Managerial Economics

National Economics University

MID-TERM EXAM Time allowance 90 minutes

PART I: SELECT THE BEST ANSWER TO THE FOLLOWING QUESTIONS. (3 POINTS EACH) 1. According to the law of demand, if a firm reduces the price of its good a) Consumers in aggregate will demand more units. b) Consumers will demand roughly the same number of units. c) Consumers will demand more units only if they have the income to pay for them. d) The effect is uncertain; it depends on the behavior of rival firms. e) Competing firms are sure to match the price cut. 2. The firms demand curve is given by Q = 800 - 2P. Therefore, its inverse demand curve is a) MR = 800 4P. b) P = 800 2Q. c) P = 400 - .5Q. d) P = 800 - .5Q.. e) There is insufficient information to determine the inverse demand curve. 2 3. A firms total cost function is given by: C = 100 + 10Q + 2Q . At Q = 10, a) Total cost is 400 and marginal cost is 10. b) Marginal cost is constant. c) Average cost is 50. d) Fixed cost is 100 and marginal cost is 50. e) None of the above answers is correct. 4. At its current output level, a firms marginal profit is positive. Therefore, it should a) Decrease output until marginal profit is zero. b) Increase output because MR < MC. c) Increase both its output and its price. d) Increase output because MR > MC. e) Increase output until it is producing at full capacity. 5. To maximize profit, management should a) Set output to minimize its average cost per unit. b) Set output so that average revenue just equals average cost. c) Set price to maximize profit margin per unit. d) Set output so that marginal revenue equals marginal cost. e) Set output so that marginal revenue is zero. 6. A firm negotiates a new labor contract, raising the average hourly wage. What is the most likely effect on the firm's price and output? a) No effect. Both price and quantity will be unchanged. b) Price will increase, and quantity will be unchanged. c) Both price and quantity will increase. d) Price will be unchanged, and quantity will decrease. e) Price will increase, and quantity will decrease. 7. If the price of a good or service increases, a) The demand curve shifts inward. b) The demand curve shifts outward. c) There is a movement along the demand curve. d) There is a movement along and a shift in the demand curve. e) The demand curve changes slope but does not shift. 8. If the price of MP3 players decreases, a) The price per downloaded song will also decrease. b) The demand for downloading songs will increase. c) The demand for downloading songs will be unaffected. d) Answers a and b are both correct. e) None of the answers above is correct. 9. Management estimates the firms demand curve to be: Q = 400 - 5P. At P = $15, the point elasticity of demand is 1

a) -.23 b) -.013 c) -.85 d) -4.35 e) -5.00 10. The cross price elasticity between two products has been measured at 2.0. If the price of the first product is increased by 8%, demand for the second product will a) Increase by 8% b) Decrease by 4% c) Increase by 4% d) Increase by 16% e) There is not enough information to provide an answer. 11. If the price of a good is in the elastic range and the firm raises price, a) Quantity demanded will fall but revenue will increase. b) Revenue will be largely unchanged. c) Revenue will decrease. d) The fall in quantity demanded will be less than the increase in price. e) None of the answers above is correct. 12. The best definition of the short run is the period of time in which a) Management cannot change its decisions. b) The amount of output cannot be varied. c) One or more inputs are fixed d) All inputs can be varied but at a high marginal cost. e) Economic conditions are relatively stable and unchanging. 13. According to the law of diminishing marginal returns, a) If all inputs are increased in equal proportions, output will eventually decrease. b) If one input is increased, with all other inputs unchanged, additions to output will eventually decrease. c) If one input is held constant, and all other inputs are increased, output will eventually decrease. d) If one input is increased, and all other factors are held constant, output will eventually decrease. e) If all inputs are increased, output will grow but by a smaller proportion. 14. Under increasing returns to scale, a) As one input increases, additions to output eventually decrease. b) As all inputs are varied, average cost increases. c) As inputs increase in a given proportion, output increases by a greater proportion. d) As output is increased, required inputs grow at a faster rate. e) As scale economies are reached, total costs escalate. 15. Accounting profit typically exceeds economic profit because a) Accounting profit includes intangible revenue sources. b) Economic cost includes all relevant opportunity costs. c) Accounting cost contains implicit costs. d) Accounting practice is to allocate fixed costs to other activities. e) This is incorrect. Economic profit is usually greater than accounting profit. PART II: PROVIDE ANSWERS TO THE FOLLOWING QUESTIONS (25 POINTS) 1. (10 points) Suppose that a firm sells in a highly competitive market, in which the going price is $15 2 per unit. The firms cost equation is C = $25 + .25Q . a) Find the profit-maximizing level of output for the firm. Determine its level of profit. b) Suppose that fixed costs increase to $75. Find the profit-maximizing level of output for the firm. Determine its level of profit. 2. (15 points) The college and graduate-school textbook market is one of the most profitable segments for book publishers. A best-selling accounting text published by Old School Inc (OS) has a demand curve: P = 150 - Q, where Q denotes yearly sales (in thousands) of books. (In other words, Q = 20 means 20 thousand books.) The cost of producing, handling, and shipping each additional book is about $40, and the publisher pays a $10 per book royalty to the author. Finally, the publishers overall marketing and promotion spending (set annually) acco unts for an average cost of about $10 per book. a) Determine OSs profit-maximizing output and price for the accounting text.

b) A rival publisher has raised the price of its best-selling accounting text by $15. One option is to exactly match this price hike and so exactly preserve your level of sales. Do you endorse this price increase? (Explain briefly why or why not.) PART III: SHORT ESSAYS (30 POINTS) (see attached file)