Econ 4140/5140 Final Exam Dr. Michael Nieswiadomy
Managerial Economics May 11, 1998
MULTIPLE CHOICE ARE WORTH A TOTAL OF 90 POINTS:
Graduate students must answer all of the following 50 multiple choice questions.
Undergraduates must choose exactly 45 of the following 50 multiple choice questions.
1. For a perfectly competitive firm in the short run,
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Firm B
Low Price High Price
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Low Price A:80, B:60 A:90, B:-5
Firm A
High Price A:100, B:40 A:35, B:25
2. Which statement is true?
a. Firm B's dominant strategy is to charge a high price.
b. Firm A's dominant strategy is to charge a low price, B's
dominant strategy is to charge a high price.
c. Firm A's dominant strategy is a high price, B's dominant strategy is to charge a
low price.
d. Both firms' dominant strategy is to charge a high price.
e. Both firms' dominant strategy is to charge a low price.
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3. Firm X threatens to charge a low price if Firm Y also charges a low price. Is Firm
X's threat credible?
Firm Y
__________________________
Low Price High Price
__________________________
Low Price X:120, Y:18 X:20, Y:0
Firm X
High Price X:200, Y:110 X:90, Y:70
__________________________
a) Yes b) No
4. Firms X and Y are non-cooperative and each has resources to introduce only one new
product. If X introduces Smoked Bacon, then Y cannot also successfully introduce
Smoked Bacon. However, Y could successfully introduce Sausage Plus, a competing
product. If the payoff matrix is as follows, which strategy for X and Y will yield
a Nash equilibrium?
5. Two lawn care companies, Ridweed and Noweed, behave as oligopolists. The following
payoff matrix summarizes the profits (in thousands of dollars) for the two
strategies of each firm.
The dominant strategy in the payoff matrix is
a. Ridweed's strategy 1
b. Ridweed's strategy 2
c. Noweed's strategy A
d. Noweed's strategy B
e. none of the above
6. Two chemical companies, Proton and DNAtech, behave as oligopolists. The following
payoff matrix summarizes the profits (in thousands of dollars) for the two
strategies of each firm.
If Proton follows a maximin strategy, it will choose:
a. A b. B
7. As the demand for a firm's product becomes more inelastic, the percentage markup the
firm can charge
a. remains constant, since long-run average costs become constant.
b. increases
c. decreases
d. none of the above
8. For a firm producing two products in fixed proportions,
a. the total marginal revenue is the diagonal summation of the individual
marginal revenue curves
b. the total marginal revenue is the vertical summation of the individual
marginal revenue curves
c. the total marginal revenue is the horizontal summation of the individual
marginal revenue curves
d. the total demand is the horizontal summation of the individual demand curves
9. For a third degree price discriminating monopolist,
a. the total marginal revenue is the horizontal summation of the individual
marginal revenue curves
b. the total marginal revenue is the vertical summation of the individual
marginal revenue curves
c. the total demand revenue is the diagonal summation of the individual demand
revenue curves
d. the total demand revenue is the horizontal summation of the individual demand
revenue curves
10. A perfectly competitive firm produces clocks according to the following total cost
function
TC = 200 + 16Q + 8Q2
If the market price of clocks is $32, how many clocks should the firm sell?
a. sell 4 clocks
b. sell 6 clocks
c. sell 8 clocks
d. sell 10 clocks
e. shut down
11. A situation in which each firm is doing the best it can, given what its rivals are
doing is called
12. A dominant strategy can best be described as
Use this figure to answer the next three questions.
13. The profit-maximizing (or loss-minimizing) level of output for this pure monopolist
is approximately
a. 42 b. 50 c. 58 d. 66 e. 75
14. At the profit-maximizing (or loss-minimizing) level of output, this pure
monopolist's total pure economic profit is approximately
a. $2,020 b. $4,060 c. $5,790 d. $7,450 e. $8,640
15. In its profit-maximizing (or loss-minimizing) position, this pure monopolist should
charge a price of
a. $50 b. $70 c. $90 d. $110 e. $140
16. A firms sells an identical product to two groups of consumers, A and B. The firm
has decided that third-degree price discrimination is feasible and wishes to set
prices that maximize profits. Which of the following best describes the price and
output strategy that will maximize profits?
Use the diagram below to answer the next 2 questions.
17. What price will be set by the dominant firm?
a. $10 b. $15 c. $25 d. $30 e. $40
18. What outputs will be produced by the dominant firm and the competitive firms
respectively?
a. QD = 40, QS = 10
b. QD = 20, QS = 25
c. QD = 15, QS = 35
d. QD = 20, QS = 20
e. QD = 30, QS = 15
19. When price discrimination occurs,
20. As the demand for a firm's product becomes more inelastic, the percentage markup the
firm can charge
21. A firm is producing two products, X and Y, in fixed proportions (one unit of X for
each unit of Y). The firm's total cost and demand functions are as follows:
TC = ??? + ???Q + ?Q2
Px = ??? - ??Qx
Py = ??? - ?Qy
22. Given this information, how many units of the joint product should the firm produce?
a) 50 b) 100 c) 150 d) 200 e) none of the above
23. Given this information, how many units of the product Y should the firm throw away?
a) 10 b) 30 c) 40 d) 50 e) none of the above
24. A producer of earth moving equipment has determined the following probability
distribution for its profit:
Event Probability Profit
High level of highway construction 0.? $50,000,000
Low level of highway construction 0.? $10,000,000
The expected profit for this company equals:
a.$2,000,000 b.$13,500,000 c.$18,100,000 d.$25,000,000 e.$33,000,000
25. Donald Krump is indifferent between receiving $?? for certain and a gamble where
there is a 50% chance he will receive $0 and a 50% chance he will receive $65. In
this situation, Donald Krump is
a. risk averse. b. indifferent to risk.
c. a risk taker. d. none of the above with certainty
26. Donald Krump is indifferent between receiving $?? for certain and a gamble where
there is a 90% chance of losing $100 and a 10% chance of gaining $1,000. In this
situation, Donald Krump is
a. risk averse. b. indifferent to risk.
c. a risk taker. d. none of the above with certainty
27. In diagram above, how much output of joint product A (QA) and how much of joint
product B (QB) should the firm sell to maximize profits?
a. QA = 5, QB = 50
b. QA = 30, QB = 30
c. QA =22.5, QB = 40
d. QA = 30, QB = 50
e. QA = 15, QB = 40
28. You have just the Texas Lottery which will give you $???? per month for the rest of
your life (approximately 50 years). The present value of your winnings using an
annual interest rate of ?% is:
a. $300,000 b. $113,777 c. $133,333 d. $178,237 e. $123,780
29. Lerner's index of monopoly power is:
30. If a monopolist has a downward sloping linear demand curve, price elasticity of
demand is
31. Assume that a profit maximizing monopolist is producing a quantity such that MR
exceeds MC. We can conclude that the
32. To maximize its profits, a multiplant monopolist
33. In the above diagram, what are the profit maximizing Prices and Quantities in
Markets 1 and 2 for a price discriminating monopolist?
A. P1 = $65, Q1 = 35 ; P2 = $45, Q2 = 15
B. P1 = $75, Q1 = 25 ; P2 = $50, Q2 = 10
C. P1 = $70, Q1 = 30 ; P2 = $40, Q2 = 20
D. P1 = $55, Q1 = 45 ; P2 = $30, Q2 = 30
Use this information to answer the next two questions:
Suppose a third degree price discriminating monopolist has the following market
demand curves and total cost curve:
Market 1: Q1 =
Market 2: Q2 = Marginal Cost:
34. What is the profit maximizing 3rd degree discriminating price to charge in market 1?
a. $4 b. $6 c. $8 d. $10 e. none of the above
35. What is the profit maximizing 3rd degree discriminating price to charge in market 2?
a. $5.50 b. $6.50 c. $7.50 d. $9.50 e. none of the above
36. Consider a firm, Atlas Manufacturing, that produces, using two plants, A and B, with
marginal cost functions:
MCA =
MCB =
The estimated inverse demand function for Atlas Manufacturing is
P=
The optimal output is ______ units
a) 8 b) 10 c) 12 d) 14 e) none of the above
37. In the above problem, the firm should divide the output between A and B as
a) QA = 6, QB = 2
b) QA = 6, QB = 4
c) QA = 4, QB = 6
d) QA = 8, QB = 6
e) none of the above
38. A firm sells two products that are related in consumption, X and Y. The firm
estimates the demand functions as:
QX = ?? ??PX + ??Py
QY = 40 ??PY + ??PX
The estimated average cost functions are
ACX = ?? + ???
What is the profit maximizing price for product X?
a) $8 b) $10 c) $12 d) $16 e) none of the above
39. What is the profit maximizing price for product Y?
a) $8 b) $10 c) $12 d) $16 e) none of the above
40. A firm produces two products that are substitutes in production, X and Y. The firm
estimates the demand functions as:
QX = ?? ???PX
QY = ?? ??PY
The manufacturing process uses common production facility, and the outputs of the
two products are estimated to be
QX = ??FX
QY = ??FY
where FX and FY are the number of hours per week the production facility is used to produce
good X and good Y, respectively. The marginal cost for using the production facility is
estimated to be:
MC = ? + ??F,
where F is the total number of hours per week that the plant operates (F = FX + FY)
41. What is the profit maximizing amount of X to produce?
a) 24 b) 32 c) 36 d) 44 e) none of the above
42. What is the profit maximizing amount of Y to produce?
a) 8 b) 12 c) 16 d) 20 e) none of the above
43. Suppose a firm’s long run cost function is Q = -????K3L3 + ??K2L2
Suppose the firm currently uses 15 units of capital. AT what level of labor usage
is the marginal product of labor begin to diminish?
a) 27.78 b) 32.34 c) 35.98 d) 43.67 e) none of the above
44. Suppose a firm’s average variable cost function is AVC= ?? - ??Q + ???Q3. AVC
reaches its minimum value at Q =
a) 5 b) 10 c) 15 d) 20 e) none of the above
45. The market demand and supply curves for a competitive industry are:
Demand: Q = ?? - ??P +??M
Supply: Q = ?? + ??P - ??PI
where Q is measured in 1,000 units, the price of the product (P) in dollars per
unit, income(M) in thousand of dollars and the price of an input (PI) in dollars per unit.
The forecast for next year for M and PI are M = $??, and PI = $??. The average variable
cost function is AVC = ?????????. The optimal level of production for the firm
is:
a) 2 b) 4 c) 6 d) 8 e) none of the above
46. In the above problem, the maximum profit is
a) $500 b) $1,000 c) $1,500 d) $2,000 e) none of the above
47. The market demand for a monopoly is given by
Q = ???????????
where Q is measured in 1,000 units, the price of the product (P) in dollars per unit,
income(M) in thousand of dollars. The forecast for next year for M and PR are M = $32,
and PR = $4. The profit maximizing output for the monopolist is:
a) 20 b) 40 c) 60 d) 80 e) none of the above
48. In the above problem, the profit maximizing price is
$540 b) $1,060 c) $1,470 d) $2,320 e) none of the above
49. A firm sells a product to two groups of consumers, A and B. The price elasticity of
demand for group A is -??, while price elasticity for group B is - ??. Given the
information above, the price charged to group A should be
a. twice the price charged to B.
b. 2/3 of the price charged to B.
c. 1/3 of the price charged to B.
d. 1/2 of the price charged to B.
e. 1/4 of the price charged to B.
50. In the theory of the kinked demand curve, the firm believes that the response of
rival firms will result in
Short Essay (10 points)
Answer 10 points worth of the following questions