Deck 15: Economics Primer

Question 1

If a firm is producing as efficiently as it knows how,then 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

Answer 1

Upward

Question 2

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

Answer 2

When average cost neither increases or decreases (because it is constant or at a minimum point),marginal cost is equal to average cost

Question 3

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

Answer 3

If high prices confer prestige

Question 4

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

Question 5

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

Question 6

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 7

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 8

Which of the following would be the range of elasticity for a product with an "inelastic" demand?

A) < 1
B) = 1
C) > 1
D) > 2
E)none of the above

Question 9

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 10

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 11

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 12

If a firm can sell its product for more than its fixed costs,but not for more than its totals costs:

A)It will shut down
B)It will lower its fixed costs
C)It will stop producing that product
D)It will continue to operate in the short run at a loss
E)It will increase its production quantity

Question 13

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 14

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 15

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 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 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 18

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 19

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)0.6
C)1.67
D)0.8
E)0.17

Question 20

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 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

If η=.8 and P=$25,what is MR?

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

Question 23

Which characteristic is present in 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)Firms can enter and exit the market very easily
E)all of the above

Question 24

Which of the following would not be a characteristic of a good with an elastic demand?

A)The product lacks unique features that differentiate it from competing products
B)The product is a high percentage of a consumer's total expenditures
C)The good is an input used to make a product that is sensitive to changes in price
D)There are many substitutes available for the good
E)The product has high switching costs

Question 25

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 26

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 27

Which of the following would be an example of a good with elastic demand?

A)Bread
B)Work Shoes
C)Prescription medicine
D)Luxury speedboat
E)Raincoats in winter

Question 28

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?

Question 29

Which of the following would be the range of elasticity for a product with an "inelastic" demand?

A) < 1
B) = 1
C) > 1
D) > 2
E)none of the above

Question 30

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

A)Office salaries
B)Rent
C)Raw Materials
D)Insurance
E)None of the above

Question 31

Which of the following best describes average cost?

A)The per-unit-of-output cost for a product at a given quantity
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 32

Why does a Nash equilibrium represent a plausible outcome for a game?

A)If Party A chooses first,the outcome is the same as its expectation regardless of B's choice
B)If Party B chooses first,the outcome is the same as its expectation regardless of A's choice
C)Regardless of which party chooses first,if they both expect the other to choose a its Nash equilibrium,then both parties expectations will equal the outcome.
D)Neither party needs to make a choice,the market forces an agreeable equilibrium outcome
E)None of the above are correct

Question 33

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

Question 34

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?