demonstrate your knowledge of percentage rates of change of an entire demand function

1. The marginal product is defined as:

• The ratio of total output to the amount of the variable input used in producing the output
• The incremental change in total output that can be produced by the use of one more unit of the variable input in the production process
• The percentage change in output resulting from a given percentage change in the amount
• The amount of fixed cost involved.
• None of the above

2. Fill in the missing data to solve this problem.

Variable Total Average Marginal

Input Product Product Product

4 ? 70 —-

5 ? ? 40

6 350 ? ?

3, What is the total product for 5 units of input, and what is the marginal product for 6 units of input?

• 320 and 30
• 350 and 20
• 360 and 15
• 400 and 10
• 430 and 8

4. The following is a Cobb-Douglas production function: Q = 1.75K^0.5∙L^0.5. What is correct here?

• A one-percent change in L will cause Q to change by one percent
• A one-percent change in K will cause Q to change by two percent
• This production function displays increasing returns to scale
• This production function displays constant returns to scale
• This production function displays decreasing returns to scale

5. Suppose you have a Cobb-Douglas function with a capital elasticity of output (α) of 0.28 and a labor elasticity of output (β) of 0.84. What statement is correct?

• There are increasing returns to scale
• If the amount of labor input (L) is increased by 1%, the output will increase by 0.84%
• If the amount of capital input (K) is decreased by 1%, the output will decrease by 0.28%
• The sum of the exponents in the Cobb-Douglas function is 1.12.
• All of the above

6. Sources of positive net present value projects include

a.	buyer preferences for established brand names
b.	economies of large-scale production and distribution
c.	patent control of superior product designs or production techniques
d.	a and b only
e.	a, b, and c

6. Receiving $100 at the end of the next three years is worth more to me than receiving $260 right now, when my required interest rate is 10%.

a. True

b. False

7. Suppose we estimate that the demand elasticity for fine leather jackets is ‑.7 at their current prices. Then we know that:

a. a 1% increase in price reduces quantity sold by .7%.

b. no one wants to buy leather jackets.

c. demand for leather jackets is elastic.

d. a cut in the prices will increase total revenue.

e. leather jackets are luxury items.

8. If demand were inelastic, then we should immediately:

a. cut the price.

b. keep the price where it is.

c. go to the Nobel Prize Committee to show we were the first to find an upward sloping demand curve.

d. stop selling it since it is inelastic.

e. raise the price.

9. In this problem, demonstrate your knowledge of percentage rates of change of an entire demand function (Hint: %DQ = E_P•%DP + E_Y•%DY). You have found that the price elasticity of motor control devices at Allen-Bradley Corporation is -2, and that the income elasticity is a +1.5. You have been asked to predict sales of these devices for one year into the future. Economists from the Conference Board predict that income will be rising 3% over the next year, and AB’s management is planning to raise prices 2%. You expect that the number of AB motor control devices sold in one year will:

fall .5%.

not change.

rise 1%r.

rise 2%.

rise .5%.

10. A linear demand for lake front cabins on a nearby lake is estimated to be: Q_D = 900,000 – 2P. What is thepoint price elasticity for lake front cabins at a price of P = $300,000? [Hint: E_p= (¶Q/¶P)(P/Q)]

E_P = -3.0

E_P = -2.0

E_P = -1.0

E_P = -0.5

E_P = 0

11. When demand is ____ a percentage change in ____ is exactly offset by the same percentage change in ____ demanded, the net result being a constant total consumer expenditure.

a.	elastic; price; quantity
b.	unit elastic; price; quantity
c.	inelastic; quantity; price
d.	inelastic; price; quantity
e.	none of the above

12. Marginal revenue (MR) is ____ when total revenue is maximized.

a.	greater than one
b.	equal to one
c.	less than zero
d.	equal to zero
e.	equal to minus one

13. In a cross section regression of 48 states, the following linear demand for per-capita cans of soda was found: Cans = 159.17 – 102.56 Price + 1.00 Income + 3.94Temp

	Coefficients	Standard Error	t Stat
Intercept	159.17	94.16	1.69
Price	-102.56	33.25	-3.08
Income	1.00	1.77	0.57
Temperature	3.94	0.82	4.83

R-Sq = 54.1% R-Sq(adj) = 51.0%

From the linear regression results in the cans case above, we know that:

Price is insignificant

Income is significant

Temp is significant

As price rises for soda, people tend to drink less of it

All of the coefficients are significant

14. A study of expenditures on food in cities resulting in the following equation:

Log E = 0.693 Log Y + 0.224 Log N

where E is Food Expenditures; Y is total expenditures on goods and services; and N is the size of the family. This evidence implies:

a. that as total expenditures on goods and services rises, food expenditures falls.

b. that a one-percent increase in family size increases food expenditures .693%.

c. that a one-percent increase in family size increases food expenditures .224%.

d. that a one-percent increase in total expenditures increases food expenditures 1%.

e. that as family size increases, food expenditures go down.

15. Which of the following is never negative?

a.	marginal product
b.	average product
c.	production elasticity
d.	marginal rate of technical substitution
e.	slope of the isocost lines

16. Concerning the maximization of output subject to a cost constraint, which of the following statements (if any) are true?

a.	At the optimal input combination, the slope of the isoquant must equal the slope of the isocost line.
b.	The optimal solution occurs at the boundary of the feasible region of input combinations.
c.	The optimal solution occurs at the point where the isoquant is tangent to the isocost lines.
d.	all of the above
e.	none of the above

17. In a production process, an excessive amount of the variable input relative to the fixed input is being used to produce the desired output. This statement is true for:

a.	stage II
b.	stages I and II
c.	when Ep = 1
d.	stage III
e.	none of the above

18. Marginal revenue product is:

a.	defined as the amount that an additional unit of the variable input adds to the total revenue
b.	equal to the marginal factor cost of the variable factor times the marginal revenue resulting from the increase in output obtained
c.	equal to the marginal product of the variable factor times the marginal product resulting from the increase in output obtained
d.	a and b
e.	a and c

19. The isoquants for inputs that are perfect substitutes for one another consist of a series of:

a.	right angles
b.	parallel lines
c.	concentric circles
d.	right triangles
e.	none of the above

20. The original Cobb-Douglas function was given as. It was subsequently rewritten as. What benefit was derived in the revision?

a.	the function becomes a non-linear relationship so it would fit to production curves having an “S” shape
b.	returns to scale can be shown in the revision
c.	returns to scale become constant
d.	a and b only
e.	a, b, and c

21. The Cobb-Douglas production function has which of the following properties?

a.	output is a linear increasing function of each of the inputs
b.	it provides a good fit to the traditional S-shaped production function
c.	the elasticity of production is constant and equal to 1 minus the exponent of the appropriate variable
d.	all of the above
e.	none of the above

22. What method of inventory valuation should be used for economic decision-making problems?

a.	book value
b.	original cost
c.	current replacement cost
d.	cost or market, whichever is lower
e.	historical cost

23. According to the theory of cost, specialization in the use of variable resources in the short-run resultsinitially in:

a.	decreasing returns and declining average and marginal costs
b.	increasing returns and declining average and marginal costs
c.	increasing returns and increasing average and marginal costs
d.	decreasing returns and increasing average and marginal costs
e.	none of the above

24. For a short-run cost function which of the following statements is (are) not true?

a.	The average fixed cost function is monotonically decreasing.
b.	The marginal cost function intersects the average fixed cost function where the average variable cost function is a minimum.
c.	The marginal cost function intersects the average variable cost function where the average variable cost function is a minimum.
d.	The marginal cost function intersects the average total cost function where the average total cost function is a minimum.
e.	b and c

25. The cost function is:

a.	a means for expressing output as a function of cost
b.	a schedule or mathematical relationship showing the total cost of producing various quantities of output
c.	similar to a profit and loss statement
d.	incapable in being developed from statistical regression analysis
e.	none of the above

26. Which of the following statements about cost functions is true?

a.	Variable costs will always increase in direct proportion to the quantity of output produced.
b.	The less capital equipment employed in the production process relative to labor and other inputs, the longer will be the period of time required to increase significantly the scale of operation.
c.	The shape of the firm’s long-run cost function is important in decisions to expand the scale of operations.
d.	none of the above

27. All of the following are true for both competition and monopolistic competition in the long run, except one of them. Which is it?

P = MC

P = AC

Economic profits become zero in the long-run

The barriers to entry and exit are relatively easy

None of the above is an exception

28. Which of the following statements is (are) true concerning a pure competition situation?

a.	Its demand curve is represented by a vertical line.
b.	Firms must sell at or below market price.
c.	Marginal revenue is equal to price.
d.	both b and c
e.	both a and b

29. In the short-run for a purely competitive market, a manufacturer will stop production when:

a.	the total revenue is less than total costs
b.	the contribution to fixed costs is zero or less
c.	the price is greater than AVC
d.	operating at a loss
e.	a and b

30. In the purely competitive case, marginal revenue (MR) is equal to:

a.	cost
b.	profit
c.	price
d.	total revenue
e.	none of the above

31. The demand curve facing the firm in ____ is the same as the industry demand curve.

a.	pure competition
b.	monopolistic competition
c.	oligopoly
d.	pure monopoly
e.	none of the above

32. When the cross elasticity of demand between one product and all other products is low, one is generally referring to a(n) ____ situation.

a.	oligopoly
b.	monopoly
c.	pure competition
d.	substitution
e.	monopolistic competition

33. In the electric power industry, residential customers have relatively ____ demand for electricity compared with large industrial users. But contrary to price discrimination, large industrial users generally are charged ____ rates.

a.	similar, similar
b.	elastic, lower
c.	elastic, higher
d.	inelastic, lower
e.	inelastic, higher

Declining cost industries

have upward rising AC curves.

have upward rising demand curves.

have Ç-shaped total costs.

have diseconomies of scale.

have marginal cost curves below their average cost curve.

A monopolist seller of Irish ceramics faces the following demand function for its product: P = 62 – 3Q. The fixed cost is $10 and the variable cost per unit is $2. What is the maximizing QUANTITY for this monopoly? Hint: MR is twice as steep as the inverse demand curve: MR = 62 – 6 Q. (Pick closest answer)

Q = 10

Q = 15

Q = 22

Q = 37

Q = 41

Globo Public Supply has $1,000,000 in assets. Its demand curve is: P = 206 – .20•Q and its total cost function is: TC = 20,000 + 6•Q where TC excludes the cost of capital. If Globo Public Supply is UNREGULATED, find Globo’s optimal price.

$206

$106

$56

$6

$3

37. For a monopolist that engages in price discrimination, when the price elasticity in market 1 is less (in absolute value) than in market 2, the optimal price in market 1 will exceed the optimal price in market 2.

a.	true
b.	false

38. To maximize profits, a monopolist that engages in price discrimination must allocate output in such a way as to make identical the ____ in all markets.

a.	ratio of price to marginal cost
b.	ratio of marginal cost to marginal utility
c.	ratio of price to elasticity
d.	marginal revenue
e.	none of the above

39. Barbers give a price discount to kids. According to price discrimination, if barbers use price discrimination, this implies demand for hair cuts by kids is more elastic.

True

False

40. Third-degree price discrimination exists whenever:

the seller knows exactly how much each potential customer is willing to pay and will charge accordingly.

different prices are charged by blocks of services.

the seller can separate markets by geography, income, age, etc., and charge different prices to these different groups.

the seller will bargain with buyers in each of the markets to obtain the best possible price.

41. The following are possible examples of price discrimination, EXCEPT:

prices in export markets are lower than for identical products in the domestic market.

senior citizens pay lower fares on public transportation than younger people at the same time.

a product sells at a higher price at location A than at location B, because transportation costs are higher from the factory to A.

subscription prices for a professional journal are higher when bought by a library than when bought by an individual.