Question 1

A number of the costs of a manufacturing firm are fixed in the short run,like its building and machinery costs.Given these fixed costs,

Accepted Answer

Average fixed costs decrease as production increases because the fixed costs are spread over a larger number of units.

Question 2

If production exceeds the level at which marginal cost is equal to marginal revenue,

Accepted Answer

If production exceeds the level at which marginal cost is equal to marginal revenue, it means that the cost of producing an additional unit exceeds the revenue generated from selling that unit. This results in a decrease in profitability, as the additional units produced are not generating profits. Therefore, to maximize profitability, production should be reduced.

Question 3

Mr.D's Barbeque of Pickwick,TN.produces 10,000 dry-rubbed rib slabs per year.Annually Mr.D's fixed costs are $50,000.The average variable cost per slab is a constant $2.Suppose Mr.D smoked 10% more ribs.

Accepted Answer

Average total cost would drop because fixed costs are spread over more units, reducing the average cost per unit.

Question 4

A brewery is considering two potential production investments: Option A costs an initial $2 million and will involve constant marginal cost of $5 Option B costs an initial $4 million and will involve constant marginal cost of $3 In order to make the calculations simple,assume that the annual capital cost is 10% of the total investment.At what production quantity per year would the brewery be indifferent between these two investment opportunities?

Accepted Answer

The answer of A brewery is considering two potential production...

Question 5

A yo-yo manufacturer is producing 5,000 yo-yos selling them for $1.50 each.At this level of output,marginal revenue is $1.50.From this information,we can conclude that the yo-yo manufacturer

Accepted Answer

The fact that the marginal revenue is equal to the price ($1.50) indicates that the yo-yo manufacturer is not able to influence the market price and is taking the price as given. This is a characteristic of a competitive firm (price taker) rather than a monopolistic firm (which would have some degree of market power and be able to charge a higher price). The lack of market power also suggests that the demand curve is relatively elastic, further supporting the conclusion that the firm is a price taker.

Question 6

For a competitive firm (price-taker),

Accepted Answer

A competitive firm is a price-taker, meaning it cannot set prices above the market equilibrium. If it tries to increase its price, consumers will buy from other firms, causing its revenues to disappear.

Question 7

In the spring and summer of 1993,Chronic Wasting Disease wiped out 25% of the elk herd in Wyoming,and the number of state hunting licenses issued was reduced accordingly.In order to compensate for the decrease in license issuances,Wyoming dramatically increased the price.Unfortunately,this strategy proved unsuccessful as the state reported a 50% decrease in total elk license revenues for '93.Which of the following most accurately describes this economic situation?

Accepted Answer

The 50% decrease in total elk license revenues indicates that the demand for Wyoming elk hunting is price elastic, meaning that as the price increased, the quantity demanded decreased by a greater proportion. If the demand was price inelastic, the decrease in quantity demanded would have been proportionally smaller, resulting in relatively stable revenues despite the increase in price. The information provided does not indicate anything about the elasticity of supply.

Question 8

A bidders' value for a good may be low ($2),medium ($5),or high ($7).There are an equal number of potential bidders having each value.Suppose two bidders show up for an auction at which the good is offered.What is the best estimate of the expected revenue from the auction assuming there is no minimum bid increment?

Accepted Answer

The answer of A bidders' value for a good may...

Question 9

If supply falls in a perfectly competitive market,we can expect all of the following EXCEPT

Accepted Answer

If supply falls in a perfectly competitive market, it will lead to a decrease in the equilibrium quantity bought and sold and an increase in price. However, as demand is not affected, the quantity demanded will remain the same. Therefore, the correct answer is D, as demand is not expected to fall in this scenario.

Question 10

A company currently sells 60,000 units a month at $10 per unit.The marginal cost is constant at $6 up to 100,000 units per month.The company is considering raising the price by 10% to $11.If the price elasticity of demand is constant and ______ in that price range then profits would increase if they raise the price to $11.

Accepted Answer

If the price elasticity of demand is greater than or equal to -2.2, the percentage decrease in quantity demanded will be less than the percentage increase in price, leading to higher total revenue and increased profits.

Question 11

Which of the following will not decrease the demand for jogging shoes?

Accepted Answer

An increase in the price of jogging shoes will not decrease the demand; it will decrease the quantity demanded, not the demand itself. Demand refers to the entire demand curve, while quantity demanded refers to a specific point on the curve.

Question 12

If a firm's average cost is falling (economies of scale)with output,then

Accepted Answer

If a firm's average cost is falling with output, it means that the firm is experiencing economies of scale. This means that as output increases, the firm's cost per unit of output decreases. Since marginal cost is the cost of producing an additional unit of output, if the firm is experiencing economies of scale, it means that the cost of producing an additional unit of output (marginal cost) is less than the average cost of all units produced so far. Therefore, the correct answer is A.

Question 13

Mr.D's Barbeque of Pickwick,TN produces 10,000 dry-rubbed rib slabs per year.Annually Mr.D's fixed costs are $50,000.The average variable cost per slab is a constant $2.The average total cost per slab then is

Accepted Answer

The average total cost per slab is calculated by adding the average fixed cost per slab to the average variable cost per slab. The average fixed cost per slab is $50,000 / 10,000 = $5. Adding the average variable cost of $2, the average total cost per slab is $5 + $2 = $7.

Question 14

The threat of new entrants would be higher under which of the following conditions?

Accepted Answer

When product differentiation is low, it is easier for new entrants to compete with existing firms, as they do not need to overcome strong brand loyalty or unique product features.

Question 15

A firm is producing 10,000 units of output.Price at this output level is $16.00 for each unit,and marginal revenue is $13.00.Average per unit cost is $12.00,and marginal cost is $12.50.From this information,we can conclude that the business

Accepted Answer

The answer of A firm is producing 10,000 units of...

Question 16

A pencil manufacturer is in a perfectly competitive market.The firm can sell as much as it wants at a price of $1.50 per pencil.At some production levels,its average variable costs are less than $1.50,but there is not production level where its average total cost is equal or less than $1.50.What would be your recommendation to the pencil manufacturer.

Accepted Answer

In the short run, the firm should continue production as long as it covers its variable costs. However, in the long run, if the firm cannot produce at a cost lower than the market price, it will not be able to earn economic profits and should exit the market. The only exception would be if the firm expects prices to rise or costs to fall in the future, allowing it to earn profits in the long run. Therefore, the best option is to continue production in the short run but exit the business in the long run unless prices are expected to rise or costs to fall.

Question 17

The Country Music Hall of Fame is considering lowering admission prices to increase gross revenue.This plan will work if the price elasticity of demand for tickets is

Accepted Answer

If the price elasticity of demand for tickets is elastic, then a decrease in ticket prices would result in a larger increase in quantity demanded. This would offset the decrease in price and lead to a net increase in gross revenue.

Question 18

If a firm is earning an abnormally high rate of return on invested capital,

Accepted Answer

If a firm is earning an abnormally high rate of return on invested capital, then it is earning more than a normal competitive rate of return. This means that the firm is earning positive economic profits, which are above and beyond the opportunity cost of the capital used. Therefore, choice A is the correct answer.

Question 19

How much of a good will consumers who wish to maximize their net benefit (value less cost)purchase?

Accepted Answer

Consumers who wish to maximize their net benefit (value less cost) will purchase the amount where marginal value just equals the good's price. This is because purchasing more than this amount of the good will result in the marginal value being less than the price, therefore reducing the net benefit. On the other hand, purchasing less than this amount will result in the marginal value being greater than the price, again reducing the net benefit. Therefore, the optimal amount to purchase is where the marginal value just equals the price.

Question 20

The Country Music Hall of Fame is considering increasing admission prices to increase gross revenue.If the price of admission rises from $20 to $30,and attendance drops from 3,000 to 1,500,what is the approximate elasticity of demand for admission tickets?

Accepted Answer

The elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. Here, the percentage change in quantity is (1500-3000)/3000 = -0.5, and the percentage change in price is (30-20)/20 = 0.5. Elasticity = -0.5/0.5 = -1.

Quiz 1: Managerial Economics