Answers to Practice Questions before the Midterm ( Essays - Economy

Answers to Practice Questions before the Midterm ( Essays - Economy Answers to Practice Questions before the Midterm (MBAC 512) Prof. Silke Forbes Spring 2017 Multiple-Choice Questions 1 . The law of demand states that, holding all else constant: A. as price falls, demand will fall also. B. as price rises, demand will also rise. C. price has no effect on quantity demanded. D. as price falls, quantity demanded rises. 2 . An increase in the price of steak will probably lead to: A. an increase in demand for chicken. B. an increase in demand for steak. C. no change in the demand for steak or chicken. D. an increase in the supply of chicken. 3 . If A and B are complements, an increase in the price of good A would: A. have no effect on the quantity demanded of B. B. lead to an increase in demand for B. C. lead to a decrease in demand for B. D. none of the statements associated with this question are correct. 4 . Suppose both supply and demand decrease. What effect will this have on the market price? A. It will fall. B. It will rise. C. It may rise or fall. D. It will remain the same. 5 . Assume that the price elasticity of demand is -2 for a certain firm's product. If the firm raises price, the firm's manage rs can expect total revenue to: A. decrease. B. increase. C. remain constant. D. either increase or remain constant, depending upon the size of the price increase. 6 . One of the conditions under which market-based (third-degree) price discrimination is profitable is: A. ability to identify consumer types. B. inability to resell the good. C. differences in demand elasticities. D. All of the statements associated with this question are correct. 7. The own price elasticity of demand for apples is -1.2. If the price of apples falls by 5 percent, what will happen to the quantity of apples demanded? It will increase 5 percent. It will fall 4.3 percent. It will increase 4.2 percent. It will increase 6 percent. 8. If apples have an own price elasticity of -1.2 we know the demand is: unitary. indeterminate. elastic. inelastic. 9 . A consumer values a car at $525,000 and a producer values the same car at $485,000. If the transaction is completed at $510,000, the transaction will generate: No surplus. $25,000 worth of producer surplus and unknown amount of consumer surplus. $15,000 worth of consumer surplus and $25,000 of producer surplus. $25,000 worth of consumer surplus and unknown amount of producer surplus. 1 0 . The opportunity cost of an action: is equal to the marginal cost of an action. is equal to explicit cost. is equal to the value of next best alternative . is the total cost of an action 1 1 . If Average Variable Costs are equal to $5 and Average Fixed Costs are equal to $15, then the Average Total Costs are equal to: $10 $5 $15 $20 1 2 . Sarah's Machinery Company is deciding to dump their current technology A for a new technology B with small fixed costs but big marginal costs. The current technology has fixed costs of $500 and marginal costs of $50 whereas the new technology has fixed costs of $250 and marginal costs of $100. At what quantity is Sarah Machinery indifferent between two technologies? 5 6 7 8 1 3 . In 2011, Netflix raised prices on its DVDs and internet streaming plan. This decision could have been based on the following rationale: Netflix had become an industry leader thereby making the demand curve inelastic. Netflix had become an industry leader thereby making the demand curve elastic. Internet service, a complement to a Netflix subscription, had become more expensive. There are many substitutes to Netflix products. 1 4 . It costs a firm $80 per unit to produce product A and $50 per unit to produce product B individually. If the firm can produce both products together at $120 per unit of product A and B, this exhibits signs of Economies of scale. Economies of Scope. Diseconomies of Scale. Diseconomies of Scope. 15 . When there are economies of scale, per-unit costs increase as output increases. per-unit costs