Deck 11: What Should the Firm Do

Question 1

Brand names help

A)create commodities.
B)maintain market power.
C)create competition.
D)keep economic profits at zero.

Answer 1

maintain market power.

Question 2

Entry of new firms causes

A)accounting profits to go to zero.
B)market share to grown.
C)economic profits to go to zero.
D)total revenue to be maximized.

Answer 2

economic profits to go to zero.

Question 3

If a firm's product becomes a commodity

A)the firm gains market power.
B)the firm's strategy has apparently paid off.
C)the firm has become a monopoly.
D)the firm looses market power.

Answer 3

the firm looses market power.

Question 4

According to economic theory, profits are maximized where

A)total revenue equals total cost.
B)marginal revenue equals marginal cost.
C)price and average cost are equal.
D)where marginal product and average cost are equal.

Question 5

Managers should maximize

A)social accountability.
B)the health and welfare of the employees.
C)market share.
D)none of these choices.

Question 6

Fixed costs

A)do not vary with output
B)vary with output
C)do not vary with price
D)vary with price

Question 7

Adding value means

A)to make products that have positive prices.
B)that the value of a firms output is greater than the value of the output that was not produced by the inputs the firm employs.
C)that the firm has a positive economic profit.
D)that economic profit is zero.

Question 8

How often should a firm address 'social responsibility'?

A)never.
B)all the time.
C)once a year.
D)over the long-run.

Question 9

If a firm does not maximize value

A)it has not focused on what is important.
B)it will shift its focus to market share.
C)it will shutdown.
D)it has paid too much in taxes.

Question 10

Executives should

A)spend an additional dollar on an activity if consumers value it by more than a dollar.
B)do more of something if marginal revenue is positive.
C)pend an additional dollar on an activity if consumers value it by less than a dollar.
D)do more of something if average revenue is greater than zero.

Question 11

A firm needs to maximize the value to all of its

A)managers.
B)employees.
C)suppliers.
D)stakeholders.

Question 12

If firms are exiting a market then

A)economic profits must be zero
B)economic profits must be greater than zero
C)economic profits must be less than zero
D)both economic and accounting profits must be greater than zero.

Question 13

Firms can create value by

A)creating a brand name.
B)by offering guarantees.
C)by offering warranties.
D)all of these choices.

Question 14

According to economic theory, profits are maximized at the rate of output where

A)price equals total revenue.
B)marginal revenue equals marginal cost.
C)economic profits are zero.
D)price and marginal revenue are equal.

Question 15

Competition is essentially the search for

A)accounting profit.
B)economic profit.
C)zero tax liability.
D)the market with the most competitors.

Question 16

When a firm earns economic profit

A)accounting profits are zero.
B)market share has be capitalized.
C)other firms enter the market.
D)total revenue has been maximized.

Question 17

If a firm has market power it may be able

A)to protect market share.
B)to continue to earn economic profits.
C)minimize marginal costs.
D)to maximize total revenue.

Question 18

Value maximization means

A)that managers make decision so as to increase the long-run market value of the financial claims on the firm.
B)that a firm should make products that have the highest price.
C)that managers make decision so as to increase the short-run market value of the financial claims on the firm.
D)all of these choices.

Question 19

It is sometime useful to view each step in the supply chain as a(n)

A)single market.
B)integrated process.
C)horizontal process.
D)vertical process.

Question 20

Government may make it possible

A)to create a network externality.
B)to find 'winners' in the stock market.
C)for a firm to become a monopoly.
D)all of these choices.

Question 21

Managers should engage in an activity if, on average, it can be done for less that a dollar per unit.

Question 22

The abnormal net income model

A)assumes that economic profits cannot be earned in the short run.
B)assumes that economic profits cannot be earned in the long run.
C)employs economic profit in its valuation of a firm.
D)none of these choices.

Question 23

Competitive firm can earn economic profits over the long run.

Question 24

A manager maximizes profit when they find a level of output where marginal revenue and marginal cost are equal.

Question 25

A brand name makes a product a commodity.

Question 26

The key to understanding the movement in stock prices is to understand

A)expectations.
B)market share.
C)accounting profits.
D)the firms contribution to the social welfare of its employees.

Question 27

Managers should do more of an activity if it adds more to revenue than it adds to cost.

Question 28

Diversification is determined by adding value.

Question 29

Stock prices are determined by only past performance.

Question 30

Exit from a market will occur if economic profits are zero.

Question 31

Variable costs

A)do not vary with price.
B)do not vary with output.
C)vary with price.
D)vary with output.

Question 32

The present value of the future is

A)not related to the interest rate.
B)inversely related to the interest rate.
C)positively related to the interest rate.
D)equal to economic profit

Question 33

The abnormal net income model predicts a negative relationship between economic profits and stock prices.

Question 34

If managers minimize costs they have maximized profits.

Question 35

Economic profits and the performance of stock

A)are independent of each other.
B)are negatively related.
C)are positively related.
D)are positively related only during downturns in the business cycle.

Question 36

It does not make economic sense to maximize short run performance over long run performance.

Question 37

Managers should attempt to maximize market share.

Question 38

Warrantees do not contribute to market power.

Question 39

By seeking economic profit, managers are seeking to create value.

Question 40

Price makers do not have market power.