Question 1

This question refers to the following game in strategic form,where each cell shows the profits accruing to Lightning Industries and Maximum Power:  The Nash equilibrium of this game is:

Accepted Answer

In this game, both companies have an incentive to build new capacity since their profits would increase. Thus, both companies building new capacity is the Nash equilibrium of the game. As there is no dominant strategy for either player, they both have to adopt a strategy that is optimal for them given the strategy of the other player, leading to the Nash equilibrium of both companies building new capacity.

Question 2

In the short term,a firm in a very competitive market

Accepted Answer

In a very competitive market, a firm must set its price at the competitive equilibrium price even if it is below their minimum average cost. This is because if the firm sets the price higher than the equilibrium price, it will lose customers to its competitors who are charging a lower price. As a result, the firm will have to lower its price to remain competitive, leading to lower profits. Therefore, in the short term, a firm in a very competitive market maximizes its profits by setting its price at the competitive equilibrium price.

Question 3

The price elasticity of demand for bread is -0.5.If the price falls by 5%,the quantity demanded will change by:

Accepted Answer

Given price elasticity of demand for bread is -0.5, implying that a 1% decrease in price will result in a 0.5% increase in the quantity demanded. 
So, when the price falls by 5%, the quantity demanded will change by 5%*0.5 = 2.5%.
Since the price has fallen, the demand for bread would increase, which means that the answer is a positive percentage change in the quantity demanded. Therefore, the answer is B) +2.5%.

Question 4

If you are planning a common value auction and suspect that collusion may occur,which of the following should you NOT do?

Accepted Answer

Publishing a list of the people that you expect to attend the auction could allow the potential bidders to collude before the auction takes place.

Question 5

You are more likely to experience the "winner's curse" in which type of auction?

Accepted Answer

The "winner's curse" refers to the situation where the winner of an auction ends up paying more than the item is actually worth. This is more likely to happen in a common value auction where bidders have incomplete information about the true value of the item being auctioned off. In a sealed-bid auction, bidders submit their bids privately, so there is less opportunity for overbidding based on what others are willing to pay. Similarly, in a second-price auction, the winner pays only slightly more than the second-highest bidder, reducing the chances of overbidding. In an oral auction, on the other hand, bidders may get caught up in the excitement of the moment and bid higher than they intended to.

Question 6

If you are an auctioneer in a common value action you should do all of the following except…

Accepted Answer

As an auctioneer in a common value auction, hiding adverse information that would devalue the item would be unethical and potentially illegal. The goal should be to provide as much information as possible to potential bidders to ensure a fair and transparent auction process. Encouraging aggressive bidding is also not necessary and could potentially intimidate some bidders. Reducing the uncertainty of the value of the item and releasing as much information about the item as possible are both appropriate steps an auctioneer should take to facilitate a successful auction.

Question 7

An oral auction with values of $4,$6,$9,$12,$13,and $15 is currently taking place.What will the winning bidder pay?

Accepted Answer

In an oral auction, the winning bidder pays the highest bid that was made. Out of the values given, $15 is the highest bid. Therefore, the winning bidder will pay $15.

Question 8

Five bidders bidding for an item in an oral auction agree to collude.Their values are {$9,$8,$7,$3,$2}.Five bidders are not in the cartel and are bidding competitively.Their values are {$6,$5,$5,$2,$1}.What is the winning bid?

Accepted Answer

The cartel will bid just above the highest value of the non-colluding bidders, which is $6, to win the auction at the lowest possible price.

Question 9

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

Accepted Answer

Price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. Here, it is -1.83%/1% = -1.83.

Question 10

Which of the following conditions that must be satisfied by a successful price discrimination scheme?

Accepted Answer

All of the given conditions are necessary for a successful price discrimination scheme. The seller must have market power to be able to charge different prices to different customer groups. The seller must also be able to identify customer groups with different demand elasticities to determine the optimal pricing strategy. Finally, the seller must be able to prevent arbitrage between the two groups to ensure that the groups do not trade goods or services among themselves to circumvent the pricing scheme.

Question 11

If the people with values of $4,$12,$15 form a cartel during the auction in the previous problem (values for all participates are $4,$6,$9,$12,$13,and $15),how much money will the cartel save?

Accepted Answer

The answer of If the people with values of $4,$12,$15...

Question 12

If two firms producing substitutes agree to fix prices,then their prices will 1.____________ .If two firms producing complements agree to fix prices,then their prices will 2.____________ .

Accepted Answer

When firms producing substitutes agree to fix prices, they will increase their prices to maximize profits. When firms producing complements agree to fix prices, they will decrease their prices to increase demand for both products.

Question 13

The forces that create high rivalry within an industry include all of the following except:

Accepted Answer

Fast industry growth typically reduces rivalry by creating more opportunities for all competitors to succeed. Therefore, it is not a force that creates high rivalry within an industry. A, B, and D all increase rivalry by making it more difficult for any one competitor to gain an advantage over the others.

Question 14

A video store believes there are two equally sized consumer groups with different values for two DVDs as follows: 
 segment 1 values DVD A at $10 and DVD B at $8
Segment 2 values DVD A at $4 and DVD B at $12.
There are estimated to be 50 consumers in each group.The store currently has 100 of each DVD on hand.It paid $10 for each DVD.If it is unable to sell them all it can return them to the distributor for $4 each.To maximize profit contribution from the sale (or return)of these DVDs the store should:

Accepted Answer

Offering A and B together for $16 maximizes profit because each segment values the bundle at $18, ensuring all DVDs are sold at a price above the return value, maximizing revenue.

Question 15

The fixed cost of Boeing's new aircraft,the 797,is $6 billion.The average variable cost is $100,000,000.The sales price is $ 140,000,000.What is the projected breakeven volume?

Accepted Answer

The breakeven volume is calculated by dividing the fixed costs by the contribution margin per unit (sales price - variable cost). Here, $6 billion / ($140 million - $100 million) = 150 units.

Question 16

The demand for insurance arises from people who are:

Accepted Answer

People who are risk-averse are more likely to seek insurance as a means of protecting themselves against potential losses. Risk-seeking individuals are more inclined to take on risk rather than purchasing insurance to protect against it, while risk-neutral individuals would make decisions based solely on expected values and would not be motivated solely by the idea of avoiding risk.

Question 17

What is the definition of market equilibrium?

Accepted Answer

Market equilibrium is the point where the quantity demanded of a good or service equals the quantity supplied, meaning there is no excess of supply or demand. This is also known as the market clearing price, where buyers and sellers are satisfied with the price and quantity being exchanged in the market. Therefore, the correct answer is C. Choice A is incorrect because unit elasticity of demand does not necessarily indicate market equilibrium. Choice B is incorrect because it only describes the extraction of consumer surplus, which may occur at prices above or below market equilibrium.

Question 18

Switching costs refer to the

Accepted Answer

Switching costs refer to the one-time costs customers incur when buying from a different supplier. These costs can include things like learning a new system, training staff, or any other expenses associated with switching to a new supplier.

Question 19

A company manufactures three products as shown below.It is considering a decision to discontinue the production of product C.Corporate overhead of $60,000 is allocated to each product in equal parts.If the company decides to discontinue product C,50% of its quantity demanded will shift to product A (i.e.,products A and C are substitutes).Product B is neither a substitute nor a complement for product A or product C. $\begin{array}{|l|r|r|r|}
\hline &A&B&C\
\hline \text { Unit Price } & \$ 10.00 & \$ 15.00 & \$ 5.00 \
\hline \text { Marginal Cost } & \$ 5.00 & \$ 5.00 & \$ 3.00 \
\hline \text { Quantity Sold } & 10,000 & 2,000 & 3,000 \
\hline \text { Unit Margin } & \$ 5.00 & \$ 10.00 & \$ 2.00 \
\hline \text { Total Margin } & \$ 50,000.00 & \$ 20,000.00 & \$ 6,000.00 \
\hline \text { Overhead Allocation } & \$ 20,000.00 & \$ 20,000.00 & \$ 20,00.00 \
\hline \text { Accounting Profit } & \$ 30,000.00 & \$ 0.00 & -\$ 14,000.00\
\hline
\end{array}$ The company should:

Accepted Answer

Continuing to produce product C would result in a negative accounting profit, as the total margin generated by the product is less than the allocated overhead. Additionally, discontinuing product C would result in a positive substitution effect for product A, which has a higher unit margin. Thus, discontinuing product C would maximize the total economic profit contribution generated by the company.

Question 20

You are considering entry into a market in which there is currently only one producer (incumbent).Entry will require $20k in fixed costs per year (avoidable at the end of each year).If you enter,the incumbent can take one of two strategies,price low or price high.If they price high then you expect a $60k profit per year.If they price low then you expect a $20k loss per year.

Accepted Answer

If the probability of the incumbent pricing low is less than 0.75, the expected profit from entering the market is positive, making entry a viable option.

Quiz 1: Managerial Economics

This question refers to the following game in strategic form,where each cell shows the profits accruing to Lightning Industries and Maximum Power: The Nash equilibrium of this game is: