Econ_ Chapter 5

If output is produced according to Q = K^(1/2) + 3 L^(1/2), then this production process exhibits:
decreasing returns to scale

The production function for a competitive firm is Q = K^(.5)L^(.5). The firm sells its output at a price of $10, and can hire labor at a wage of $5. Capital is fixed at one unit. The maximum profits are
5.

An American economist visiting India observed that the roads were maintained by large numbers of workers with picks and shovels and other hand tools, while the same work is done in the United States by relatively small numbers of workers and mechanized devices. He correctly concluded that the reason for this difference is that:
workers in the Unites States are paid more than Indian workers

Which of the following conditions is NOT true when a producer minimizes the cost of producing a given level of output?
The marginal products of all inputs are equal.

Which of the following identifies the optimal usage of inputs by a profit-maximizing firm?
Marginal product of labor/price of labor = marginal product of capital/price of capital

Suppose the production function is given by Q = 3K + 4L. What is the average product of capital when 5 units of capital and 10 units of labor are employed
11.

Which of the following production functions displays decreasing returns to scale?
Q = cL^(.2)K^(.5)

The marginal product of labor is defined by the:
change in output divided by the change in labor input usage

The short-run is best defined as the time period in which:
one or more inputs to production are fixed

Whenever average product is declining with increases in input usage:
marginal product is less than average product

The marginal revenue product of labor is equal to the product of:
the marginal revenue per unit of output and the marginal product of labor.

Suppose the marginal product of labor is 8 and the marginal product of capital is 2. If the wage rate is $4 and the price of capital is $2, then in order to minimize costs the firm should use
more labor and less capital.

In order to minimize the cost of producing a given level of output, a firm manager should use more inputs when:
Its price falls.

In the table below, the average product of labor at L = 3 is:
APL=Q/L

In the table below, the marginal product of labor at L = 4 is:

MPL=change in Q / change in L

The law of diminishing marginal returns states that:
the marginal product of a factor eventually diminishes as more of the input is used, holding other inputs fixed

The following table shows the total output per hour produced in a factory at various levels of employment of labor. The firm sells each unit of output at $2 and each worker is paid a wage of $12.
Table 5-1

Refer to Table 5-1. Diminishing returns occurs beyond:
3 Workers

Which of the following correctly describes a production isoquant?
An isoquant is a curve that shows all possible combinations of inputs that can produce a given level of output.

Econ_ Chapter 2/3

The demand for good X is estimated to be Q x d = 10, 000 - 4P X + 5P Y + 2M + A X, where P X is the price of X, P Y is the price of good Y, M is income and A X is the amount of advertising on X. Suppose the present price of good X is $50, P Y = $100, M = $25,000, and A X = 1,000 units. Based on this information, the income elasticity of good X is
0.82.

The demand for answering machines is Q = 1,000 – 150 P + 25 I. Assume that per capita disposable income I is $200. When the price of answering machines is P = $10, the price elasticity of demand is:
–0.33

When the price of sugar was "low", consumers in the U.S. spent a total of $3 billion annually on sugar consumption. When the price doubled, consumer expenditures increased to $5 billion annually. This data indicates that:
The demand for sugar is inelastic.

"Colombia, Brazil Advance Proposal to Withhold 10 Percent of Export Output" ( Wall Street Journal, September 23, 1991, p. B6). A Colombian delegate to the International Coffee Organization said that if all its members withheld 10 percent of export output, the international price would rise 20 percent. This statement implies the price elasticity of demand for coffee is approximately:
-0.50

A manufacturer of infant clothes has found that the demand for its product is given by Q = 100 P –1.25 A 0.5, where P is price and A is advertising expenditures. The price elasticity of demand for these infant clothes is:
–1.25

The formula for the income elasticity of demand can be written as:

When marginal revenue is positive for a linear (inverse) demand function, decreases in output will cause total revenues to
decrease.

The initial price for an item is $5.00, and the quantity demanded is 400 units. When the price is raised to $5.25, the quantity demanded falls to 350 units. The absolute value of the point elasticity of demand is _____.
2.5

Suppose demand is given by Q x d = 50 - 4P x + 6P y + A x, where P x = $4, P y = $2, and A x = $50. What is the quantity demanded of good x?
96.

A firm's demand curve is usually:
more elastic than the market demand curve

The cross-price elasticity of demand for textbooks and copies of old exams is -3.5. If the price of copies of old exams increase by 10 percent, the quantity demanded of textbooks will
fall by 35 percent.

When a firm practices price discrimination in two market segments, the firm:
must be able to identify market segments that have different price elasticities.

Suppose a firm’s profit is given by the equation π = -200 + 80Q - .2Q 2. Which of the following is true?
The firm’s profit-maximizing output is Q = 200.

The demand for fax machines in thousands of units has been estimated to be Q = 1,000 – 1.5 P + 5 L, where P is the price of the machines and L is the average cost of a 10-minute midday call from Los Angeles to New York. At a fax machine price of $400 and a phone call cost of $10, the price elasticity of demand for fax machines is:
–1.33

The demand for a product is more elastic the:
longer the time period covered

If quantity demanded for sneakers falls by 10% when price increases 25% we know that the absolute value of the own-price elasticity of sneakers is:
0.4.

If the income elasticity for lobster is .6, a 25% increase in income will lead to a
15% increase in demand for lobster.

If the price of pork chops falls from $8 to $6, and this leads to an increase in demand for apple sauce from 100 to 140 jars, what is the cross price-elasticity of apple sauce and pork chops at a pork chop price of $6?
-0.86.

For a parking garage of fixed capacity, the owner sets different parking rates for cars that are parked for less than 24 hours (short-term) and for those that are parked for more than 24 hours (long-term). To maximize revenue, the operator should set prices and target the number of places for each segment such that:
the marginal revenues from the segments are equal.

The cross price elasticity of demand between goods X and Y is -3.5. If the price of X decreases by 7%, the quantity demanded of Y will:
increase by 24.5%.

The demand for good X is estimated to be Q x d = 10, 000 - 4P X + 5P Y + 2M + A X, where P X is the price of X, P Y is the price of good Y, M is income and A X is the amount of advertising on X. Suppose the present price of good X is $50, P Y = $100, M = $25,000, and A X = 1,000 units. Based on this information, we know that the demand for good X is
inelastic.

The own-price elasticity of demand for apples is -1.5. If the price of apples falls by 6%, what will happen to the quantity of apples demanded?
It will increase 9%.

Since most consumers spend very little on salt, a small increase in the price of salt will
not reduce quantity demanded by very much.

The demand for good X is estimated to be Q x d = 10, 000 - 4P X + 5P Y + 2M + A X, where P X is the price of X, P Y is the price of good Y, M is income and A X is the amount of advertising on X. Suppose the present price of good X is $50, P Y = $100, M = $25,000, and A X = 1,000 units. Based on this information, the cross price elasticity between goods X and Y is
0.008.

If the price of a good or service increases, what happens to the firm’s demand curve?
There is an upward movement along the demand curve.

The demand for textbooks is Q = 200 – P + 25 U – 50 P beer. Assume that the unemployment rate U is 8 and the price of beer P beer is $2. When the average price of a textbook is P = $100, the price elasticity of demand is:
-0.5

If the marginal cost of seating a theatergoer is $5 and the elasticity of demand is –4, the profit-maximizing price is:
$6.67

El Niño wind patterns affected the weather across the United States during the winter of 1997–98.  Suppose the demand for home heating oil in Connecticut is given by Q = 20 – 2 P_hho + 0.5 P_ng – TEMP, where Q is the quantity of home heating oil demanded, P_hho is the price of home heating oil per unit, P_ng is the price of natural gas per unit, and TEMP is the absolute difference between the average winter temperature over the past 10 years and the current average winter temperature.  If the current price of home heating oil is $1.20, the current price of natural gas is $2.00, and the average winter temperature this year is 40 degrees compared to 28 degrees over the past 10 years, the price elasticity of demand for home heating oil is:
–0.36

If the marginal cost of making a photocopy is 3 cents and the elasticity of demand is –2, the profit-maximizing price is:

6 cents

El Niño wind patterns affected the weather across the United States during the winter of 1997–98.  Suppose the demand for home heating oil in Connecticut is given by Q = 20 – 2 P_hho + 0.5 P_ng – TEMP, where Q is the quantity of home heating oil demanded, P_hho is the price of home heating oil per unit, P_ng is the price of natural gas per unit, and TEMP is the absolute difference between the average winter temperature over the past 10 years and the current average winter temperature.  If the current price of home heating oil is $1.20, the current price of natural gas is $2.00, and the average winter temperature this year is 40 degrees compared to 28 degrees over the past 10 years, the quantity of home heating oil demanded is:

6.6 gallons

The following table shows the total revenue and total cost (in dollars) from different sales volumes of the good.
Table 2-1 

Refer to Table 2-1. What is the marginal profit of the firm from the sale of the 3rd unit of the good?

$6

Which of the following correctly defines second-degree price discrimination?

The seller offers different prices and customers choose the one that best suits them.

Which of the following is true of full-cost pricing?

Since fixed costs do not affect optimal price and quantity, full-cost pricing is error-prone.

A manufacturer of infant clothes has found that the demand for its product is given by Q = 100 P ^–1.25 A ^0.5, where P is price and A is advertising expenditures. If marginal cost is $5, the profit-maximizing price is:

$25.00

The demand for space heaters is Q = 250 – P + 2COOL, where COOL is the absolute value of the difference between the average overnight low temperature and 40°F. Assume that the average overnight low is 0°F. When the price of space heaters is P = $30, the price elasticity of demand is:

–0.1

Assume that the price and income elasticities of demand for luxury cars are E _P = -0.52 and E _Y = 3.2 respectively. In the coming year, car prices are expected to rise by 2 percent and income by 8 percent. Based on this information, sales of cars are expected to _____.

increase by 24.56%

The following table shows the total revenue (in dollars) and total cost (in dollars) from the production and sale of different units of a product. 
Table 2-1 

Refer to Table 2-1. What is the profit-maximizing level of output for the firm?

5 units

The income elasticity of demand is defined as the:

percentage change in the quantity demanded divided by the percentage change in per capita income

A market demand curve is likely to shift to the right when:

population increases

A price elasticity of zero corresponds to a demand curve that is:

Vertical

If the own price elasticity of demand is infinite in absolute value, then

demand is perfectly elastic.

The demand function in the above table is Q _X ^d = 100 - 2P _X. Based on this information, when Q _X = 80, the price, P _X, (point A) is

$10.

Since most consumers spend very little on salt, a small increase in the price of salt will

not reduce quantity demanded by very much.

The demand for cough medicine is Q = 10 – 2 P. At a price of $2.50, the price elasticity of demand is:

–1.0

The marginal cost of producing a paperback is half the marginal cost of producing a hardback version sold to consumers at four times the paperback price. If the price elasticity of demand for paperbacks is –4, then the price elasticity of demand for hardcover books is:

–1.6

The price elasticity of market demand primarily depends on the:

availability of substitutes

The price elasticity of demand is -2.0 for a certain firm's product. If the firm raises price, the firm manager can expect total revenue to

decrease.

Suppose the equilibrium price in the market is $10 and the price elasticity of demand for the linear demand function at the market equilibrium is -1.25. Then we know that

marginal revenue is $2.

If the demand for a good is price-elastic, a cut in price will:

lead to an increase in quantity demanded and an increase in the firm’s revenue.

The demand for good X is estimated to be Q _x ^d = 10, 000 - 4P _X + 5P _Y + 2M + A _X, where P _X is the price of X, P _Y is the price of good Y, M is income and A _X is the amount of advertising on X. Suppose the present price of good X is $50, P _Y = $100, M = $25,000, and A _X = 1,000 units. Based on this information, goods X and Y are

substitutes.

If price is $25 when the price elasticity of demand is –0.5, then marginal revenue must be:

–$25

When a demand curve is linear,

demand is elastic at high prices.

Assume that the price elasticity of demand is -0.75 for a certain firm's product. If the firm lowers price, the firm's managers can expect total revenue to

Decrease

If the demand function for a particular good is Q = 20 - 8P, then the price elasticity of demand (in absolute value) at a price of $1 is

2/3.

Given the total cost equation for a firm, the marginal cost equation can be derived by:

taking the first derivative of the cost function with respect to quantity.

The quantity consumed of a good is relatively unresponsive to changes in price whenever demand is:

inelastic.

Suppose that at the equilibrium price and quantity the marginal revenue is -$15 and the price elasticity of demand for a linear demand function is -0.75. Then we know that the equilibrium price is

$45.

The constant price elasticity of demand for cigarettes has been estimated to be –0.5. To reduce smoking by 50 percent, approximately how much tax needs to be added to a $1 pack?

$1.00

A good whose demand curve shifts to the left as income increases is a(n):

inferior good

Given that digital music players are used to play music downloaded from the Internet, a fall in the price of digital music players will lead to:

an increase in the demand for downloaded songs.

In Russia, as per capita income rises from $1,980 to $2,020, everything else remaining constant, annual per capita consumption of vodka falls from 525 to 475 liters; this implies an income elasticity of demand for vodka of:

–5.0

If a firm’s profit is given by π = -150 + 360Q - 36Q ², then its optimal output is:

5 units.

A product’s point price elasticity has been estimated at -1.5. At the initial price of $20, the quantity demanded was 10 units. If the firm cuts the price to $17.50, quantity demanded and sold is expected to increase by _____.

18.75%

A graphical representation of the demand function is called a:

demand curve

A profit-maximizing firm’s price can be written in terms of marginal cost and price elasticity of demand as:

P = MC/(1 + 1/h)

If the income elasticity of demand for a good is greater than one, it implies that:

sales of the good are highly sensitive to changes in consumers’ income.

When the price of sugar was "low", consumers in the United States spent a total of $3 billion annually on its consumption. When the price doubled, consumer expenditures actually increased to $4 billion annually. This indicates that

none of the statements associated with this question are correct.

If a firm’s demand function is of the form P = a - bQ, what is its marginal revenue equation?

MR = a - 2bQ

The demand for a product is given by Q = 600 - 30P. At P = $15, the firm sells:

150 units.

Suppose the own-price elasticity of demand for good X is -0.5, and that the price of good X increases by 10%. We would expect the quantity demanded of good X to

decrease by 5%.

The demand for food (a broad group) is more

inelastic than the demand for beef (specific commodity).

If the cross-price elasticity between ketchup and hamburgers is -2.5, a 2% increase in the price of ketchup will lead to a

5% 5% drop in quantity demanded of hamburgers.

If a price increase from $5 to $7 causes quantity demanded to fall from 150 to 100, what is the absolute value of the own-price elasticity at a price of $7?

1.75.

A profit-maximizing firm sets its price:

where demand is elastic

Suppose the own-price elasticity of demand for good X is -0.25, and that the quantity of good X increases by 5%. What would you expect to happen to the total expenditures on good X?

decrease.

Demand is more inelastic in the short-term because consumers:

have no time to find available substitutes.

Assume that Burger King, a fast food chain, enters into a franchise agreement. The royalty paid to Burger King by the franchisee is calculated as a percentage of the franchisee’s revenue. Given that the franchisee faces a downward-sloping demand curve, which of the following is likely to be true?

The franchisee’s revenue-maximizing output will be greater than its profit-maximizing output.

As we move down a linear demand curve, demand becomes:

less elastic

The demand for space heaters is Q = 250 – P + 2COOL, where COOL is the absolute value of the difference between the average overnight low temperature and 40°F. Assume that the average overnight low this month is 40°F. When the price of space heaters is P = $50, the price elasticity of demand is:

–0.25

The demand for cable television hookups is Q = 100 – 10 P ^1/2 + 2 I ^–1, where P is price and I is per capita income. Cable TV is a(n):

inferior good

The elasticity that measures the responsiveness of consumer demand to changes in income is the:

income elasticity.

We would expect the own price elasticity of demand for food to be:

less elastic than the demand for cereal.

Each week Bill buys exactly 7 bottles of cola regardless of its price. Bill's own price elasticity of demand for cola in absolute value is:

zero.

You are the manager of a popular hat company. You know that the advertising elasticity of demand for your product is 0.25. How much will you have to increase advertising in order to increase demand by 5%?

20%.

Demand tends to be

more inelastic in the short-term than in the long-term.

Suppose Q _x ^d = 10,000 - 2 P _x + 3 P _y - 4.5M, where P _x = $100, P _y = $50, and M = $2,000. What is the own-price elasticity of demand?

-0.21.

If the income elasticity for lobster is 0.4, a 40% increase in income will lead to a:

16% increase in demand for lobster.

The demand for good X is estimated to be Q _x ^d = 10,000 - 4P _X + 5P _Y + 2M + A _X where P _X is the price of X, P _Y is the price of good Y, M is income and A _X is the amount of advertising on X. Suppose the present price of good X is $50, P _Y = $100, M = $25,000, and A _X = 1,000 units. What is the quantity demanded of good X?

61,300.

The demand for answering machines is Q = 1,000 – 150 P + 25 I. Assume that per capita disposable income I is $200. When the price of answering machines is P = $10, the income elasticity of demand is:

1.11

If the own price elasticity of demand is infinite in absolute value, then

the demand curve is horizontal.

Makers of disposable diapers must advertise 5 percent more to offset completely the 2 percent decline in sales due to heightened environmental concern. The advertising elasticity of demand is:

0.4

If quantity demanded for sneakers falls by 6% when price increases 20% we know that the absolute value of the own-price elasticity of sneakers is

0.3

Econ_ Chapter 1

Ann is a manager at a private construction company. David works in the city planning department of the government. Based on this information, which of the following is most likely to be true?

David will make decisions based on benefit-cost analysis.

As a result of historically high gasoline prices in 2008, traffic volume in the United States (measured in terms of billions of miles driven per month) declined significantly. These changes were caused by a _____ of gasoline and _____.
shortage; a decrease in the quantity demanded of gasoline

The price of computers has fallen, while the quantity purchased has remained constant. This implies that the demand for computers has:
decreased, while the supply of computers has increased.

Which of the following correctly explains a probabilistic model?
A probabilistic model shows the possibility of a range of outcomes.

The government is deciding whether it should build a veteran’s hospital in an urban area. It will choose to build the hospital only if:

the total benefits from the hospital exceed total costs.

California imposes strict new regulations on the blending of gasoline that increase production costs. As a result, the:
supply of gasoline will decrease.

Which of the following is true of economic models?

Models are simplified descriptions of processes, relationships, or other phenomena.

Maximizing profit by enumerating the profit outcomes of different courses of action

Becomes increasingly costly as the number of choices increase.

A cosmetics company is conducting a second-year review of one of its newest products. The marketing department expects that the firm will continue to earn profits from the sale of the product in the third year as it did in the past two years. Senior management, however, feels that the profit projections would vary based on other factors such as the price of the competitor's products, the actual level of sales, and the possibility of cost reductions. In other words, the senior management is undertaking
a sensitivity analysis

The market demand curve shows the quantity of a good or service that:

households would buy at various prices.

A research study estimates that the direct cost of constructing a bridge connecting two boroughs in a city is $10 million. The revenue from the tolls on the bridge is estimated to be $8 million. The dollar value of pollution from the construction is estimated to be $5 million but the dollar value of the benefit to the city's residents is calculated to be $20 million. The construction of the bridge is most likely to be undertaken by:

the government because the total benefits exceed total costs

J. D. Power, the big management consulting firm, extols the reliability of Dell computers; this causes the:

demand for Dell computers to increase.

A coffee shop decides that it will increase its market share to 55% by the end of the year by lowering the price of a cup of coffee. The price cut will certainly result in an increase in the firm’s share but will lower its profits. Which of the following best explains the firm’s decision?

Revenue maximization

According to the satisficing model of management behavior, the goal of a firm is to:

achieve a satisfactory level of performance against a benchmark.

The economic theory of the firm assumes that the primary objective of a firm’s owner or owners is to:

maximize the value of the firm.

Managerial economics draws upon all of the following EXCEPT:

sociology.

The market supply curve shows the quantity of a good or service that ____, holding other possible influences constant.

firms would sell at various prices

According to the theory of the firm, the management’s ultimate objective is to:

maximize the value of the firm.

Managerial economics can best be defined as the:

analysis of major management decisions using economic tools

The study of behavioral economics shows that decision makers:

are prone to biases, mistakes, and pitfalls.

In evaluating public programs, benefit-cost analysis:

states that a program should be undertaken only if total benefits exceed total costs.

Sensitivity analysis is used by a firm to:

examine how an optimal decision is affected if key economic facts vary.

ConAgra has introduced a lean mixture of cereal and ground beef that is indistinguishable from ground beef but has about the same amount of fat as chicken. As a result, the:

demand for chicken decreases.

Managers make decisions that contribute to the profitability of a firm by:

taking on risks.