Managerial Econ Final

Long run average costs are lower for greater quantities of output

Economies of scale

The cost of producing the two products separately is greater than the cost of producing both of those goods jointly

economies of scope

Suppose Nike’s managers were considering expanding into producing sports beverages. Why might the company decide to do this under the Nike brand name?

The cost of producing sports beverages along with its current products under the Nike brand name is LESS than the cost of producing sports beverages under a brand name plus the cost of producing Nike’s current products under the Nike brand name.

The variety of Riverside Ranger logo T-shirts includes 12 different designs. Setup between designs takes one hour (and $17,000), and, after setting up, you can produce 1,000 units of a particular design per hour (at a cost of $11,000).

Note: Assume Q denotes the quantity produced of a particular design.

Which of the following best represents the average cost function for producing any single design?

Based on this information, production in any one single design ____ economies of sale.

AC=($17,000/Q) + $11; exhibits

Under increasing returns to scale, average cost ____ as the quantity produced increases. Over this range of output, the marginal cost curve is _____ the average cost curve.

falls; lower than

Suppose you have a production technology that can be characterized by a learning curve. Every time you increase production by one unit, your marginal cost decreases by $6. There are no fixed costs, and the first unit costs you $62 to produce.

Use the given information to fill in the marginal cost of each unit, as well as the total cost and average cost of each level of output.

Suppose you receive a request for proposal (RFP) on a project for two units. Your break-even price for two units is _____.

Suppose that if you get the contract, you estimate that you can win another project for two more units. The break-even price for those next two units alone is _____.

Quantity	Marginal Cost	Total Cost	Average Cost
(Units)	($)</em></span></p></th><th colspan="1" rowspan="1" style="text-align: left; line-height: 1.3em; padding: 1px 10px 3px; vertical-align: bottom;"><p><span><em>($)	($/unit)
1	$62	$62	$62
2	$56.00	$118.00	$59.00
3	$50.00	$168.00	$56.00
4	$44.00	$212.00	$53.00
5	$38.00	$250.00	$50.00
6	$32.00	$282.00	$47.00

$59.00

$47.00

The widget market is competitive and includes no transaction costs. Five suppliers are willing to sell one widget at the following prices: $26, $14, $10, $5, and $3 (one seller at each price). Five buyers are willing to buy one widget at the following prices: $10, $14, $26, $34, and $42 (one buyer at each price).

For each price shown in the following table, use the given information to enter the quantity demanded and quantity supplied.

In this market, the equilibrium price will be ____ per widget.

In this market, the equilibrium quantity will be _____ widgets.

Price	Quantity Demanded	Quantity Supplied
($ per widget)	(widgets)	(widgets)
$3	5	1
$5	5	2
$10	5	3
$14	4	4
$26	3	5
$34	2	5
$42	1	5

$14

4 widgets

The “A” index is a proxy for the world price of cotton. From January to October 2021, the price reflected by the “A” index decreased by about 50%.

On the following graph, shift the demand curve to show what may have caused the decrease in the price of cotton.

Another possible explanation for this decrease in the price of cotton is a ______ shift of the supply curve.

Demand curve (blue line) moves to the left

rightward

Suppose that due to the outbreak of a new flu, known as H14N9, the demand for hand sanitizer has tripled.

Smith & Smith, a company that produces and sells hand sanitizer, should ______ production of its hand sanitizer.

Increase

Suppose there is no vaccine for H14N9, and that a vaccine will not be developed for several decades.

True or False: Smith & Smith should increase its productive capacity by leasing new plant and equipment.

True

The following graph depicts the market for candy bars, currently in equilibrium.

Suppose there is an increase in cocoa prices.

Shift either the supply curve or demand curve on the following graph to depict this increase in cocoa prices, then answer the questions that follow.

As a result of the increase in cocoa prices, the equilibrium quantity of candy bars has ______, and the equilibrium prices has _______

Supply curves (orange line) moves to the left

Decreased; Increased

Indicate whether the following change would cause a shift in the demand curve for product A and, if so, the direction of the shift.

Change	Demand Curve Shift?	Direction of Shift
An increase in the price of a complementary product

Yes

Decrease

Suppose that on Valentine’s Day, the demand for both roses and greeting cards increases by the same percentage amount. However, the price of roses increased by more than the price of greeting cards.

Based on this information, you can conclude that the supply of Valentine’s cards is _____ sensitive to price than the supply of roses.

More

At a university faculty meeting in 2020, a proposal was made to increase health care benefits for new faculty to keep pace with the high cost of health care.

True or False: In the long run, this increase in HEALTH CARE BENEFITS will make faculty positions LESS attractive than other jobs. (Hint: Consider how the indifference principle applies to this occupation in the long run.)

False

At a university faculty meeting in 2020, a proposal was made to increase the housing benefits for new faculty to keep pace with the high cost of housing.

True or False: In the long run, this increase in HOUSING BENEFITS will have NO EFFECT on the attractiveness of faculty positions compared to other jobs. (Hint: Consider how the indifference principle applies to this occupation in the long run.)

True

At a university faculty meeting in 2020, a proposal was made to increase health care benefits for new faculty to keep pace with the high cost of health care.

True or False: In the long run, this increase in HEALTH CARE BENEFITS will have NO EFFECT on the attractiveness of faculty positions compared to other jobs. (Hint: Consider how the indifference principle applies to this occupation in the long run.)

True

Distributors of pipes earn some monopoly profits in their local markets but see them slowly erode as substitutes enter the market. Suppose Nebraska has scheduled a vote on the legalization of marijuana. Additionally, suppose that marijuana and pipes are complements and that the legalization of marijuana would lead to a decrease in the price of marijuana.

Given the relationship between marijuana and pipes, the legalization of marijuana would lead to _______ in demand for pipes. Thus, distributors of pipes would likely ______ the legalization of marijuana.

an increase; support

Suppose that a new entry has decreased your demand elasticity from –5 to –6 (made demand more elastic) and that your price, before the new entry, was $10.

You should adjust your price to _______ due to the new entry and decreased demand elasticity.

$9.60

Suppose that a new entry has decreased your demand elasticity from –2 to –3 (made demand more elastic) and that your price, before the new entry, was $20.

You should adjust your price to _______ due to the new entry and decreased demand elasticity.

$15.00

Relative to managers in more competitive industries, managers in more monopolistic industries are more likely to spend their time on _______.

Pricing strategies

Describe the difference in economic profit between a competitive firm and a monopolist in both the short and long run. Which should take longer to reach the long-run equilibrium?

In the short run, both monopolists and competitive firms _____ earn positive economic profit. In the long run, ________can earn a positive economic profit.

Can; neither monopolists nor competitive firms

True or False: The adjustment to long-run equilibrium occurs more quickly for competitive industries than for monopolists.

True

True or False: The adjustment to long-run equilibrium occurs more quickly for monopolists than for competitive industries.

False

You're the manager of global opportunities for a U.S. manufacturer that is considering expanding sales into Asia. Your market research has identified the market potential in Malaysia, the Philippines, and Singapore as described in the following table:

	Success Level
	Big	Mediocre	Failure
Malaysia
Probability	0.3	0.2	0.5
Units	1,100,000	352,000	0
Philippines
Probability	0.3	0.3	0.4
Units	1,300,000	650,000	0
Singapore
Probability	0.7	0.1	0.2
Units	600,000	360,000	0

The product sells for $20, and each unit has a constant marginal cost of $16. Assume that the (fixed) cost of entering the market (regardless of which market you select) is $500,000.

In the following table, enter the expected number of units sold, and the expected profit, from entering each market.

If you were to enter one of the previously described markets, which one would you enter in order to earn the highest expected profit?

Market	Expected Number of Units Sold	Expected Profit
Malaysia	400,400	$1,101,600
Philippines	585,000	$1,840,000
Singapore	456,000	$1,324,000

Philippines

You're a contestant on a TV game show. In the final round of the game, if contestants answer a question correctly, they will increase their current winnings of $1 million to $3 million. If they are wrong, their prize is decreased to $750,000. You believe you have a 25% chance of answering the question correctly.

Ignoring your current winnings, your expected payoff from playing the final round of the game show is _________. (Hint: Enter a negative sign if the expected payoff is negative.)

Given that this is _______, you _______ play the final round of the game

The lowest probability of a correct guess that would make the guessing in the final round profitable (in expected value) is _______. (Hint: At what probability does playing the final round yield an expected value of zero?

$312,500.00

Positive; should

11.1111%

The residential division of Prism’s high-speed internet service uses one advertising agency, while its commercial division uses another. Two analysts, Andy and Brad, are asked to test the effectiveness of the two agencies. Andy proposes an A/B test that compares the click-through rates per ad of the two agencies. Brad proposes a difference-in-difference test in which the budgets for both agencies are increased by 50%, and the percentage changes in the click-through rates are compared.

True or False: Both Andy’s estimator and Brad’s estimator are unbiased.

False

Your company has a customer who is shutting down a production line, and it is your responsibility to dispose of the extrusion machine. The company could keep it in inventory for a possible future product and estimates that the reservation value is $350,000. Your dealings on the secondhand market lead you to believe that if you commit to a price of $400,000, there is a 0.4 chance you will be able to sell the machine. If you commit to a price of $450,000, there is a 0.25 chance you will be able to sell the machine. If you commit to a price of $500,000, there is a 0.1 chance you will be able to sell the machine. These probabilities are summarized in the following table.

For each posted price, enter the expected value of attempting to sell the machine at that price. (Hint: Be sure to take into account the value of the machine to your company in the event that you are not be able to sell the machine.)

Assume you must commit to one posted price.

In order to maximize the expected profit of the potential sale, which posted price would you commit to in order to maximize the expected value of the potential sale of the machine?

Posted Price	Probability of Sale	Expected Value
($)</em></strong></p></th><th colspan="1" rowspan="1" style="padding: 1px 10px; text-align: center; vertical-align: top; font-style: italic; font-weight: bold; max-width: 550px;"><p><strong><em>($)
$500,000	0.1	$365,000.00
$450,000	0.25	$375,000.00
$400,000	0.4	$370,000.00

$450,000

You are offered the following gamble based on coin flips. If the first heads occurs on the first flip, you get $2. If the first heads occurs on the second flip, you get $4, and so on, so that if the first heads is on the Nth flip, you get $2^N. The game continues until there is a heads.

Which of the following best represents the expected value of this gamble in dollars?

When offered, most people say they would pay only less than $10 to play this game. One possible explanation for this phenomenon is that, for most individuals, the marginal utility of each dollar _____ at larger sums of money.

∑N=1∞1
Decreases

The HR department is trying to fill a vacant position for a job with a small talent pool. Valid applications arrive every week or so, and the applicants all seem to bring different levels of expertise. For each applicant, the HR manager gathers information by trying to verify various claims on the candidate's résumé, but some doubt about “fit” always lingers when a decision to hire or not is to be made.

Suppose that hiring an employee who is a bad fit for the company results in an error cost of $900, but failing to hire a good employee results in an error cost of $200 to the company. Although it is impossible to tell in advance whether an employee is a good fit, assume that the probability that an applicant is a “good fit” is 0.4, while the probability that an applicant is a “bad fit” is 1−0.4=0.6. Hiring an applicant who is a good fit, as well as not hiring an applicant who is a bad fit, results in no error cost to the company.

For each decision in the following table, calculate and enter the expected error cost of that decision.

Suppose an otherwise qualified applicant applies for a job. In order to minimize expected error costs, the HR department should _________ the applicant.

Decision	Reality		Expected Error Cost
	Good Fit	Bad Fit
	p=0.4	p=0.6
Hire	Cost: 0	Cost: $900	$540.00
Do Not Hire	Cost: $200	Cost: 0	$80.00

Not Hire

In the late 1990s, car leasing was very popular in the United States. A customer would lease a car from the manufacturer for a set term, usually two years, and then have the option of keeping the car. If the customer decided to keep the car, the customer would pay a price to the manufacturer, the “residual value,” computed as 60% of the new car price. The manufacturer would then sell the returned cars at auction. In 1999, manufacturers lost an average of $480 on each returned car (the auction price was, on average, $480 less than the residual value).

Suppose two customers have leased cars from a manufacturer. Their lease agreements are up, and they are considering whether to keep (and purchase at 60% of the new car price) their cars or return their cars. Two years ago, Becky leased a car valued new at $10,000. If she returns the car, the manufacturer could likely get $7,000 at auction for the car. Clancy also leased a car, valued new at $14,000, two years ago. If he returns the car, the manufacturer could likely get $7,280 at auction for the car.

Use the following table to indicate whether each buyer is more likely to purchase or return the car.

The manufacturer will lose money (at auction, relative to the residual value of the car) if _____ returns the car instead of keeping and purchasing it.

True or False: Setting a more accurate residual price of each car would help attenuate the problems of adverse selection.

Becky: Keep and Purchase Car; Clancy: Return Car

Clancy

True

Many police officer positions require the applicant to have a college degree, even though the tasks of a police officer rarely call upon college course material.

Suppose two individuals who do not have college degrees are considering applying to the police force. Lorenzo is considering applying for an officer position and plans on working for the police force for a period of time, over which he would earn approximately $5,000 (in present discounted value) in earnings while in the position. Jake is also considering applying, and plans on working as an officer for a period of time, over which he would earn approximately $600,000 (in present discounted value) in lifetime earnings while in the position. Also suppose that present value of obtaining a college degree, which is required to submit a job application to the police department, is $50,000.

Use the following table to indicate whether each individual would likely apply, or not, given the cost of obtaining a college degree.

Jake: Would apply

Lorenzo: Would not apply

Suppose that you sell bicycle theft insurance, and bicycle owners do not know whether they are high or low risk consumers.

True or False: This situation causes an adverse selection problem, but only if the person is a high-risk consumer.

False

When China reformed state-owned enterprises, it tried a new approach to choosing managers: it put managerial jobs up for auction. The bids for the jobs consisted of promises of future profit streams that the managers would generate and then deliver to the state. In cases where the incumbent manager was the winning bidder, firm productivity tended to increase dramatically. When outside bidders won, there was little productivity improvement. Assume that incumbent managers and new managers had similar qualifications.

True or False: This result stems from information asymmetry between incumbent managers and outside bidders

True

When China reformed state-owned enterprises, it tried a new approach to choosing managers: it put managerial jobs up for auction. The bids for the jobs consisted of promises of future profit streams that the managers would generate and then deliver to the state. In cases where the incumbent manager was the winning bidder, firm productivity tended to increase dramatically. When outside bidders won, there was little productivity improvement. Assume that incumbent managers and new managers had similar qualifications.

True or False: This result is an example of the winner's curse.

True

Soft selling occurs when a buyer is skeptical of the usefulness of a product and the seller offers to set a price that depends on realized value. For example, suppose a sales representative is trying to sell a company a new accounting system that will, with certainty, reduce costs by 20%. However, the customer has heard this claim before and believes there is only a 50% chance of actually realizing that cost reduction and a 50% chance of realizing no cost reduction.

Assume the customer has an initial total cost of $700.

According to the customer's beliefs, the expected value of the accounting system, or the expected reduction in cost, is ________.

Suppose the sales representative initially offers the accounting system to the customer for a price of $105.00.

The information asymmetry stems from the fact that the ______ has more information about the efficacy of the accounting system than does the _____. At this price, the customer _______ purchase the accounting system, since the expected value of the accounting system is _______ than the price.

Instead of naming a price, suppose the sales representative offers to give the customer the product in exchange for 50% of the cost savings. If there is no reduction in cost for the customer, then the customer does not have to pay.

True or False: This pricing scheme worsens the problem of information asymmetry in this scenario.

$70.00

Sales representative; Buyer; will not; less

False

You need to hire some new employees to staff your startup venture. You know that potential employees are distributed throughout the population as follows, but you can't distinguish among them:

Employee Value	Probability
$40,000	0.1
$51,000	0.1
$62,000	0.1
$73,000	0.1
$84,000	0.1
$95,000	0.1
$106,000	0.1
$117,000	0.1
$128,000	0.1
$139,000	0.1

The expected value of hiring one employee is ______.

Suppose you set the salary of the position equal to the expected value of an employee. Assume that employees will not work for a salary below their employee value.

The expected value of an employee who would apply for the position, at this salary, is _______.

Given this adverse selection, your most reasonable salary offer (that ensures you do not lose money) is ________.

$89,500.00

$62,000.00

$40,000.00

You need to hire some new employees to staff your startup venture. You know that potential employees are distributed throughout the population as follows, but you can't distinguish among them:

Employee Value	Probability
$55,000	0.125
$68,000	0.125
$81,000	0.125
$94,000	0.125
$107,000	0.125
$120,000	0.125
$133,000	0.125
$146,000	0.125

The expected value of hiring one employee is _______.

Suppose you set the salary of the position equal to the expected value of an employee. Assume that employees will not work for a salary below their employee value.

The expected value of an employee who would apply for the position, at this salary, is _______.

Given this adverse selection, your most reasonable salary offer (that ensures you do not lose money) is _______.

$100,500.00

$74,500.00

$55,000.00

Your product fails about 2% of the time, on average. Some customers purchase the extended warranty you offer in which you will replace the product if it fails. Suppose that you have currently set the price of the extended warranty at 2% of the product price.

An analyst at your company argues that the types of customers who purchase the extended warranty are more likely to misuse and break the product. However, the analyst argues, the company cannot accurately identify these types of customers.

The analyst is claiming that ______ will cause the claim rate to be ______ than 2%.

True or False: You should keep the price of the extended warranty at 2% of the product price.

Adverse selection; higher

False

A colleague tells you that they can get a business loan from the bank, but the rate seems very high for what your colleague considers a low-risk loan.

Use the following table to classify each explanation for the high rate as an instance of either adverse selection or moral hazard.

You advise your friend to disclose all of their past financial records and credit history to the bank to show that they are likely to pay back the loan.

Your advice is more likely to solve the problem of _______.

Explanation for High Rate	Adverse Selection	Moral Hazard
The bank cannot determine which borrowers are likely to pay back the loan and which are likely to default.	Yes
The bank believes your friend, if given access to financing at low rates, would use the money frivolously.		Yes

Adverse selection