Deck 1: Basic Microeconomic Principles

Question 1

What is a sunk cost?

A)A cost that can be avoided if certain choices are made
B)A cost that always varies with the output of a factory
C)The average cost of operating a plant
D)The "lower envelope" of short-run average cost functions
E)A cost incurred no matter what the decision is and cannot be avoided

Answer 1

E

Question 2

Suppose a factory is producing 100 units and the price of each unit is $10.If raising the price to $12 per unit results in a drop in sales of 12 units,what is the price elasticity of demand,η?

A)6
B))6
C)1)67
D))8
E))17

Answer 2

B

Question 3

Suppose an entrepreneur starts a business earning $2M in revenue in 2009 while at the same time incurring $1.8M in costs.If the entrepreneur's best outside alternative employment opportunity is to earn $300K,what are the firms accounting and economic profits?

A)$200K, -$100K
B)$200K, $100K
C)$300K, $100K
D)$300K, -$100K
E)$200K, $200K

Answer 3

A

Question 4

What is the revenue destruction effect?

A)The loss in revenue a firm incurs on units it would have sold at a higher price when reducing price to sell extra units
B)The loss in revenue a firm incurs as a result of selling fewer units of output when raising price to increase profit
C)The loss in revenue a firm incurs due to brand level elasticities
D)The loss in revenue a firm incurs due to being in a perfectly competitive market
E)The loss in revenue a firm incurs due to predatory pricing

Question 5

Which of the following cost line items would be a fixed cost?

A)Commissions to Salespeople
B)Rent
C)Raw Materials
D)Packaging
E)Shipping/Delivery Charges

Question 6

If η=.8 and P=$25,what is MR?

A)$20
B)$6.25
C)-$5
D)-$6.25
E)$5

Question 7

Which of the following best describes marginal revenue?

A)How sales revenue varies as a function of how much product is sold
B)The incremental sales from producing one more unit of output
C)Rate of change in total revenue that results from the sale of ΔQ additional units of output
D)The total sales for a given product based on plant output
E)Percentage change in quantity divided by percentage change in price

Question 8

Which of the following variables does not influence the quantity of product that a firm is able to sell?

A)Price of the product
B)Price of related products
C)Plant production costs
D)Incomes and tastes of consumers
E)Advertising

Question 9

What is a Nash equilibrium?

A)A state where each player is doing the best it can, given the strategies of all other players
B)A state where the sum of all payoffs is maximized
C)A state where the players always have achieved their best possible result
D)A state at which the MR=MC for a firm
E)A state where each player always must play a dominant strategy

Question 10

The basic law of demand says that all other things being the same,_______________________.

A)The lower the price of a product, the less of it consumers will purchase
B)The higher the price of a product, the less of it consumers will purchase
C)The lower the price of a product, the more of it consumers will purchase
D)The higher the price of a product, the more of it consumers will purchase
E)The greater the number of units of a product sold in the past, the more of it consumers will purchase that product in the future

Question 11

Which of the following statements is true regarding the relationship between average and marginal cost functions?

A)When average cost is a decreasing function of output, marginal cost is greater than average cost.
B)When average cost neither increases or decreases (because it is constant or at a minimum point), marginal cost is equal to average cost
C)The average cost function is always smaller than the marginal cost function
D)The average cost function is always greater than the marginal cost function
E)When average cost is an increasing function of output, marginal cost is less than average cost

Question 12

In what special situation might the law of demand not hold?

A)In a perfectly competitive market
B)When there is a high price elasticity of demand
C)When MR=MC
D)At the Nash Equilibrium
E)If high prices confer prestige

Question 13

If TC(Q)=1000Q²+100Q+10,what is the formula for AC(Q)?

A)2000Q+100
B)2000Q²+100Q
C)1000Q²+100Q+10
D)1000Q+100+10/Q
E)100Q+10+1/Q

Question 14

Which characteristic does not describe a perfectly competitive market?

A)Firms produce identical or nearly identical products
B)Market price is beyond the control of any individual firm
C)A firm's demand curve is perfectly horizontal at the market price
D)Industry-level price elasticity is finite
E)Firm-level price elasticity of demand facing another perfect competitor is infinite

Question 15

In which of the following markets is a consumer more sensitive to price?

A)Credit Cards
B)Items sold door to door
C)Customized software upgrade
D)Copier/Printer Toner
E)Health Care

Question 16

At what point can a firm achieve a profit maximizing quantity?

A)MR>MC
B)MC=D
C)MRD)MR=D
E)MR=MC

Question 17

The following figure plots Short Run Average Cost functions for small,medium,and large plants. Based on the figure and plots provided,for which quantity level is a medium plant the best choice?

A)Q₁
B)Q₂
C)Q₃
D)Q₄
E)Q₅

Question 18

In which of the following markets is a consumer less sensitive to price?

A)Airlines
B)Refrigerators
C)Health Care
D)Computer components
E)Washing Machines

Question 19

If a firm is producing as efficiently as it knows how,the how will the total cost function slope?

A)Upward
B)Downward
C)No Slope
D)Downward until an output threshold value, then upward
E)Upward until an output threshold value, then downward

Question 20

Which of the following best describes marginal cost?

A)The per-unit-of-output cost for a product
B)The incremental cost of producing one more unit of output.
C)A cost invariant to the firm's output
D)The sum of all costs associate with the production of a product
E)The cost of fixed items such as general and administrative expenses

Question 21

Suppose a firm's plant produces Q units in any given year.The plant itself operates with annualized costs of $10M and other annual fixed expenses totaling $3M.In addition,the firm's variable costs depend on Q and are given by the formula 5Q²+3Q.What is the formula for the firm's Average Fixed Costs?

Question 22

Suppose a firm's plant produces Q units in any given year.The plant itself operates with annualized costs of $10M and other annual fixed expenses totaling $3M.In addition,the firm's variable costs depend on Q and are given by the formula 5Q²+3Q.What is the formula for the firm's Short-Run (i.e.one year)Average Costs?

Question 23

What are the Nash Equilibrium Strategies and corresponding payoffs for the following matrix?

Question 24

Suppose a firm's plant produces Q units in any given year.The plant itself operates with annualized costs of $10M and other annual fixed expenses totaling $3M.In addition,the firm's variable costs depend on Q and are given by the formula 5Q²+3Q.What is the formula for the firm's Average Variable Costs?

Question 25

In the following sequential decision tree,Alpha chooses a strategy first and then Beta chooses a strategy.Using backwards inductions,determine the Subgame Perfect Nash Equilibrium strategies and payoffs?