# ECO 500 FINAL EXAMS

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The main role of economic profits is to:
signal where resources are most highly valued by society
allow firms to cover their production costs
allow consumers to cover their opportunity cost
None of the statements associated with this question are correct
If the interest rate is 3 percent, the present value of \$900 received at the end of three years is:
\$891.
\$823.63.
\$799.64
\$983.45
The optimal amount of exercise is determined by comparing:
marginal benefit and the total cost of exercise.
total benefit and the marginal cost of exercise.
marginal benefit and the marginal cost of exercise.
total benefit and the total cost of exercise.
Suppose the market supply for good X is given by QXS = -200 + 5PX. If the equilibrium price of X is \$100 per unit then producers' revenue from X is
\$100.
\$300.
\$30,000.
cannot be determined from the information contained in the question.

Other things held constant, the higher the price of a good
the lower the demand.
the higher the demand.
the greater the consumer surplus.
the smaller the consumer surplus.
If cars are a normal good, what do you suppose would happen to price and quantity of a car during an economic recession?
Price would increase and quantity decrease.
Price and quantity would both increase.
Price and quantity would both decrease.
Price would decrease and quantity increase
The responsiveness of consumer demand to changes in income is called:
income elasticity.
own price elasticity.
cross-price elasticity.
neither the income elasticity, the own price elasticity, nor the cross-price elasticity.

A firm derives revenue from two sources: goods X and Y. Annual revenues from good X and Y are \$10,000 and \$20,000, respectively. If the price elasticity of demand for good X is −2.0 and the cross-price elasticity of demand between Y and X is 3, then a 5 percent increase in the price of X will:
increase total revenues from X and Y by \$2,500.
decrease total revenues from X and Y by \$2,500.
decrease total revenues from X and Y by \$3,500.
increase total revenues from X and Y by \$3,500.

Which of the following measures of fit penalizes a researcher for estimating many coefficients with relatively little data?
F-statistic
R-square
Adjusted R-square
None of these

The demand for labor is:
sloping upward.
determined by MPL = W.
the value marginal product of labor.
derived from the profit-maximizing input condition
According to the table below, what is the average total cost of producing 145 units of output?

12.07
18.97
36.21
77.59
Diseconomies of scale exist whenever long-run average costs:
increase as output is increased.
decrease as output is increased.
remain constant as output is increased.
None of the statements is correct.
A benefit of using long-term contracts instead of the spot exchange is:
not needing spot checks.
more flexibility.
not needing to continually renegotiate the contract.
None of the statements is correct
A relationship-specific exchange:
is a consequence of profit sharing.
makes firms use spot markets.
is needed when there are specialized investments.
is needed when there are NO specialized investments
A benefit of long-term contracts is:
low transaction costs.
short-term flexibility.
the continual need to renegotiate the contract.
None of the answers are correct
The principal is an individual:
dependent on the agent.
who hires an agent to achieve goals.
hired by the agent to achieve goals.
hired by the agent to consult with him.
By removing performance-based rewards to CEOs the profits of firms will likely:
rise.
fall.
remain constant.
None of the statements is correct.

The activity known as shirking is MOST likely to occur when:
workers are not monitored.
the earnings of a worker are closely tied to the worker's output.
sanctions for shirking are high.
firm ownership is not separated from the managerial control.
An increase in the chance of being fired:
decreases productivity at a decreasing rate.
decreases productivity at an increasing rate.
raises productivity at an increasing rate.
raises productivity at a decreasing rate.

The hold-up problem arises when both the purchaser and the seller:
behave as principals.
are opportunistic.
do not take advantage of the economies of scale.
do not take advantage of the economies of scope.

Which of the following is a transaction cost associated with using inputs?
Time spent negotiating labor contracts with union workers
Opportunity costs of negotiating the price of renting machines
Costs of searching for a new supplier of machines
All of the above
Suppose a firm needs to renegotiate their contract due to a decrease in the relationship-specific assets needed to complete the deal. This new contract should be:
longer term because the marginal benefit of contracting increases.
shorter term because the marginal benefit of contracting increases.
longer term because the marginal benefit of contracting decreases.
shorter term because the marginal benefit of contracting decreases.

The following groups do NOT experience principal-agent problems:
stockholders and managers.
managers and workers.
stockholders and consumers.
stockholders and workers.
The cost to an employee of shirking is:
a decrease in his flat salary.
a decrease in the profit of the firm.
a decrease in the sales of the firm.
an increase in the likelihood of being fired.
The opposite of shirking is:
long lunch hours.
putting in maximum amount of effort.
leaving work early.
All of the statements associated with this question are correct.
A manager who tries to enhance worker effort by tying workers' compensation to how many units they produce is using:
spot checks.
revenue sharing.
profit sharing.
piece rates.
Under a monopoly which of the following always holds?
P > ATC.
P > MR.
P = MC.
All of the choices are true for monopoly.

The following is an example of a monopolist’s source of power:
large startup costs are needed to lay pipes to start a water utility company.
a seven-year patent on a new drug.
a pharmaceutical company discovers a drug that allows them to develop new drugs more cheaply in the future.
All of the statements associated with this question are correct.

You are the manager of a monopoly that faces a demand curve described by P = 220 − 10Q. Your costs are C = 5 + 20Q. The profit-maximizing output for your firm is:
10.
5.
20.
3.83.

Suppose perfectly competitive market conditions are characterized by the following inverse demand and inverse supply functions: P = 50 − 2Q and P = 10 + 2Q. The demand curve facing an individual firm operating in this market is:
P = 50 − 2Q.
P = 50 − 4Q.
a horizontal line at \$10.
a horizontal line at \$30.
In a competitive industry with identical firms, long-run equilibrium is NOT characterized by:
There is no excess capacity.
P < ATC.
P = MR.
P = MC.
Perfectly competitive markets differ from monopolistically competitive markets in that:
there are zero profits in the long run.
equilibrium price is set by the minimum of the ATC.
they each have a market supply curve.
all of the above.
There are several models of oligopoly because:
the actions of other firms have a profound impact on the manager’s optimal decision.
the order in which rival firms act matters.
oligopoly is the most complicated type of market structure.
all of the above.
A market is NOT contestable if:
some rivals have better technology.
consumers respond quickly to a price change.
existing firms cannot respond quickly to entry by lowering their price.
there are no sunk costs.
Collusion in pricing games is easier with:
A perfectly competitive market
A small number of firms
The ability to punish cheaters
A small number of firms and the ability to punish cheaters
Refer to the normal-form game shown below.

Which of the following represents player 1's full strategy space?
{High, Low}
{High, Left}
{(High, Left), (High, Right), (Low, Left), (Low, Right)}
{Left, Right}
Which of the following is NOT needed to sustain collusion in pricing games?
A large number of firms.
A small number of firms.
Punishments for cheating.
None of the answers is correct

A monopoly produces widgets at a marginal cost of \$4 per unit and zero fixed costs. It faces an inverse demand function given by P = 40 − Q. The monopoly price is:
\$22.
\$4.
\$36.
\$18.
The idea of charging different groups of consumers different prices is practiced in:
Two-part pricing.
First-degree price discrimination.
Second-degree price discrimination.
First- and second-degree price discrimination
Limited capacity is a necessary condition for a firm to use:
Cross-subsidization
Peak-load pricing
Transfer pricing
Two-part pricing
Price-matching strategies will likely enhance profits when:
you have brand loyalty.
customers can lie about finding a lower price.
competitors’ marginal costs are the same or higher than yours.
None of the above
Auto insurance shows us that which of the following is a characteristic of many people?
Risk aversion
Risk loving
Risk neutral
Desire to maximize wealth
You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the following table.

The expected value of project A is:
-\$20
\$50
\$15
None of the statements is correct.
Buying flood insurance decreases homeowner’s incentives to install state of the art equipment that helps prevent flooding in homes. This is a(n) __________ problem.
adverse selection
moral hazard
risk aversion
none of the statements associated with this question are correct
Which of the following auction examples has a private value information structure?
Three firms bid for an oil lease.
An auction of a book signed by the author.
A stadium in need of money decides to name itself after the person willing to pay the most for the privilege.
An auction of a book signed by the author and a stadium in need of money decides to name itself after the person willing to pay the most for the privilege.

The price an unregulated monopolist will likely charge is:
above marginal cost.
below marginal revenue.
where marginal cost is equal to marginal revenue.
below MR and above MC.
Which of the following statements is true in the presence of negative externalities?
The socially efficient equilibrium is found at the intersection of MC to society and the demand curve.
The social marginal cost curve is equal to the sum of the internal and external marginal cost curves.
An unregulated monopoly will produce where the internal marginal cost curve intersects with the demand curve.
All of the above statements are true
Nonrivalry and nonexclusionary are characteristics of which of the following:
Public goods
Antitrust policy
Free riding
All of the above
Which of the following pieces of legislation is aimed at curbing the negative effects of asymmetric information?
Robison-Patman Act
Clayton Act
Clean Air Act
Truth in Lending Simplification Act
A consequence of government intervention is:
rent seeking.
moral hazard.
public goods.
adverse selection.

Jaynet spends \$30,000 per year on painting supplies and storage space.  She recently received two job offers from a famous marketing firm – one offer was for \$110,000 per year, and the other was for \$80,000.  However, she turned both jobs down to continue a painting career. If Jaynet sells 25 paintings per year at a price of \$8,000 each:

a. What are her accounting profits?

\$

b. What are her economic profits?

\$

The demand curve for product X is given by QXd = 520 - 4PX.

a. Find the inverse demand curve.

PX =  -  QXd

Instructions: Round your answer to the nearest penny (2 decimal places).

b. How much consumer surplus do consumers receive when Px = \$50?

\$

c. How much consumer surplus do consumers receive when Px = \$30?

\$

d. In general, what happens to the level of consumer surplus as the price of a good falls?

The level of consumer surplus  as the price of a good falls.

You are the manager of a firm that receives revenues of \$40,000 per year from product X and \$80,000 per year from product Y. The own price elasticity of demand for product X is -1.5, and the cross-price elasticity of demand between product Y and X is -1.8.

How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 1 percent?

Instructions: Round your answer to the nearest dollar. Include a minus (-) sign if applicable.

\$

An economist estimated that the cost function of a single-product firm is:

C(Q) = 50 + 25Q + 30Q2 + 5Q3.

Based on this information, determine the following:

a. The fixed cost of producing 10 units of output.

\$

b. The variable cost of producing 10 units of output.

\$

c. The total cost of producing 10 units of output.

\$

d. The average fixed cost of producing 10 units of output.

\$

e. The average variable cost of producing 10 units of output.

\$

f. The average total cost of producing 10 units of output.

\$

g. The marginal cost when Q = 10.

\$

Describe how a manager who derives satisfaction from both income and shirking allocates a 10-hour day between these activities when paid an annual, fixed salary of \$110,000.

Time spent working:  hours
Time spent shirking:  hours

When this same manager is given an annual, fixed salary of \$110,000 and 5 percent of the firm’s profits—amounting to a total salary of \$150,000 per year—the manager chooses to work 8 hours and shirks for 2 hours. Given this information, which of the compensation schemes does the manager prefer?
The manager is indifferent between the two payment schemes.
The scheme with fixed payment of \$110,000 and a percentage of profits.
The scheme with only a fixed payment of \$110,000.
Suppose the own price elasticity of market demand for retail gasoline is -0.7, the Rothschild index is 0.3, and a typical gasoline retailer enjoys sales of \$2,500,000 annually. What is the price elasticity of demand for a representative gasoline retailer’s product?

Instruction: Round your answer to 2 decimal places.

Last month you assumed the position of manager for a large car dealership. The distinguishing feature of this dealership is its “no hassle” pricing strategy; prices (usually well below the sticker price) are posted on the windows, and your sales staff has a reputation for not negotiating with customers. Last year, your company spent \$4 million on advertisements to inform customers about its “no hassle” policy, and had overall sales revenue of \$30 million. A recent study from an agency on Madison Avenue indicates that, for each 8 percent increase in TV advertising expenditures, a car dealer can expect to sell 3 percent more cars—but that it would take a 2 percent decrease in price to generate the same 3 percent increase in units sold.

Assuming the information from Madison Avenue is correct, should you increase or decrease your firm’s level of advertising?
The firm should increase advertising.
The firm should decrease advertising.
The firm should not change advertising.

The manager of a local monopoly estimates that the elasticity of demand for its product is constant and equal to -3. The firm’s marginal cost is constant at \$15 per unit.

a. Express the firm’s marginal revenue as a function of its price.

Instruction: Round your response to 2 decimal places.

MR =  x P

b. Determine the profit-maximizing price.

Instruction: Use the rounded value calculated above and round your response to 2 decimal places.

\$

Consider a Bertrand oligopoly consisting of four firms that produce an identical product at a marginal cost of \$200. The inverse market demand for this product is P = 400 -4Q.

a. Determine the equilibrium level of output in the market.

b. Determine the equilibrium market price.

\$

c. Determine the profits of each firm.

\$
Use the following normal-form game to answer the questions below.
Player 2
Strategy    C    D
Player 1    A    70, 70    110, 40
B    40, 110    75, 75

a. Identify the one-shot Nash equilibrium.

b. Suppose the players know this game will be repeated exactly three times. Can they achieve payoffs that are better than the one-shot Nash equilibrium?

c. Suppose this game is infinitely repeated and the interest rate is 4 percent. Can the players achieve payoffs that are better than the one-shot Nash equilibrium?

d. Suppose the players do not know exactly how many times this game will be repeated, but they do know that the probability the game will end after a given play is θ. If θ is sufficiently low, can players earn more than they could in the one-shot Nash equilibrium?

You are the manager of a monopoly that sells a product to two groups of consumers in different parts of the country. Group 1’s elasticity of demand is -3, while group 2’s is -4. Your marginal cost of producing the product is \$20.

a. Determine your optimal markups and prices under third-degree price discrimination.

Instruction: Round your answers to two decimal places.

Markup for group 1:
Price for group 1: \$

Markup for group 2:
Price for group 2: \$

b. Which of the following are necessary conditions for third-degree price discrimination to enhance profits.

Instructions: You may select more than one answer. Click the box with a check mark for the correct answers and click twice to empty the box for the wrong answers. You must click to select or deselect each option in order to receive full credit.
At least one group has elasticity of demand greater than 1 in absolute value.
There are two different groups with different (and identifiable) elasticities of demand.
At least one group has elasticity of demand less than one in absolute value.
We are able to prevent resale between the groups.

A risk-neutral consumer is deciding whether to purchase a homogeneous product from one of two firms. One firm produces an unreliable product and the other a reliable product. At the time of the sale, the consumer is unable to distinguish between the two firms’ products. From the consumer’s perspective, there is an equal chance that a given firm’s product is reliable or unreliable. The maximum amount this consumer will pay for an unreliable product is \$0, while she will pay \$50 for a reliable product.

a.    Given this uncertainty, what is the most this consumer will pay to purchase one unit of this product?

\$
b.    How much will this consumer be willing to pay for the product if the firm offering the reliable product includes a warranty that will protect the consumer?

\$

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