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Managerial Economics

Part 1:

1. The price of good A goes up. As a result the demand for good B shifts to the left. From this we can infer that:

a. good A is a normal good. b. good B is an inferior good. c. goods A and B are substitutes. d. goods A and B are complements. e. none of the above.

Choose: d) the definition os complements

2. Joe's budget line is 15F + 45C = 900. When Joe chooses his most preferred market basket, he buys 10 units of C. therefore, he also buys :

a. 10 units of F b. 30 units of F c. 50 units of F d. 60 units of F e. None of the above

Choose: b) We assume that Joe will spend all his income. If C = 10, then 15F =900 – 45(10) =450, so F = 450/15 =30.

3. Kim only buys coffee and compact discs. Coffee costs $0.60 per cup, and CDs cost $12.00 each. She has $18 per week to spend on these two goods. If Kim is maximizing her utility, her marginal rate of substitution of coffee for CDs is:

a. 0.05 b. 20 c. 18 d. 1.50 e. None of the above

Choose: a) At Kim's most preferred market basket, her MRS equals the price ratio (Pcoffee/PCD), which equals 0.6/12 or 0.05.

4. The bandwagon effect corresponds best to which of the following? a. snob effect.

b. external economy.

c. negative network externality. d. positive network externality. Choose: d)

5. A Giffen good

a. is always the same as an inferior good.

b. is the special subset of inferior goods in which the substitution effect dominates the income effect.

c. is the special subset of inferior goods in which the income effect dominates the substitution effect.

d. must have a downward sloping demand curve. Choose: c) the definition of Giffen good

6. An Engel curve for a good has a positive slope if the good is :

a. an inferior good. b. a Giffen good.

c. a normal good. d. a, b, and c are true. e. None of the above is true.

Choose: c) Inferior and Giffen goods have negatively sloped Engel curves.

7. The price of beef and quantity of beef traded are P* and Q*, respectively. Given this information, consumer surplus is the area:

a. 0BCQ* b. ABC c. ACP* d. CBP* e. 0ACQ* Choose: d) Consumer surplus is the area between the demand line and the price.

8. In Figure 1, holding income constant, what change must have occurred to rotate the budget line from the old line(1) to the new line(2)?

Pizza (2) (1)

Figure 1

Coke a. The price of Coke fell b. The price of pizza fell c. The price of pizza rose d. The price of Coke went up e. b and c

Choose: b) The horizontal intercept, I/PC, is unchanged, which implies that PC could not have changed (holding income constant). Since the slope is PP/PC, the slope change means that the price of pizza must have fallen. This can also be seen intuitively from Figure 1, since the consumer can now buy more pizza than before if he spends all his income on pizza.

9. Andy buys 10 pounds of onions per month when the price is $0.75 per pound. If the price falls to $0.50 per pound, he buys 30 pounds of onions. What is his arc elasticity of demand over this price range?

a. - 1.33 b.–2 c.–2.5 d. - 6 e. None of the above is correct. Choose: c) Using the arc elasticity formula,

EP??QP(30?10)(0.50?0.75)?2?????2.5 ?PQ(0.50?0.75)(30?10)?2The next two questions refer to the following information: Opie and Gomer are the only two

consumers in the video cassette rental market in the Mayberry. Their demand curves per week are pictured in Figure 2.

10. If rentals cost $2.50 each, the total quantity demanded each week in the market is : a. 3 b. 6 c. 15 d. 10 e. None of the above is correct.

Choose: b) Add horizontally to get the market demand curve. At P = $2.50, QO = 3 and QG = 3 for a total of 6 units demanded.

11. For a decrease in price from $2.50 to $1.50, market demand is :

a. elastic. b. unit elastic. c. inelastic. d. perfectly inelastic. e. More information is needed. Choose: a) Demand is price elastic:

EP = %ΔQ/%ΔP = [(15-6)/6]/[(2.50-1.50)/2.50] = -3.75

OPIE Price($/unit) 2.50 Do 1.50 Quantity (number of cassettes) 3 8 (a)

COMER Price($/unit) 2.50 DG 1.50

Quantity

(number of cassettes) 3 7

(b) Figure 2

12. As president and CEO of MegaWorld industries, you must decide on some very risky alternative investments:

Profit if Probability Successful of Success A $10 million .5 B $50 million .2 C $90 million .1 D $20 million .8 E $15 million .4 The highest expected return belongs to investment Project Loss if Failure -$6 million -$4 million -$10 million -$50 million $0 Probability of Failure .5 .8 .9 .2 .6 a. A. b. B. c. C. d. D. e. E Choose: b) Ea=2 Eb=6.8 Ec=0 Ed=6 Ee=6

13. An individual with a constant marginal utility of income will be a. risk averse. b. risk neutral.

c. risk loving. d. insufficient information for a decision.

Choose: b) An individual with a constant marginal utility of income is risk neutral. 14. In the figure below, what is true about the two jobs?

a. Job 1 has a lower standard deviation than Job 2.

b. All outcomes in both jobs have the same probability of occurrence. c. A risk-averse person would prefer Job 2. d. A risk-neutral person would prefer Job 1.

e. Job 1 has a higher expected income than Job 2.

Choose: a) Job 1 has a lower standard deviation than Job 2. Expected income of Job 1 equals to Job 2.

Part 2:

The demand curves for steak, eggs, and hot dogs are given in the table below. The current price of steak is $5. The price of eggs is $2.50, and the price of hot dogs is $0.75. Fill in the

remaining columns of the table using this information. Indicate which goods are substitutes and which goods are complements. Steak Price Egg Price Hotdog Good Demand Equation Elasticity of Elasticity of Price