Two Distinctive Features of the New Economy Are

MANAGERIAL ECONOMICS

CHAPTER 1

Question 1

Two distinctive features of the new economy are:

(A)Economies of scope and scale

(B)Scalability and network effects

(C)Network effects and economies of scope

Question 2

Toyota’s production of cars last year is a _____, while its inventory of cars at the end of last year is a ______.

(A)Flow, Stock

(B)Stock, Flow

(C)Flow, Flow

Question 3

A model that explicitly focuses on the timing and sequence of actions and payments is called a ______model.

(A)Dynamic

(B)Static

(C)Neither of the above

Question 4

Do Los Angeles and New York cable TV providers belong to a single market?

(A)Yes

(B)No

Question 5

All markets are global; no firm can avoid international competition.

(A)True

(B)False

Solution

1B – 2A – 3A – 4B – 5B

CHAPTER 2

QUESTION 1

Demand curves slope downward because:

(A)Marginal benefit is diminishing

(B)More people buy when the price is lower

(C)Both of the above

Question 2

If the buyer’s income increases, her demand curve for an inferior product will ______.

(A)Shift tot the left

(B)Not change

(C)Shift tot the right

Question 3

The demand for durable goods depends on

(A)Price, buyer income, advertising

(B)Expectations of future prices and income, interest rates and price of the used goods

(C)All of the above

Question 4

It is relatively more important to know the distribution of income in estimating the demand for a

(A)Neceessity

(B)Luxury product

(C)Substitute

Question 5

A two-part price aims to ______.

(A)Extract the buyer’s surplus

(B)Encourage the buyer to purchase a larger quantity

(C)Reduce the average price to the buyer

Solution

1C – 2A – 3C – 4B – 5A

CHAPTER 3

QUESTION 1

It has been observed that, when the price of music CDs rose by 1%, the market quantity demanded fell by 1.83%. The own-price elasticity of market demand is:

(A)1,83%

(B)-1,83%

(C)0,55%

(D)-0,55%

QUESTION 2

Suppose that the own-price elasticity of the market demand for cigarettes is –0.4. If the price falls by 5%, the quantity demanded will change by:

(A)-2%

(B)+2%

(C)-0,8%

(D)+0,8%

QUESTION 3

The advertising elasticity of demand is:

(A)Usually negative

(B)Usually positive

(C)May be positive or negative

QUESTION 4

The long-run demand for a nondurable good ______than the short-run demand.

(A)is more elastic

(B)is less elastic

(C)may be more or less elastic

Solution

1B – 2B – 3B – 4A

CHAPTER 4

QUESTION 1

The short run is a time horizon in which the seller ______.

(A)Cannot adjust one or more inputs

(B)Must work within the constraints of past commitments

(C)Both of the above

QUESTION 2

An increase in the fixed cost will ______the marginal cost.

(A)reduce

(B)not change

(C)increase

QUESTION 3

The market supply curve slopes upward because:

(A)the market demand curve slopes downward

(B)the marginal cost curves of the individual sellers slope upward

(C)new businesses can enter in the long run

QUESTION 4

A cut in construction sector wages would ______the supply of new apartments.

(A)reduce

(B)not change

(C)increase

QUESTION 5

The long-run supply is generally ______elastic than the short-run supply.

(A)less

(B)equally

(C)more

Solution

1C – 2B – 3B – 4C – 5C

CHAPTER 5

QUESTION 1

Conditions for a perfect competitive market

(A)Homogenous product

(B)Many buyers, each buying a small quantity

(C)Many sellers, each selling a small quantity

(D)All of the above

QUESTION 2

If a market experiences excess supply, the price will tend to:

(A)Fall

(B)Remain unchanged

(C)Rise

QUESTION 3

Suppose that the market demand is extremely elastic. If the market supply falls, the equilibrium price will ______.

(A)Fall

(B)Remain unchanged

(C)Rise

QUESTION 4

“When demand or supply changes, it is possible that the market price does not change.”

(A)True

(B)False

QUESTION 5

Prices are ______volatile in the short than in the long run.

(A)Less

(B)Equally

(C)More

SOLUTION

1D – 2A – 3B – 4A – 5C

CHAPTER 6

QUESTION 1

If some supplier is operating at a lower marginal cost than others, it should ______production so that the use of resources will be economically efficient.

(A)Reduce

(B)Not change

(C)Raise

QUESTION 2

The objective of transfer pricing is to ______within an organization.

(A)Minimize cost

(B)Achieve economic efficiency

(C)Maximize benefit

QUESTION 3

Following a $10 increase in freight charges, the price of cement rose by $7. The incidence on sellers was ______.

(A)$10

(B)$7

(C)$3

(D)None of the above

QUESTION 4

The deadweight loss due to a price ceiling will be larger if ______.

(A)The demand is more elastic and supply more elastic

(B)The demand is more elastic and supply more inelastic

(C)The demand is more inelastic and supply more elastic

(D)The demand is more inelastic and supply more inelastic

QUESTION 5

A minimum wage set at above the equilibrium wage forunskilled labor would ______.

(A)Reduce employment

(B)Encourage employers to automate

(C)Encourage employers to substitute skilled for unskilled labor

(D)All of the above

SOLUTION

1C – 2B – 3C – 4C – 5D

CHAPTER 7

QUESTION 1

Economies of scale arise where ______.

(A)There are significant fixed inputs

(B)Average variable cost falls with the scale of production

(C)Either of the above

QUESTION 2

Economies of scope arise where ______.

(A)There are significant fixed inputs

(B)There are significant joint inputs

(C)Either of the above

QUESTION 3

To uncover relevant costs that are shown in conventional accounting statements, we should ______.

(A)Consider alternative courses of action

(B)Apply the concept of opportunity cost

(C)Both of the above

QUESTION 4

“The transfer price of an internally-produced input should always be set equal to the marginal cost of the input.”

(A)True

(B)False

(C)True or false, depending on the circumstances

QUESTION 5

Conventional accounting statements may ______.

(A)Omit relevant costs

(B)Show sunk costs

(C)Both of the above

SOLUTION

1C – 2B – 3C – 4C – 5C

CHAPTER 8

QUESTION 1

The source of Microsoft’s market power over the Windows operating system is a ______.

(A)Unique resource

(B)Copyright

(C)Patent

QUESTION 2

A monopoly is selling at a rate where marginal revenue is less than marginal cost. It should ______.

(A)Reduce sales / increase price

(B)Raise sales / decrease price

(C)Reduce or raise sales, depending on the circumstances

QUESTION 3

A monopoly is selling at a rate where marginal revenue equals marginal cost. Its marginal cost increases by $2 per unit. It should ______.

(A)Increase price by $2 per unit

(B)Reduce sales / raise price

(C)Both of the above

QUESTION 4

A monopoly may set a price close to marginal cost because ______.

(A)Its demand is elastic

(B)It has few competitors

(C)It has few competitors

QUESTION 5

Cartel is less efficient when

(D)Low entry/exit barriers

solution

1B – 2A – 3B – 4A – 5D

CHAPTER 10

Question 1

Question 1 refers to the following game in strategic form, where each cell shows the profits accruing to Lucas Corp and Max Inc:

For Lucas Corporation, the strategy “build new capacity” is dominated by the strategy “do not build”.

(A)True

(B)False

(C)May be true or false, depending on the circumstances

Question 2

In a situation of first-mover advantage, a strategic move would be to:

(A)Gain the opportunity to move first

(B)Influence the beliefs or actions of the other party in a favorable way

(C)Wait for the other party to move first

Question 3

If the other player has adopted a Nash equilibrium strategy, I should

(A)Also adopt a Nash equilibrium strategy

(B)Look for a strategy that yields a higher return than the Nash equilibrium strategy

(C)May be (a) or (b), depending on the circumstances

Question 4

In a randomized equilibrium strategy, the expected return from each of the possible moves should be ______.

(A)different

(B)equal

(C)different or equal, depending on the circumstances

Solution

1B – 2A – 3A – 4B

Chapter 11

Question 1

Competition policy is needed to ___

(A)prevent cartels

(B)make informed decisions as to whether proposed mergers should be allowed or not

(C)prevent monopolization of the markets

(D)none of the above

(E)all of the above (except for answer d)

Question 2

With horizontal product differentiation ____

(A)Everybody agrees which product(s) are better than others

(B)Nobody agrees on which product(s) are better than others

(C)Some people prefer one product, some another

Question 3

HHI is not used as a decisive guideline in mergers.

(A)Not true

(B)True because changes in concentration alone is not indicative of changes in market power

(C)True because it does not map into a theoretical model of competition

Question 4

In a model of Cournot (capacity) competition between firms:

(A)An increase in marginal costs shifts the best response (reaction) function downwards

(B)Quantities are strategic substitutes

(C)Both of the above

Question 5

A best response function (reaction function)

(A)Tells us how a firm should react to a decision by its rival

(B)Characterizes all possible ...

(C)Depends on the value ...

Question 6

When 2 decision variables are strategic complements, then

(A)When the rival increases the value of its decision variable, it is in a firm's interest to do so as well

(B)When the rival increases the value of its decision variable, it is in a firm's interest to do the exact opposite

(C)There are no capacity constraints

Question 7

In a market with horizontal product differentiation, the firms want to locate away from each other in order to ____

(A)increase market share

(B)lure away customers from the rival

(C)increase their ability to raise prices

Question 8

The Bertrand trap is used to describe the situation where ____

(A)Prices are strategic substitutes

(B)There is no threat of entry

(C)Competition between two firms leads to the same outcome as perfectly competitive markets

Solution

1E – 2C– 3B – 4C – 5A – 6A – 7C – 8C

CHAPTER 13

Question 1

Ali is borrowing money from Jupiter Bank to buy a house. Ali has better information about his future earnings. Which of the following statements is true?

(A)The bank has imperfect information about Ali’s future earnings

(B)The bank bears risk with respect to Ali’s future earnings

(C)There is asymmetric information between Ali and the bank

(D)All of the above are true

Question 2

In a market where some proportion of items for sale is of low quality, the actual marginal benefit of buyers ______than the marginal benefit of buyers who receive high quality items.

(A) Is lower

(B)May be lower or higher

(C)Is higher

Question 3

In indirect segment discrimination, the seller is ______, and uses the discriminating variable to screen among the buyer segments according to their ______.

(A)Less-informed, willingness to pay

(B)Better-informed, willingness to pay

(C)Less-informed; purchase size

(D)Better-informed; purchase size

Question 4

Both screening and signaling rely on ______.

(A)Asymmetric information

(B)Appraisal

(C)Self-selection

(D)All of the above

Question 5

In an eBay auction for multiple units of an item, all winning bidders pay the price of the lowest successful bid. This illustrates a ______.

(A)Discriminatory auction

(B)Non-discriminatory auction

(C)Winner’s curse

(D)Reserve price

Question 6

Suppose that a car manufacturer requires its employees to drive its own brand of cars. Is this a credible signal of quality?

(A)Yes

(B) No

Question 7

A clothing manufacturer wishes to attract hard-working employees. Which of the following compensation schemes would screen most effectively among workers according to their work ethic?

(A)Fixed monthly salary

(B)Fixed monthly salary plus bonus for exceeding production quota

(C)Payment by quantity of clothing produced (piece-rate)

Question 8

Screening is an initiative of the ______, while signaling is an initiative of the ______to resolve asymmetric information.

(A)Less-informed, better-informed

(B)Less-informed, less-informed

(C)Better-informed, less-informed

(D)Better-informed, better-informed

Question 9

Moodys, Standard and Poors, and Fitch/IBCA resolve asymmetric information through ______.

(A)Appraisal

(B)Screening

Question 10

“If all bidders knew the true value of the item for sale, there would be no winner’s curse.”

(A)True

(B)False

(C)May be true or false, depending on the circumstances

Question 11

Which of the following statements is true?

(A)Asymmetric information can be resolved directly through appraisal, screening, or signalling

(B)Asymmetric information can be resolved indirectly through appraisal, screening, or signalling

(C)Neither statement is true

Question 12

Typically, real estate agents are paid through commission – they earn a percentage of the sale price if the property is sold, and nothing otherwise. The commission is an example of ______.

(A)Screening

(B)Signaling

(C)Contingency fee

Question 13

The demand for insurance arises from people who are ______.

(A)Risk-seeking

(B)Risk-neutral

(C)Risk-averse

(D)None of the above

Question 14

Evan is an apple grower. Hailey works as a doctor and is not related to Evan. Which of the following statements is correct?

(A)Only Evan has imperfect information about the price of apples and bears risk

(B)Only Hailey has imperfect information about the price of apples and bears risk

(C)Both Evan and Hailey have imperfect information about the price of apples, but only Evan bears risk

(D)Both Evan and Hailey have imperfect information about the price of apples and bear risk

Solution

1D – 2B? – 3A/C? – 4C – 5B? – 6B – 7C? – 8A – 9A – 10A?– 11C – 12C – 13C – 14C

CHAPTER 14

Question 1

To resolve moral hazard, it is necessary that performance incentives align the marginal benefit of effort of the better-informed party to the marginal benefit of the less-informed party ______

(A)at all effort levels

(B)around the economically efficient level of effort

(C)at the maximum effort level

Question 2

A South Korean investor in the North Korean tourist industry set up a floating hotel.What is the advantage of a floating hotel over one built on land?

(A)avoids vertical integration

(B)reduces specific investment

(C)equivalent to a complete contract

(D)all of the above

Question 3

Which of the following would affect the distribution of ownership?

(A)horizontal integration

(B)vertical integration

(C)both of the above

Question 4

The architecture of an organization includes ______

(A)distribution of ownership

(B)incentive schemes

(C)monitoring systems

(D)all of the above

Question 5

For a party subject to moral hazard with respect to multiple responsibilities, strong performance incentives for one responsibility may ______

(A)resolve moral hazard on that responsibility

(B)induce worse performance on other responsibilities

(C)both of the above

Question 6

The owner of an asset has the rights to ____

(A)vertical integration

(B)residual control

(C)horizontal integration

Question 7

Trucks may be equipped with computers to monitor location and usage. Employee-driven trucks are more likely to have such computers than owner-driven trucks because ______

(A)there is a conflict of interest between employer and driver

(B)employees might hold up their employer

(C)the contract with employees is incomplete

Question 8

Construction site supervisors are responsible for both the progress of work and worker safety. Which of the following is true?

(A)if supervisors are given incentives linked to the speed of work, they will tend to neglect safety

(B)if supervisors are given incentives linked to safety, they will tend to neglect the speed of work

(C)both of the above

Question 9

If a worker is subject to moral hazard, the marginal benefit of effort to the employer _____ the marginal cost of effort by the worker.

(A)is less than

(B)equals

(C)exceeds

Question 10

Performance incentives may impose risk because ______

(A)The party subject to incentives has imperfect information about extraneous factors that affect the performance indicator

(B)The incentives are based on the performance indicator

(C)Both of the above

Question 11

The contract between parties should be more detailed if ...

(A)the potential for holdup is small, and specific investments are not important.

(B)the potential for holdup is large, and specific investements are important.

(C)either of the above

Question 12

A bank may be subject to moral hazard relative to the provider of deposit insurance. In this case, the less-informed party is the ______

(A)bank

(B)deposit insurer

(C)government

Question 13

Vertical integration may reduce ______but increase ______

(A)potential for holdup; moral hazard

(B)moral hazard; potential for holdup

(C)specific investments; internal monopoly power

(D)internal monopoly power; specific investments

Solution

1B? – 2D? – 3B? – 4D? – 5C?– 6B? – 7A? – 8A/C? – 9A? – 10A/C? – 11B? – 12A? – 13C?