University of the Cumberlands. Managerial Accounting. Assignment; Chapters 1 & 2—The One Lesson of Business & Benefits, Costs, and Decisions, Assignment Two - Chapters 4 & 5— Extent (How much) Decisions & Investment Decisions, ASSIGNMENT TWELVE– CHAPTERS 16 & 17 – BARGAINING AND DECSION UNCERTAINTY, ASSIGNMENT TEN– CHAPTERS 13 & 14 — DIRECT AND INDIRECT PRICE DISCRIMINATION.

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Answer Key - Assignment One - Chapters 1 & 2—The One Lesson of Business & Benefits, Costs, and Decisions MULTIPLE CHOICE 1. One lesson of business: a. is tracing the consequences of a policy. b.... promoting a policy change to eradicate inefficiencies. c. moving assets from lower to higher value uses, thereby creating wealth. d. None of the above 2. An individual’s value for a good or service is the a. The amount of money he or she used to pay for a good b. The amount of money he or she is willing to pay for it c. The amount of money he or she has to spend on goods d. None of the above 3. The difference between Capitalism and Socialism is that a. Capitalism is concerned more about how to slice up the “pie” b. Socialism is concerned with making the “pie” as large as possible c. Capitalism is concerned with making the “pie” as large as possible d. Both A and B 4. A consumer values a car at $30,000 and a producer values the same car at $20,000. If the transaction is completed at $24,000, the transaction will generate: a. No surplus b. $4,000 worth of seller surplus and unknown amount of buyer surplus c. $6,000 worth of buyer surplus and $4,000 of seller surplus d. $6,000 worth of buyer surplus and unknown amount of seller surplus 5. A consumer values a car at $30,000 and a producer values the same car at $20,000. The transaction will not take place if a tax is imposed a. equal to the seller surplus b. smaller than the total surplus c. larger than the total surplus d. smaller than the buyer surplus 6. A consumer values a car at $30,000 and a producer values the same car at $20,000. If the transaction is completed at $24,000, what level of sales tax will result in unconsummated transaction? a. 0% b. 25% c. 20% d. 40% 7. A buyer values a house at $525,000 and a seller values the same house at $485,000. If sales tax is 8% and is levied on the buyer, then, what would be the highest price that the buyer would be willing to pay? a. $525,000 b. $523,800 c. $485,000 d. $486,111 8. The difference between the maximum price the consumer is willing to pay and the price the consumer actually pays for a product is referred to as: a. market surplus. b. market shortage. c. consumer surplus. d. producer surplus. 9. Price ceilings are primarily intended to help a. No one b. Consumers c. Producers d. Government 10. Government can intervene in the market through a. Price floors b. Price ceilings c. Taxes d. All the above 11. Variable costs are a. costs that vary with output b. not important in decision making c. costs that do not vary with output d. equal to total costs 12. A business incurs the following costs per unit: Labor $125/unit; Materials $45/unit and rent $250,000/month. If the firm produces 1,000,000 units a month, the total variable costs equal a. $125Million b. $45Million c. $1Million d. $170Million 13. Jane makes 1000 items a day. Each day she spends 8 hours producing those items. If hired elsewhere she could have earned $250 an hour. The item sells for $15 each. Production occurs seven days a week. If the explicit costs total $150,000 per month, what is her accounting profit? a. $300,000 b. $60,000 c. $450,000 d. $240,000 14. A business owner makes 1000 items a day. Each day she spends 8 hours producing those items. If hired, elsewhere she could have earned $250 an hour. The item sells for $15 each. Production occurs seven days a week. If the explicit costs total $150,000 per month, what is her economic profit? a. $300,000 b. $60,000 c. $450,000 d. $240,000 15. Which of the following statements is true? a. Economic profits ignore implicit costs. b. Economic profits include implicit costs. c. Accounting profits include all of the opportunity costs. d. Economists consider sunk costs in their decision making. 16. Jim is planning on attending a football game. He spent $40 on the ticket. He will have to take the day off losing 8 hours of work. His hourly wage is $10. He estimates it will cost him around $20 for gas and parking at the game. Jim’s total economic cost of attending the game equals a. $80 b. $40 c. $60 d. $140 17. You and two partners start a company. However, your partners play no role in running the company. You spend all your time managing the business. The time that you could have spent working for someone else and earning wages instead of running the business is your: a. explicit cost. b. marginal cost. c. sunk cost. d. opportunity cost. 18. After graduating from college, Jim had two choices. He can either move to Florida, from Philadelphia, where he can work as an analyst and earn $60,000 or he can stay in Philadelphia and work in a car dealership earning $59,000. His opportunity cost of moving to Florida includes a. The benefits he could have received from playing soccer b. $59,000 c. both a and b d. none of the above 19. A manager invests $400,000 in a technology that should reduce the overall costs of production. The company managed to reduce their cost per unit from $2 to $1.85. After the investment has been made, the $400,000 investment is a. Considered sunk costs, not relevant in further decision making b. Considered sunk costs, but still relevant in further decision making c. Considered a loss d. Considered a profit 20. The fixed-cost fallacy occurs when a. A firm considers sunk costs in making decisions b. A firm ignores relevant costs c. A firm considers overhead or depreciation costs in making decisions d. Both a and c SHORT ESSAYS 1. Taco Casa is considering installing touch screen terminals for patrons to place their food orders. A terminal can typically accommodate the placement of 15 orders each hour while a human can process 20 orders each hour. If employee costs are $7.50/hour in wages and $4.50/hour in taxes, benefits and insurance, what is the per order opportunity cost of a touch screen? Solution When economists refer to the “opportunity cost” of a resource, they mean the value of the next-highestvalued alternative use of that resource. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you cannot spend the money on something else. If your next-best alternative to seeing the movie is reading the book, then the opportunity cost of seeing the movie is the money spent plus the pleasure you forgo by not reading the book. Human processing of order An employee can process 20 orders in an hour. Wages per hour = $7.50 Taxes, benefits, and insurance per hour = $ 4.50 Total cost per hour = $7.50 + $4.50 = $12 If they install the touch screen they would have to forgo paying $12/ hour for employees to process orders. Thus, the opportunity cost of installing the touch screen is $12/hour Since there are 15 orders/hour with using the touch screen; The per order opportunity cost of a touch screen = $12/15 orders = $0.8/hour 2. BMC is considering upgrading the sound systems in their theaters so that patrons can get the full experience from surround sound movies. They discovered that upgrade costs at locations with 12 screens were $170,000 but were $110,000 at locations with six screens. What are the fixed costs of upgrading at a location? Fixed Costs = stays the same irrespective of the level of output Variable Costs = changes with the level of output Total Costs = Fixed Costs + Variable Costs Fixed Costs = Total Costs – Variable Costs Let Fixed Costs = FC Let Variable Costs = VC Let Total Costs = TC Total costs of upgrading 12 Screens = $170,000 Let X be the per unit variable costs of an upgrade Variable costs = 12 * X TC = FC + 12 * X 170,000 = FC + 12 * X ---------------------------------------------------------- (1) Total costs of upgrading 6 Screens = $110,000 Similarly, the variable costs of upgrading 6 screens = 6 * X TC = FC + 6 * X 110,000 = FC + 6 * X --------------------------------------------------------------(2) Solving equations (1) and (2) yield a fixed costs (FC) of $50,000 Assignment One – Detailed Explanation 4. A consumer values a car at $30,000 and a producer values the same car at $20,000. If the transaction is completed at $24,000, the transaction will generate: a. No surplus b. $4,000 worth of seller surplus and unknown amount of buyer surplus c. $6,000 worth of buyer surplus and $4,000 of seller surplus d. $6,000 worth of buyer surplus and unknown amount of seller surplus Explanation Consumer surplus/ Buyer surplus is derived whenever the price a consumer actually pays is less than they are prepared or willing to pay. The value the consumer/buyer places on the car is what he/she is willing or prepare to pay = $30,000 The transaction is completed at $24,000, meaning the consumer actually paid $24,000 Consumer/buyer surplus = 30,000-24000 = 6,000 Producer/Seller surplus is the difference between the price a firm receives and the price it would be willing to sell it at. The value the producer/seller places on the car is what he/she is willing to sell the car for = $20,000 The transaction is completed at $24,000, meaning the seller actually received $20,000 Producer/Seller surplus = $24,000 – $20,000 = $4000 Note that we are not concerned about whether the difference is negative or positive but the magnitude on the difference 6. A consumer values a car at $30,000 and a producer values the same car at $20,000. If the transaction is completed at $24,000, what level of sales tax will result in unconsummated transaction? a. 0% b. 25% c. 20% d. 40% Explanation Consumer surplus/ Buyer surplus is derived whenever the price a consumer actually pays is less than they are prepared or willing to pay. If the price the offered to the consumer is greater than what he/she is willing to pay the transaction will not take place (unconsummated transaction) In this question you realize that a tax of 40% will move the price above what the consumer is willing pay, which will result in (unconsummated transaction) Tax on cost of the car = 40/100 * 24,000 = $9,600 Price + the sales tax = 24,000 + 9,600 = 33,600 The final price (price + sales tax = $33,600) is greater than what the consumer is willing to pay ($30,000), thus the transaction will not take place. 7. A buyer values a house at $525,000 and a seller values the same house at $485,000. If sales tax is 8% and is levied on the buyer, then, what would be the highest price that the buyer would be willing to pay? a. $525,000 b. $523,800 c. $485,000 d. $486,111 Explanation For the transaction to be consummated Price + sales tax ≤ how much value the consumer Let Price = X Sales tax = 0.08X Price + sales tax = X + 0.08X How much value the consumer = $525,000 X + 0.08X ≤ $525,000 1.08 X ≤ $525,000 X ≤ $525,000/1.08 X ≤ $486,111 13. Jane makes 1000 items a day. Each day she spends 8 hours producing those items. If hired elsewhere she could have earned $250 an hour. The item sells for $15 each. Production occurs seven days a week. If the explicit costs total $150,000 per month, what is her accounting profit? a. $300,000 b. $60,000 c. $450,000 d. $240,000 Explanation Explicit cost: A direct payment made to others in the course of running a business, such as wages, rent, and materials, as opposed to implicit costs, which are those where no actual payment is made. Implicit cost: The opportunity cost equal to what a firm must give up in order to use factors which it neither purchases nor hires. Accounting profit = total revenue- explicit costs. Assume we have 30 days in a month Total revenue per month = 30 days * 1000 items * $15 each = $450,000 Explicit cost = $150,000 Accounting profit = $450,000- $150,000 Accounting profit = $300,000 14. A business owner makes 1000 items a day. Each day she spends 8 hours producing those items. If hired, elsewhere she could have earned $250 an hour. The item sells for $15 each. Production occurs seven days a week. If the explicit costs total $150,000 per month, what is her economic profit? a. $300,000 b. $60,000 c. $450,000 d. $240,000 Explanation Economic profit = total revenue – (explicit costs + implicit costs). Implicit costs = 8 hours/day * 30 days * $250 = $60,000 Explicit costs + implicit costs = $150,000 + $60,000 = $ 210, 000 Economic profit = $450,000 – $210,000 Economic profit = $240,000 Page 1 Assignment Two - Chapters 4 & 5— Extent (How much) Decisions & Investment Decisions MULTIPLE CHOICE 1. If AVC=$5 and AFC=15, then AC= a. $10 b. $5 c. $15 d. $20 2. Total cost divided by the number of units produced is called: a. marginal cost b. average cost c. total cost d. variable cost 3. A firm produces 500 units per week. It hires 20 full-time workers (40 hours/week) at an hourly wage of $15. Raw materials are ordered weekly and they costs $10 for every unit produced. The weekly cost of the rent payment for the factory is $2,250. How do the overall costs breakdown? a. total variable cost is $17,000; total fixed cost is $2,250; total cost is $19,250 b. total variable cost is $12,000; total fixed cost is $7,250; total cost is $19,250 c. total variable cost is $5,000; total fixed cost is $14,250; total cost is $19.250 d. total variable cost is $5,000; total fixed cost is $2,250; total cost is $7,250 4. In the short run, a. Some production costs are fixed b. All inputs are variable c. All inputs are fixed d. None of the above 5. Marginal cost is ____________. a. The cost of producing an additional unit of output b. The total cost of production c. The revenue from selling an additional unit of output d. none of the above 6. Marginal cost typically ________ and marginal revenue typically _________ with increasing output. a. rises; falls b. falls; rises c. rises; rises d. falls; falls 7. The higher the interest rates a. the more value individuals place on future dollars b. the more value individuals place on current dollars c. individuals do not place any importance on either current or future dollars Page 2 d. does not affect the investment strategy 8. A publisher is deciding whether or not to invest in a new printer. The printer would cost $900, and would increase the cash flows in year 1 by $500 and in year 3 by $800. Cash flows do not change in year 2. If the interest rate is 12%, what is the present value of the cash flows from the investment? a. $155.59 b. $1015.85 c. $1076.56 d. $346.78 9. A cloth manufacturing firm is deciding whether or not to invest in new machinery. The machinery costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second year by $30,000. The firm’s current fixed costs are $9,000 and current marginal costs are $15. The firm currently charges $18 per unit. If the interest rate is 5% then the present value of the cash flows is a. $6,020.41 b. $51,020.41 c. -$7,380.95 d. $10,000 10. Lucy invested $10,000 at the rate of 12%. According to the rule of 72, it would take ______ years for her money to double a. 4 b. 5 c. 6 d. 7 11. If GDP is expected to increase at a steady rate of 3% per year, how many years would it take for living standards to double? a. 10 b. 20 c. 24 d. 30 12. The government is looking to double the living standards of its population in 18 years, what rate of GDP growth would it need to achieve that? a. 1% b. 2% c. 3% d. 4% 13. According to the Net Present Value (NPV) rule, managers choose to invest if a. The NPV of the project is less than zero b. The NPV of the project is greater than zero c. The NPV of the project is equal to zero d. The NPV of the project is equal to the cost of capital 14. If the interest rate is 25%, but cash flows change such that the investment renders a cash flow of $500 in year 1 and $800 in year 2 instead of year 3, would the investment take place? a. Yes since NPV>0 Page 3 b. No since NPV<0 c. Yes since the present value of the cash flows is greater than zero d. No since the present value of the cash flows is lesser than zero 15. Ricky is thinking about borrowing $10,000 from Fred. He promises Fred cash flows of $5000 for the next three years. If Fred’s cost of capital is 10%, what is the Net Present Value of the investment for Fred? a. -$126.55 b. $1,342.76 c. $2,434.26 d. -$1,322.31 16. Projects with a positive NPV create a. economic profits since they earn a return higher than the company’s cost of capital b. economic profits since they earn a return lower than the company’s cost of capital c. accounting profits only since they earn a return higher than the company’s cost of capital d. accounting profits only since they earn a return lower than the company’s cost of capital 17. A firm’s fixed costs are $10 million. It sets the price at $1800 per unit and has marginal costs of $1,000. What’s the firm’s contribution margin per unit? a. 1200 b. 1000 c. 400 d. 800 18. The break-even quantity is a. Fixed Costs/Price b. Fixed Costs/Marginal Cost c. Fixed Costs/(Price – Marginal Costs) d. Contribution Margin/Fixed Costs 19. A business produces 4,000 units per month which it sells at $20/unit. Costs include: $10,000 on raw materials, $15,000 in wages for operators and $10,000 in wages to sales people. If the business is just breaking even, what are its fixed costs: a. $35,000 b. $40,000 c. $45,000 d. $50,000 20. A firm is deciding between two different sewing machines. Technology A has fixed costs of $500 and marginal costs of $50 whereas Technology B has fixed costs of $250 and marginal costs of $100. If the price is $60 per unit, what is the break even amount of units for technology B? a. 50 b. 60 c. 70 d. None-They would have to shut down Page 4 21. A firm will shut down in the short-run if a. P>AVC b. P<AVC c. Profits<0 d. P<ATC 22. A firm sets its price at $10.00 per unit. It has an average variable cost of $8.00 and an average fixed cost of $4.00 per unit. In the short run, this firm is a. incurring a loss of $2.00 per unit and should shut down. b. unable to cover all of its fixed cost and hence should shut down. c. incurring a profit. d. incurring a loss per unit of $2.00, but since it can still cover its variable costs, should continue to operate 23. A shoe manufacturer is producing at a point where its marginal costs are $5 and its fixed costs are $5000. At the current price of $10 it is producing 500 pairs. If the demand goes down, such that they can now only charge $8 per pair, should they continue production in the short run? a. No because price has fallen b. Yes because price is still higher than marginal costs c. No because price is lower than average cost d. Yes because price is higher than marginal costs 24. Hold-up problems usually occur when a. One of the parties makes a heavy investment in equipment specific to its trading partner b. One of the firms decides to invest heavily in general purpose equipment c. Costs are avoidable d. Costs are incurred 25. What are some of the solutions for a hold-up problem? a. Mergers b. Contracts c. Exchange of ‘hostages’ d. All the above SHORT ESSAYS 1. A cloth manufacturing firm is deciding whether or not to invest in new machinery. The machinery costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second year by $30,000. The firm’s current fixed costs are $9,000 and current marginal cost are $15. The firm currently charges $18 per unit. What’s the firm’s current contribution margin? Contribution margin = Price – Marginal Cost/ Variable Cost = $18 - $ 15 = $ 3 Page 5 2. A cloth manufacturing firm is deciding whether or not to invest in new machinery. The machinery costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second year by $30,000. The firm’s current fixed costs are $9,000 and current marginal cost are $15. The firm currently charges $18 per unit. The current break-even quantity is Break Even quantity = Fixed Cost/ Price – Variable Cost Break Even Quantity = 9000/ 18-15 Break Even Quantity = 3000 . Page 1 Assignment Three – Chapter 6— SIMPLE PRICING MULTIPLE CHOICE 1. The first law of demand states that a. the quantity demanded increases as price falls b. the quantity demanded decreases as price falls c. the quantity demanded increases as price increases d. none of the above 2. Its lunch time, you are hungry and would like to have some pizza. By the law of diminishing marginal value, a. you would pay more for your first slice of pizza than your second b. you would pay more for your second slice of pizza than your first c. you would pay an equal amount of money for both the slices since they are identical d. none of the above 3. A demand curves describes a. the amount of units a consumer will purchase at a given price b. the amount of units a producer will sell at a given price c. both the amount of units that a consumer will buy and a producer will produce at a given price d. the amount of units supplied given a change in prices 4. What criteria do consumers apply when deciding whether or not to consume a. The consumer would consume only if the price is lower than his highest willingness to pay b. The consumer would only consume if his surplus is greater than zero c. The consumer would only consume if the price is higher than his highest willingness to pay d. Both A&B 5. If MR<MC, then the firm should a. increase production b. decrease production c. keep the prices constant d. keep the production level constant 6. In general, the smaller the price elasticity: a. the smaller the responsiveness of price to changes in quantity. b. the smaller the responsiveness of quantity to changes in price. c. the larger the responsiveness of price to changes in quantity. d. the larger the responsiveness of quantity to changes in price. 7. The price elasticity of demand tells us about a. The sensitivity of price to quantity b. The sensitivity of quantity to price c. The sensitivity of income to price . Page 2 d. The sensitivity of income to quantity 8. Jim saw a decrease in the quantity demanded for his firm’s product from 8000 to 6000 units a week when he raised the price of the product from $200 to $250. What is Jim’s own price elasticity of demand? a. 1.29 b. 1 c. 0.25 d. 0.78 9. The government decided to reduce taxes on fast-food to increase revenue. The government assumes that fastfood products have a. An inelastic demand b. An elastic demand c. A demand curve that is upward sloping d. Unitary elastic demand curve 10. If the price elasticity of demand is -0.8 and the firm increases price, revenue will a. Increase b. Decrease c. Stay constant d. become zero, they would lose all their customers 11. Jim has estimated elasticity of demand for gasoline to be -0.7 in the short-run and -1.8 in the long run. A decrease in taxes on gasoline would: a. lower tax revenue in both the short and long run. b. raise tax revenue in both the short and long run. c. raise tax revenue in the short run but lower tax revenue in the long run. d. lower tax revenue in the short run but raise tax revenue in the long run. 12. A perfectly elastic demand curve a. Is a horizontal line parallel to the x axis b. Has an elasticity of demand between 0 and 1 c. Is the demand curve of a product that usually has no substitutes d. None of the above 13. Jim recently graduated from college. His income increased dramatically;from$5000 a year to $60,000 a year. Jim decided that instead of using the bus, he would buy himself a car. This implies that a. The car is a normal good for Jim b. The car is an inferior good for Jim c. He is equally happy between using the bus and buying a car d. None of the above . Page 3 14. If the quantity sold of two-liter Coke bottles increases by 10% when price falls by 2%, what is the total change in revenue? a. Revenue increases by 12% b. Revenue increases by 8% c. Revenue falls by 8% d. Revenue falls by 12% 15. A research firm’s findings concluded that the demand for movie tickets is price elastic in the afternoon but inelastic in the evenings. Given this information, to increase overall revenue the theatre owners should a. Reduce the ticket prices for the afternoon shows and reduce the ticket prices for the evening shows b. Increase the ticket prices for the afternoon shows and reduce the ticket prices for the evening shows c. Reduce the ticket prices for the afternoon shows and increase the ticket prices for the evening shows d. Increase the ticket prices for the afternoon shows and increase the ticket prices for the evening shows 16. An owner of a local salon realized that by decreasing the prices that she charges for haircuts, her revenue has increased. This implies that a. The demand for her haircuts is elastic b. The demand for her haircuts is inelastic c. The demand for her haircuts is unitary elastic d. The demand for her haircuts is perfectly inelastic 17. The demand for Dell laptops is more price elastic than the demand for laptops as a whole. This can be best explained by the fact that a. There are fewer substitutes for Dell laptops than for laptops as whole b. There are more substitutes for Dell laptops than for laptops as whole c. Dell laptops are luxurious goods d. Dell laptops are a necessity 18. The demand for a product is more inelastic a. When it has many close substitutes b. In the long-run c. When it has many complements d. None of the above 19. If cars are normal goods, a fall in income will a. Increase the demand for cars b. Decrease the demand for cars c. Have no effect on the demand for cars d. None of the above 20. If potatoes are inferior goods, which of the following will increase the demand for potatoes? a. Increase in the price of a complement b. Decrease in income c. Decrease in the price of a substitute . Page 4 d. Increase in income 21. For complements, cross price elasticity of demand is: a. Negative b. Positive c. between zero and one only d. zero. 22. An economist estimated the cross-price elasticity for peanut butter and jelly to be -1.5. Based on this information, we know the goods are a. inferior goods. b. complements. c. inelastic. d. substitutes. SHORT ESSAYS Q = 8-2P+0.10I+Px Where Q is quantity demanded, P is the price of the product, I is income, and Px is the price of a related good. Assume that P=$10, I=100, and Px=20. Using the following equation for the demand for a good or service, Calculate the price elasticity of demand Price elasticity of demand= dQ/ dP * (P/Q) dQ/ dP= -2 Q=8 – 2*10 + .10*100 + 20 = 18 Price elasticity = -2*(10/18) =-1.11 . Page 5 Q = 8-2P+0.10I+Px Where Q is quantity demanded, P is the price of the product, I is income, and Px is the price of a related good. Assume that P=$10, I=100, and Px=20. Using the following equation for the demand for a good or service, Calculate the income elasticity of demand Income elasticity of demand= dQ/ dI * (I/Q) dQ/ dI= 0.1 Q=8 – 2*10 + .10*100 + 20 = 18 Income Elasticity = .1*(100/18) = .5556 Detailed Explanation 8. Jim saw a decrease in the quantity demanded for his firm’s product from 8000 to 6000 units a week when he raised the price of the product from $200 to $250. What is Jim’s own price elasticity of demand? a. 1.29 b. 1 c. 0.25 d. 0.78 We use the arc price elasticity of demand formula: e = [(Q2 - Q1) / {(Q1 + Q2) / 2}] / [(P2 - P1) / {(P1 + P2) / 2}] Here, Q2 = 6000 Q1 = 8000 P2 = $250 P1 = $200 e = [(6000 - 8000) / {(8000 + 6000) / 2}] / [($250 - $200) / {($200 + $250) / 2}] e = [(- 2000) / 7000] / [(50 / 225] e = - 1.3 That means absolute value of e is 1.3. Page 1 Assignment Four – Chapter 7— ECONOMIES SCALE AND SCOPE MULTIPLE CHOICE 1. The law of diminishing marginal productivity states that a. As you expand output, your marginal productivity eventually increases b. As you expand output, your marginal productivity eventually declines c. As you expand output, the total product eventually increases d. None of the above 2. Which one of the statements is true? a. Diminishing returns is a long-run concept while decreasing returns to scale is a short-run concept. b. Diminishing returns is a short-run concept while decreasing returns to scale is a long-run concept. c. Diminishing returns is a both short and long-run concept while decreasing returns to scale is a shortrun concept. d. Diminishing returns is a long-run concept while decreasing returns to scale is a short and long-run concept. 3. Which of the following statements describes the presence of diminishing returns? All else equal, a. Marginal product is constant as output increases b. Marginal product is falling as output increases c. Marginal product is rising as output increases d. Marginal product is zero 4. The term “bottleneck” refers to a. when increasing amounts of variable inputs must share a fixed input. b. “fixity” of some factor of production c. None of the above d. Both a and b 5. When a firm is experiencing increasing marginal costs, it implies a. A constant marginal productivity b. decreasing average costs c. decreasing marginal productivity d. increasing marginal productivity 6. If average cost is decreasing, then marginal cost a. Must be increasing b. Must be greater than average cost c. Must be less than average cost d. None of the above Page 2 7. Marginal productivity is a. The total output associated with total inputs b. The total output associated with extra inputs c. The extra output associated with total inputs d. The extra output associated with extra inputs 8. Economies of scale are also known as a. Increasing returns to scale b. Decreasing returns to scale c. Constant returns to scale d. None of the above 9. All of these could be sources of economies of scale except a. Investment in more efficient technology b. Specialization c. A bottleneck procedure d. Discounts on bulk purchase of inputs 10. Diseconomies of scale are also known as a. Increasing returns to scale b. Decreasing returns to scale c. Constant returns to scale d. None of the above 11. If your long-run costs exhibit increasing returns to scale, securing big orders leads you to a. Increase average costs b. Reduce average costs c. Keep the average costs constant d. None of the above 12. As a table manufacturing company produces more tables, the average total cost of each table produced increases. This could be because: a. Total fixed costs are decreasing as more tables are produced b. There are economies of scale c. There are diseconomies of scale d. Total variable cost is decreasing as more tables are produced. 13. Eddys’ Electronics found that instead of producing a dvd player and a gaming system separately, it is cheaper to incorporate dvd playing capabilities in their new version of the gaming system. Eddy’s is taking advantage of a. Economies of Scale b. Learning curve c. Economies of Scope d. Decreasing marginal costs Page 3 14. What is a synergy or cost complementarity? a. the cost of producing different products offered by separate companies would be more expensive when produced by one company b. the cost of producing different products offered by separate companies is higher than when produced by one company c. the cost of producing different products offered by separate companies is equal to when the products are produced by one company d. None of the above 15. What are economies of scope? a. the cost of producing two products jointly by one firm is more than the cost of producing them separately b. the cost of producing two products jointly by one firm is lesser than the cost of producing them separately c. the cost of producing two products jointly by one firm is equal to the cost of producing them separately d. none of the above SHORT ESSAYS 1. Two of UK’s larger wine distribution companies, Bibendum and PLB, merged their businesses in October 2014. Bibendum is primarily a restaurant supplier while PLB focuses on supplying wines to retailers. Does this suggest a mechanism through which the merger might create value? The merged firm could eke out some economies of scope from selling to the two customer types. There may or may not be synergies in marketing or delivering wines. However, many of the two customer types purchase the same wines. There are likely to be economies of scale in warehousing, storing and, perhaps, purchasing any specific wine label. These scale economies make serving the two markets less costly. 2. What is the difference between economies of scale and economies of scope Scale economies arise from producing greater quantities of the same product. Average total costs fall as you produce more of the same product. Scope economies arise from producing different products together – total production cost of producing the two goods together is less than the cost of producing them separately. Assignment Five – Chapter 8 — MARKET AND INDUSTRY CHANGES MULTIPLE CHOICE 1. If movie theatres decided to increase the price for the movie tickets, holding other factors constant, what would happen to the demand for popcorn in the theatres? a. the demand for popcorn would shift to the left because popcorn and movies are substitute goods. b. the demand for popcorn would shift to the left because popcorn and movies are complementary goods. c. the demand for popcorn would shift to the right because popcorn and movies are substitute goods. d. the demand for popcorn would shift to the right because popcorn and movies are complementary goods. 2. Changes in the price of a product can cause a. A movement along the demand curve b. A shift of the demand curve c. A shift of the supply curve d. All of the above 3. After the housing bubble burst, consumer confidence plummeted and housing sales dropped to all-time lows. This caused the demand curve for normal goods to shift a. inwards b. outwards c. stay constant d. none of the above 4. The change in any factor other than ________ would shift the demand curve a. Weather b. interest rate c. Price d. all of the above 5. An increase in the price of a substitute shifts the demand curve to the _______ a. right b. left c. it does not change the demand curve d. none of the above 6. An increase in the price of a complement shifts the demand curve to the a. right b. left c. it does not change the demand curve d. none of the above 7. A decrease in the price of a substitute shifts the demand curve to the _______ a. right b. left c. it does not change the demand curve d. none of the above 8. A decrease in the price of a complement shifts the demand curve to the a. right b. left c. it does not change the demand curve d. none of the above 9. An increase in demand could arise from which of the following factors a. an increase in income b. a decrease in the price of a complement c. an increase in the price of a substitute d. all of the above 10. An increase in demand could arise from which of the following factors a. an increase in income b. a decrease in the price of a substitute c. an increase in the price of a complement d. all of the above 11. Assuming that beer is a normal good, what will happen to the demand for beer near college towns if student income increased? a. Demand will fall because students love these beers b. Demand will fall c. Demand will rise d. Supply would rise 12. A recent medical study shows that peanuts are one of the leading causes of high cholesterol. This would cause the demand for peanuts to a. Shift to the left b. Shift to the right c. go down the demand curve d. not change 13. The change in quantity demanded derived from a change in price is a. the movement along a demand curve b. the movement along a supply curve c. a shift in the demand curve d. a shift in the supply curve 14. Recent research suggested that there are large health benefits from consuming cooked tomatoes. Holding other things constant, this will cause a. The demand curve for tomatoes to shift to the right b. The demand curve for tomatoes to shift to the left c. The supply curve for tomatoes to shift to the right d. The supply curve for tomatoes to shift to the left 15. How does an increase in income affect the market for bus rides (inferior good)? a. The demand curve for bus rides to shift to the right b. The demand curve for bus rides to shift to the left c. The supply curve for bus rides to shift to the right d. The supply curve for bus rides to shift to the left 16. An increase in income causes the demand for inferior goods to_____________ and the price of inferior goods to ____________. a. Increase; increase b. Increase; decrease c. Decrease; increase d. Decrease, decrease 17. An increase in income causes the demand of normal goods to _________ and the price of normal goods to a. Increase; increase b. Increase; decrease c. Decrease; increase d. Decrease, decrease 18. How does an increase in income affect the market for iPads (normal good)? a. The demand curve for iPads shifts to the right b. The demand curve for iPads shifts to the left c. The supply curve for iPads shifts to the right d. The supply curve for iPads shifts to the left 19. You lose your job and as a result your demand for steak falls. This implies that you consider steaks to be a a. Complementary good b. Normal good c. Inferior good d. Substitute good 20. While you were an intern you bought 5 packages of hot dogs a month. After acquiring a full-time job with a considerably higher salary, you stopped purchasing hot dogs. For you, hot dogs are a a. Complementary good b. Normal good c. Inferior good d. Substitute good 21. The wages for Nike workers increases. At the same time, we see the price for Adidas shoes increase. This would cause the price for Nike shoes_____________ and the quantity demanded for Nike shoes ____________. a. Uncertain; decreases b. Decreases; increases c. Decreases; uncertain d. Increases; uncertain 22. Firm X both produces automobiles and owns gas stations. If decides to decrease the gas to induce higher sales for the automobiles, it means that a. the gas and the automobiles are complements b. the gas and the automobiles are substitutes c. the gas and the automobiles are not related in demand d. none of the above 23. Peter’s Pizzeria sells both pizzas and wings. It wants to increase the sales of its pizzas. If it decides to increase the price of the wings, it is assuming that a. the pizza and the wings are substitutes b. the pizza and the wings are complements c. the pizza and the wings are unrelated in demands d. it cannot increase the sales of its pizzas 24. Holding other factors constant, if bad weather destroys the annual crop for carrots, it causes the supply curve for carrots to a. Shift to the left, causing the prices of carrots to rise b. Shift to the left, causing the prices of carrots to fall c. Stay the same d. The supply curve does not shift. Only the demand curve shifts. 25. All these factors would shift the supply curve of tobacco, except a. Bad weather b. Change in the price of tobacco c. Changes in the wages of agricultural workers d. A tax charged on the production of tobacco 26. A supply curve describes a. the relationship between price and quantity demanded b. the relationship between price and quantity supplied c. the relationship between a group of buyers and sellers d. none of the above 27. Which of the following factors would shift the supply curve for ice cream to the right? a. a new cooling technology emerges b. the price per unit increases c. the number of producers in the market for ice cream increase d. Both A&C 28. Which of the following would shift the supply of Florida Oranges to the left? a. a hurricane in Florida destroying a major part of the crop b. an increase in the price of water per unit, a major input, used to irrigate the orange trees c. one of the orange grooves shuts down d. all of the above 29. A recent medical study reports new benefits of cycling. Simultaneously, the price of the parts needed to make bikes falls. The demand curve would _________ and the supply curve would__________ a. Shift to the right, shift to the left b. shift to the left, shift to the right c. shift to the left, shift to the left d. shift to the right, shift to the right SHORT ESSAY Utility companies can use a mix of plants different energy sources to produce electricity, mainly these are coal fired plants but increasingly they relying on gas turbines. Technological improvements in hydraulic fracturing, or “fracking,” have decreased the cost of extracting smaller pockets of natural gas. What affect does fracking have on supply and demand for coal? ANSWER: Fracking lowers the cost of natural gas. The supply of natural gas shifts out which lowers the price of natural gas. Since natural gas and coal are substitutes, this decreases the demand for coal. Assignment Six – Chapter 9 — MARKET AND INDUSTRY CHANGES MULTIPLE CHOICE 1. All of these are characteristics of a competitive industry, except: a. Many substitutes b. No barriers to entry c. Homogenous product d. Little or no information on rivals’ products 2. Which of the following markets are closest to perfectly competitive a. The market for smart phones b. The market for generic pharmaceuticals c. The market for sport shoes d. The market for fast food 3. A firm in a ______________ faces a __________ demand curve. a. perfectly competitive market; perfectly inelastic b. perfectly competitive market; perfectly elastic c. monopoly market; perfectly elastic d. monopoly market; horizontal 4. In a perfectly competitive market industry, firm’s prices are equal to a. Average revenue b. Marginal revenue c. Both a and b d. None of the above 5. A perfectly competitive firm has a. A perfectly elastic demand for its products b. A perfectly inelastic demand for its products c. A downward sloping demand for its products d. None of the above 6. If a firm in a perfectly competitive industry is experiencing higher than normal returns, in the long-run a. Some firms will leave the industry and price will rise b. Some firms will enter the industry and price will rise c. Some firms will leave the industry and price will fall d. Some firms will enter the industry and price will fall 7. A sudden rise in the market demand in a competitive industry leads to a. A short run market equilibrium price higher than the original equilibrium b. A market equilibrium higher than the short run price c. Some firms exiting the market d. All of the above 8. In a competitive industry a. firms produce a product or service with very close substitutes b. the firms products have a very elastic demand c. the firms have many rivals d. all of the above 9. In a competitive industry a. firms have no cost advantages b. some firms have cost advantages, while others do not c. all the firms have highly differentiated products d. Consumers have strong preferences across brands 10. In a competitive industry a. the industry has high barriers to entry b. the industry has high barriers to exit c. the industry has high barriers to entry and exit d. the industry has no barriers to entry or exit 11. The main reason(s) firms in a competitive market cannot earn positive profits in the long run is(are) a. assets can quickly move in and out of the industry when demand fluctuates b. an increase in demand leads to entry of firms which absorb the extra demand c. a decrease in demand leads to exit of firms from the market such that there is no surplus d. all of the above 12. The main reason(s) monopolies can earn positive profits for a while is(are) a. assets cannot quickly move in and out of the industry when demand fluctuates b. an increase in demand does not lead to entry of firms to absorb the extra demand c. both A&B d. none of the above 13. Two cities face identical prices for their housing. City A decided to be a pollution free city “Clean town” and all the factories would locate in city B “Smogville”, we expect the prices of housing in city A “Clean town” to a. increase b. decrease c. stay the same d. none of the above 14. The concept of mean reversion is defined by a. the tendency of profits to revert to zero b. the tendency of costs to revert to zero c. the tendency of economic profits to revert to zero d. the tendency of profits to revert to negative 15. Firemen generally are paid higher wages because a. they are usually highly educated b. they are usually working under riskier conditions c. they are working long and uncertain hours d. both B&C 16. Critical care surgeons get paid higher salaries than family doctors because a. they usually work under highly stressful conditions b. they usually have to get longer training c. they usually work uncertain hours d. all of the above 17. In equilibrium, high risk stocks would typically be accompanied by a. low returns b. no returns c. high returns d. no sales-no one would buy risky stocks 18. Low risk stocks are usually accompanied by a. low returns b. no returns c. high returns d. no sales-no one would buy low risk stocks 19. A risk premium is a. the difference between the earnings of a low risk asset and a high risk asset b. premium paid to a security holder to compensate him for bearing a higher risk c. both A&B d. none of the above 20. A compensating wage differential is a. the difference between the wage of an individual working in favorable conditions and the wage of an individual working in unfavorable conditions b. compensation paid to an individual for working in a less desirable environment c. premium paid to a security holder to compensate him for bearing a higher risk d. Only A&B 21. An investor has to choose between stocks A&B, each selling for $10. Stock A, can either increase in price to $12, with a 50% probability or stay at $10 with a 50% probability. Stock B can either increase in price to $15 with a 50% probability or go down to $7 with a 50% probability. Which of the stocks would the investor choose a. Stock A b. Stock B c. None of the stocks d. The investor would exit the market 22. Jim has a choice between two jobs. Job A would pay him $15 an hour with certainty, and the job B is commission based where he could earn $12, with a 50% probability and $18 with a 50% probability. Which job would he choose? a. Job A b. Job B c. Neither of the jobs d. He would choose to exit the labor market 23. A monopoly firm is a ______________ and faces a __________ sloping demand curve. a. Price taker; horizontal b. Price maker; horizontal c. Price maker; downward d. Price taker; downward 24. Lipitor, a heart medication with few substitutes, should have an own-price elasticity of demand that is: a. Relative elastic b. Relatively inelastic c. Perfectly inelastic d. Perfectly elastic 25. Monopoly firms manage to earn positive profits, even in the long run because a. they have no close substitutes b. there are high barriers of entry to the market c. they have a cost advantage difficult to duplicate d. all of the above 1 ASSIGNMENT SEVEN – CHAPTER 10 — STRATEGY: THE QUEST TO SLOW PROFIT EROSION MULTIPLE CHOICE 1. Firms maintain their completive edge by a. Providing a good at lower costs than their rivals b. Providing a superior product at the same cost as your rival c. Being innovative d. All the above 2. Which of the following is the foundation for success for a company facing competition a. Create an advantage over the competition b. Protect the advantage created over the competition c. Create and protect advantages over the competition d. None of the above 3. Strategy is a. The art of matching the resources and capabilities of a firm to the opportunities and risks in its environment b. Developing a resource for the company that is both rare and valuable to create competitive advantage c. Making sure that the resource developed is non-fungible to create a sustainable advantage d. All of the above 4. Intense market competition is ________ for consumers, since it_______. a. Bad; erodes producer surplus b. Bad, increases variety in the market c. Good, increases the price level in the market d. Good; decreases the price level in the market 5. Intense market competition is ________ for producers, since it_______. a. Bad; erode consumer surplus b. Bad, erode producer profits c. Good, increase the price level in the market d. Good; decrease the price level in the market 6. It is more profitable for a firm to be_______ than ________ a. In perfect competition; monopolists b. A monopolists; in perfect competition c. Not in business; in business d. All of the above 7. The IO Economics perspective locates the source of competitive advantage for a firm at the a. Individual firm level b. Industry level c. Customer Level d. None of the above 8. The RBV perspective locates the source of competitive advantage for a firm at the a. Individual firm level 2 b. Industry level c. Customer Level d. None of the above 9. Supplier power tends to be high when a. your firm purchases critical inputs from the supplier b. your input choices are highly differentiated c. Both A&B d. None of the above 10. Supplier power tends to be low when a. The supplier provides critical inputs b. The supplier provides homogenous inputs c. Both A&B d. None of the above 11. Rivalry among firms would tend to be high if a. There is a small number of firms in the market b. There is a large number of firms in the market c. There is only one firm in the market d. None of the above 12. Porter’s five forces portray a. A zero-sum game b. A game where your profitability comes at the expense of someone else’s c. The ability of market participants to create a larger total pie d. Only A&B 13. All of the following are examples of entry barriers, except a. Government protection through patents or licensing requirements b. Strong brands c. Low capital requirements for entry d. Lower costs driven by economies of scale 14. The concept that explains the firm’s ability to produce output with differing bundles of resources is called a. Resource heterogeneity b. Resource immobility c. Barriers to entry d. Imitability 15. If the stock price of a company is higher than the discounted value of its future earnings, a. Buy the stock only if the company has a sustained competitive advantage b. Don’t buy the stock, even if the company has a sustained competitive advantage c. Always buy the stock d. None of the above 16. All of these allow a firm to differentiate its product, except 3 a. Product branding b. Reducing quality c. Advertising d. Limiting availability 17. Which of the following can a firm use to reduce competition in the market? a. Locking in customers to long term contracts b. Seek an exclusive government contract c. Acquire patents d. All the above SHORT ESSAY 1. Nora’s Nicest Knick Knacks has sold a variety of products to hundreds of small retailers. Over time, she has added distributers who have a talent for finding more retailers for Nora. Now, over half of her sales go through just two of these distributers. Rather than making periodic orders as stock gets low, these distributers make only a few large purchases each year. How can these aspects of her buyer relationships affect how much of the value she creates that she gets to capture? ANSWER: Nora’s sales are increasingly being concentrated to a few large buyers and into a few large orders. These buyers have increasing more leverage to demand better terms. Nora can no longer afford to not come to terms and lose these distributers as customers. This means she will tend to capture less of the value her firm creates. 2. Nora’s Nicest Knick Knacks has produces a variety of products sold as souvenirs. She started out printing local sayings on tee-shirts, e.g., FDNY, and purchased plain tee-shirts from a single supplier. Since then, she has added coffee mugs, key chains, souvenirs spoons and many other items. For each of these, she has lined up one or more suppliers. How does the change in the sourcing of her inputs affect how much of the value she creates that she gets to capture? ANSWER: Nora’s purchases used to be concentrated with a single supplier. This means she had to take whatever deal they were offering or go out of business. But over time, she has added more suppliers and is less dependent on any one. This means she can still have sales and production of some items even while she is negotiating with suppliers for another. This means she will tend to capture more of the value her firm creates. ASSIGNMENT EIGHTY – CHAPTER 11 — DEMAND/SUPPLY ANALYSIS OF TRADE, BUBBLES, AND MARKET-MAKING MULTIPLE CHOICE 1. When interest rates go up, people are a. More likely to borrow b. Less likely to borrow c. Does not affect a person’s consumption d. None of the above 2. When interest rates fall, people are a. More likely to borrow b. Less likely to borrow c. Not likely to change borrowing patterns d. None of the above 3. Holding other things constant, a depreciation of the US Dollar relative to the Kenyan Shilling would cause the demand for the Shilling to _____________ and the supply for Shilling to __________. a. Increase; decrease b. Increase, increase c. Decrease; Increase d. Decrease; Decrease 4. Holding other things constant, a decrease in the inflation rate in the US compared to the Canadian economy may cause the demand for the US dollar to _____________ and the supply to __________. a. Increase; decrease b. Increase, increase c. Decrease; Increase d. Decrease; Decrease 5. Holding other things constant, a decrease in the inflation rate in the US compared to the Canadian economy will cause the demand for the Canadian dollar to _____________ and the supply to __________. a. Increase; decrease b. Increase, increase c. Decrease; Increase d. Decrease; Decrease 6. The term to describe one currency in terms of another is called a. The interest rates b. The market price c. The inflation rate d. The exchange rate 7. An individual in the US wants to buy a car from England which costs 12,000 pounds. If the exchange rate is 1 pound = $1.75, how much would the car cost him in dollars? a. $21,000 b. $6,800 c. $12,000 d. Need more information 8. The demand for dollars is downward sloping because when dollar appreciates, a. Foreigners demand more US goods and services b. Foreigners demand fewer US goods and services c. Foreigners demand more dollars d. Foreigners do not change their demand for US goods and services 9. Holding other things constant, an appreciation of the US Dollar relative to the Chinese Yuan causes the demand for the Yuan to _____________ and the supply for Yuan to __________. a. Increase; decrease b. Increase, increase c. Decrease; Increase d. Decrease; Decrease 10. Holding other things constant, an increase in the inflation rate in the US compared to China may cause the demand for dollar to _____________ and the supply for dollar to __________. a. Increase; decrease b. Increase, increase c. Decrease; Increase d. Decrease; Decrease 11. An individual in the US wants to buy office equipment from England which costs 2,000 pounds. If the exchange rate is 1pound=$1.9, how much will the office equipment cost him in dollar terms? a. $2,000 b. $2,800 c. $3,800 d. $1052 12. An individual in the England wants to buy office equipment from England which costs $2,000. If the exchange rate is 1pound=$1.9, how much will the office equipment cost him in pounds? a. 2,000 pounds b. 1,800 pounds c. 3,800 pounds d. 1,053 pounds 13. When interest rates go down, people are a. more likely to borrow b. less likely to borrow c. does not affect a person’s consumption d. None of the above 14. The equilibrium price in the market for foreign currencies is called a. The price b. The market price c. The exchange rate d. The going rate 15. In the market for Canadian dollars measured in US dollars, the supply of US dollars is a. The supply of Canadian dollars b. The demand for Canadian Dollars c. The demand for US dollars d. None of the above 16. In the market for Canadian dollars measured in US dollars, the demand for US dollars is a. The supply of Canadian dollars b. The demand for Canadian Dollars c. The supply of US dollars d. None of the above 17. In the market for Canadian dollars measured in US dollars, the demand for Canadian dollars is a. The supply of Canadian dollars b. The demand for US Dollars c. The supply of US dollars d. None of the above 18. In the market for Canadian dollars measured in US dollars, the supply of Canadian dollars is a. The demand for Canadian dollars b. The demand for US Dollars c. The supply of US dollars d. None of the above 19. In the market for Canadian dollars measured in US dollars, if the price of a Canadian dollar is 0.90 cents US, a US dollar is a. 0.90 cents Canadian b. 1 Canadian dollar c. 1.11 Canadian dollars d. 1.05 Canadian dollars 20. In the market for Canadian dollars measured in US dollars, if the price of a US dollar is 1.10 Canadian dollars, a Canadian dollar is a. 1.10 US dollars b. 1 US dollar c. 0.91 cents US d. 0.99 cents US 21. If a panic causes Indian depositors to withdraw their money from Japanese banks, it would cause the Japanese Yen to depreciate, since the supply of Yen has________ a. Not changed b. Decreased c. Increased d. None of the above 22. If a panic causes Indian depositors to withdraw their money from Japanese banks, it would cause the Japanese Yen to ___________, since the supply of Yen has increased a. Appreciate b. Depreciate c. Not change in value d. None of the above 23. If a panic causes Indian depositors to withdraw their money from Japanese banks, it would cause the Japanese Yen to ___________, since the supply of Yen has__________ a. Appreciate; Decrease b. Depreciate; Decrease c. Appreciate, Increase d. Depreciate; Increase 24. In the case where interest rates are lower in Japan, which of the following is an example of a “carry trade” a. Increase borrowing in the US, convert to Yuan and invest in financial assets in Japan b. Increase borrowing in Japan and invest in Japan c. Increase borrowing in Japan, convert to Dollars and invest in the US d. Increase borrowing in the US and invest in the US 25. In the case where interest rates are higher in Canada, which of the following is an example of a “carry trade” a. Increase borrowing in the US, convert to Canadian dollars and invest in Canada b. Increase borrowing in the US and invest in the US c. Increase borrowing in Canada, convert to dollars and invest in the US d. Increase borrowing in Canada and invest in Canada 26. An American consumer wants to buy a Swiss watch. The exchange rate is 1USD=0.89 CHF(Swiss Francs). The watch costs 100 Swiss Francs. How much would it cost him in dollars? a. $89 b. $112.36 c. $100 d. $160.82 27. A Swiss consumer wants to buy an American car. The exchange rate is 1USD=0.89CHF (Swiss Francs). The car costs $10,000. How much would the car cost him in Swiss Francs? a. 12,000 Francs b. 11,600Francs c. 8,900 Francs d. 7,500 Francs 28. A Swiss consumer wants to buy an American laptop. The exchange rate is 1USD=0.89CHF (Swiss Francs). The laptop costs $800. How much would the laptop cost him in Swiss Francs? a. 1200 Francs b. 1160Francs c. 890Francs d. 712 Francs 29. If Chinese consumers want to buy US goods, they will a. Buy Yuan and sell US Dollars b. Sell Yuan and buy US Dollars c. Neither buy nor sell Yuan d. Neither buy nor sell dollars 30. If US consumers want to buy Chinese goods, they will a. Buy Yuan and sell US Dollars b. Sell Yuan and buy US Dollars c. Neither buy nor sell Yuan d. Neither buy nor sell dollars 31. For foreigners, the intersection of the demand for US dollars and the supply of US dollar is known as the a. Inflation rate b. Exchange rate c. Price d. Quantity 32. Holding other things constant, decreases in the price level in the US will a. Cause the dollar to appreciate b. Cause the dollar to depreciate c. Cause no change in dollar value d. None of the above 33. Holding other things constant, if the US dollar appreciates, it makes the US exports a. Less attractive to foreigners b. More attractive to foreigners c. Neither more nor less attractive to foreigners d. None of the above 34. Holding other things constant, if the US dollar depreciates, it makes the US exports a. Less attractive to foreigners b. More attractive to foreigners c. Neither more nor less attractive to foreigners d. None of the above 35. Holding other things constant, if the Japanese Yen, depreciates, it makes the Japanese products a. Less attractive to US customers b. More attractive to US customers c. Neither more nor less attractive to US customers d. None of the above 36. Holding other things constant, if the Japanese Yen, appreciates, it makes the Japanese products a. Less attractive to US customers b. More attractive to US customers c. Neither more nor less attractive to US customers d. None of the above 37. Holding other things constant, if the Japanese Yen, depreciates, it makes the imports to Japan a. More expensive for Japanese customer b. Less expensive for Japanese customers c. Neither more or less expensive for importers d. None of the above 38. Holding other things constant, if the Japanese Yen, appreciates, it makes the imports to Japan a. More expensive for Japanese customer b. Less expensive for Japanese customers c. Neither more or less expensive for importers d. None of the above 39. If the Canadian dollar appreciates, holding other things constant, it makes Canadian imports a. More expensive for Canadian customers b. Less expensive for Canadian customers c. Neither more or less expensive for importers d. None of the above 40. If the Canadian dollar depreciates, holding other things constant, it makes Canadian imports a. More expensive for Canadian customers b. Less expensive for Canadian customers c. Neither more or less expensive for importers d. None of the above . Page 1 ASSIGNMENT TWELVE– CHAPTERS 16 & 17 – BARGAINING AND DECSION UNCERTAINTY MULTIPLE CHOICE 1. In the strategic view of bargaining: a. Bargaining is described by standard game theory rules b. The game is played without specific strategies c. The game always results in a fifty-fifty split d. The game is played just for the fun of it 2. In the simultaneous move labor negotiation game: a. Neither party prefers bargaining hard in the Nash equilibrium b. Both the parties want to end up in the least efficient outcome c. Both parties bargain hard in the Nash equilibrium d. Both parties want to stay in the prisoner’s dilemma 3. When buying a car from a commission salesman you improve your bargaining position by a. shopping for last year's model when the new model year cars are arriving b. shopping when the showroom is full of customers c. shopping when the car lot has few cars left unsold d. shopping toward the beginning of the month 4. In the strategic sequential labor negotiation game: a. The first mover has an advantage b. The second mover has an advantage c. There is no advantage to either mover d. None of the above 5. In the sequential negotiation games: a. You can induce a change in the strategy in your opponent only if your threat is believed b. Any threat can induce a change in strategy in your opponent c. The best threat is the one that you do not have to carry out d. A and C For the following questions 8-16 use this setup. Consider a simultaneous move game between a union and a company. If both the parties bargain hard, each would gain nothing. If only one party bargains hard the accommodating party gets a profit of $1 million while the bargaining party gets a $5 million, while if they both accommodate, they each get $3 million. 6. What would be the Nash equilibrium of this game? a. Bargain hard, bargain hard b. Firm bargains hard, union accommodates c. Union bargains hard, firm accommodates d. Both B&C . Page 2 7. Is this Nash equilibrium efficient? a. Yes, because the sum of payoffs is highest b. No, because both the parties can do better c. No, because both the parties are maximizing their profits d. All of the above 8. Could either party do better? a. Yes, both parties can do better without hurting each other if they cooperated b. Yes, one party can do better, but only at the expense of the other c. No, neither party can do better d. No, each party has its best possible outcome 9. If the Union threatens a strike, what is the firm’s best response? a. Bargain hard b. Accommodate c. Run d. Hide 10. If the union leader has already sent strikers to the picket line before entering negotiations, the union has a. Eliminated half of the strategies of the game b. Forced the firm to choose the best response in the union’s best interest c. Made it in the firm’s best interest to accommodate their requests d. All of the above 11. If the firm hires security guards to enforce a lockout, what are they implying? a. They would always accommodate b. They would always bargain hard c. They would not accommodate d. Both B&C 12. If the firm threatens a lockout (and the threat is credible), what is the union’s best response? a. Bargain hard b. Accommodate c. Run d. Hide 13. By threatening to lockout the workers, the firm has a. Eliminated half of the strategies b. Forced the union to choose the best response in the firm’s best interest c. Made it in the union’s best interest to not strike d. All of the above . Page 3 14. When a variable can take on different values a. it is a random variable b. it is a dependent variable c. it is an dummy variable d. it is an endogenous variable 15. Expected value is a. (Probability of state A+Value in state A) (Probability of state B+Value in state B) b. (Probability of state A*Value in state A)+(Probability of state B*Value in state B) c. (Probability of state A*Value in state A)-(Probability of state B*Value in state B) d. (Probability of state A-Value in state A) (Probability of state B-Value in state B) 16. In a coin toss bet, where both heads and tails are equally likely, you win a dollar on heads but lose a dollar on tails. The expected value of the bet is a. $0.50 b. -$0.50 c. $1.00 d. $0.00 17. You can invest $100,000 into either project A or B. You estimate that A would succeed with a probability of 0.7 in which case it doubles in value. If it fails, its scrap value is $50,000. Project B would succeed with probability 0.6, in which case it would have a value of $150,000. If it fails, project B’s scrap value is $30,000. Which project should you invest in? a. Project A b. Project B c. Neither of the projects d. You cannot tell from the information presented 18. You can invest $100,000 into either project A or B. You estimate that A would succeed with a probability of 0.5 in which case it doubles in value. If it fails, its scrap value is $50,000. Project B would succeed with probability 0.8, in which case it would have a value of $150,000. If it fails, project B’s scrap value is $30,000. Which project should you invest in? a. Project A b. Project B c. Neither of the projects d. You cannot tell from the information presented 19. You can either invest in project A or B. Project A could have a value of $100 with a probability of 0.1 or a value of $75 with probability 0.9. Project B could have a value of $110 with probability 0.2 or a value of $70 with a probability of 0.8. Which project should you invest in? a. Project A b. Project B c. Neither of the projects d. You cannot tell from the information presented . Page 4 20. A pharmaceutical company executive has to decide whether to fund a new drug development project. For this project, a success would earn $90 million and a failure would cost $10 million in lost profits. At what probability of expected success should she fund the project? a. 0.10 b. 0.20 c. 0.80 d. 0.90 SHORT ESSAYS 1. Transcendent Technologies is deciding between developing complicated, thought-activated software, or simple, voice-activated software. The voice-activated software would cost $50 million to develop and has a 60% chance of being successfully launched and generating revenue of $100 million. The thoughtactivated software would be a bonanza if successful, generating $1 billion in revenue. But it is so complicated, it is projected to cost would be $400 million. How likely would success have to be for Transcendent Technologies to opt for the thought-activated software? ANSWER : First, find the expected profit from the voice-activated software: Expected Revenue = 0.6 (100 million) = 60 million (60% chance of generating 100 million or being successful) Expected Cost = 50 million Expected profit (voice) = 60 million – 50 million = 10 million Second, find the expected profit from the thought-activated software: Expected Revenue = x% (1billion) = 400 million (we assume there is x% chance of generating 1 billion or being successful) Expected Cost = 400 million Expected profit (thought) = x (1 billion) – 400 million For Transcendent Technologies to opt for the thought-activated software. Expected profit (thought) >= Expected profit (voice) x (1 billion) – 400 million>= 10 million Solve for x = 0.41 The required probability would have be 41% Meaning, if there is 41% chance that thought-activated software would be successful then the Transcendent Technologies would opt for thought-activated software. . Page 5 2. A buyer for a department store must decide on which designs the stores will carry before he knows what the demand will be in the coming season. Choosing a poorly demanded design means lots of unsold merchandise and losses that are $200,000 on average. Passing on a highly demanded design means unsold merchandise and missing out on profits that are $300,000 on average. What probability of a design’s success should he be in order to choose to carry it? ANSWER: Under the hypothesis that a given design will be profitable, the cost of a Type I Error (false positive) is $300,000 and the cost of a Type II Error (false negative) is $200,000 of passing. If p is the probability that the hypothesis is true, the expected costs of both decision errors are equal if: p×$300,000 = (1-p)×(200,000) or p×$300,000 = 200,000-p×200,000 or p×($300,000+200,000) = 200,000 or p = 200,000/($300,000+200,000) = 40%. So long as he is more than 40% confident that the design will be successful, carrying the design will minimize expected decision error costs. Page 1 ASSIGNMENT ELEVEN – CHAPTER 15 — GAME THEORY MULTIPLE CHOICE 1. In sequential games, a. Players take turns and observe their rivals choices before they make their choices b. Players take turns but don’t observe their rivals choices before they make their choices c. Players move at the same time d. None of the above Use the following case from questions 2-10 Irene’s Dairy is deciding whether or not to enter the market for ice cream, currently monopolized by Mattie’s Ice-cream. If it enters the market, Mattie’s can either accommodate him and share his 10million in profits equally with Irene or fight him and cause a 5million loss for each in a price war. 2. In a sequential game, if Irene decides to enter the market, what would be Mattie’s best response? a. Accommodate b. Fight c. Run away d. Shut down 3. In a sequential game, given Mattie’s best response function, what would Irene’s best response be? a. Not enter the market b. Enter the market c. Fight d. Run away 4. What would the Nash equilibrium be in this sequential game? a. Enter, fight b. Enter, Accommodate c. Do not enter, Fight d. Do not enter, Accommodate 5. What would the profits be for Mattie’s Dairy if Irene does not enter the market? a. 5million b. 10million c. 15million d. Zero 6. What would be the profits for Mattie’s Dairy in equilibrium if Irene does enter the market? a. 5 million loss b. 5 million c. 10 million d. 20 million 7. What would be the profits for Irene’s Dairy in equilibrium? a. 5 million loss b. 5 million Page 2 c. 10 million d. 20 million 8. If Mattie wants to discourage Irene from entering the market, what strategy should she follow? a. Threaten to always accommodate b. Always accommodate c. Threaten to always fight d. All of the above 9. If Mattie’s threatens to always fight, what would Irene’s best response be? a. Enter b. Not enter c. Run d. All of the above 10. Given that Mattie could convincingly threatens to always fight, what would be Irene’s best response a. Enter b. Not Enter c. Run d. Hide Use the following case from questions 11-17 Two siblings, Sarah and Tom are playing a simultaneous hit and tell game. Sarah can hit Tom or not and Tom can tattle on Sarah or not. Relative to no hitting and no tattling, if Sarah hits Tom, and he tattles they both experience a loss of 10. Not telling, gets Tom a bruise, a loss of 5 but Sarah gains 5. If he tattles untruthfully, he gets a gain of 5 and Sarah loses 5. If they get along, no one gets anything 11. If Sarah decides to hit Tom, what would Tom’s best response be a. Tell b. Not tell c. Run d. Hide 12. If Tom tattles, what would Sarah’s best response be a. Hit b. Not hit c. Run d. Hide 13. If Sarah decides not to hit Tom, what would Tom’s best response be a. Tell b. Not tell c. Run d. Hide 14. If Tom does not tattle, what would Sarah’s best response be a. Hit b. Not hit c. Run d. Hide Page 3 15. What would be the Nash equilibrium of this simultaneous game? a. Hit, Tell b. Not hit, Tell c. Hit, Not tell d. Both B&C 16. If Tom wants to not be hit, what strategy could he follow a. Threaten to not tell b. Always not tell c. Threaten to tell d. All of the above 17. If Tom threatens to tell, what would Sarah’s best response be? a. Hit b. Not hit c. Run d. Hide Use the following case from questions 18-24 Two siblings, Bratty Brad and Mousey Mike are playing a simultaneous hit and tell game. Bratty Brad can hit Mousey Mike or not and Mousey Mike can tattle on Bratty Brad or not. Relative to no hitting and no tattling, if Bratty Brad hits Mousey Mike, and he tattles they both experience a loss of 10. Not telling, gets Mousey Mike a bruise, a loss of 5 but Bratty Brad gains 5. If he tattles untruthfully, Mousey Mike gets a gain of 5 and Bratty Brad loses 5. If they get along, no one gets anything 18. If Bratty Brad decides to hit Mousey Mike, what would Mousey Mike’s best response be a. Tell b. Not tell c. Run d. Hide 19. If Mousey Mike tattles, what would Bratty Brad’s best response be a. Hit b. Not hit c. Run d. Hide 20. If Bratty Brad decides not to hit Mousey Mike, what would Mousey Mike’s best response be? a. Tell b. Not tell c. Run d. Hide Page 4 SHORT ESSAY (S) Nestlé’s has over one hundred production facilities that all purchase hair nets and other hygienic supplies through independent suppliers. Nestlé created a centralized purchasing system that is cumbersome to use has the potential to bargain for lower prices. Suppose that a division can purchase hairnets for $8 independently. If they all purchase through the central system, hairnets cost $6. But if one division uses the system and the other purchases independently, the cost to the first is $9 while the cost to the second is $7. What does the simultaneous move game look like and what is the equilibrium? ANSWER: Division 2 Independent Central Division 1 Independent Central 8, 8 7, 9 9, 7 6, 6 There are two Nash Equilibria (Independent, Independent) and (Central, Central). Nestlé has been stuck in the “bad” equilibrium and needs to find a way to move to the “good” equilibrium. ASSIGNMENT TEN– CHAPTERS 13 & 14 — DIRECT AND INDIRECT PRICE DISCRIMINATION MULTIPLE CHOICE 1. Which of the following is an example of price discrimination? a. Seniors paying a lower price for tickets at movie theatres b. Students paying discounted rates on travel c. Tourists paying higher prices on local attractions than locals d. All of the above 2. The practice of buying a firm’s good in one market at a low price and selling it in another market for a higher price in order to profit from the price difference is known as a. Predatory pricing b. Price collusion c. Arbitrage d. Mark-up pricing 3. The consequences of price discrimination are a. Consummate more transactions b. Extract more consumer surplus c. Increase producer surplus d. All of the above 4. Movie theatres offer seniors discounts because a. Seniors have a more inelastic demand for movie tickets b. Seniors have a more elastic demand for movie tickets c. Seniors have a higher opportunity cost of their time d. Only B&C 5. Movie theatres offer senior discounts because a. Seniors have a more elastic demand for movie tickets b. Seniors have lower incomes c. Seniors have a lower opportunity cost of time d. All of the above 6. Relative to simple pricing, price discrimination leads to a. Consumer surplus being converted to producer surplus b. Increased profits c. A simplified pricing schedule d. Both a and b 7. When a firm practices perfect price discrimination, a. Consumer surplus is maximized b. Producer surplus is minimized c. Producer surplus is maximized d. None of the above 8. The idea behind price discrimination is a. To be able to sell to high-value customers, who value the product most b. To be able to sell to the marginal customers, who are indifferent about the purchase c. To be able to sell to the low-value customers, who would otherwise not buy the product d. To be able to sell to both high and low value customers at different prices 9. Price discrimination is a. The practice of charging different prices to different individual buyers or customer groups b. The practice of differentiating the product to make demand less elastic c. The practice of deciding a single price to be charged to customers d. Always illegal 10. Many bars close to campuses have started offering cheaper beer to consumers with a student ID. These bars a. Assume students have an inelastic demand curve b. Assume students have an elastic demand curve c. Are practicing price discrimination d. Both b and c 11. Many bars close to campuses have started offering cheaper beer to consumers with a student IDs. These bars are using a. Direct price discrimination b. Indirect price discrimination c. Decreasing returns to scale d. None of the above 12. For direct price discrimination to work effectively a. The low-valued customers should not be able to engage in arbitrage b. You need to charge the same price to the different groups c. Both groups should have the same elasticity of demand d. None of the above 13. Amusement parks often offer discounts to locals with IDs. This is an example of a. A direct discrimination scheme b. An indirect discrimination scheme c. Diminishing marginal returns d. Vertical integration 14. Public transit offers discounted monthly passes to students, which can only be bought and used with valid student IDs. The transit system is using a. A direct discrimination scheme b. An indirect discrimination scheme c. The Robinson-Patman act d. None of the above 15. A firm practicing direct price discrimination will charge a higher price to a. Consumers known to have an elastic demand b. All consumers c. Consumers known to have an inelastic demand d. Consumers known to have a unitary elastic demand 16. A firm practicing direct price discrimination will charge lower prices to a. Consumers with an elastic demand b. All consumers c. Consumers known to have an inelastic demand d. Consumers known to have a unitary elastic demand 17. For direct price discrimination to work, the firm a. Must be able to identify members of the low value group b. Charge the low-value group lower prices than the rest c. Prevent the low-value group from reselling their low priced goods to higher-valued group d. All of the above 18. For direct price discrimination to work, a. The firm need not be able to identify members of the low-value group b. The firm must charge a single price to all its customers c. The firm need not worry about any arbitrage since all its customers are charged the same price d. None of the above 19. For direct price discrimination to work a. The firm must be able to identify the members of the low value group b. The firm must charge a single price to all its customers c. The firm need not worry about any arbitrage since all its customers are charged the same price d. The firm should charge a higher price to those customers with the most elastic demand 20. For direct price discrimination to work a. The firm need not be able to identify the members of the low-value group b. The firm be able to charge the low-value customers a lower price than the higher-value customers c. The firm need not worry about any arbitrage since all its customers are charged the same price d. It needs to be too complicated for the customers to understand 21. The Robinson-Patman act a. Is a part of the antitrust laws b. Makes it illegal to give a price discount on a good sold to another business c. Is also known as the Anti-Chain-store Act d. All of the above 22. For a firm to maximize total profits through price discrimination, it should a. Charge a high price to consumers with an inelastic demand and low price to consumers with an elastic demand b. Charge a low price to consumers with an inelastic demand and high price to consumers with an elastic demand c. Charge the same price to both sets of consumers d. Charge nothing to both set of consumers-throw a party 23. Indirect price discrimination differs from direct price discrimination because a. In indirect price discrimination high value consumers can sometimes still get the low price b. In direct price discrimination firms do not have to worry about cannibalizing c. Direct price discrimination encourages rivals to enter but indirect discrimination does not d. There is no difference between the two 24. When deciding what price to charge customers, a firm may choose to charge different prices based on customers’ a. Age b. Willingness to pay c. Location d. All of the above 25. Airlines charge a ____________price to business travelers compared to leisure travelers because business travelers have a ____________ demand than leisure travelers. a. Higher; more elastic b. Higher; less elastic c. Lower; more elastic d. Lower; less elastic 26. Arbitrage a. Is the act of to buying low in one market and selling high in another market b. Can force a seller to go back to uniform pricing c. Can offset the benefits of direct price discrimination d. All of the above 27. Which of the following is FALSE about indirect price discrimination a. The firm is able to identify each customer’s willingness to pay b. The firm is able to charge different prices to the different value customers c. The firm is be able to prevent arbitrage d. All of the above 28. Which of the following is FALSE about indirect price discrimination a. It requires identifying some feature that is correlated with different value customers b. The firm must be able to charge different prices to the different value customers c. The firm must be able to prevent arbitrage d. All of the above 29. Amusement parks often offer coupons to the local market that are not available to tourists. This is an example of a. Direct discrimination scheme b. Indirect discrimination scheme c. Both of the above d. None of the above 30. Advance-purchase discounts offered by airlines are an example of a. Direct price discrimination b. Indirect price discrimination c. All of the above d. None of the above SHORT ESSAYS A recent study by economists Steven Puller and Lisa Taylor found that airline tickets purchased over the weekend were priced 5% lower on average. Why would airlines charge lower prices to customers making bookings on the weekend? ANSWER: This is a price discrimination scheme. Weekday bookings tend to be for business travel and weekend bookings tend to be for tourist travel. Tourists tend to be more flexible in their travel plans and so are more elastic customers. The weekend price is a way to offer them discounts while reducing the risk of arbitrage from the business customers. . Page 1 ASSIGNMENT NINE – CHAPTER 12 — MORE REALISTIC AND COMPLEX PRICING MULTIPLE CHOICE 1. Acquiring a firm that sells a substitute good would make the demand curve for your original product a. More inelastic b. More elastic c. Unchanged d. None of the above 2. You own two different energy drink brands: “Blue Cow” and “600 minute energy.” If you reduce the price on “Blue Cow”, a. Sales of “Blue Cow” would increase, without any changes in sales for “600 minute energy.” b. Sales of both “Blue Cow” and “600 minute energy.” would increase c. Sales of “Blue Cow” would increase, but the sales of “600 minute energy” would be cannibalized d. Neither “Blue Cow” nor “600 minute energy” would see an increase in sales. 3. You own two different energy drink brands: “Blue Cow” and “600 minute energy.” If you reduce the price on “Blue Cow”, sales of “600 minute energy” would a. Increase b. Decrease c. Not change d. None of the above 4. You own two different energy drink brands with similar elasticities: “Blue Cow” and “600 minute energy.” If you reduce the price on “Blue Cow”, you can only increase your total sales if a. Prices for “600 minute energy” are increased b. Prices for “600 minute energy” are reduced c. Prices for “600 minute energy” stay constant d. None of the above 5. The general rule to increase profits when two close substitute brands are jointly owned is a. Increase prices for both brands b. Decrease prices for both brands c. Increase prices on one brand, decreasing it for the other d. Increase prices on one brand, keeping the prices of the second brand constant 6. After acquiring closely substitutable product brands, a firm can successfully raise prices on both of the brands without losing much of its total sales because a. Customers are insensitive to price changes . Page 2 b. None of these sales would be captured by its other brand c. Some of these sales lost by one brand would be captured by the other d. All of the above 7. In a multi-product firm, cannibalization is a. An increase in the quality of both the brand’s products b. A decrease in the quality of both the brands products c. An increase in both the brand’s sales d. An increase in one of the brand’s sales due to the decrease in sales of the other. 8. If an ice-cream manufacturer acquires a frozen yogurt producer, you would likely see a. Lower prices for both the ice cream and the frozen yogurt b. Higher prices for both the ice cream and the frozen yogurt c. Higher prices for ice cream, but lower prices for frozen yogurt d. Higher prices for frozen yogurt but lower prices for ice cream 9. If a hot dog manufacturer acquires a bakery that primarily bakes hot dog buns, you would likely see a. Higher prices for the hot dogs but lower prices for the buns b. Higher prices for the buns but lower prices for the hot dogs c. Higher prices for both the hot dogs and the buns d. Lower prices for both the hot dogs and the buns 10. Which of the following is true? a. To reduce cannibalization among products, reposition a product so that it does not directly compete with the other b. After acquiring a substitute product, raise prices on both the products c. After acquiring a complementary product, lower prices on both the products d. All of the above 11. Which of the following is true? a. To reduce cannibalization among products, reposition a product so that it does not directly compete with the other b. After acquiring a substitute product, lower prices on both the products c. After acquiring a complementary product, raise prices on both the products d. All of the above 12. Which of the following is FALSE? a. To reduce cannibalization among products, reposition a product so that it does not directly compete with the other b. After acquiring a substitute product, raise prices on both the products c. After acquiring a complementary product, raise prices on both the products . Page 3 d. All of the above 13. Which of the following is FALSE? a. To reduce cannibalization among products, reposition a product so that it does not directly compete with the other b. After acquiring a substitute product, lower prices on both the products c. After acquiring a complementary product, lower prices on both the products d. All of the above 14. Which of the following is FALSE? a. To reduce cannibalization among products, make the products more homogenous b. After acquiring a substitute product, raise prices on both the products c. After acquiring a complementary product, lower prices on both the products d. All of the above 15. Which of the following is TRUE? a. To reduce cannibalization among products, reposition a product so that it does not directly compete with the other b. After acquiring a substitute product, lower prices on both the products c. After acquiring a complementary product, raise prices on both the products d. None of the above 16. For jointly owned substitute products, cannibalization leads to MR______MC a. Being higher than b. Being lower than c. Equaling d. None of the above 17. Upon acquiring a complement the inter-relatedness of demand leads to, MR________ a. Rising b. Falling c. Staying constant d. None of the above 18. The general rule to increase profits when two close complementary brands are jointly owned is a. Increase prices for both brands b. Decrease prices for both brands c. Increase prices on one brand, decreasing it for the other d. Increase prices on one brand, keeping the prices of the second brand constant . Page 4 19. Firm A owns produces both toothpaste and toothbrushes. In order to increase profits the firm must a. Increase prices for both toothbrushes and toothpaste b. Decrease prices for both toothbrushes and toothpaste c. Increase prices on toothbrushes and increase the price on toothpaste d. Increase prices on toothbrushes but keep the price on toothpaste constant 20. You are the owner of an art supply store, selling both paint and paintbrushes. In order to maximize total sales you should a. Decrease the price on the paint only b. Decrease the price on paintbrushes only c. Decrease the price on both the paint and the paintbrushes d. Increase the price on both the paint and the paintbrushes 21. Firm X owns both a grocery store and the parking lot outside the grocery store. In order to increase the traffic at the store it must a. Decrease the prices on the goods sold in the store b. Decrease the parking rates c. All of the above d. None of the above 22. Brenda’s Bakery started selling coffee along with pastries. In order to increase total sales she should a. Increase the prices on coffee b. Decrease the price on pastries c. Increase the price of pastries d. Shut down 23. Firm X owns both a grocery store and the parking lot outside the grocery store. In order to increase the traffic at the store the owners of the store should a. Increase the prices on the goods sold in the store b. Increase the parking rates c. All of the above d. None of the above 24. Firm X owns both a grocery store and the parking lot outside the grocery store. In order to increase the traffic at the store, the store should a. Decrease the prices on the goods sold in the store b. Increase the parking rates c. All of the above d. None of the above . Page 5 25. Firms tend to raise the price of their goods after acquiring a firm that sells a substitute because a. They lose market power b. There is an increase in the overall demand for their products c. The bundle has a more elastic demand than individual goods d. The bundle has a more inelastic demand than individual goods 26. A firm that acquires a substitute product can try to reduce inter-product cannibalization by a. Doing nothing b. Repositioning its product or the substitute so that they do not directly compete with each other c. Pricing each product at the same level d. Lowering the prices on both the products 27. After firm A acquired firm B, it raised the prices for the goods produced by both firms. This can increase profits if those goods are a. Substitutes b. Complements c. Not related d. None of the above 28. After firm A acquired firm B, it lowered the prices for the goods produced by both firms. This can increase profits if the goods are a. Substitutes b. Complements c. Not related d. None of the above 29. On average, if demand is unknown and costs of underpricing are _______ than the costs of overpricing, then err on the side of_________. a. Smaller; overpricing b. Smaller; underpricing c. Larger; underpricing d. None of the above 30. The pricing rule MR=MC holds for a. All firms b. Single product firms c. Multiple product firms d. None of the above . Page 6 SHORT ESSAYS In October, 2014, Vintners Global Resource’s (VGR) agreed to purchase M.A. Silva. VGR is a leading manufacturer of glass bottles and packaging for wines and M.A. Silva is a manufacturer of premium natural corks. What is the expected effect of this merger on price-cost margins? ANSWER: These two companies’ products are complements for each other. A price decrease for one company would lower the cost of the final product, a bottle of wine, increasing the quantity demanded and so benefit the other. Before the merger, the second effect would not have been captured by the firm reducing prices. After the merger, it would. Therefore it is more willing to reduce prices. ASSIGNMENT EIGHTY – CHAPTER 11 — DEMAND/SUPPLY ANALYSIS OF TRADE, BUBBLES, AND MARKET-MAKING MULTIPLE CHOICE 1. When interest rates go up, people are a. More likely to borrow b. Less likely to borrow c. Does not affect a person’s consumption d. None of the above 2. When interest rates fall, people are a. More likely to borrow b. Less likely to borrow c. Not likely to change borrowing patterns d. None of the above 3. Holding other things constant, a depreciation of the US Dollar relative to the Kenyan Shilling would cause the demand for the Shilling to _____________ and the supply for Shilling to __________. a. Increase; decrease b. Increase, increase c. Decrease; Increase d. Decrease; Decrease 4. Holding other things constant, a decrease in the inflation rate in the US compared to the Canadian economy may cause the demand for the US dollar to _____________ and the supply to __________. a. Increase; decrease b. Increase, increase c. Decrease; Increase d. Decrease; Decrease 5. Holding other things constant, a decrease in the inflation rate in the US compared to the Canadian economy will cause the demand for the Canadian dollar to _____________ and the supply to __________. a. Increase; decrease b. Increase, increase c. Decrease; Increase d. Decrease; Decrease 6. The term to describe one currency in terms of another is called a. The interest rates b. The market price c. The inflation rate d. The exchange rate 7. An individual in the US wants to buy a car from England which costs 12,000 pounds. If the exchange rate is 1 pound = $1.75, how much would the car cost him in dollars? a. $21,000 b. $6,800 c. $12,000 d. Need more information 8. The demand for dollars is downward sloping because when dollar appreciates, a. Foreigners demand more US goods and services b. Foreigners demand fewer US goods and services c. Foreigners demand more dollars d. Foreigners do not change their demand for US goods and services 9. Holding other things constant, an appreciation of the US Dollar relative to the Chinese Yuan causes the demand for the Yuan to _____________ and the supply for Yuan to __________. a. Increase; decrease b. Increase, increase c. Decrease; Increase d. Decrease; Decrease 10. Holding other things constant, an increase in the inflation rate in the US compared to China may cause the demand for dollar to _____________ and the supply for dollar to __________. a. Increase; decrease b. Increase, increase c. Decrease; Increase d. Decrease; Decrease 11. An individual in the US wants to buy office equipment from England which costs 2,000 pounds. If the exchange rate is 1pound=$1.9, how much will the office equipment cost him in dollar terms? a. $2,000 b. $2,800 c. $3,800 d. $1052 12. An individual in the England wants to buy office equipment from England which costs $2,000. If the exchange rate is 1pound=$1.9, how much will the office equipment cost him in pounds? a. 2,000 pounds b. 1,800 pounds c. 3,800 pounds d. 1,053 pounds 13. When interest rates go down, people are a. more likely to borrow b. less likely to borrow c. does not affect a person’s consumption d. None of the above 14. The equilibrium price in the market for foreign currencies is called a. The price b. The market price c. The exchange rate d. The going rate 15. In the market for Canadian dollars measured in US dollars, the supply of US dollars is a. The supply of Canadian dollars b. The demand for Canadian Dollars c. The demand for US dollars d. None of the above 16. In the market for Canadian dollars measured in US dollars, the demand for US dollars is a. The supply of Canadian dollars b. The demand for Canadian Dollars c. The supply of US dollars d. None of the above 17. In the market for Canadian dollars measured in US dollars, the demand for Canadian dollars is a. The supply of Canadian dollars b. The demand for US Dollars c. The supply of US dollars d. None of the above 18. In the market for Canadian dollars measured in US dollars, the supply of Canadian dollars is a. The demand for Canadian dollars b. The demand for US Dollars c. The supply of US dollars d. None of the above 19. In the market for Canadian dollars measured in US dollars, if the price of a Canadian dollar is 0.90 cents US, a US dollar is a. 0.90 cents Canadian b. 1 Canadian dollar c. 1.11 Canadian dollars d. 1.05 Canadian dollars 20. In the market for Canadian dollars measured in US dollars, if the price of a US dollar is 1.10 Canadian dollars, a Canadian dollar is a. 1.10 US dollars b. 1 US dollar c. 0.91 cents US d. 0.99 cents US 21. If a panic causes Indian depositors to withdraw their money from Japanese banks, it would cause the Japanese Yen to depreciate, since the supply of Yen has________ a. Not changed b. Decreased c. Increased d. None of the above 22. If a panic causes Indian depositors to withdraw their money from Japanese banks, it would cause the Japanese Yen to ___________, since the supply of Yen has increased a. Appreciate b. Depreciate c. Not change in value d. None of the above 23. If a panic causes Indian depositors to withdraw their money from Japanese banks, it would cause the Japanese Yen to ___________, since the supply of Yen has__________ a. Appreciate; Decrease b. Depreciate; Decrease c. Appreciate, Increase d. Depreciate; Increase 24. In the case where interest rates are lower in Japan, which of the following is an example of a “carry trade” a. Increase borrowing in the US, convert to Yuan and invest in financial assets in Japan b. Increase borrowing in Japan and invest in Japan c. Increase borrowing in Japan, convert to Dollars and invest in the US d. Increase borrowing in the US and invest in the US 25. In the case where interest rates are higher in Canada, which of the following is an example of a “carry trade” a. Increase borrowing in the US, convert to Canadian dollars and invest in Canada b. Increase borrowing in the US and invest in the US c. Increase borrowing in Canada, convert to dollars and invest in the US d. Increase borrowing in Canada and invest in Canada 26. An American consumer wants to buy a Swiss watch. The exchange rate is 1USD=0.89 CHF(Swiss Francs). The watch costs 100 Swiss Francs. How much would it cost him in dollars? a. $89 b. $112.36 c. $100 d. $160.82 27. A Swiss consumer wants to buy an American car. The exchange rate is 1USD=0.89CHF (Swiss Francs). The car costs $10,000. How much would the car cost him in Swiss Francs? a. 12,000 Francs b. 11,600Francs c. 8,900 Francs d. 7,500 Francs 28. A Swiss consumer wants to buy an American laptop. The exchange rate is 1USD=0.89CHF (Swiss Francs). The laptop costs $800. How much would the laptop cost him in Swiss Francs? a. 1200 Francs b. 1160Francs c. 890Francs d. 712 Francs 29. If Chinese consumers want to buy US goods, they will a. Buy Yuan and sell US Dollars b. Sell Yuan and buy US Dollars c. Neither buy nor sell Yuan d. Neither buy nor sell dollars 30. If US consumers want to buy Chinese goods, they will a. Buy Yuan and sell US Dollars b. Sell Yuan and buy US Dollars c. Neither buy nor sell Yuan d. Neither buy nor sell dollars 31. For foreigners, the intersection of the demand for US dollars and the supply of US dollar is known as the a. Inflation rate b. Exchange rate c. Price d. Quantity 32. Holding other things constant, decreases in the price level in the US will a. Cause the dollar to appreciate b. Cause the dollar to depreciate c. Cause no change in dollar value d. None of the above 33. Holding other things constant, if the US dollar appreciates, it makes the US exports a. Less attractive to foreigners b. More attractive to foreigners c. Neither more nor less attractive to foreigners d. None of the above 34. Holding other things constant, if the US dollar depreciates, it makes the US exports a. Less attractive to foreigners b. More attractive to foreigners c. Neither more nor less attractive to foreigners d. None of the above 35. Holding other things constant, if the Japanese Yen, depreciates, it makes the Japanese products a. Less attractive to US customers b. More attractive to US customers c. Neither more nor less attractive to US customers d. None of the above 36. Holding other things constant, if the Japanese Yen, appreciates, it makes the Japanese products a. Less attractive to US customers b. More attractive to US customers c. Neither more nor less attractive to US customers d. None of the above 37. Holding other things constant, if the Japanese Yen, depreciates, it makes the imports to Japan a. More expensive for Japanese customer b. Less expensive for Japanese customers c. Neither more or less expensive for importers d. None of the above 38. Holding other things constant, if the Japanese Yen, appreciates, it makes the imports to Japan a. More expensive for Japanese customer b. Less expensive for Japanese customers c. Neither more or less expensive for importers d. None of the above 39. If the Canadian dollar appreciates, holding other things constant, it makes Canadian imports a. More expensive for Canadian customers b. Less expensive for Canadian customers c. Neither more or less expensive for importers d. None of the above 40. If the Canadian dollar depreciates, holding other things constant, it makes Canadian imports a. More expensive for Canadian customers b. Less expensive for Canadian customers c. Neither more or less expensive for importers d. None of the above [Show More]

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