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ECON 305 Midterm 1
midterm1
175
Economics
Undergraduate 3
07/22/2012
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Term
The primary virtue of managerial economics lies in its:
 Definition
usefulness.
Term
Managerial economics cannot be used to identify:
 Definition
goals of the organization.
Term
The value-maximizing organization design does not involve the:
 Definition
establishment of the regulatory environment.
Term
Business profit is:
 Definition
the residual of sales revenue minus the explicit accounting costs of doing business.
Term
In a free market economy, the optimal quality of goods and services is determined by:
 Definition
customers.
Term
Managers who seek satisfactory rather than optimal results:
 Definition
take actions that benefit parties other than stockholders.
Term
Nonvalue-maximizing behavior is most common:
 Definition
when shareholders are poorly informed.
Term
Government regulation is important because government:
 Definition
uses scarce resources.
Term
The share of revenues paid to suppliers does not depend upon:
 Definition
output market competition.
Term
To maximize value, management must:
 Definition
maximize long run profit.
Term
Value maximization is broader than profit maximization because it considers:
 Definition
interests rates.
Term
Industry profits can be increased by constraints on:
 Definition
imports.
Term
Managers display less than optimal behavior if they seek
 Definition
an industry-average profit rate.
Term
Unfriendly takeovers have the greatest potential to enhance the market price of companies whose managers:
 Definition
satisfice.
Term
Value maximization theory fails to address the problem of:
 Definition
self-serving management.
Term
Constrained optimization techniques are not designed to deal with the problem of:
 Definition
self-serving management.
Term
Economic profit equals
 Definition
business profits minus implicit costs.
Term
To be useful, the theory of the firm must:
 Definition
accurately predict real-world phenomena.
Term
The value of a firm is equal to:
 Definition
the present value of all future cash flows.
Term
The value of the firm decreases with a decrease in:
 Definition
total revenue.
Term
Direct regulation of business has the potential to yield economic benefits to society when:
 Definition
there are no good substitutes for a product
Term
Monopoly exploitation is reduced by regulation that:
 Definition
enhances product-market competition.
Term
A typical annual rate of return on invested capital is:
 Definition
10%
Term
Warren Buffet looks for "wonderful businesses" that feature:
 Definition
consistent earnings growth.
Term
The return to owner-privided inputs is an:
 Definition
implicit cost.
Term
An equation is:
 Definition
an analytical expression of functional relatinships.
Term
Inflection is:
 Definition
a point of maximum slope.
Term
The breakeven level of output occurs where:
 Definition
total profit equals zero.
Term
Incremental profit is:
 Definition
the change in profit caused by a given managerial decision.
Term
The incremental profit earned from the production and sale of a new product will be higher if:
 Definition
excess capacity can be used to produce the new product.
Term
Which of the following short run strategies should a manager select to obtain the highest degree of sales penetration?
 Definition
maximize revenues.
Term
If total revenue increases at a constant rate as output increases, marginal revenue:
 Definition
equals average revenue
Term
The comprehensive impact resulting from a decision is the:
 Definition
incremental change.
Term
Total revenue is maximized at the point where:
 Definition
marginal revenue equals zero.
Term
If P = $1,000 - $4Q: MR=?
 Definition
MR = $1,000 - $8Q
Term
Total cost minimization occurs at the point where: Q=?
 Definition
Q = 0
Term
Average cost minimization occurs at the point where:
 Definition
MC = AC
Term
The optimal output decision:
 Definition
is most consistent with managerial objectives.
Term
Marginal profit equals:
 Definition
the change in total profit following a one-unit change.
Term
Profit per unit is rising when marginal profit is:
 Definition
greater than average profit per unit.
Term
Marginal cost is rising when marginal cost is:
 Definition
greater than average cost
Term
Marginal profit equals average profit when:
 Definition
average profit is maximized.
Term
Total revenue increases at a constant rate as output increases when average revenue:
 Definition
equals average revenue
Term
The optimal decision produces:
 Definition
a result consistent with managerial objectives.
Term
If average profit increases with output marginal profit must be:
 Definition
greater than average profit.
Term
At the profit-maximizing level of output:
 Definition
marginal profit equals zero.
Term
When marginal profit equals zero:
 Definition
profit is maximized.
Term
If profit is to rise as output expands, then marginal profit must be:
 Definition
positive.
Term
An optimal decision:
 Definition
produces the result most consistent with decision maker objectives.
Term
The slope of a straight line from the origin to the total profit curve indicates:
 Definition
average profit at that point.
Term
If demand increases while supply decreases for a particular good:
 Definition
its equalibrium price will increase while the quantity of the good produced and sold could increase, decrease, or remain constant.
Term
Surplus is a condition of:
 Definition
excess supply.
Term
The quantity of product X supplied can be expected to rise with a fall in:
 Definition
input prices.
Term
Derived demand is directly determined by:
 Definition
the profitability of using inputs to produce output.
Term
A demand curve expresses the relation between the quantity demanded and:
 Definition
price.
Term
Change in the quantity supplied reflects a:
 Definition
change in price.
Term
Holding all else equal, an unnecessary increase in federally-mandated auto safety requirments leads to a decrease in:
 Definition
auto supply.
Term
Holding all else equal, an increase in mandatory payments by employers for universal health care coverage for workers would lead to a decrease in the:
 Definition
demand for workers.
Term
The effect on sales of an increase in price is a decrease in:
 Definition
the quantity demanded.
Term
Utility is measured by:
 Definition
value or worth.
Term
Demand is the total quantity of a good or service that customers:
 Definition
are willing and able to purchase.
Term
Demand for consumption goods and services is:
 Definition
direct demand.
Term
The demand function for a product states the relation between the aggregate quantity demanded and:
 Definition
all factors that influence demand.
Term
Change in the quantity demanded is caused by a change in:
 Definition
price.
Term
Change in the quantity supplied is caused by a change in:
 Definition
price.
Term
The supply of a product does not depend on:
 Definition
consumer incomes.
Term
If the production of two goods is complementary a decrease in the price of one will:
 Definition
decrease the supply of the other.
Term
Oil refiners can vary the mix of gasoline versus diesel fuel derrived from a barrel of oil. If the price of diesel fuel increases relative to the price of gasoline:
 Definition
supply of gasoline will shift to the left.
Term
The supply curve expresses the relation between the aggregate quantity supplied and:
 Definition
price, holding constant the effects of all other variables.
Term
The equilibrium market price of a service is the:
 Definition
price where the quantity demanded equals the quantity supplied.
Term
If the market price is higher than the equilibrium price a:
 Definition
surplus exists and the market price will fall until it equals the equilibrium price and the surplus is eliminated.
Term
The equilibrium market price and quantity of beef would increase if:
 Definition
consumer income increased.
Term
The equilibrium market price of lead pencils would decrease and the quantity of pencils produced and sold would increase if:
 Definition
the price of graphite (pencil lead) decreased.
Term
If demand and supply both increase, the:
 Definition
quantity produced and sold will increase while the equilibrium price could increase, decrease, or remain constant.
Term
Holding all else equal, if supply increases, the:
 Definition
none of these.
Term
If two services provide the same amount of satisfaction or utility, the consumer is said to display:
 Definition
indifference.
Term
When preferences are transitive, consumers are able to:
 Definition
rank order the desirability of various goods and services.
Term
Utility function is:
 Definition
a descriptive statement that relates satisfaction or well-being to the consumption of goods and services.
Term
The utility derived from consumption is:
 Definition
revealed through purchase decisions for goods and services.
Term
All combinations of goods and services that provide the same utility are indentified by the:
 Definition
indifference curve.
Term
The increase in overall consumption made possible by a price cut is the:
 Definition
income effect.
Term
A utility function is a descriptive statement that relates total utility to:
 Definition
the consumption of goods and services.
Term
Holding consumption of other goods and services constant:
 Definition
marginal utility tends to diminish as consumption increases within a given time interval.
Term
If the marginal utility derived from consuming cheeseburgers tends to fall, the cost of each marginal unit of satisfaction will:
 Definition
rise when prices are held constant.
Term
According to the law of diminishing marginal utility:
 Definition
as the consumption of a given product rises, the added benefit eventually diminishes.
Term
Given limited budgets, consumers obtain the most satisfaction if they purchase goods and services that:
 Definition
provide the highest level of marginal utility per dollar spent.
Term
An indifference curve is a set of market baskets that:
 Definition
provide the same utility.
Term
An increase in the quantity purchased following a price cut is:
 Definition
consistent with the law of diminishing marginal utility.
Term
The marginal rate of substitution is always equal to:
 Definition
minus one times the ratio of marginal utilities for each product.
Term
If the quantity of X is measured on the horizontal axis and the quantity of Y is measured on the vertical axis, the slope of the budget constraint will decrease if the:
 Definition
price of X decreases.
Term
Income and substitution effects explain change in the quantity of a good consumed that result from a change in:
 Definition
price.
Term
The change to a new indifference curve following a rise in aggregate consumption caused by a price cut is:
 Definition
an income effect.
Term
The movement along an indifference curve reflection the substitution of cheaper products for more expensive ones is:
 Definition
a substitution effect.
Term
A consumer will obtain the maximum level of utility if:
 Definition
MUX/MUY = PX/PY
Term
The demand for a product tends to be inelastic if:
 Definition
a small proportion of consumer's income is spent on the good.
Term
Perfect substitutes have:
 Definition
straight-line indifference curves.
Term
Because moviegoers like to consumer buttered popcorn and soda at the theater, movies, buttered popcorn, and soda are all:
 Definition
complements.
Term
Holding all else constant, a given percentage increase in the price of X and Y will cause the budget constraint to:
 Definition
shift inward in a parrallel manner
Term
Holding all else equal, an increase in the relative price of X will cause the budget constraint to:
 Definition
become more steeply sloped.
Term
The consumer surplus concept cannot be used to explain:
 Definition
how the price changed might exceed the marginal benefit from consumption.
Term
Point elasticity measures elasticity:
 Definition
at a spot on a function.
Term
Arc elasticity is measured:
 Definition
over a given range along a function.
Term
With elastic demand, a price increase will:
 Definition
decrease total revenue.
Term
With unitary elasticity of demand, a price increase will:
 Definition
be associated with zero marginal revenue.
Term
With inelastic demand, a price increase produces:
 Definition
a less than proportionate decline in quantity demanded.
Term
With inelastic demand, a price increase produces:
 Definition
higher profits.
Term
A direct relation exists between the price of one product and the demand for:
 Definition
substitutes.
Term
The demand for a product tends to be inelastic if:
 Definition
a small proportion of consumer's income is spent on the good.
Term
Two products are complements if the:
 Definition
cross-price elasticity of demand is less than zero.
Term
If the income elasticty of demand for a good is greater than one, the good is:
 Definition
a cyclical normal good
Term
A product that enjoys rapidly growing demand over time is likely to be:
 Definition
a cyclical normal good.
Term
The point advertising elasticity reveals the:
 Definition
percentage change in demand following a change in advertising.
Term
When the product demand curve is Q=140 -10P, and price is decreased from P1=$10 to P2=$9, the arc price elasticity of demand is:
 Definition
-3
Term
If the point price elasticity of demand equals -2 and the marginal cost per unit is $5, the optimal price is:
 Definition
$10
Term
The concept of cross-price elasticity is used to examine the responsiveness of demand:
 Definition
for one product to change in the price of another.
Term
When the cross-price elasticity εPX = 3:
 Definition
demand rises by 3% with a 1% increase in the price of X.
Term
Goods for which εI > 1 are often refered to as:
 Definition
cyclical normal goods.
Term
If εP = -3 and MC = $0.66, the profit-maximizing price is:
 Definition
$0.99
Term
In demand analysis, endogenous variables include:
 Definition
company advertising.
Term
In demand analysis, factors within the control of the firm are called:
 Definition
endogenous variables.
Term
Arc elasticity:
 Definition
varies at different points along a function.
Term
In terms of advertising, the expected change in demand following a one-unit ($1,000) change in advertising is:
 Definition
бQ/бA
Term
With elastic demand:
 Definition
a given percentage increase in price causes quantity to decrese by a large percentage.
Term
When marginal cost is greater than zero, the profit-maximizing point price elasticity of demand must be:
 Definition
greater than one.
Term
When the product demand curve is P = $5 - $0.05Q, and Q = 40, the point price elasticity of demand is:
 Definition
-3/2
Term
The production function Q = 0.25X^0.5 Y exhibits:
 Definition
increasing returns to scale.
Term
The law of diminishing returns:
 Definition
states that the marginal product of a variable factor must eventually decline as increasingly more is employed.
Term
A new production function results following:
 Definition
the successful completion of a training program that enhances worker productivity.
Term
the relation between output and the variation in all inputs taken together is the:
 Definition
eturns to scale characteristic of a production system.
Term
When PX = $60, MPX = 5 and MPY = 2, relative employment levels are optimal provided:
 Definition
PY = $24.
Term
When Px = $100, MPX = 10 and MRQ = $5, the marginal revenue product of X equals:
 Definition
$50.
Term
The returns to scale characteristic of a production system:
 Definition
shows the relation between output and the variation in all inputs.
Term
Returns to a factor denotes the relation between the quantity of an individual input employed and the:
 Definition
level of output produced.
Term
The marginal product concept is:
 Definition
the change in output associated with a one-unit change in an individual factor.
Term
A production function describes the relation between output and:
 Definition
all inputs.
Term
Total product divided by the number of units of variable input employed equals:
 Definition
average product.
Term
Marginal product is the change in output associated with a unit change in:
 Definition
one input factor.
Term
When the slope of the average product curve equals zero:
 Definition
marginal product equals average product.
Term
Total output is maximized when:
 Definition
marginal product equals zero.
Term
An isoquant represents:
 Definition
input combinations that can efficiently produce the same output.
Term
Right-angle shaped isoquants reflect inputs that are:
 Definition
perfect complements.
Term
The marginal rate of technical substitution is:
 Definition
minus one times the ratio of marginal products for each input.
Term
Marginal revenue product equals:
 Definition
marginal revenue multiplied by marginal product.
Term
A firm will maximize profits by employing the quantity of each input where the marginal:
 Definition
revenue product of each input equals its price.
Term
If tripling the quantities of all inputs employed doubles the quantity of output produced, the output elasticity:
 Definition
is less than one.
Term
The maximum output that can be produced for a given amount of input is called a:
 Definition
production function.
Term
The output effect of a proportional increase in all inputs is called:
 Definition
returns to scale
Term
As the quantity of a variable input increases, the resulting rate of output increase eventually:
 Definition
falls.
Term
Economic efficiency is achieved when all firms equate the marginal:
 Definition
revenue product and price for all inputs.
Term
When MRQ = $25, PX = $200, and MPX = 8, employment of X:
 Definition
is optimal.
Term
The foregone value associated with the current rather than next-best use of a given asset is called:
 Definition
opportunity cost.
Term
Sunk costs:
 Definition
do not vay across decision alternatives.
Term
In the short run, the:
 Definition
availability of at least one input is fixed.
Term
In the long run, the:
 Definition
firm has complete flexibility with respect to input use.
Term
The amount that must be paid for an item under prevailing market conditions is:
 Definition
current cost.
Term
The acquisition cost of an asset is:
 Definition
an implicit cost.
Term
Incremental cost is the change in:
 Definition
total cost caused by a given managerial decision.
Term
Noncash expenses are:
 Definition
implicit costs.
Term
In the decision process, management should ignore:
 Definition
sunk costs.
Term
In the decision process, management should always consider:
 Definition
relevant costs.
Term
Fixed costs include:
 Definition
variable interest costs for borrowed capital.
Term
Marginal cost equals:
 Definition
the change in total variable cost divided by the change in quantity.
Term
Incremental cost equals:
 Definition
is the added cost tied to a given managerial decision.
Term
If the productivity of variable factors is decreasing in the short-run:
 Definition
marginal cost must increase as output increases.
Term
If the slope of a long-run total cost function decreases as output increases, the firm's underlying production function exhibits:
 Definition
increasing returns to scale.
Term
Average cost declines as output expands in a production process with:
 Definition
increasing returns to scale.
Term
If a total product curve exhibits increasing returns to a variable input, the cost elasticity is:
 Definition
unknown, without further information.
Term
Each point on a long-run average cost curve is the minimum:
 Definition
short-run average cost of production.
Term
A firm's capacity is the output:
 Definition
level where short-run average costs are minimized.
Term
The amount paid is:
 Definition
historical cost.
Term
The change in cost caused by a given managerial decision is:
 Definition
incremental cost.
Term
Costs that do not vary across decision alternatives are:
 Definition
sunk.
Term
A cost-output relation for a specific plant and operating environment is the:
 Definition
short-run cost curve.
Term
The output level at which short-run average costs are minimized is:
 Definition
capacity.
Term
Opportunity cost is not:
 Definition
none of these.
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