Question 1

Suppose that both the equilibrium price and quantity of golf clubs rise.Which of the following explanations would best explain this outcome?

Accepted Answer

An increase in demand for golf clubs with no change in supply.

Question 2

When you double all of the inputs to your production process,your total output is less than doubled.Your production appears to exhibit which of the following?

Accepted Answer

If doubling the inputs results in less than double the output, it suggests decreasing returns to scale. This means that increasing the inputs does not lead to a proportional increase in output, and there may be inefficiencies or limitations in the production process.

Question 3

If the market for a certain product experiences an increase in demand,which of the following results is expected to occur?

Accepted Answer

When there is an increase in demand for a product, the demand curve shifts to the right, causing the equilibrium price and quantity to rise. Therefore, both option b and c are correct.

Question 4

If a project has a positive net present value,the expected rate of return for the project is:

Accepted Answer

A positive net present value indicates that the project's expected cash inflows are greater than its expected cash outflows, even when taking into account the time value of money. This means that the project is expected to generate a return that exceeds the discount rate, which is the rate used to calculate the present value of future cash flows. Therefore, the expected rate of return for the project must be higher than the discount rate.

Question 5

To mitigate the lost from post-investment holdup,vulnerable parties should avoid

Accepted Answer

The answer of To mitigate the lost from post-investment holdup,vulnerable...

Question 6

If your production technology exhibits constant returns to scale,and you increase all inputs by 20%,what can you expect to occur to your output level?

Accepted Answer

If the production technology exhibits constant returns to scale, then increasing all inputs by the same percentage will result in an equal increase in output. Therefore, if all inputs are increased by 20%, output is expected to increase by the same percentage, which is 20%.

Question 7

You run a small auto service shop.Your fixed expenses per week are $1,000 and your average customer invoice is $500 with an associated marginal cost of $300.What is your weekly break-even quantity?

Accepted Answer

To find the break-even quantity, we can use the formula:
Break-even quantity = Fixed expenses / (Average customer invoice - Marginal cost)
Plugging in our values, we get:
Break-even quantity = 1000 / (500 - 300)
Break-even quantity = 1000 / 200
Break-even quantity = 5 cars

Therefore, the best choice is C) 5 cars, as this is the minimum number of cars the shop needs to service per week to break even.

Question 8

The strategy underlying price discrimination is

Accepted Answer

The strategy underlying price discrimination is to increase total revenue by charging higher prices to those with less elastic demand for the product and lower prices to those with more elastic demand. This is because customers with less elastic demand are willing to pay more for the product and those with more elastic demand are more sensitive to price changes and will buy more if the price is lower. Therefore, price discrimination allows firms to capture the maximum amount of consumer surplus and increase total revenue.

Question 9

It costs your company $200 to produce pens and pencils together.To produce the same amount of pens and pencils separately costs $100 for the pens and $120 for the pencils.The production of pens and pencils exhibits

Accepted Answer

The cost of producing pens and pencils together ($200) is less than the cost of producing them separately ($100 for pens + $120 for pencils = $220). This indicates that there are economies of scope in producing pens and pencils together.

Question 10

When a resource or capability is valuable,rare,hard to imitate,and non-substitutable firms may gain:

Accepted Answer

When a resource or capability is valuable, rare, hard to imitate, and non-substitutable, it means that the firm has a sustainable competitive advantage. This type of advantage is difficult for competitors to replicate, leading to long-term success and profitability for the firm.

Question 11

Market competition led to the rise of franchising in the 1950s.The franchiser ( the company owning the franchise)gives the franchisee (external entity)the right,and all the know-how to sell or give out services of that company using its image,logos,and publicity methods,in return for a fixed or variable franchise fee .The success of the franchising system is attributed to the following factors EXCEPT:

Accepted Answer

Easy monitoring of quality is not a factor attributed to the success of franchising, as maintaining consistent quality across different franchise locations can be challenging.

Question 12

Your firm is considering investing in a new project.If the economy is strong (30% probability),you expect an NPV of $500,000; if the economy is normal (50% probability),you expect an NPV of $400,000; and if the economy is weak (20% probability),you expect an NPV of $300,000.What is the expected NPV of the project?

Accepted Answer

The expected NPV is calculated by multiplying each NPV by its probability and summing the results: (0.3 * $500,000) + (0.5 * $400,000) + (0.2 * $300,000) = $410,000.

Question 13

If the price of CD players decreases,what can we expect to happen in the market for compact discs?

Accepted Answer

If the price of CD players decreases, more people are likely to buy CD players, increasing the demand for compact discs. This increased demand can lead to a rise in the equilibrium price of compact discs.

Question 14

What is the net present value of a project that requires a $100 investment today and returns $50 at the end of the first year and $80 at the end of the second year? Assume a discount rate of 10%.

Accepted Answer

The net present value (NPV) is calculated by discounting the future cash flows to the present value and subtracting the initial investment. NPV = ($50 / (1+0.10)^1) + ($80 / (1+0.10)^2) - $100 = $11.57.

Question 15

If a production technology exhibits decreasing returns to scale,which of the following will occur when all inputs are increased by 10%?

Accepted Answer

If a production technology has decreasing returns to scale, increasing all inputs by the same percentage will result in a less than proportional increase in output. Therefore, the output will increase by less than 10%.

Question 16

The rent in the two neighbor towns Cleansville and Grimyville is $10,000 and $8,000 respectively.The price difference is only explained by the high air pollution in Grimyville due to the presence of steel factories.Later,the Clean Air Act is instituted in Grimyville which forces the steel factories to stop polluting the air.The following are possible long term outcomes.(Ignore the effect of inflation) 
i- Rent will go down in Cleansville
Ii- Rent will increase in Grimmyville
Iii- Rent will remain the same in Cleansville
Iv- Rent will remain the same in Grimmyville
V- Rent will be equal in both towns.

Accepted Answer

The Clean Air Act will reduce air pollution in Grimyville, making it more desirable to live in. This will increase demand for housing in Grimyville, leading to an increase in rent. In Cleansville, the reduction in air pollution in Grimyville will make it a less desirable place to live, leading to a decrease in demand for housing and a decrease in rent. In the long run, rent will be equal in both towns as people move from Cleansville to Grimyville in search of cleaner air.

Question 17

John and Jane are a married couple who work as independent consultants.Assume that John's average hourly fee is $80 and his marginal fee is $125 whereas Jane's average and marginal hourly fees are both $100.One of them can work on a short consulting assignment for $1,000.Which of the following is IRRELEVANT information to the decision for maximizing the family's income?

Accepted Answer

John's average cost is irrelevant because the decision for maximizing the family's income depends on their marginal costs and the opportunity costs of their time, not their average costs.

Question 18

You expect to sell 500 cell phones a month,which have a marginal cost of $50.If your fixed costs are $5,000 per month,what is the break-even price?

Accepted Answer

To calculate the break-even price, we need to find the total cost and the total revenue at the expected sales level of 500 phones per month.

Total cost = Fixed cost + (Marginal cost x Units sold)
Total cost = $5,000 + ($50 x 500)
Total cost = $30,000

Total revenue = Price per unit x Units sold
Total revenue = Price per unit x 500

To break even, the total revenue must equal the total cost:
Price per unit x 500 = $30,000
Price per unit = $60

Therefore, the break-even price is $60, which means that you need to sell each phone for $60 in order to cover your costs and start making a profit. Choice C is the correct answer.

Question 19

If the market for a certain product experiences an increase in supply,which of the following results is expected to occur?

Accepted Answer

An increase in supply typically leads to a lower equilibrium price and a higher equilibrium quantity, as more of the product is available at a lower price.

Question 20

The break-up of AT&T in 1984 separated the production of long distance and local telephone service and sacrificed benefits from

Accepted Answer

Economies of scope are the cost advantages that arise from producing two or more products together rather than separately. The break-up of AT&T in 1984 separated the production of long distance and local telephone service, which sacrificed the benefits from economies of scope.

Quiz 1: Managerial Economics