Managerial Economics Final Review Questions Answers PDF

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Final Review Questions and Answers 1. Kevin is considering leaving his current job, which pays $50,000 per year, to start a new company that manufactures a line of special pens for personal digital assistants. He expects the annual overhead costs and operating expenses to amount to $3,200,000. How much revenue would he need in order to earn non-negative accounting profits? Non-negative economic profits?

A. $3,200,000, $50,000 B. $3,250,000, $3,200,000 C. $3,200,000, $3,250,000 D. $3,150,000, $3,250,000

2. The demand curve for a product is given by Q x = 1000 – 2P x +0.02Pz, where P Z = $400 What is the cross-price elasticity of demand between good X and good Z when Px = $154? Are good X and Z substitutes or complements?

A. -2.36, complements. B. -2.36, substitutes. C. 0.01, complements. D. 0.01, substitutes.

3. Alfred derives utility from consuming iced tea and lemonade. For the bundle he currently consumes, the marginal utility he receives from iced tea is 16, and the marginal utility he receives from lemonade is 8. Instead of consuming this bundle, Alfred should:

A. Buy more iced tea and less lemonade. B. Buy more lemonade and less iced tea. C. Buy more iced tea and lemonade. D. None of the above is necessarily correct.

4. When the price faced by a perfectly competitive firm was $50, the firm produced nothing in the short run. However, when the price rose to $100, the firm produced 100 tons of output. We can than infer that:

A. The firm’s marginal costs of production is always greater than $100 B. The firm’s total cost of producing 100 tons is less than $10,000 C. The firm’s marginal costs of production never fall below $50. D. The minimum value of the firm’s average variable cost lies between $50 and $100.

5. Identify the false statement:

A. How prices change from increases in the demand for a good depends on the slope of the supply curve B. In a perfectly competitive market, all firms’ long-run survival depends on the costs of production C. In the long-run equilibrium of a perfectly competitive market, the amount of economic profit earned cannot differ across firms D. In the long-run equilibrium of a perfectly competitive market, a firm will have an economic profit=0 and accounting profit=0

6. Assume that a profit maximizing monopolist is producing a quantity such that marginal revenue exceeds marginal cost. We can conclude that the

A. firm is maximizing profit. B. firm's output is smaller than the profit maximizing quantity. C. firm's output is larger than the profit maximizing quantity. D. firm's output does not maximize profit, but we cannot conclude whether the output is too large or too small.

7. In a simultaneous move game with two players, Hint: subordinate = lower in rank = dominated A. If neither player has a dominant strategy, we successfully eliminate each player’s subordinate strategy. B. A played chooses among two or more pure strategies according to pre-specified probabilities. C. If one player has a dominant strategy and the other doesn’t, you can’t reach a Nash equilibrium. D. If both players have a dominant strategy, these constitute their Nash equilibrium strategies.

8. Suppose that the government wishes to encourage the manufacture and sales of small cars. The current 10

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supply and demand of small cars are ฀฀฀ ฀ = − 9� � + � � ฀฀; ฀฀฀ ฀ = 100 − ฀฀, where Q is in millions of cars

and P is in hundreds of dollars.

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Now suppose that the government is considering two alternative plans for encouraging small car sales. Under Plan A, every car manufacturer will receive a $500 rebate from the government for each car sold. Under plan B, every purchase of a small car will receive a $500 rebate from the government. Given the tools we learned in class, which plan is more effective in encouraging small car sales? A. Plan A is more effective than plan B. B. Plan B is more effective than plan A. C. Both plans have the same effects. D. Neither of them takes effect.

1. C Accounting costs: $3.2M, so revenue should be greater than or equal to $3.2M for non-negative accounting profits. Economic costs: $3.2M + $50K = $3.25M, so revenue should be greater than or equal to $3.25M. 2. D Elasticity = 0.02 * 400 / (1000-2*154+0.02*400) = 0.02 * 400 / 700 = 0.01143 Elasticity > 0 => Substitutes by definition 3. D Optimality condition: MU x / p x = MU y / p y , so without prices the answer is uncertain. 4. D Minimum value of AVC is where MC crosses AVC, firm shuts down if P < AVC, and firms set P = MC as long as P = MC > AVC in perfectly competitive markets. Given these three facts, A is incorrect because marginal costs could be less than $100 at the original point at which P = $50. B is incorrect because fixed costs are unknown. C is incorrect because marginal costs of production could decrease as quantity decreases and could be less than $50 when quantity is small. D is correct because at $50, firm shuts down so AVC > MC = P = 50 and MC has not yet crossed min(AVC) so 50 ≤ min(AVC). When P = 100, Q > 0 so 100 = P = MC ≥ AVC ≥ min(AVC). Hence, 50 ≤ min(AVC) ≤ 100. Please refer to this graph on the slides for more intuition.

5. D A is true since the shape of the supply curve determines the magnitude of price changes for a given demand shift. B is true as costs of production that are too high will lead to exit of firms as profits become negative. C is true because all firms earn zero economic profits. D is false because accounting profits may be positive if accounting costs do not include all economic costs.

6. B When MR > MC, given that MR is downward sloping and MC is upward sloping, this implies that the firm is producing less than the profit maximizing quantity, as they could produce further units that generate profits. 7. D Dominant strategy equilibrium is a subset of Nash equilibrium. When both firms have a dominant strategy, they are best responding regardless of what the other player plays. Hence, they are best responding to one another, so they must be playing Nash equilibrium strategies. C is incorrect because if one player has a dominant strategy and the other doesn’t, you can still possibly reach a Nash equilibrium. B is incorrect because we never discussed anything regarding how to choose among pure strategies nor did we teach anything about probabilities. A is incorrect because it depends on what equilibrium we are solving for: iterated dominance equilibrium is only one form of many possible equilibria. 8. C Statutory incidence is about whether government gives rebate to seller or buyer. As shown in lecture, they have the same impact on consumer or producer burden / benefits. Therefore, both plans should have the same effect. Although unnecessary, we can also go through the math as shown in the slides. In the case of a supply curve, the “price” now facing the seller is now P+5, where P is the price charged to the buyer, because he receives a rebate of $500 from the government for each unit sold in addition to the price charged to the buyer. Likewise, for the buyer, the price is now P-5, where P is the price paid by the buyer, because the government gives them a rebate for each unit bought which partially offsets the price paid to the seller....