Strayer New ECO550 Final Exam

ECO 550 (NEW) Final Exam CHAPTER 9 To CHAPTER 17MULTIPLE CHOICE1. Evidence from empirical studies of short-run cost-output relationships lends support to the:a. existence of a non-linear cubic total cost functionb. hypothesis that marginal costs first decrease, then gradually increase over the normal operating range of the firmc. hypothesis that total costs increase quadratically over the ranges of output examinedd. hypothesis that total costs increase linearly over the range of output examinede. none of the above2. The short-run cost function is:a. where all inputs to the production process are variableb. relevant to decisions in which one or more inputs to the production process are fixedc. not relevant to optimal pricing and production output decisionsd. crucial in making optimal investment decisions in new production facilitiese. none of the above3. Theoretically, in a long-run cost function:a. all inputs are fixedb. all inputs are considered variablec. some inputs are always fixedd. capital and labor are always combined in fixed proportionse. b and d 4. Break-even analysis usually assumes all of the following except:a. in the short run, there is no distinction between variable and fixed costs.b. revenue and cost curves are straight-lines throughout the analysis.c. there appears to be perfect competition since the price is considered to remain the same regardless of quantity.d. the straight-line cost curve implies that marginal cost is constant.e. both c and d5. What is another term meaning the degree of operating leverage?a. The measure of the importance of fixed cost.b. The operating profit elasticity.c. The measure of business risk.d. D.O.L.e. All of the above.6. In a study of banking by asset size over time, we can find which asset sizes are tending to become more prominent. The size that is becoming more predominant is presumed to be least cost. This is called:a. regression to the mean analysis.b. breakeven analysis.c. survivorship analysis.d. engineering cost analysis.e. a Willie Sutton analysis.7. George Webb Restaurant collects on the average $5 per customer at its breakfast & lunch diner. Its variable cost per customer averages $3, and its annual fixed cost is $40,000. If George Webb wants to make a profit of $20,000 per year at the diner, it will have to serve__________ customers per year.a. 10,000 customersb. 20,000 customersc. 30,000 customersd. 40,000 customerse. 50,000 customers8. In determining the shape of the cost-output relationship only ____ depreciation is relevant.a. directb. indirectc. usaged. timee. scheduled9. Which of the following is not a limitation of the survivor technique for measuring the optimum size of firms within an industry?a. since the technique does not employ actual cost data in the analysis, there is no way to assess the magnitude of the cost differentials between firms of varying size and efficiency.b. the managerial and entrepreneurial aspects of the production process are not included in the analysisc. because of legal factors, the long-run cost curve derived by this technique may be distorted and may not measure the cost curve postulated in economic theoryd. a and be. b and c10. The primary disadvantage of engineering methods for measuring cost functions is that they deal with the managerial and entrepreneurial aspects of the production process or plant.a. trueb. false11. A linear total cost function implies that:a. marginal costs are constant as output increasesb. average total costs are continually decreasing as output increasesc. a and bd. none of the above12. A ____ total cost function implies that marginal costs ____ as output is increased.a. linear; increase linearlyb. quadratic; increase linearlyc. cubic; increase linearlyd. a and be. none of the above13. A ____ total cost function implies that marginal costs ____ as output is increased.a. linear; increase linearlyb. quadratic; are constantc. cubic; increase linearlyd. linear; are constante. none of the above14. A ____ total cost function yields a U-shaped average total cost function.a. cubicb. quadraticc. lineard. a and b onlye. a, b, and c15. In the linear breakeven model, the difference between selling price per unit and variable cost per unit is referred to as:a. variable margin per unitb. variable cost ratioc. contribution margin per unitd. target margin per unite. none of the above16. Which of the following is not an assumption of the linear breakeven model:a. constant selling price per unitb. decreasing variable cost per unitc. fixed costs are independent of the output leveld. a single product (or a constant mix of products) is being produced and solde. all costs can be classified as fixed or variable17. In the linear breakeven model, the breakeven sales volume (in dollars) is equal to fixed costs divided by:a. unit selling price less unit variable costb. contribution margin per unitc. one minus the variable cost ratiod. a and b onlye. a, b, and c18. The degree of operating leverage is equal to the ____ change in ____ divided by the ____ change in ____.a. percentage; sales; percentage; EBITb. unit; sales; unit; EBITc. percentage; EBIT; percentage; salesd. unit; EBIT; unit; salese. none of the above19. The linear breakeven model excludes ____ from the analysis.a. financing costsb. taxesc. contribution margind. a and b onlye. a, b, and c20. In the linear breakeven model, the relevant range of output is that range where the linearity assumptions of the model are assumed to hold.a. trueb. false 21. In the linear breakeven model, the breakeven sales volume (in dollars) can be found by multiplying the breakeven sales volume (in units) by:a. one minus the variable cost ratiob. contribution margin per unitc. selling price per unitd. standard deviation of unit salese. none of the above 22. In the linear breakeven model, a firm incurs operating losses whenever output is less than the breakeven level.a. trueb. falsePROBLEMS1. For each of the following cost-output relationships, describe the shape (U-shape, decreasing, increasing, constant) of the average total cost and marginal cost functions (C = total cost, Q = output):(a) C = 42,500,000 + 2550Q(b) C = 8.48 + 0.65Q + .00220Q22. Offshore Petroleum’s fixed costs are $2,500,000 and its debt repayment requirements are $1,000,000. Selling price per barrel of oil is $18 and variable costs per barrel are $10.(a) Determine the breakeven output (in dollars).(b) Determine the number of barrels of oil that offshore must produce and sell in order to earn a target (operating) profit of $1,500,000.(c) Determine the degree of operating leverage at an output of 400,000 barrels.(d) Assuming that sales of oil are normally distributed with a mean of 362,500 barrels and a standard deviation of 100,000 barrels, determine the probability that Offshore will incur an operating loss.Chapter 10—Prices, Output, and Strategy: Pure and Monopolistic CompetitionMULTIPLE CHOICE1. The main difference between perfect competition and monopolistic competition is:a. The number of sellers in the marketb. The ease of entry and exit in the industryc. The degree of information about market priced. The degree of product differentiatione. Whether it is the short run or the long run2. Long distance telephone service has become a competitive market. The average cost per call is $0.05 a minute, and it’s declining. The likely reason for the declining price for long distance service is:a. Governmental pressure to lower the priceb. Reduced demand for long distance servicec. Entry into this industry pushes prices downd. Lower price for a barrel of crude oile. Increased cost of providing long distance service3. What is the profit maximization point for a firm in a purely competitive environment?a. The output where P = MCb. The output where P < MCc. The output where P > MCd. The output where MR = MCe. The output where AVC < P4. All of the following are true for both competition and monopolistic competition in the long run, except one of them. Which is it?a. P = MCb. P = ACc. Economic profits become zero in the long-rund. The barriers to entry and exit are relatively easye. None of the above is an exception5. Which of the following statements is (are) true concerning a pure competition situation?a. Its demand curve is represented by a vertical line.b. Firms must sell at or below market price.c. Marginal revenue is equal to price.d. both b and ce. both a and b6. In pure competition:a. the optimal price-output solution occurs at the point where marginal revenue is equal to priceb. a firm's demand curve is represented by a horizontal linec. a firm is a price-taker since the products of every producer are perfect substitutes for the products of every other producerd. a and b onlye. a, b, and c7. In the short-run for a purely competitive market, a manufacturer will stop production when:a. the total revenue is less than total costsb. the contribution to fixed costs is zero or lessc. the price is greater than AVCd. operating at a losse. a and b8. In the purely competitive case, marginal revenue (MR) is equal to:a. costb. profitc. priced. total revenuee. none of the above9. In long-run equilibrium, all firms in a pure competition market situation operating under a condition of certainty will have identical costs even though they may use different production and operation techniques.a. trueb. false10. If price exceeds average costs under pure competition, ____ firms will enter the industry, supply will ____, and price will be driven ____.a. more; decrease; downb. more; decrease; upc. more; increase; downd. more; increase; upe. none of the above 11. A firm in pure competition would shut down when:a. price is less than average total costb. price is less than average fixed costc. price is less than marginal costd. price is less than average variable cost12. In the long-run, firms in a monopolistically competitive industry willa. earn substantial economic profitsb. tend to just cover costs, including normal profitsc. seek to increase the scale of operationsd. seek to reduce the scale of operations13. Uncertainty includes all of the following except ____.a. unknown effects of deliberate actionsb. incomplete information as to the type of competitorc. random disturbancesd. unverifiable claimse. accidents due to weather hazards14. Experience goods are products or servicesa. that the customer already knowsb. whose performance is highly unusualc. whose quality is undetectable when purchasedd. not likely to cause repeat purchasese. all of the above15. Buyers anticipate that the temporary warehouse seller of unbranded computer equipment willa. deliver high quality products consistent with expectationsb. not attempt to establish any warranty enforcement mechanismsc. offer several prices and qualitiesd. produce only one qualitye. none of the above16. All of the following are mechanisms which reduce the adverse selection problem except ____.a. warranties from established enterprises with non-redeployable assetsb. high interest ratesc. large collateral requirementsd. brand names and product-specific promotions and retail displayse. higher prices in repeat customer transactions17. Asset specificity is largest whena. value in first best use is largeb. value in second best use is largec. customers choose their supplier at randomd. very valuable assets are non-redeployablee. customers are loyal to a particular seller18. Under asymmetric information,a. you never get what you pay forb. you sometimes get cheatedc. you always get cheatedd. at best you get what you pay fore. sellers make profits in excess of competitive returns19. To escape adverse selection and elicit high quality experience goods buyers cana. offer price premiums to new firms in the marketb. seek out unbranded goodsc. buy from generic storefronts that have leased temporary spaced. secure warranties from warehouse retailerse. none of the above20. The problems of asymmetric information exchange arise ultimately becausea. one party to the exchange possesses different information than anotherb. one party has more information than anotherc. one party knows nothingd. one party cannot independently verify the information of anothere. information is scarce21. The market for "lemons" is one in whicha. the rational buyer discountsb. the seller's product claims are unverifiable at the point of purchasec. "the bad apples drive out the good"d. the problem of adverse selection is rampante. all of the above22. The fraudulent delivery of low quality experience goods at high prices is more likely ifa. interest rates declineb. information about notorious firms is speedily disseminatedc. price premiums for allegedly high quality increased. sellers invest in non-transferable reputatione. none of the above23. An "experience good" is one that:a. Only an expert can useb. Has undetectable quality when purchasedc. Can be readily experienced simply by touching or tastingd. Improves with age, like a fine winee. All of the above24. A "search good" is:a. One that depends on how the product behaves over timeb. A product whose quality is only found out over time by finding how durable it isc. Like a peach that can be examined for flawsd. Like a used car, since it is easy to determine its inherent qualitye. None of the above25. The price for used cars is well below the price of new cars of the same general quality. This is an example of:a. The Degree of Operating Leverageb. A Lemon's Marketc. Redeployment Assetsd. Cyclical Competitione. The Unemployment RatePROBLEMS1. Sunrise Juice Company sells its output in a perfectly competitive market. The firm's total cost function is given in the following schedule: Output Total Cost(Units) ($) 0 5010 12020 17030 21040 26050 33060 430Total costs include a "normal" return on the time (labor services) and capital that the owner has invested in the firm. The prevailing market price is $7 per unit.(a) Prepare (i) marginal cost and (ii) average total cost schedules for the firm.(b) What is the firm's profit maximizing output level?(c) Is the industry in long-run equilibrium? Justify your answer.2. Superior Metals Company has seen its sales volume decline over the last few years as the result of rising foreign imports. In order to increase sales (and hopefully, profits), the firm is considering a price reduction on luranium--a metal that it produces and sells. The firm currently sells 60,000 pounds of luranium a year at an average price of $10 per pound. Fixed costs of producing luranium are $250,000. Current variable costs per pound are $5. The firm has determined that the variable cost per pound could be reduced by $.50 if production volume could be increased by 10 percent (fixed costs would remain constant). The firm's marketing department has estimated the arc elasticity of demand for luranium to be-1.5.(a) How much would Superior Metals have to reduce the price of luranium in order to achieve a 10 percent increase in the quantity sold?(b) What would the firm's (i) total revenue, (ii) total cost, and (iii) total profit be before and after the price cut?Chapter 11—Price and Output Determination: Monopoly and Dominant FirmsMULTIPLE CHOICE1. Unique Creations has a monopoly position in magnometers. If the marginal cost for a magnometer is $50 and the price elasticity for magnometers is -4, what is the optimal monopoly price?Hint: P (1 +1/E) = MC.a. $37.50b. $41.25c. $66.67d. $75.00e. $82.502. Land’s End estimates a demand curve for turtleneck sweaters to be:Log Q = .41 + 2.3 Log Y - 3 Log Pwhere Q is quantity, P is price, and Y is a measure on national income. If the marginal cost of imported turtleneck sweaters is $9.00. (HINT: P (1 +1/E) = MC). The optimal monopoly price would be:a. P = $13.50b. P = $26.50c. P = $27.50d. P = $34.50e. P = $56.223. Declining cost industriesa. have upward rising AC curves.b. have upward rising demand curves.c. have Ç-shaped total costs.d. have diseconomies of scale.e. have marginal cost curves below their average cost curve.4. A monopolist seller of Irish ceramics faces the following demand function for its product: P = 62 - 3Q. The fixed cost is $10 and the variable cost per unit is $2. What is the maximizing QUANTITY for this monopoly? Hint: MR is twice as steep as the inverse demand curve: MR = 62 – 6 Q. (Pick closest answer) a. Q = 10b. Q = 15c. Q = 22d. Q = 37e. Q = 41 5. Globo Public Supply has $1,000,000 in assets. Its demand curve is: P = 206 - .20•Q and its total cost function is: TC = 20,000 + 6•Q where TC excludes the cost of capital. If Globo Public Supply is UNREGULATED, find Globo's optimal price.a. $206b. $106c. $56d. $6e. $36. A monopolist faces the following demand curve: P = 12 - .3Q with marginal costs of $3. What is the monopolistic PRICE?a. P = $5.50b. P = $6.50c. P = $7.50d. P = $8.50e. P = $9.507.8.9.10.11.12.7. In natural monopoly, AC continuously declines due to economies in distribution or in production, which tends to found in industries which face increasing returns to scale. If price were set equal to marginal cost, then:a. price would equal average cost.b. price would exceed average cost.c. price would be below average cost.d. price would be at the profit maximizing level for natural monopolye. all of the above8. The profit maximizing monopolist, faced with a negative-sloping demand curve, will always produce:a. at an output greater than the output where average costs are minimizedb. at an output short of that output where average costs are minimizedc. at an output equal to industry output under pure competitiond. a and ce. none of the above9. In the case of pure monopoly:a. one firm is the sole producer of a good or service which has no close substitutesb. the firm's profit is maximized at the price and output combination where marginal cost equals marginal revenuec. the demand curve is always elasticd. a and b onlye. a, b, and c