measure of ________ and the higher the variance, ________.

A) expected profit; the greater the profit B) risk; the greater the risk C) standard deviation; greater the standard deviation D) risk; the lower the risk Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 24) Variance is a measure of ________ and the lower the variance, ________.

A) expected profit; the lower the profit B) risk; the lower the risk C) standard deviation; lower the standard deviation D) risk; the greater the risk Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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25) A lottery game pays $500 with .001 probability and $0 otherwise. The variance of the payout is A) 15.8.

B) 249.50.

C) 249.75.

D) 499.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 26) All else held constant, as the variance of a payoff increases, the A) expected value of the payoff increases.

B) risk of the payoff increases.

C) expected value of the payoff decreases.

D) risk of the payoff decreases.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old For the following, please answer "True" or "False" and explain why.

27) Expected value represents the average of all outcomes if one were to undertake the risky event many times over and over again.

Answer: True. The expected value is not expected on any one outcome, because it represents the average of many outcomes.

Skill: Definition AACSB: Written and Oral Communication Status: Old 28) For a given expected value, the smaller the standard deviation of the expected value, the larger the risk.

Answer: False. The smaller the standard deviation the smaller the associated risk. The standard deviation is the square root of the variance, thus the smaller the variance the smaller the standard deviation. The smaller the variance of the expected value the smaller the risk.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old

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29) On any given day, a salesman can earn $0 with a 20% probability, $100 with a 40% probability, or $300 with a 20% probability. Calculate the expected value and variance of his earnings, and interpret.

Answer: E(X) = (0 ∗ .2) + (100 ∗ .4) + (300 ∗ .2) = $100 Variance(X) = .2(0 - 100)2 + .4(100 - 100)2 + .2(300 - 100)2 = 2000 + 0 + 8000 = 10,000.

E(X) tells us that her earnings will average $100 per day if she stays at this job over a long time period. The variance is a measure of how risky her income is.

Skill: Analytical AACSB: Analytical Thinking Status: Old 30) Sarah buys little stuffed animals for $5 each. They come in different varieties. If the producer stops making (retires) a certain variety, a stuffed animal of that variety will be worth $100; otherwise it is worth $0. There is 25% chance that any variety will be retired. For the purchase of an individual animal, what is the value to Sarah of knowing ahead of time whether or not that variety will be retired?

Answer: If Sarah did not know whether a variety is to be retired, her expected value of a purchase is (.75 ∗ -5) + (.25 ∗ 95) = -3.75 + 23.75 = $20.

If she knows ahead of time that a variety won't be retired, she won't buy one. So, her expected value becomes (.75 ∗ 0) + (.25 ∗ 95) = $23.75.

The information that a variety will or will not be retired is worth $3.75 to her.

Skill: Analytical AACSB: Analytical Thinking Status: Old 14.2 Attitudes Toward Risk 1) Expected utility is A) the maximum utility that a person can get from a set of possible outcomes.

B) the probability-weighted mean of the utility gained from a set of possible outcomes.

C) negative for risk-averse people.

D) indeterminant for risk preferring people.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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2) The key economic difference between expected utility and expected value is that A) expected value only considers the value of outcomes, whereas expected utility considers the tradeoff between value and risk.

B) expected utility only considers the value of outcomes, whereas expected value considers the tradeoff between value and risk.

C) expected utility is the maximum value obtained, whereas expect value is the mean of the values from a set of possible outcomes.

D) None of the above—the differences are mathematical, not economic.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) John derives more utility from having $1,000 than from having $100. From this, we can conclude that John A) is risk averse.

B) is risk loving.

C) is risk neutral.

D) has a positive marginal utility of wealth.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 4) A fair bet is one where A) the player has a 50/50 chance of winning.

B) the player's utility function is convex.

C) the expected value is zero.

D) the expected value is positive.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 5) Which of the following games involving the roll of a single die is a fair bet?

A) Bet $1 and receive $1 if 3 or 4 comes up.

B) Bet $1 and receive $1 if 3, 4, or 5 comes up.

C) Bet $1 and receive $4 if 6 comes up.

D) None of the bets is a fair bet.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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6) John's utility from an additional dollar increases more when he has $1,000 than when he has $10,000. From this, we can conclude that John A) is risk averse.

B) is risk loving.

C) is risk neutral.

D) has a negative marginal utility of wealth.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 7) Catherine is risk-averse. When faced with a choice between a gamble and a certain level of wealth she will A) always prefer the gamble.

B) always prefer the certain level of wealth.

C) prefer the gamble if the expected utility from it is higher than the utility from the certain level of wealth.

D) prefer the certain level of wealth if the expected utility from the gamble is higher than the utility of the certain level of wealth.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 8) Someone who is risk-averse has A) diminishing marginal utility of wealth.

B) constant marginal utility of wealth.

C) increasing marginal utility of wealth.

D) less marginal utility of wealth than someone who is risk-neutral.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 9) Rahul has a concave utility function. Therefore, if there are two choices, he will pick the ________ if ________ expected value.

A) fair bet; both have the same B) less risky choice; both have the same C) more risky choice; both have the same D) less risky choice; it has a lower Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old

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10) A risk premium A) is required to get a risk-neutral person to make a fair bet.

B) is the maximum amount needed to compensate a decision-maker to willingly take a risk.

C) is the maximum amount a decision-maker would pay to avoid taking a risk.

D) is the minimum amount a decision-maker would pay to avoid taking a risk.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 11) Natasha is going to buy a risky asset that has an expected value of $62, which yields an expected utility of 146. Equivalently, she could get utility of 146 from a certainty equivalent of $43. What is Natasha's risk premium?

A) $19 B) $43 C) $103 D) $105 Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 12) Natasha is going to buy a risky asset that has an expected value of $62, which yields an expected utility of 146. Her risk premium is $19. What is her certainty equivalent?

A) $19 B) $43 C) $81 D) $208 Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 13) If a person is risk neutral, then she A) is indifferent about taking a fair bet.

B) will pay a premium to avoid a fair bet.

C) has a horizontal utility function.

D) has zero marginal utility of wealth.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old

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14) For a risk-neutral person, the expected utility associated with various levels of wealth A) is above the person's utility function.

B) is below the person's utility function.

C) is equal to the person's utility function.

D) does not exist.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 15) Someone who is risk neutral has A) diminishing marginal utility of wealth.

B) constant marginal utility of wealth.

C) increasing marginal utility of wealth.

D) less marginal utility of wealth than someone who is risk-preferring.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 16) A person who is risk neutral will A) pay a small risk premium when making a choice.

B) pick a slightly less risky option with a slightly lower expected value.

C) pick the option with the highest expected value.

D) None of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 17) Someone who is risk preferring has A) diminishing marginal utility of wealth.

B) constant marginal utility of wealth.

C) increasing marginal utility of wealth.

D) less marginal utility of wealth than someone who is risk neutral.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old

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18) A risk-preferring person is willing to pay A) a risk premium.

B) a fee to make a fair bet.

C) to obtain decreasing marginal utility.

D) None of the above.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 19) Bob invests $75 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0. From this information we can conclude that Bob is A) risk preferring.

B) risk neutral.

C) risk averse.

D) irrational.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 20) If a person is entertained by gambling, then A) she is not risk averse.

B) she does not understand the concept of a fair game.

C) she may gamble even if it is an unfair game.

D) she will definitely not buy automobile insurance.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 21) Bob invests $50 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0. From this information we can conclude that Bob is NOT A) risk preferring.

B) risk neutral.

C) risk averse.

D) rational.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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22) Bob invests $25 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0. From this information we can conclude that Bob is A) risk preferring.

B) risk neutral.

C) risk averse.

D) Any of the above.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old

23) The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. The midpoint of the chord that runs from zero and intersects the utility function where wealth is 100, represents Bob's A) risk premium.

B) expected utility of receiving $50 with certainty.

C) expected utility of receiving $0 50% of the time and $100 50% of the time.

D) risk neutrality.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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24) The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. Bob's expected utility is A) a.

B) b.

C) c.

D) d.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 25) The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. Bob's expected wealth is A) $0.

B) $50.

C) $75.

D) $100.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 26) The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. Living with this risk gives Bob the same expected utility as if there was no chance of theft and his wealth was A) $0.

B) $20.

C) $30.

D) $50.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 27) The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. What is the most Bob would pay for insurance that would replace his $100 should it be stolen?

A) $30 B) $50 C) $70 D) $75 Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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28) The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. If Bob could keep $50 with certainty, his utility would be A) a.

B) b.

C) c.

D) d.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 29) The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. Bob is risk averse because A) his utility function is concave.

B) he has diminishing marginal utility of wealth.

C) he is willing to pay a premium to avoid a risky situation.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 30) The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. Bob is risk averse because A) his utility function is convex.

B) he has negative marginal utility of wealth.

C) he is willing to pay a premium to avoid a risky situation.

D) All of the above.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 31) The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance that it could all be stolen. Bob will buy theft insurance to cover the full $100 A) as long as it does not cost more than $25.

B) as long as it does not cost more than $50.

C) as long as it does not cost more than $70.

D) at any price.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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For the following, please answer "True" or "False" and explain why.

32) If a person is risk averse, then she has negative marginal utility of wealth.

Answer: False. The marginal utility of wealth is positive for the risk-averse person; however, marginal utility diminishes as wealth increases.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old 33) A fair game is a game in which the chances are 50-50 that you win or lose.

Answer: False. A fair game is one in which the expected value of the payoff to the player is equal to the cost of playing.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old 34) If a person willingly plays an unfair game that is NOT in his favor, he is risk loving.

Answer: False. While that could be the reason, there are others. Either the person likes gambling for entertainment reasons, or the person does not understand the probabilities associated with each payout.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old 35) What type of risk behavior does the person exhibit who is willing to pay $5 for the chance to bet $60 on a game where 20% of the time the bet returns $100, and 80% of the time returns $50?

Explain.

Answer: This person is risk preferring. The bet is fair. The expected wealth of the person is the same whether or not the bet is made. However, this person is willing to pay $5 to make this fair bet.

Skill: Analytical AACSB: Analytical Thinking Status: Old 14.3 Reducing Risk 1) Taking actions that reduce risk A) raises your expected value.

B) makes you less risk-averse.

C) is impractical in most circumstances.

D) changes your utility function.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old

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2) Searching the Internet for information to help select a product that is more reliable is most likely to be done by a A) risk-averse person.

B) risk-neutral person.

C) risk-preferring person.

D) This cannot be determined with the information provided.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) Making many risky bets A) reduces your expected value.

B) is called risk-pooling and can reduce risk.

C) is irrational.

D) is called risk pooling and increases your expected value.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 4) If Stock A and Stock B both increase in value at the same time, they are A) negatively correlated.

B) uncorrelated.

C) positively correlated.

D) certain bets.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 5) If Stock A and Stock B both decrease in value at the same time, they are A) negatively correlated.

B) uncorrelated.

C) positively correlated.

D) bad bets.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old

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6) If Stock A increases in value when Stock B decreases in value at the same time, they are A) negatively correlated.

B) uncorrelated.

C) positively correlated.

D) in different industries.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 7) If Stock A sometimes increases and sometimes decreases in value when Stock B increases in value at the same time, they are A) negatively correlated.

B) uncorrelated.

C) positively correlated.

D) random bets.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 8) If Stock A sometimes increases and sometimes decreases in value when Stock B decreases in value at the same time, they are A) negatively correlated.

B) uncorrelated.

C) positively correlated.

D) random bets.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 9) The ability of diversification to reduce risk A) is greater the more negatively correlated the two events are.

B) is greater the more positively correlated the two events are.

C) is greater the more uncorrelated the two events are.

D) is greater the more risk averse the individual is.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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10) If two events are perfectly positively correlated, then A) diversification is not necessary since there is no risk.

B) diversification eliminates all risk.

C) diversification does not reduce risk at all.

D) diversification only cuts the risk in half.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) If two events are perfectly negatively correlated, then A) diversification can reduce but not eliminate risk.

B) diversification can eliminate risk.

C) diversification has no impact on risk.

D) diversification cuts risk in half.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 12) If two events are positively correlated but NOT perfectly correlated, then A) diversification is not necessary since there is no risk.

B) diversification eliminates all risk.

C) diversification does not reduce risk at all.

D) diversification can reduce risk.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 13) Buying a diversified mutual stock fund allows you to A) completely avoid all types of risk.

B) avoid only random, unsystematic risk.

C) avoid only systematic risk.

D) avoid risk only when all the stock prices are perfectly correlated.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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14) In terms of the stock market, systematic risk refers to the fact that A) some stocks have higher returns than others.

B) some stocks' returns have a higher variance than others.

C) all stock prices are correlated with the health of the economy.

D) most stock prices are perfectly negatively correlated.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 15) A stock mutual fund is generally A) less risky than buying individual stocks.

B) more risky than buying individual stocks.

C) just as risky as buying individual stocks.

D) a way for the rich to avoid taxes.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 16) A stock mutual fund's primary advantage is to allow A) investors to diversify away systematic risk.

B) investors to diversify away all risk.

C) investors to diversify away idiosyncratic risk.

D) the rich to avoid taxes.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 17) Which of the following helps to reduce risk?

A) Purchasing insurance B) Obtaining more information C) Diversifying D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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18) Fair insurance A) has an expected value for the policy holder of zero.

B) has a positive expected value for the insurance company.

C) has very high insurance premiums.

D) is available only to those who fully insure.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 19) If your risk of losing your house to catastrophe is 25%, how much would fair insurance cost if your home were worth $1,000,000?

A) $250,000 B) $750,000 C) $1,000,000 D) Unable to determine with the information given.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 20) Insurance companies do NOT offer fair insurance because A) they are run by greedy capitalists.

B) they could not stay in business.

C) they cannot diversify their risks.

D) they are risk-avoiding.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 21) Insurance companies offer only unfair insurance because A) they are run by greedy capitalists.

B) they can fool customers into buying it.

C) they have operating costs.

D) their risks are positively correlated.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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22) Many people do NOT fully insure against risk because A) they are risk averse.

B) the insurance companies are all crooks.

C) the insurance offered is less than fair.

D) the insurance offered is more than fair.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 23) If fair insurance is offered to a risk-averse person, she will A) buy enough insurance to eliminate all risk.

B) not buy any insurance because it is overpriced.

C) not buy any insurance since the marginal utility of the amount of the payment is positive.

D) buy enough insurance to cover about half of the possible loss.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 24) Which of the following losses to an individual would an insurance company NOT cover?

A) The person's automobile is stolen.

B) Fire destroys the person's home.

C) The person's father dies.

D) The person's country is invaded.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 25) Insurance companies do NOT cover losses that would A) happen to all of the policyholders at once.

B) happen with a very low probability.

C) happen to just a handful of policyholders.

D) happen with uncertainty.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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26) After Hurricane Katrina, there was considerable public outrage that many of the properties were not insured against flooding although they were insured against wind damage. What might explain these different approaches to insurance?

A) The risk of wind damage is potentially diversifiable, but the risk of flooding is not.

B) The risk of flood damage is potentially diversifiable, but the risk of wind damage is not.

C) predatory insurance policies D) Neither the risk of wind damage nor the risk of flooding is diversifiable.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 27) Farmers who purchase insurance against crop failures tend to be pooled with farmers far away. Why might this be the case?

A) The weather in a single geographic area represents idiosyncratic risk, which is diversifiable.

B) The weather in a single geographic area represents systematic risk, which is not diversifiable.

C) The weather in far-flung geographic areas represents systematic risk, which is not diversifiable.

D) The weather in far-flung geographic areas are commonly positively correlated.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 28) If global warming began to cause random world-wide damage to crops, insurance companies A) would insure against specific crop failures.

B) would not insure against specific crop failures.

C) would be indifferent between insuring or not.

D) would find themselves facing prosecution for ignoring the problem for so long.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old

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29) What is one reason the federal government might "bail out" farmers in flood prone areas of the country?

A) Such flooding is not diversifiable and therefore only non-profit entities, such as the federal government, can cover the risks.

B) Such flooding is diversifiable, but insurance company CEOs are more concerned with their stock-holder wealth than the well-being of farmers.

C) Such flooding is diversifiable, but the market for such insurance policies cannot clear without the assistance of the International Community.

D) Such flooding is known to happen on a regular basis and therefore there is no "risk" to be insured against.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 30) Explain why insurance companies usually do NOT offer earthquake insurance.

Answer: Insurance companies diversify their risk by covering many people who mostly have uncorrelated expected losses. However, an earthquake usually causes losses to many people in an area. Thus, earthquake losses are very much positively correlated and cannot be easily diversified. Insurance companies do not want to face losses they cannot easily diversify.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old 14.4 Investing Under Uncertainty 1) A risk-neutral person will invest in a project by examining if A) the expected utility associated with the project is positive.

B) the marginal utility associated with the project is positive.

C) the expected value is positive.

D) All of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) If an individual makes her investment decisions based solely on the Expected Value criterion, one can conclude that she is A) risk averse.

B) risk neutral.

C) risk loving.

D) extremely wealthy.

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3) A risk-neutral individual will make investment decisions purely based on expected value because A) she doesn't care about utility.

B) utility is a linear function of wealth.

C) she loves to take risk.

D) expected value is always more than expected utility.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) Risk-averse individuals make risky investments A) never.

B) when the investment's expected return exceeds the return on a non-risky investment.

C) when the investment's expected return adequately compensates for the risk.

D) only when they are feeling irrational.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) With regards to an investment project, which of the following is TRUE? A) A risk-neutral individual is more likely to invest than a risk-averse individual.

B) A risk-neutral individual is more likely to invest than a risk-loving individual.

C) A risk-neutral individual is less likely to invest than a risk-averse individual.

D) Not enough information is given.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 14.5 Behavioral Economics and Uncertainty 1) Behavioral economics under uncertainty documents that A) people's behavior often differs from what standard expected utility theory predicts.

B) people's behavior can change with their circumstances.

C) people might put considerable weight on certain outcomes.

D) All of the above.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old

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2) The gambler's fallacy suggests that what happened in the past will influence the present.

Suffering from the gambler's fallacy is most likely TRUE in which of the following situations?

A) flipping cards from a single deck B) tossing a fair coin C) the quality of play of a baseball team D) horse racing Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 3) The gambler's fallacy is A) true in many games, such as flipping coins.

B) a result of overconfidence.

C) the false belief that past events affect current dependent outcomes.

D) the false belief that past events affect current independent outcomes.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 4) If you have flipped a fair coin and tails has come up 49 times in a row, what are the odds that the next flip will be a tail?

A) 0 B) 1/50 C) 1/25 D) 1/2 Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 5) If you have flipped a fair coin and tails has come up 49 times in a row, what are the odds that the next flip will be a head?

A) 1/50 B) 1/25 C) 1/2 D) 1 (100%) Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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6) A jar has 20 red jelly beans and 40 black jelly beans. If you pick a red jelly bean and put it back, what are the odds of picking a black jelly bean next?

A) 20/40 B) 20/60 C) 40/60 D) 1 (100%) Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 7) A jar has 20 red jelly beans and 40 black jelly beans. If you pick a red jelly bean and put it back, what are the odds of picking a red jelly bean next?

A) 20/40 B) 20/60 C) 40/60 D) 0 Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 8) Sports announcers often refer to a baseball batter in a hitting slump as "being due." If they are correct, then it must be the case that A) a batter's hits are randomly distributed.

B) a batter's at-bats are related to each other.

C) a batter's at-bats are independent of each other.

D) baseball players are acting irrationally.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 9) What is one reason a gambler might bet $1,000 that a team that is ranked sixteenth will win the NCAA basketball tournament?

A) irrationality B) overconfidence C) exuberance D) gambler's fallacy Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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10) Politicians often highlight the plight of a single individual as a reason to support a particular project or agenda. In this case, politicians are using A) the Kahneman effect.

B) the Allais effect.

C) framing.

D) prospect theory.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) Framing often causes people to A) violate expected utility theory.

B) go to prison.

C) fall afoul of the certainty effect.

D) become risk averse.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 12) According to the reflection effect, A) people think harder about losses than about gains.

B) people become more risk preferring over time.

C) attitudes toward risk are reversed for gains versus losses.

D) subjective probabilities on riskier outcomes are weighted heavier than on less risky outcomes.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 13) According to ________, people are often risk averse when it comes to gains and risk preferring when it comes to losses.

A) prospect theory B) the reflection effect C) the certainty effect D) the framing effect Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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14) The certainty effect shows that A) people are overconfident about their choices.

B) people prefer certain outcomes to uncertain outcomes even when the expected value of the uncertain outcome is lower.

C) people prefer certain outcomes to uncertain outcomes even when the expected value of the uncertain outcome is higher.

D) people prefer certain outcomes to uncertain outcomes even when the expected values are the same.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 15) Prospect theory can explain why A) people tend to gamble on long odds with small expected utility.

B) people tend to sell their losing stocks and keep their winning stocks.

C) people should only sell their losing stocks.

D) people should never play the lottery.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 16) One aspect of prospect theory is that people tend to A) be very risk averse to large gains.

B) be very risk averse to losses.

C) love losses more than gains.

D) hate gains regardless of potential losses.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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Managerial Economics and Strategy, 3e (Perloff/Brander) Chapter 15 Asymmetric Information 15.1 Adverse Selection 1) Adverse selection is due to A) hidden characteristics.

B) hidden actions.

C) symmetric information.

D) moral hazard.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 2) Asymmetric information occurs when A) everyone has the same information.

B) one person in a transaction has more information than the other.

C) people engaging in a transaction are uncertain about future events.

D) the information available to the people in a transaction is misleading or incomplete.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 3) Adverse selection can occur when A) all persons involved in a transaction have full information.

B) one person has information not available to others.

C) post-agreement incentives result in workers shirking.

D) nobody has any information about a particular product.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) Adverse selection occurs when there is A) full information.

B) unobserved behavior.

C) an unobserved characteristic.

D) a worker who shirks because his boss does not watch him.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old

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5) Opportunism may occur when A) both parties have limited information.

B) both parties have full information.

C) one party has information the other does not.

D) All of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) What is one of the most important benefits of the Internet?

A) The Internet has increased asymmetric information.

B) The Internet has reduced asymmetric information.

C) The Internet has increased moral hazard.

D) The Internet has increased transaction costs.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 7) If adverse selection exists in a market, A) it increases consumer surplus but reduces producer surplus.

B) it reduces consumer and producer surplus.

C) it reduces producer surplus but has no impact on consumer surplus.

D) it increases both consumer and producer surplus.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) If adverse selection exists in a market, A) the government steps in and shuts it down.

B) the market is considered a "grey market."

C) consumers may not participate in the market at all.

D) total surplus is maximized.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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9) A person practices poisonous snake charming and does not reveal this to her health insurance company before purchasing insurance. This is an example of A) moral hazard.

B) adverse selection.

C) signaling.

D) screening.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 10) In the automobile insurance market, adverse selection occurs when A) drivers with greater risks buy a policy with large deductibles.

B) drivers with greater risks buy a policy with no deductibles.

C) uninsured drivers drive recklessly.

D) insured drivers drive recklessly.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) Adverse selection occurs when A) a person takes more risks that are not known to the life insurance company because he has life insurance.

B) a person buys life insurance because he has a risky lifestyle that is not known to the life insurance company.

C) a person is a risk lover.

D) pregnant women with health insurance make more doctor visits than uninsured pregnant women.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 12) If reckless drivers are more likely to buy automobile insurance than safe drivers are, A) a moral hazard has occurred.

B) adverse selection has occurred.

C) the market for insurance is efficient.

D) then automobile insurance will be fairly priced.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: New

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13) If a health insurer charges a rate equal to the average cost of health care for the entire population, then it is likely that A) everyone buys health insurance.

B) unhealthy people will not buy health insurance.

C) healthy people will not buy health insurance.

D) nobody will buy health insurance.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 14) The quality of a product A) is usually unknown to the seller and the buyer.

B) leads to adverse selection.

C) creates noise in a market.

D) is a hidden characteristic.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 15) In the market for used cars, A) the market is efficient because the cars are bought by the people who value them the most.

B) the market is inefficient because lemons drive out the high quality cars.

C) no cars are sold, because people don't like buying lemons.

D) Not enough information to determine.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 16) If information in the market for used motorcycles is symmetric and both buyers and sellers are equally ignorant, then A) the market is efficient.

B) both good and bad motorcycles will sell for the same price.

C) if only good motorcycles are sold, the price would be higher.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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17) If all used cars in a market with symmetric information about quality are sold at the same price, then A) sellers of good quality cars are subsidizing sellers of lemons.

B) buyers of good quality cars are subsidizing buyers of lemons.

C) sellers of lemons are subsidizing sellers of good quality cars.

D) sellers of good quality cars are subsidizing buyers of lemons.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 18) In the market for used cars, if there is asymmetric information yet all cars sell for the same price, A) there is an efficiency problem and there are equity implications.

B) there is no efficiency problem, but there are equity implications.

C) buyers of lemons win at the expense of buyers of good cars.

D) there is no efficiency problem and there are no equity implications.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: New 19) In the market for used cars, if buyers and sellers have perfect information about the quality of cars, then A) all cars will sell for the same price and there is no asymmetric information problem.

B) all cars will sell for the same price and there is an asymmetric information problem.

C) cars sell for their true value and there is no asymmetric information problem.

D) all cars will sell for the same price and there is a moral hazard problem.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 20) Asymmetric information will always cause A) efficiency problems.

B) equity problems.

C) Both A and B. D) None of the above.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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21) If a firm can sell essentially the same product with the same quality under different brand names that have different perceived quality, the firm A) has a moral hazard problem.

B) benefits from asymmetric information.

C) creates an arbitrage opportunity.

D) is engaging in unfair trading practices.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: New 15.2 Reducing Adverse Selection 1) One method for solving the adverse selection problem is A) to restrict the ability of the party with information from taking advantage of hidden information.

B) by having the government run all firms.

C) to close down firms with bad reputations.

D) All of the above.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) Firms that seek to avoid hiring lazy workers that assert they are hardworking are trying to avoid A) adverse selection.

B) moral hazard.

C) screening.

D) signaling.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) Assume Health Insurance is provided universally by the government. This would A) eliminate the problems of adverse selection.

B) result in adverse selection.

C) eliminate the problems of moral hazard.

D) All of the above.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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4) The requirement that all drivers must carry auto insurance reduces A) moral hazard.

B) the effectiveness of signaling.

C) adverse selection.

D) the chance of auto accidents.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) Which of the following is a method for solving the problem of adverse selection?

A) Truth-in-advertising laws B) Product liability laws C) Food labeling requirements D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New 6) An uninformed party can use ________ to learn about the information held by the informed party.

A) signaling B) screening C) a warranty D) product liability laws Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: New 7) If a life insurance company does NOT require a medical exam of its policyholders, it is most likely that the company A) charges above-average premiums.

B) charges below-average premiums.

C) charges no premiums.

D) has only very healthy policyholders.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old

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8) Life insurance companies often give applicants a physical examination to prevent A) the person from dying before obtaining the policy.

B) signaling.

C) adverse selection.

D) profit maximization.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 9) Some companies subject their applicants to extensive tests. Why? A) To reduce the informational asymmetry between the firm and the applicant.

B) To screen the applicant to avoid the problem of adverse selection.

C) To gather more information about the applicant.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New 10) If bad drivers can usually avoid being ticketed by the police, then insurance companies will A) use drivers' driving record as a signal.

B) use drivers' driving record as a screening device.

C) not be able to use drivers' driving record as a screening device.

D) request driving records directly from the police and not from the individual applicant.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) A physical examination is NOT a good screening device for life insurance companies if A) life-threatening diseases are usually undetected.

B) doctors cannot be easily bribed to write a good report.

C) medical history is a good predictor of life expectancy.

D) one's current state of health is a good predictor of life expectancy.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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12) If the government provides universal health insurance, what screening process will the government need?

A) It won't need a screening test.

B) It will only give health insurance to non-smokers.

C) It won't use screening tests, but it will use statistical discrimination.

D) It won't use screening tests, but it will use signals.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 13) To reduce adverse selection, A) firms can use screening.

B) both consumers and firms can use screening.

C) the government could eliminate all monopolies and oligopolies.

D) Both B and C. Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 14) A consumer could screen the quality of a pizza joint by A) asking friends.

B) using online rating sites.

C) watching the chef prepare the pizza.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 15) An informed party can use ________ to give information to an uninformed or lesserinformed party.

A) signaling B) screening C) an individual mandate D) rating sites Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: New

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16) Signals solve the adverse selection problem A) if the signal is an advertisement placed in the New York Times or other top-tier publication.

B) only if the signal is viewed as credible.

C) when the signal is expensive to produce.

D) if the signaling firm is known to be a profit-maximizer.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 17) If a student achieves a high SAT score, this A) sends a signal to a college that the applicant will be a good college student.

B) does not act as a screening device.

C) is a moral hazard.

D) provides a college with no information.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 18) A college education can be a signal because A) a college education is expensive.

B) those who graduate college have successful parents, and are therefore also likely to be successful.

C) highly capable people are more likely to finish college than those with low capabilities.

D) college teaches useful skills and gives valuable training.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 19) Used car buyers will believe that a car is of good quality when the seller signals the car's high quality by offering a warranty when A) a warranty on a lemon is costly to the seller.

B) warranties are offered on all cars.

C) warranties are only offered on lemons.

D) a warranty on a good car is a false signal.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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20) What role does a company like J.D. Power (which provides product satisfaction reviews) serve?

A) It provides a screening test.

B) It provides a signal of quality.

C) It reduces moral hazard.

D) It reduces costs of giving surveys.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 21) Why would a firm prefer that a company like J.D. Power (which provides product satisfaction reviews) review its product rather than doing it within the firm?

A) J.D. Power provides less credibility.

B) J.D. Power provides greater credibility.

C) J.D. Power is more honest than the average firm.

D) J.D. Power has a government monopoly in providing product satisfaction reviews.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 22) Which firm provides the better signal when trying to decide which of the firms' stock to buy?

A) Firm A, which uses an independent accounting firm for auditing.

B) Firm B, which uses an internal group for auditing.

C) Firm C, which has seen its stock go up by $20 per share in the last week.

D) Firm D, which hasn't been under SEC investigation for over 5 years.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 23) Which of the following reduces the effects of asymmetric information?

A) Repeat purchases B) Warranties C) Building a reputation D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New

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24) eBay has a seller reputation system to provide A) consumers with a signal concerning seller quality.

B) sellers a chance to signal other sellers concerning their quality.

C) a reduction in monopoly power.

D) improvements in investor relations.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 25) What is one reason the eBay seller reputation system is important?

A) eBay transactions tend to be isolated, one-off transactions.

B) eBay transactions tend to be repeat sales between the same seller and buyers.

C) eBay transactions often involve stolen products.

D) eBay transactions require a larger percentage than, say, Amazon transactions.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 26) The Department of Transportation certifies motorcycle helmets, and all helmets certified carry a "DOT" logo. This is an example of A) government overreach.

B) screening.

C) signaling using established standards.

D) licensing to restrict entry by helmet manufacturers.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 27) Requiring that barbers have licenses, restricts entry and A) raises the average quality of haircuts.

B) increases the costs of getting a haircut.

C) may increase or decrease welfare.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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28) Restricting entry to a profession through licensing or certification requirements A) increases welfare.

B) decreases welfare.

C) may increase or decrease welfare.

D) leaves welfare unchanged.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old For the following, please answer "True" or "False" and explain why.

29) Signals can help prevent adverse selection as long as a false signal is costly to the person sending it.

Answer: True. If false signals can be made at little cost to the perpetrator, the signals are meaningless. Signals are believed only when they are credible.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old 30) How can a warranty at the seller's expense signal that a product is of high quality?

Answer: If the product is of low quality, the warranty would be very costly to the seller since a low-quality product would need more repairs than a high-quality product.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old 31) Explain how product liability laws can reduce adverse selection.

Answer: Product liability laws force producers to compensate consumers that purchase a defective product. This eliminates the producer's ability to profit from asymmetric information.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old 32) Explain why some people who are applying for a job at a bank dress up, arrive early, and have their paperwork neatly completed for the job interview.

Answer: They are trying to eliminate adverse selection. These people are trying to signal that they would be a high-quality worker for the position at the bank.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old

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15.3 Moral Hazard 1) Moral hazard is due to A) hidden characteristics.

B) hidden actions.

C) symmetric information.

D) adverse selection.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 2) A person starts practicing poisonous snake charming after signing a contract with a health insurance company. This is an example of A) moral hazard.

B) adverse selection.

C) signaling.

D) screening.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) Assume health insurance is provided universally by the government. This would A) force every taxpayer to bear the costs of adverse selection.

B) force every taxpayer to bear the costs of moral hazard.

C) force the government to deal with adverse selection problems.

D) force foreign governments to deal with moral hazard problems.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 4) What is one potential problem with nationalized health care?

A) It might not reduce moral hazard.

B) It is guaranteed to solve the principal-agent problem.

C) It would be efficient in risk bearing.

D) It might cost too much.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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5) When a person has health insurance, they often have to pay nothing or very little (called a "copay") to see a doctor. This might result in A) their being overly healthy.

B) a principal-agent problem.

C) some moral hazard, since people might overuse the benefit.

D) an adverse selection problem.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) In a principal-agent relationship, moral hazard might occur if A) the agent can hide his actions from the principal.

B) the principal and agent are married.

C) payoffs are based on a state of nature.

D) the principal can hide her actions from the agent.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 7) If a principal and agent have an efficient contract, then A) one of them must be more risk-averse than the other.

B) neither can be made better off without harming the other.

C) they must have symmetric information.

D) the principal bears more of the risk.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 8) The agency problem can be avoided if A) the firm is not subject to regulation by a government agency.

B) the manager and owner can manipulate reported profit.

C) the firm has positive profits.

D) the goals of the owner and manager are aligned.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New

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9) A conflict between an owner and a manager may occur when A) the manager earns more when the firm has higher profits.

B) the manager is seeking to maximize leisure time.

C) the owner can easily observe the manager slacking off and punish him accordingly.

D) the firm is very small and the manager must perform multiple tasks.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: New 10) One problem with compensation systems is that A) sometimes a manager is rewarded for an objective other than maximizing profits.

B) managers are often paid too much.

C) owners sometimes want to pursue social objectives.

D) the Dodd-Frank Act of 2010 requires shareholder votes on compensation that are nonbinding.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: New 11) In a store that sells souvenirs, suppose an agent receives a $1 commission for each unit sold, and the principal receives the residual profit. As a result, A) joint profit is maximized.

B) the agent will sell until the principal's marginal cost equals $1.

C) no agent would enter into such a contract.

D) the agent wishes to sell as many units as he can.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 12) Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will be paid a fixed fee. Under this contract, A) efficiency is achieved.

B) the client bears all of the risk.

C) the lawyer has an incentive to lie about his hours worked.

D) All of the above.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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13) Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will be paid by the hour. Under this contract, A) efficiency is not achieved.

B) the client bears all of the risk.

C) the lawyer has an incentive to lie about his hours worked.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 14) Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will receive a share of the settlement if the plaintiff wins. Under this contract, A) efficiency cannot be achieved.

B) the client bears all of the risk.

C) the lawyer bears all of the risk.

D) the risk is shared.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 15) Suppose a plaintiff hires a lawyer to represent her in a court case. To which of the following contracts would a highly risk-averse plaintiff agree?

A) The lawyer is paid by the hour.

B) The lawyer receives a share of the settlement.

C) The lawyer receives a fixed fee.

D) The lawyer pays the client a fee for the right to the entire settlement.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 15.4 Using Contracts to Reduce Moral Hazard 1) In the presence of asymmetric information, a fixed-fee contract A) achieves production efficiency.

B) can lead to opportunistic behavior on the part of the agent.

C) is impossible to write.

D) will result in the principal earning all of the profit.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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2) If a principal and agent enter into a fixed-fee contract where the agent is paid a fixed wage, A) the principal bears all the risk.

B) the agent bears all the risk.

C) the principal and agent share the risk.

D) Unable to determine with the information given.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) If a principal and agent enter into a fixed-fee contract where the agent pays the principal a licensing fee, A) the principal bears all the risk.

B) the agent bears all the risk.

C) the principal and agent share the risk.

D) Unable to determine with the information given.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) Under which one of the following contracts does an agent have the least incentive to behave opportunistically?

A) The agent pays a fixed fee to the principal for the right to all future payoffs.

B) The agent works for the principal on an hourly basis.

C) The agent receives a share of the profit.

D) The agent works for the principal on a per unit basis.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) If an agent is risk neutral and a principal is risk averse, which of the following contracts would be efficient in risk bearing?

A) A fixed fee is paid to the agent.

B) A fixed fee is paid to the principal.

C) An hourly rate is paid to the agent.

D) The agent enjoys a share of the profit.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old

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6) If an agent is risk averse and a principal is risk neutral, and if the agent pays the principal a fixed fee, A) all risk is eliminated.

B) the risk neutral person bears all the risk while the risk averse person bears none.

C) the risk averse person bears all the risk while the risk neutral person bears none.

D) the principal and agent share risk equally.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 7) In the presence of asymmetric information, a contingent contract A) achieves production efficiency.

B) can lead to opportunistic behavior on the part of the agent.

C) is impossible to write.

D) will result in the principal earning all of the profit.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) Contingent contracts A) are inefficient when monitoring is possible.

B) equally divide the risk between principal and agent.

C) can be used when monitoring is not reasonably possible.

D) put the risk on the principal.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 9) In a contingent contract, A) the risk-neutral party bears the risk.

B) monitoring is not possible.

C) the principal will be at a disadvantage.

D) the payoffs are dependent upon another variable, such as revenue or profit.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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10) Which of the following is most likely to be a feature of a state-contingent contract?

A) The agent pays the principal a higher licensing fee when demand is high compared to when demand is low.

B) The agent makes the same wage regardless of demand.

C) The agent, who lives in Nevada, earns more money on out-of-state sales (e.g., sales to California or New York) than in-state sales.

D) The restaurant owner (principal) pays the waiter (agent) more when it is snowing or raining outside.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 11) Which of the following would be considered a contingent contract?

A) A piece rate contract B) A profit-sharing contract C) A contact with a bonus D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New 12) Which of the following is most likely to be a feature of a contingent contract?

A) A CFO is paid $250,000 if he does a good job.

B) A VP of Sales is given options as part of her salary.

C) Both A and B. D) None of the above.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 13) A common incentive owners offer managers is A) the year-end bonus.

B) stock options.

C) profit sharing.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New

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14) Stock options A) are a type of contingent reward.

B) allow you to pay people only $1 in salary.

C) force CEOs to try and maximize the share price in the short run.

D) All of the above.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: New 15) In the presence of asymmetric information, a piece-rate contract A) is not as good as a contract based on commissions.

B) can lead to agents producing more output than would occur under a fixed-rent-paid-to-theprincipal contract.

C) is impossible to write.

D) will result in the principal earning all of the profit.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 16) In which type of contract is the agent paid per unit of output?

A) A commission-based contract.

B) A sharecropping contract.

C) A piece rate contract.

D) A contract with stock options as salary.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 17) In which type of contract does the agent receive a share of revenues earned?

A) A commission-based contract.

B) A sharecropping contract.

C) A piece rate contract.

D) A contract with stock options as salary.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: New

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18) Suppose a plaintiff hires a lawyer to represent her in a court case. Under which of the following contracts is efficiency in risk bearing assured?

A) The lawyer is paid by the hour.

B) The lawyer receives a share of the settlement.

C) The lawyer receives a fixed fee.

D) It is impossible to determine without the degree of risk aversion for each.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 19) Author A accepts a $5,000 advance from a publisher and a 10% royalty after 5,000 books are sold. Author B foregoes the publisher's advance and negotiates for a 15% royalty on all books sold. Author C decides to self-publish his book and keep 100% of all sales revenue. In what order of risk aversion (from most to least) would you rank these authors?

A) Author A, Author B, Author C B) Author A, Author C, Author B C) Author B, Author A, Author C D) Author C, Author B, Author A Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 20) Author A accepts a $5,000 advance from a publisher and a 10% royalty after 5,000 books are sold. Author B foregoes the publisher's advance and negotiates for a 15% royalty on all books sold. Author C decides to self-publish his book and keep 100% of all sales revenue. Which of these authors is most likely to have 10 books published?

A) Author A B) Author B C) Author C D) They are all equally likely.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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21) Author A accepts a $5,000 advance from a publisher and a 10% royalty after 5,000 books are sold. Author B foregoes the publisher's advance and negotiates for a 15% royalty on all books sold. Author C decides to self-publish his book and keep 100% of all sales revenue. Which of these authors expects to sell the fewest books?

A) Author A B) Author B C) Author C D) They are all equally likely.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 15.5 Using Monitoring to Reduce Moral Hazard 1) Monitoring is often used by firms in an attempt to decrease A) shirking.

B) piece rates.

C) adverse selection.

D) signaling.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) Shirking is most likely to occur when A) the principal monitors the agents extensively.

B) employees are paid an hourly wage.

C) a piece rate contract is used.

D) an assembly line is used for production.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) Many companies monitor their employees' Internet use and email. Why might they be doing this?

A) Because they like to spy.

B) In order to improve morale.

C) To gain inside information on new consumer trends.

D) To reduce shirking.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old

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4) The ability of employees to ________ might reduce the possibility or effectiveness of monitoring.

A) use the Internet B) complain to management C) telecommute D) change jobs Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 5) Firms use hostages A) to force employees to work.

B) to encourage good behavior.

C) to get employees to work for less money.

D) None of the above.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) Which of the following acts as a hostage for employees to behave well?

A) On-site childcare where employees take their children while working B) Performance bonuses C) Training D) Bonding Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New 7) Which of the following acts as a hostage for employees to behave well?

A) Deferred payments B) Efficiency wages C) Bonding D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New

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8) If a firm has established monitoring devices that have a 50% chance of detecting shirking, and an employee gains $5,000 from shirking, the employer can deter shirking by having employees post a bond equal to A) $2,500.

B) $5,000.

C) $10,000.

D) $50,000.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 9) As the probability of detecting shirking increases, the size of the bond necessary to deter shirking A) also increases.

B) stays the same.

C) decreases.

D) increases at an exponential rate.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 10) Which of the following workers is most likely to be asked to post a performance bond?

A) Construction contractor B) Fast-food worker C) Economics professor D) Book author Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: New 11) Which of the following workers is most likely to be asked to post a performance bond?

A) Car salesperson B) firefighter C) Armored car guard D) Basketball coach Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: New

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12) The benefit to employers of deferred payments is that A) adverse selection is eliminated.

B) employers cannot engage in any opportunistic behavior.

C) these payments raise the cost of being fired, so more monitoring is needed.

D) these payments raise the cost of being fired, so less monitoring is needed.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 13) One drawback of deferred payments is that A) employees may shirk anyway.

B) employers might fire high achievers to avoid paying higher wages or bonuses.

C) it is difficult to determine who are the good and who are the bad workers.

D) employees have to work for the firm for a long time.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 14) If a professional sports athlete signs a new contract which defers compensation until years after she is retired, she is signaling A) that she does not plan to shirk in the future, regardless of whether she did so in the past.

B) that she did shirk and she will do so in the future.

C) that she did shirk but won't do so in the future.

D) that she didn't shirk and she won't do so in the future.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 15) An efficiency wage is A) lower than a living wage.

B) unfair to employers.

C) a wage rate above the employees' opportunity cost.

D) unlikely to be paid when monitoring is available.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old

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16) Which of the following would NOT be used by firms to deter shirking?

A) Requiring employees to post a bond B) Offering a bonus after five years of service C) Paying more than the market wage D) Paying less than the market wage Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 17) An efficiency wage premium serves the same function as a bond because, just as with a bond, the premium represents A) the amount the employee loses if caught shirking.

B) the expected value of the amount the employee loses if he shirks.

C) the cost of monitoring the employee.

D) the gain to the employee if he shirks.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 18) A profit-maximizing firm that uses an efficiency wage and monitors will increase the wage it pays its workers until A) the worker requires no monitoring.

B) the worker receives the market wage and requires full-time monitoring.

C) the cost of monitoring the worker equals the efficiency wage.

D) the change in the workers' productivity from being monitored times the per time unit cost of monitoring equals one.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 19) If an additional dollar spent on monitoring would reduce shirking by 10 minutes, then the firm will increase the worker's wage by $1 if this caused A) shirking to increase by less than 10 minutes.

B) shirking to decrease by more than 10 minutes.

C) shirking to decrease by less than 10 minutes.

D) monitoring to become unnecessary.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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20) If all firms pay an efficiency wage, then A) there is no cost to shirking because the shirking worker can receive his high wage at another firm after being caught and fired.

B) the macroeconomy would enjoy a prolonged period of near-zero unemployment.

C) there is a cost to shirking because the efficiency wage is less than it would have been if only a few firms paid it.

D) there is a cost to shirking because the shirking worker will spend a greater time unemployed after being caught and fired.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 21) Monitoring of employees A) is only effective while the employees are working, so that payment may be withheld for shirking.

B) can be effective after-the-fact if the shirking behavior can be detected later and the employee punished.

C) is only effective after-the-fact when it is possible to fire them for shirking.

D) None of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 22) Monitoring a manager can be difficult if A) the owner and manager do not have an enforceable contract.

B) the owner cannot easily observe the manager's actions.

C) the manager doesn't have to use a time clock.

D) the board does not have enough outside directors.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: New 23) If manager performance is easily observable, then A) profits will be maximized for the firm.

B) the owner can directly reward the manager.

C) the manager will attempt to manipulate the reported profit.

D) the firm's stock price will go up.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: New

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For the following, please answer "True" or "False" and explain why.

24) When shirking at the workplace occurs, increased monitoring of workers is the only effective way to reduce this behavior.

Answer: False. There are other means of reducing shirking, such as an efficiency wage, bonding workers, or screening applicants.

Skill: Conceptual AACSB: Written and Oral Communication Status: Old 25) Suppose employees pay a bond of $1,000 to an employer. The gain from shirking is $400.

Monitoring devices have been installed so that there is a 50% chance of being caught if you are shirking. The company is considering the installation of additional monitoring devices to increase the chance of catching a shirker to 100%. They feel this is needed to deter all shirking.

What is your recommendation to the company? Explain.

Answer: Shirking is already deterred; the company does not need any more monitoring devices.

The employee gains $400 by shirking but has an expected loss of $500 (loses $1,000 with 50% probability).

Skill: Analytical AACSB: Analytical Thinking Status: Old

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Managerial Economics and Strategy, 3e (Perloff/Brander) Chapter 16 Government and Business 16.1 Market Failure and Government Policy 1) Who said "If it moves, tax it. If it still moves, regulate it. If it stops moving, subsidize it."?

A) Barack Obama B) Ronald Reagan C) Vilfredo Pareto D) Adam Smith Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 2) When discussing rules that governments use to intervene in a market, we can take a(n) ________ approach where we discuss what governments should do, or a ________ approach where we discuss what governments actually do.

A) normative; positive B) positive; normative C) optimistic; cynical D) bipartisan; normative Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) Market failures ________ and generate ________.

A) compel the government to act; regulations B) create monopolies or oligopolies; deadweight loss C) reduce economic efficiency; deadweight loss D) create deadweight loss; externalities Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) A main rationale for government intervention in markets ________ and ________.

A) is to reduce producer surplus; redistribute wealth B) concerns the creation of public goods; reduces free-riding C) is to correct market failures; increase surplus D) There is never an economic rationale for government intervention.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 1 Copyright © 2020 Pearson Education, Inc.

5) The argument that society should be in favor of changes that benefit some people without making others worse off is known as A) a positive externality.

B) the Coase Theorem.

C) the cost-benefit principle.

D) the Pareto principle.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 6) If a government policy increases benefits to the unemployed without having a detrimental effect on any other constituent, the policy is A) a Pareto improvement.

B) redistributive.

C) regressive.

D) a positive externality effect.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 7) Which of the following statements is TRUE? A) A government policy that eliminates a market failure, but only some people gain while others are kept the same, is not a Pareto improvement.

B) A government policy that eliminates a market failure, but only some people gain while others are kept the same, is a Pareto improvement.

C) A government policy that eliminates a market failure and some people gain and some lose only a little, is a Pareto improvement.

D) A government policy that generates a Pareto improvement eliminates all deadweight loss.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 8) Which of the following is a Pareto improvement?

A) A monopolist loses its monopoly when a government policy allows another firm to enter the market, resulting in lower prices and higher quantity available for consumers.

B) A government policy is implemented that results in the middle class being better off, and the very rich only have to pay a little bit more in taxes.

C) A government policy removes a market failure.

D) None of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 2 Copyright © 2020 Pearson Education, Inc.

9) If a government policy change harms a monopolist, the government could A) tax those who get additional gains and compensate the monopolist, thereby making the change a Pareto improvement.

B) increase the general tax rate and compensate the monopolist, thereby making the change a Pareto improvement.

C) do nothing, because the change is a Pareto improvement.

D) It is not possible to mitigate the harm to a monopolist.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 10) If Pareto efficiency has been achieved, A) there are no additional Pareto improvements that can be made.

B) surplus is maximized.

C) economic efficiency is also achieved.

D) All of the above.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 11) If all Pareto improvements have been made, A) the result is increased government regulations.

B) the outcome is Pareto efficient.

C) consumer surplus is maximized.

D) monopolists are unhappy.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 12) If a policy helps some but harms others, A) the result is a Pareto improvement for the people who are helped.

B) then the cost-benefit analysis will show a net increase in surplus and is therefore desirable.

C) we cannot use the Pareto principle to evaluate whether or not the policy is desirable.

D) it is too hard to determine whether or not the outcome is desirable.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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13) According to the cost-benefit principle, if a change generates $50,000 in gains and $45,000 in losses, A) it is desirable.

B) the gain is not large enough to justify the change.

C) the desirability depends on who gains and who loses.

D) it is a Pareto improvement.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: New 14) If a change passes the cost-benefit test, then A) it is a Pareto improvement.

B) it may be a Pareto improvement.

C) it is not a Pareto improvement.

D) total surplus is maximized.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 15) If a change is a Pareto improvement, then A) we also achieve Pareto efficiency.

B) consumer surplus is maximized.

C) it also passes the cost-benefit test.

D) the distributional effect is likely to be regressive.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 16) Reparations for slavery in the United States would A) be consistent with the Pareto principle.

B) be inconsistent with the Pareto principle.

C) have nothing to do with the Pareto principle.

D) be unconstitutional.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old

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16.2 Regulation of Imperfectly Competitive Markets 1) Governments can eliminate market failure due to an imperfectly competitive market by A) changing the market structure, for example by eliminating monopoly protection.

B) having the government own the monopoly.

C) imposing regulations that reduce prices.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 2) One way a government can eliminate a market failure A) is to regulate the price so that it equals marginal cost.

B) is to implement a price floor equal to marginal cost.

C) is to regulate the price so that it is below average cost.

D) None of the above solutions will eliminate a market failure.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) Optimal price regulation sets price equal to A) marginal cost.

B) average variable cost.

C) average cost.

D) minimum average cost.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 4) If the government regulates the price a monopoly can charge, and the price ceiling is set below what the competitive market price would be, then A) a shortage will exist.

B) a surplus will exist.

C) producer surplus is maximized.

D) consumer surplus is maximized.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old

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5) If the government regulates the price a monopoly can charge, and the price ceiling is set below what the competitive market price would be, then A) there will be excess supply.

B) there will be excess demand.

C) producer surplus is maximized.

D) consumer surplus is maximized.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 6) What is one problem with trying to regulate a monopoly's price?

A) The government needs information on the monopoly's marginal cost.

B) The government needs information on the maximum quantity the monopoly can supply.

C) The government needs to identify which firm is a monopolist.

D) Anything that the government does is problematic.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 7) In order to regulate a monopoly's price, the government A) needs to hire former executives from the monopoly.

B) should rely on industry experts for information.

C) needs accurate information on the monopoly's demand and cost curves.

D) needs to know the monopoly's supply curve.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) If the government wants to regulate a natural monopoly while ensuring the firm does not earn profits or require subsidies, the government will force the firm to set price equal to A) average cost.

B) marginal cost.

C) marginal revenue.

D) None of the above.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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9) If a monopolist's production process has economies of scale and average cost exceeds marginal cost, then A) the government should set price equal to marginal cost.

B) if the government sets price equal to marginal cost, the monopoly will go out of business.

C) if the government sets price equal to average cost, the monopoly will go out of business.

D) the government cannot regulate price.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 10) If a monopolist's production process has economies of scale and average cost exceeds marginal cost, then A) the government could set price equal to marginal cost and subsidize the monopoly.

B) the government should not offer a subsidy, since the monopoly can make a profit setting price equal to marginal costs.

C) if the government sets price equal to average cost, the monopoly will go out of business.

D) the government cannot regulate price.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) Regulatory capture is where A) governments take over monopolies through use of regulation.

B) firms impose barriers to entry on regulators.

C) regulators of an industry look out for the industry instead of society.

D) the government taxes the profits of monopolies such that all producer surplus goes to the government.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 12) Rent seeking is A) when consumers search for the lowest possible rent on housing.

B) illegal in the U.S. C) what regulators do to improve their chances of getting jobs in the regulated industry after they leave government service.

D) where firms expend effort and money to profit from government actions.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old

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13) When attempting price regulation, a government faces what problem(s)?

A) limited information B) bribes C) uncooperative firms D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New 14) Regulation A) always increases consumer surplus.

B) passes the cost-benefit test.

C) solves market failures of all size.

D) None of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 15) Regulation might NOT increase total surplus because A) the costs of the regulation might outweigh the benefits.

B) it may not be possible to gather the information necessary to set prices correctly.

C) regulators might get captured by the industry.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 16.3 Antitrust Law and Competition Policy 1) Laws that are used to prevent firms from colluding and setting high prices are called A) anti-trust laws.

B) price ceiling laws.

C) anti-cartel laws.

D) anti-competition policies.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old

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2) In the U.S., the ________ and the ________ prohibit firms from explicitly agreeing to take actions that reduce competition.

A) Department of Justice Act; Federal Trade Commission Act B) Sherman Antitrust Act; Federal Trade Commission Act C) Per Se Act; Sherman Antitrust Act D) Pareto Act; Anti-Cartel Act Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) In the U.S., one example of a cartel that is legal is A) the railroads, including Union Pacific.

B) the oil industry.

C) Major League Baseball.

D) None, all cartels are prohibited.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) Cartels persist despite laws against them because A) international cartels are legal.

B) it is impossible to convict firms.

C) of the Prisoners' Dilemma issue.

D) All of the above.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) Cartels persist despite laws against them because A) international cartels are legal.

B) firms believe they can avoid detection and the penalties are small anyway.

C) firms can coordinate without explicitly colluding.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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6) In the U.S., charging monopoly-level prices A) is evidence of a conspiracy.

B) is illegal.

C) is not necessarily illegal.

D) constitutes a per se violation.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 7) Mergers may result in A) anticompetitive behavior.

B) more efficient production.

C) fewer firms in a market.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 8) Mergers are closely scrutinized by the government because A) they might allow the firms involved to dominate the market and act as a legalized cartel (monopoly).

B) they always result in a more efficient market.

C) they always result in lower joint profits of the firms involved.

D) all mergers are undesirable.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 9) Mergers harm society.

A) True. Firms merge to avoid antitrust laws and increase their prices.

B) Maybe. It depends on whether the effect on prices is larger from reducing competition or increasing efficiency.

C) False. Firms gain economies of scale and pass the price savings on to their customers.

D) True. Total surplus is reduced when firms merge.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old

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10) Antitrust laws seek to prevent actions that harm society such as A) price discrimination.

B) refusal to deal.

C) predatory pricing.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 11) A firm charging prices below marginal cost is said to be engaged in A) price fixing.

B) predatory pricing.

C) a cartel.

D) irrational behavior.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 12) Resale price maintenance A) requires a retailer to sell a good no lower than the specified price.

B) is per se illegal.

C) is the price of a maintenance contract on a good, such as an extended service contract on a car.

D) has a net negative impact on competition.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: New 13) If a dominant firm is charged with refusal to deal under antitrust law, it is being charged because A) the firm will not set its price at the regulated rate.

B) it is refusing to sell a key input to downstream rivals, thereby reducing or destroying competition.

C) it is refusing to cooperate with antitrust authorities, such as the Department of Justice.

D) it will sell its products only to people who agree to buy only from it and not from rival firms.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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14) An example of an essential facility is A) the telephone line into your house.

B) U.S. Route 66.

C) the Golden Gate Bridge.

D) your local pizza parlor.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 15) The government forcing a monopoly telecommunications company to allow other firms to use its cables is an attempt to A) regulate prices.

B) decrease the monopoly market power by eliminating a natural monopoly.

C) decrease the monopoly market power by increasing competition.

D) None of the above.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 16) An exclusive deal is A) always illegal.

B) welfare reducing.

C) one where a firm will only sell to a customer if the customer agrees not to buy anything from the firm's rivals.

D) All of the above.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 17) According to the U.S. Robinson-Patman Act of 1936, price discrimination A) is always illegal.

B) is legal unless it harms competition.

C) may be used to drive rivals out of business.

D) can only be justified if the price discrimination is due to actual cost differences.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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16.4 Externalities 1) In general, an externality is created when A) people are affected (other than by price) by a transaction which they were not part of.

B) firms produce a product of low quality and consumers don't like it.

C) firms have to pay for pollution the environment.

D) the government subsidizes education.

Answer: A Skill: Definition AACSB: Analytical Thinking Status: Old 2) Positive externalities are created when A) other consumers reduce their demand for coffee and price thereby declines.

B) farmers spray pesticide in their fields and it washes into the local river after the first rainstorm.

C) your neighbor plants beautiful trees and flowers in her yard.

D) you purchase the "Mona Lisa" and lock it in a vault.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) Negative externalities are created when A) an increase in the price of butterfat drives up the price of ice cream.

B) a driver leaves his car in a parking space after the meter expires and receives a ticket.

C) a driver drives recklessly on a busy highway.

D) a driver pulls over to help a stranded motorist fix a flat tire.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) An externality A) is always either a negative or positive externality.

B) could be either a negative or positive externality.

C) can be a negative externality for one group of people and a positive externality for another.

D) creates market failures only when they are negative.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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5) A firm's private costs A) include only its direct costs.

B) are the private profit minus the producer surplus.

C) include both direct and indirect costs.

D) exclude the taxes on any externalities generated.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 6) Students who talk loudly with each other in class A) create an externality because other students cannot follow the lecture as well.

B) disturb nobody.

C) benefit the other students in class because they engage in conversation.

D) only create an externality if they talk about something unrelated to class.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 7) If children go to school and become productive members of society, A) a negative externality is created by the schools.

B) a positive externality is created by the schools.

C) no externality is created by the schools.

D) an externality is created that may be positive or negative.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 8) The price of pie increases. Some people who purchased pie before the price increase no longer purchase pie. This is A) a positive externality.

B) a negative externality.

C) a positive externality for some consumers and a negative externality for others.

D) not an externality.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old

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9) Consider a housing development built near an existing airport. After the houses are occupied, homeowners complain that the airport imposes a negative externality on them and it should be moved or otherwise limited. Is the airport a negative externality?

A) No, the airport was there first.

B) No, if the original property values reflect the costs imposed by the airport.

C) No, airports are government entities and therefore don't impose costs on individuals.

D) Yes, the airport's noise should be curtailed for the well-being of the homeowners.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 10) What is one reason drunk driving is held in such disrepute?

A) Drunk driving imposes high potential costs on non-drunk drivers.

B) Drunk driving destroys cars and telephone poles, causing disruption in essential services.

C) Only drunk drivers cause automobile fatalities.

D) Drunk drivers impose high potential costs on other drunk drivers.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 11) If a production process creates pollution, a competitive market produces excessive pollution because A) the firms do not include the social cost of the pollution in their profit-maximizing decisions.

B) the firms place too high a price on society's cost of inflation.

C) people are not injured by the pollution.

D) zero pollution is optimal.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 12) Which of the following statements about private and social costs associated with a negative externality is TRUE? A) Social costs include externalities.

B) Private cost do not include externalities.

C) Social costs are never smaller than private costs.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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13) If a production process creates pollution, a competitive market produces excessive pollution because A) private marginal cost of pollution exceeds its social marginal cost.

B) social marginal cost of pollution exceeds its private marginal cost.

C) the marginal benefit of pollution to the firm is zero.

D) zero pollution is optimal.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 14) If a production process creates positive externalities, a competitive market produces too few positive externalities because the producer A) does not pay all the costs of the externalities.

B) does not receive compensation for the externalities.

C) Both A and B. D) None of the above.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 15) In the presence of no externalities, A) social marginal cost exceeds private marginal cost.

B) social marginal cost is less than private marginal cost.

C) social marginal cost equals private marginal cost.

D) social marginal cost and private marginal cost cannot be compared.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 16) If a production process generates pollution, then a competitive market will A) produce more of the good than is socially optimal.

B) produce less of the good than is socially optimal.

C) produce the socially optimal quantity of that good.

D) produce zero output.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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17) If a production process generates pollution, then a competitive market will produce more of the good than is socially optimal because A) firms take all costs into consideration.

B) firms incur all costs of production but ignore some of them.

C) firms ignore the costs of production that they do not incur.

D) firms set price equal to social marginal cost.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 18) In a competitive market, a negative externality creates a deadweight loss because A) the cost of the externality is double counted.

B) a harm is generated.

C) price equals social marginal cost.

D) price equals private marginal cost.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 19) In a market with positive externalities, A) the efficient level of production is less than what competition will obtain.

B) the efficient level of production is equal to what competition will obtain.

C) the efficient level of production is more than what competition will obtain.

D) there cannot be an efficient level of production.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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20) The above figure shows the market for steel ingots. If the market is competitive, then A) the socially optimal quantity of steel is zero.

B) the socially optimal quantity of steel of 50 units is produced.

C) the socially optimal quantity of steel of 100 units is produced.

D) more than the socially optimal quantity of 50 units of steel is produced.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 21) The above figure shows the market for steel ingots. An externality can be seen because A) the social marginal cost exceeds the private marginal cost.

B) the private marginal cost exceeds the social marginal cost.

C) the optimal quantity of steel is zero.

D) not enough steel gets produced by the competitive market.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old

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22) The above figure shows the market for steel ingots. If the market is competitive, then the deadweight loss to society is A) a.

B) b.

C) c.

D) zero.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 23) The above figure shows the market for steel ingots. The socially optimal quantity of steel is A) 0 units.

B) 50 units.

C) 100 units.

D) produced if the market were competitive.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 24) The above figure shows the market for steel ingots. The optimal quantity of pollution A) is 0 units.

B) is 50 units.

C) is 100 units.

D) cannot be determined from the information provided.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 25) The socially optimal amount of pollution is A) zero.

B) greater than zero.

C) indeterminant.

D) unattainable.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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26) If the government has enough knowledge about a market and the damage it causes through pollution, it can force the socially optimal output A) through an emission fee.

B) using a ban on pollution.

C) by deregulating to eliminate the monopoly.

D) All of the above.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 27) One way for the government to eliminate a negative externality is to A) charge an emissions fee.

B) set an emissions standard.

C) levy an effluent charge.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 28) When the government charges an output tax to eliminate an externality, it forces the manufacturer to ________ the negative externality.

A) charge customers for B) internalize C) stop producing D) increase the production of Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 29) The exclusive privilege to use an asset is called a(n) A) property right.

B) exclusive use agreement.

C) property privilege.

D) right to work privilege.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old

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30) Environmental CSR that is undertaken to reduce negative externalities might be A) altruistic.

B) strategic.

C) undertaken because of Internet-based scrutiny.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 31) The result that, under certain circumstances, no government action is needed to control an externality because it can be eliminated by bargaining between the affected parties is called A) a Nash Equilibrium.

B) the Coase Theorem.

C) the Bargaining Theorem.

D) English Bargaining.

Answer: B Skill: Definition AACSB: Analytical Thinking Status: Old 32) Suppose two neighbors share a park. One neighbor, Al, leaves trash in the park. This bothers the other neighbor, Bert. According to Coase's Theorem, the optimal level of trash in the park can be achieved if A) Al is fined by the government.

B) Al has the right to leave trash and Bert cannot do anything about it.

C) Al has the right to leave trash and Bert can pay him to limit his dumping.

D) Bert moves.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 33) Suppose two neighbors share a park. One neighbor, Al, leaves trash in the park. This bothers the other neighbor, Bert. According to Coase's Theorem, one way to alleviate the externality is that A) Al is fined by the government.

B) Al has the right to leave trash and Bert cannot do anything about it.

C) Bert has the right to a clean park and Al cannot leave trash.

D) Either Al or Bert owns the park.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: New

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34) Suppose two neighbors share a park. One neighbor, Al, leaves trash in the park. This bothers the other neighbor, Bert. According to Coase's Theorem, the optimal level of trash in the park can be achieved if A) someone is assigned property rights to the park.

B) government limits the use of the park.

C) nobody catches Al leaving the trash.

D) Bert moves.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 35) Suppose twenty neighbors share a park. One of the neighbors, Al, leaves trash in the park.

This bothers the other neighbors. According to Coase's Theorem, assigning the property rights to the park to Al A) will achieve the socially optimal quantity of trash.

B) will result in zero trash being dumped in the park.

C) might still not achieve the social optimum since coordinating the other nineteen neighbors can be costly.

D) is unfair.

Answer: C Skill: Conceptual AACSB: Analytical Thinking Status: Old 16.5 Open-Access, Club, and Public Goods 1) A rival good A) is one that is used up as it is consumed.

B) is one that rival firms are trying to obtain.

C) is exclusive.

D) cannot be shared.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 2) A common resource is best described as a resource where A) there is a positive externality in consumption.

B) there is a negative externality in consumption.

C) there is a positive externality in production.

D) there is a negative externality in production.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 22 Copyright © 2020 Pearson Education, Inc.

3) Which of the following is NOT a common property?

A) A city park B) A main street C) A public beach D) A movie screening Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: New 4) Which of the following would be considered open-access common property?

A) A library B) The world wide web C) A company gym D) Broadcast television Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: New 5) To alleviate the commons problem, the government can A) apply a tax.

B) set a quota.

C) assign property rights.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 6) The Commons Problem arises because A) firms don't maximize profits.

B) social and private incentives are not aligned, and property rights are missing.

C) social cost equals private cost and property rights are missing.

D) social benefit equals private benefit and property rights are missing.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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7) A public good in which exclusion is possible is called A) an exclusive good.

B) a common good.

C) an impure good.

D) a club good.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 8) Which of the following is NOT a club good?

A) cable television B) a rock concert C) a country club D) a baseball bat Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 9) A cable company can add a subscriber for ________ and a market failure occurs because the price charged ________.

A) nearly zero marginal cost; exceeds marginal cost B) less than average cost; reduces consumer surplus C) nearly zero marginal cost; is extortionist D) average variable cost; increases producer surplus Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 10) A commodity or service whose consumption by one person does not preclude others from also consuming it is called a A) private good.

B) public good.

C) Giffen good.

D) Coase good.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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11) Which of the following goods has the property of rivalry?

A) National defense B) A highway C) Air to breathe D) A digital music file Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: New 12) Markets tend to produce too little of an excludable public good because A) transaction costs are high.

B) of the lack of rivalry.

C) these goods are depletable.

D) All of the above.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 13) In the case of a good that has no exclusion and no rivalry, private markets fail because A) of free-ridership.

B) this is a natural monopoly.

C) profit is driven down to zero.

D) the quantity produced will exceed the social optimum.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 14) A free rider A) benefits from a positive externality without paying for it.

B) has a horizontal demand curve.

C) places no value on the good provided.

D) All of the above.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old

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15) The total demand for a public good is found by A) horizontally summing all individual demands.

B) vertically summing all individual demands.

C) finding the demand from the median voter.

D) dividing the marginal cost of the good by the number of voters.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 16) The efficient quantity of a pure public good occurs when the marginal cost of producing that good equals the A) marginal benefit to the median voter.

B) marginal benefit to each individual.

C) sum of all individual marginal benefits.

D) sum of all individual marginal benefits divided by the number of voters.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 17) One way to avoid the free rider problem is A) through mandates.

B) for the government to provide the good or service.

C) to use social pressure.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 16.6 Intellectual Property 1) Intellectual property A) increases total surplus.

B) prevents people who do not own the knowledge from using it.

C) assigns property rights to knowledge.

D) eliminates the free rider problem.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old

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2) A patent is a property right, which gives the owner A) the right to sell and/or license the invention.

B) the ability to make the knowledge of how to make the invention rival.

C) a guaranteed profit.

D) All of the above.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 3) Patents A) always increase total welfare.

B) create monopoly power.

C) reduce deadweight loss.

D) are a form of trade secret.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 4) Which of the following is an alternative to patents that still encourages research?

A) The government funding research by firms.

B) Offering a prize for discovery.

C) Government grants to universities.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New 5) The song "Stairway to Heaven" is likely protected A) as a trade secret.

B) with a patent.

C) under copyright law.

D) in a trust.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: New

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6) Which of the following is likely protected by copyright?

A) Your recipe for chocolate cake B) Your autobiography C) The color scheme for your house D) The names of your children Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old

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Managerial Economics and Strategy, 3e (Perloff/Brander) Chapter 17 Global Business 17.1 Reasons for International Trade 1) The ability to produce a good at a lower opportunity cost than someone else is called A) competitive production.

B) comparative advantage.

C) selective advantage.

D) absolute advantage.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 2) According to the principal of comparative advantage, a country A) that produces goods at the lowest absolute cost will export those goods.

B) will import goods it can produce at the lowest relative cost.

C) will export goods it can produce at the lowest relative cost.

D) will only import those goods that it cannot produce for itself.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) If the U.S. can produce pizza for $5 each and barrels of beer for $25 each, and Germany can produce pizza for $7 each and barrels of beer for $21 each, then the U.S. has A) a comparative advantage in the production of beer.

B) an absolute advantage in the production of beer.

C) a comparative advantage in the production of pizza.

D) a comparative advantage in the production of beer and pizza.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: New 4) If the U.S. can produce pizza for $5 each and barrels of beer for $25 each, and Germany can produce pizza for $7 each and barrels of beer for $21 each, then Germany has A) a comparative advantage in the production of beer.

B) an absolute advantage in the production of beer.

C) a comparative advantage in the production of pizza.

D) a comparative advantage in the production of beer and pizza.

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5) If the U.S. can produce pizza for $5 each and barrels of beer for $25 each, and Germany can produce pizza for $7 each and barrels of beer for $21 each, then A) each country will produce both pizza and beer.

B) the U.S. will produce beer and trade with Germany for pizza.

C) the U.S. will produce pizza and trade with Germany for beer.

D) All of the above.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 6) The U.S. can produce pizza for $7.50 each and barrels of beer for $37.50 each, and Germany can produce pizza for €5 each and barrels of beer for €15 each (€ is the symbol for the euro, the currency Germany uses). If the exchange rate is 1.50 $/€ then A) the U.S. has a comparative advantage in the production of beer.

B) neither country has a comparative advantage in the production of beer.

C) the U.S. has a comparative advantage in the production of pizza.

D) the U.S. has a comparative advantage in the production of beer and pizza.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 7) An automobile company has two factories, one in Vietnam and one in Australia, each with the same number of workers. The Vietnamese factory can produce either 150 engines or 100 transmissions per day. The Australian factory can produce either 100 engines or 75 transmission per day.

A) The Vietnamese factory has an absolute advantage producing both engines and transmissions.

B) The Australian factory has an absolute advantage in the production of transmissions.

C) The Vietnamese factory has a comparative advantage in the production of transmissions.

D) Which factory has an advantage is irrelevant since the theory of comparative advantage only applies to countries, not companies.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: New

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8) An automobile company has two factories, one in Vietnam and one in Australia, each with the same number of workers. The Vietnamese factory can produce either 150 engines or 100 transmissions per day. The Australian factory can produce either 100 engines or 75 transmissions per day.

A) The Vietnamese factory has a comparative advantage producing both engines and transmissions.

B) The Australian factory has an absolute advantage in the production of transmissions.

C) The Vietnamese factory has a comparative advantage in the production of transmissions.

D) The Australian factory has a comparative advantage in the production of transmissions.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: New 9) An automobile company has two factories, one in Vietnam and one in Australia, each with the same number of workers. The Vietnamese factory can produce either 150 engines or 100 transmissions per day. The Australian factory can produce either 100 engines or 75 transmissions per day.

A) The Australian factory has an comparative advantage producing both engines and transmissions.

B) The Australian factory has an absolute advantage in the production of transmissions.

C) The Vietnamese factory has a comparative advantage in the production of engines.

D) The Australian factory has a comparative advantage in the production of engines.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: New 10) If there are increasing returns to scale, then it makes sense to consolidate operations into one production facility A) if production above domestic demand can be exported.

B) only if the consolidation creates an absolute advantage versus other trading partners.

C) if the government subsidizes production.

D) Never, because then you lose the possibility of comparative advantage gains between the production facilities.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old

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11) Small countries might produce more of a particular good than their domestic citizens can consume A) if they are willing to take a loss on the goods produced.

B) if there are increasing returns to scale and export of the surplus is possible.

C) when arbitrage is possible.

D) if they are producing seasonal products.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 12) According to the mini-case on the Barbie Doll, Mattel is successful because A) it has been selling Barbie dolls for a long time.

B) the Barbie doll is the top import into the U.S. C) international trade allows them to produce a wide variety of doll types at many price points.

D) there are low fixed costs for product design.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 17.2 Exchange Rates 1) An exchange rate is A) the price of one currency in terms of another.

B) the monetary value of goods and services exchanged for imports.

C) the amount of gold a currency will buy.

D) All of the above.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 2) If a currency such as the US$ is traded in a competitive market, a(n) ________ in demand for the US$ ________ the price of the US$ in terms of another currency such as the Japanese Yen (¥).

A) increase; lowers B) increase; raises C) decrease; raises D) change; lowers Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old

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3) Which of the following is likely to increase the exchange rate of Yen to euros (¥/€)?

A) An increase in investment opportunities in the U.S. B) A decrease in investment opportunities in the eurozone C) An increase in demand for European goods in Japan D) A decrease in demand for European goods in Japan Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: New 4) Which of the following is likely to increase the exchange rate of Yen to euros (¥/€)?

A) A decrease in investment opportunities in the U.S. B) A decrease in investment opportunities in the eurozone C) An increase in demand for European goods in Japan D) An increase in investment opportunities in the eurozone Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: New 5) Which of the following is likely to decrease the exchange rate of Yen to euros (¥/€)?

A) An increase in investment opportunities in the U.S. B) A decrease in investment opportunities in the eurozone C) A decrease in demand for European goods in Japan D) An increase in investment opportunities in the eurozone Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: New 6) Which of the following is likely to decrease the exchange rate of Yen to euros (¥/€)?

A) A decrease in investment opportunities in the U.S. B) An increase in investment opportunities in the Japan C) A decrease in demand for European goods in Japan D) An increase in investment opportunities in the eurozone Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: New

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7) If the Mexican peso (MXN) to Brazilian real (BRL) exchange rate goes from 5.9 MXN/BRL to 7.2 MXN/BRL A) Brazilians decrease their demand for Mexican goods.

B) Brazilians increase their demand for Mexican goods.

C) Mexicans increase their demand for Brazilian goods.

D) Not enough information to determine what happens.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 8) If the Mexican peso (MXN) to Brazilian real (BRL) exchange rate goes from 5.9 MXN/BRL to 5.2 MXN/BRL A) Brazilians decrease their demand for Mexican goods.

B) Brazilians increase their demand for Mexican goods.

C) Mexicans decrease their demand for Brazilian goods.

D) Not enough information to determine what happens.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 9) If a bottle of fine French wine costs US$250 in the U.S., 2500 rand in South Africa, there are no transaction costs, and the exchange rate is 10 rand/US$, then A) there is an arbitrage opportunity by buying the wine in the U.S., and selling it in South Africa and the price in South Africa will drop.

B) there is an arbitrage opportunity by buying the wine in the U.S., and selling it in South Africa and the price in the U.S. will drop.

C) there is no arbitrage opportunity.

D) Unable to determine, since France is in the eurozone and we would need exchange rates in euro terms.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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10) If a bottle of fine French wine costs US$250 in the U.S., 2500 rand in South Africa, there are no transaction costs, and the exchange rate is 20 rand/US$, then A) there is an arbitrage opportunity by buying the wine in the U.S., and selling it in South Africa and the price in South Africa will drop.

B) there is an arbitrage opportunity by buying the wine in South Africa., and selling it in the U.S. and the price in the U.S. will drop.

C) here is an arbitrage opportunity by buying the wine in South Africa., and selling it in the U.S. and the price in the U.S. will rise.

D) there is no arbitrage opportunity.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 11) If a bottle of fine French wine costs US$250 in the U.S., 2500 rand in South Africa, there are no transaction costs, and the exchange rate is 5 rand/US$, then A) there is an arbitrage opportunity by buying the wine in the U.S., and selling it in South Africa and the price in South Africa will drop.

B) there is an arbitrage opportunity by buying the wine in South Africa., and selling it in the U.S. and the price in the U.S. will drop.

C) here is an arbitrage opportunity by buying the wine in South Africa., and selling it in the U.S. and the price in the U.S. will rise.

D) there is no arbitrage opportunity.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: Old 12) If a bottle of fine French wine costs US$250 in the U.S., 2500 rand in South Africa, there are transaction costs of US$50, and the exchange rate is 20 rand/US$, then A) there is an arbitrage opportunity by buying the wine in the U.S., and selling it in South Africa and the price in South Africa will drop.

B) there is an arbitrage opportunity by buying the wine in South Africa., and selling it in the U.S. and the price in the U.S. will drop.

C) here is an arbitrage opportunity by buying the wine in South Africa., and selling it in the U.S. and the price in the U.S. will rise.

D) there is no arbitrage opportunity.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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13) International price discrimination for a good is possible if A) goods are sold through the gray market.

B) the price difference between two countries is greater than the transaction costs in arbitrage.

C) the price difference between two countries is less than the transaction costs in arbitrage.

D) None of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 14) Your U.S.-based company is doing business internationally. One way to mitigate exchange rate risk is to A) require payment in US$.

B) use a forward contract.

C) use a futures contract.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 15) Your U.S.-based company is selling parts to a company in Bangladesh. If you require payment in US$ A) the Bangladeshi company bears the exchange rate risk.

B) your company bears the exchange rate risk.

C) the companies share in the exchange rate risk.

D) there is no exchange rate risk.

Answer: A Skill: Conceptual AACSB: Analytical Thinking Status: Old 16) Your U.S.-based company is selling parts to a company in Bangladesh. If the Bangladeshi company purchases a futures contract, A) the Bangladeshi company bears the exchange rate risk.

B) your company bears the exchange rate risk.

C) the companies share in the exchange rate risk.

D) there is no exchange rate risk.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old

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17) Your U.S.-based company is selling parts to a company in Chile and the company will pay you US$10,000 in 3 months. The current exchange rate is 490 pesos/US$. If the exchange rate at the time of payment is 510 pesos/US$ A) you earn additional profit.

B) the Chilean company will end up paying more for the goods.

C) the Chilean company will end up paying less for the goods.

D) you earn less profit.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 18) Your U.S.-based company is selling parts to a company in Chile and the company will pay you 9.8 million pesos in 3 months. The current exchange rate is 490 pesos/US$. If the exchange rate at the time of payment is 510 pesos/US$ A) you earn additional profit.

B) the Chilean company will end up paying more for the goods.

C) the Chilean company will end up paying less for the goods.

D) you earn less profit.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old 17.3 International Trade Policies 1) Which of the following can reduce the number of cars imported?

A) A tariff B) A quota C) A ban D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: New 2) The imposition of a quota on an imported good A) shifts the demand curve down for the good.

B) shifts the supply curve up for the good.

C) Both A and B. D) Not enough information to determine.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old

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3) Levying a tariff on an imported good A) shifts the demand curve down for the good.

B) shifts the supply curve up for the good.

C) Both A and B. D) Not enough information to determine.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 4) Compared to free trade, a ban on imports of a good A) increases the domestic price of the good.

B) decreases consumer surplus.

C) results in a deadweight loss.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 5) The larger the U.S. imposed per unit import tariff on a good imported and that is also produced in the U.S. A) the smaller the U.S consumer surplus.

B) the larger the U.S. producer surplus.

C) government revenue may be larger or smaller.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Analytical Thinking Status: Old 6) A ban on imports, a tariff, or a quota raise the price to domestic consumers. This means that consumers will buy less of the product at a higher price. The loss associated with this is called A) production associated loss.

B) barrier associated loss.

C) deadweight loss.

D) trade loss.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old

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7) A ban on imports, a tariff, or a quota raise the price to domestic consumers creates a deadweight loss. This loss is composed of A) production associated loss and inefficiency loss.

B) productive consumption loss and protection loss.

C) consumption distortion loss and production distortion loss.

D) consumer misperception loss and taxation loss.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old

8) The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1 represents the world supply curve. If imported rice is banned, the loss in social welfare is A) a + b + c + d + e.

B) a.

C) c + e.

D) i.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: Old

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9) The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1 represents the world supply curve. Currently 10 units are imported. The Consumption distortion loss is equal to A) c + e.

B) c.

C) c + g + i.

D) a + c + d + e.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 10) The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1 represents the world supply curve. Currently 10 units are imported. The loss from shifting production from foreign to domestic producers equals A) c + e.

B) i.

C) e.

D) a + c + d + e.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old 11) The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1 represents the world supply curve. If a $1 tariff is imposed on imported rice, the loss in social welfare is A) b + c + d + e.

B) a.

C) i.

D) a + c + d + e.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old

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12) The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1 represents the world supply curve. Suppose a free market exists. If a $1 per unit tariff is imposed on imported rice, the quantity of imported rice will decrease by A) 10 units.

B) 20 units.

C) 30 units.

D) 40 units.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: New 13) The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1 represents the world supply curve. Suppose a free market exists. An import quota of 30 units would A) cause consumer surplus to fall by "e."

B) cause social welfare to fall by $30.

C) increase producer surplus by "d."

D) have no effect.

Answer: D Skill: Analytical AACSB: Analytical Thinking Status: New 14) The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1 represents the world supply curve. Suppose a free market exists. The smallest tariff necessary to completely eliminate imported rice is A) $1 per unit.

B) $2 per unit.

C) $3 per unit.

D) $4 per unit.

Answer: B Skill: Analytical AACSB: Analytical Thinking Status: Old

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15) The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1 represents the world supply curve. A $1 per unit tariff has the same effect on producer and consumer surplus as a quota of A) 10 units.

B) 20 units.

C) 30 units.

D) 40 units.

Answer: A Skill: Analytical AACSB: Analytical Thinking Status: New 16) Tariffs and quotas create a loss in social welfare because A) producer surplus declines.

B) revenues from tariffs are misspent.

C) consumer surplus declines.

D) All of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 17) The welfare loss from an import quota is greater than that of an equivalent tariff because A) tariff revenues can be used to society's benefit.

B) the loss in consumer surplus is not as large.

C) domestic producers gain more from a quota than from a tariff.

D) tariff revenues represent an additional deadweight loss.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 18) The United States and many other countries often impose trade sanctions on other countries.

These sanctions A) decrease producer and consumer surplus in both the sanctioned and sanctioning countries.

B) tend to increase total welfare.

C) tend to decrease the deadweight loss.

D) tend to decrease consumer and producer surplus only in the sanctioned country.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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19) The cost of lobbying for an import quota in a perfectly competitive market A) increases the welfare loss of the quota.

B) decreases the deadweight loss of the quota.

C) shifts the supply curve of the good to the left.

D) increases the consumer surplus.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 20) Rent seeking in the form of lobbying for an increase in import tariffs by domestic producers A) increases consumer surplus.

B) increases total welfare.

C) increases the deadweight loss.

D) None of the above.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 21) A firm engaging in rent seeking activity A) is breaking the law.

B) is willing to spend up to the gain in producer surplus.

C) is irrational.

D) increases societal gain.

Answer: B Skill: Conceptual AACSB: Analytical Thinking Status: Old 22) Creating market power through the use of tariffs or quotas can A) drive price to the monopoly level.

B) increase the world price of the good that is targeted.

C) increase government revenue.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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23) A country uses strategic trade policy to A) increase profits that accrue to domestic producers.

B) affect the exchange rate of its currency.

C) impose countervailing duties.

D) allow dumping of imports to increase consumer surplus.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old 24) A trade policy that allows a country to gain at the expense of other countries is called A) countervailing duty policy.

B) a beggar-thy-neighbor policy.

C) an antitrust policy.

D) a dumping policy.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 25) If a foreign producer sells a good in a country at a lower price than in its home market, this is called A) a countervailing duty.

B) a tariff offset.

C) dumping.

D) a reverse tariff.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 26) A trade policy that protects domestic producers from certain actions taken by foreign governments or firms is A) illegal under WTO rules.

B) called a contingent protection policy.

C) considered a beggar-thy-neighbor policy.

D) intended to protect domestic consumers.

Answer: A Skill: Conceptual AACSB: Application of Knowledge Status: Old

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27) A country that is a member of the World Trade Organization A) can use tariffs and quotas to limit trade.

B) can establish preferential trading arrangements with other countries.

C) is allowed to eliminate all of its tariffs and quotas.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old 28) The North American Free Trade Agreement is an example of A) a beggar-thy-neighbor trade policy.

B) a preferential trade arrangement.

C) a multinational quota system.

D) a general agreement on tariffs and trade.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 29) One of the major effects of trade liberalization has been A) the liberal use of tariffs and quotas.

B) an increase in the use of beggar-thy-neighbor trade policies.

C) the globalization of supply chains.

D) an increase in the world price for most goods.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 30) A pollution haven is A) a place where people actually like pollution and view it as a positive externality.

B) a location with weak environmental rules that attracts manufacturing companies due to decreased costs.

C) a place that has very low worker wages.

D) unattractive for multinational investment because of the ambient pollution.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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17.4 Multinational Enterprises 1) A multinational enterprise is defined as a company that A) controls production assets in more than one country.

B) has board members from a variety of countries.

C) exists primarily to avoid taxes.

D) has stock that is publicly traded in many countries.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 2) When deciding where to produce, a key decision criterion for a multinational enterprise A) is the nationality of its founders.

B) hinges on the ownership of its various subsidiaries.

C) is the tax laws of the various countries is it considering.

D) is the location of its headquarters.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) A firm becomes a multinational enterprise when A) it lists its stock on a stock exchange other than the one in its home country.

B) it undertakes foreign direct investment.

C) it undertakes foreign portfolio investment.

D) Any of the above.

Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old 4) Acquisition of an existing solar cell production plant would be considered A) a greenfield investment.

B) foreign direct investment.

C) anti-competitive under antitrust law.

D) Both A and B. Answer: B Skill: Definition AACSB: Application of Knowledge Status: Old

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5) The price used to sell goods or services between subsidiaries in a company is A) the tax avoidance price.

B) set at the marginal cost of the producing subsidiary.

C) determined by the minimum of the average cost curve.

D) a transfer price.

Answer: D Skill: Definition AACSB: Application of Knowledge Status: Old 6) The transfer price between subsidiaries that maximizes profit for the parent company A) is the marginal cost of the producing subsidiary.

B) is the monopoly price of the producing subsidiary.

C) cannot be determined in the absence of non-production cost considerations such as taxes.

D) is the price that minimizes the purchasing subsidiary's marginal cost.

Answer: C Skill: Conceptual AACSB: Application of Knowledge Status: Old 7) A U.S.-based multinational has two subsidiaries, one in Lithuania where the tax rate is 15%, and one in Ireland where the tax rate is 2%. The tax rate in the U.S. is 35%. If the Lithuanianbased subsidiary is transferring a good to the Irish subsidiary and the goal is to avoid taxes, it will A) sell it to the U.S. parent at a transfer price equal to marginal cost, which will then sell it to the Irish subsidiary at monopoly level pricing.

B) set the transfer price to the Irish subsidiary at the monopoly level.

C) set the transfer price to the Irish subsidiary at marginal cost.

D) Unable to determine with the information given.

Answer: C Skill: Analytical AACSB: Analytical Thinking Status: Old 17.5 Outsourcing 1) The manager of a U.S. office building hires a local company owned by a recent Canadian immigrant to handle landscape maintenance. This is a form of A) domestic outsourcing.

B) vertical integration.

C) international outsourcing.

D) insourcing.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 19 Copyright © 2020 Pearson Education, Inc.

2) Outsourcing generally results from A) unpatriotic behavior.

B) comparative advantage.

C) tax evasion.

D) rent seeking.

Answer: B Skill: Conceptual AACSB: Application of Knowledge Status: Old 3) A firm that buys goods that it would normally produce internally from an international company is using A) transfer pricing.

B) insourcing.

C) international outsourcing.

D) domestic outsourcing.

Answer: C Skill: Definition AACSB: Application of Knowledge Status: Old 4) If an Albanian company hires a U.S.-based law firm, it is A) insourcing, from a U.S. perspective.

B) using domestic outsourcing.

C) changing into a multinational enterprise.

D) vertically integrating.

Answer: A Skill: Definition AACSB: Application of Knowledge Status: Old 5) When a country opens up to free trade A) winners and losers are created.

B) comparative advantage dictates that the country focus on production of some goods and services at the expense of others.

C) the gains outweigh the losses.

D) All of the above.

Answer: D Skill: Conceptual AACSB: Application of Knowledge Status: Old

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