Download MBA Fall 2003 Possible Test Questions for Economics Exam 2

MBA Fall 2003 Possible Test Questions for Economics Exam 2
1. Explain the “rational spending rule” for finding the optimal combination of 2 or more
goods. Give an example to support your answer.
2. Explain the idea of “consumer surplus”. Use both words and a graph. Do all purchases
result in consumer surplus? Would you purchase a good for which consumer surplus = 0?
Explain.
3. Explain the idea of “producer surplus”. Use both words and a graph. Do all purchases
result in producer surplus? Would a firm sell a good for which producer surplus = 0?
Explain.
4. Explain the difference between individual demand and market demand. How do you “addup” the individual demand curves to form the market demand curve?
5. Compare the 4 basic market structures in terms of efficiency, price-making ability of
firms, product differentiation between firms, and profitability of firms. Also, given an
example of a good sold in each type of market.
6. Explain the principle of diminishing marginal returns. Use an example and provide a
graph to support your answer. What does this principle imply for the shape of short-run
unit cost curves? Explain.
7. Explain the profit-maximizing condition for a perfectly competitive firm. Use both words
and a graph to support your answer.
8. Assume that in the short-run, economic profits are greater than zero for a PC firm. Draw a
graph of this situation. Do you expect these profits to last into the long-run? Explain why
or why not, and make any necessary changes in your graph to show what happens (if
anything) in the long-run.
9. Efficiency and Price controls. How do price controls (price floors and price ceilings) affect
the efficiency of market outcomes? Explain using both words and graphs.
10. Explain how the incidence (who pays) of a per-unit tax on a good is a function of the
relative elasticities of supply and demand. Use graphs to show a tax that is mostly paid by
consumers and one that is mostly paid by producers. Are there circumstances when a tax
will be paid entirely by one side of the market? Explain.
11. Provide economic justification for taxing gasoline at high rates relative to other goods.
Note: you should provide 2 reasons for this tax, and each should be explained with its own
graph.
12. Explain (and graph) the idea of “Dead Weight Loss”. Give at least 2 source of DWL.
13. Carefully explain the difference between “diminishing marginal returns”, and “decreasing
returns to scale”. Use an example to illustrate your answer. Be sure to include the causes
of each, and when each is likely to occur.
14. Explain the different types of barriers to entry that allow firms to have market power.
What is a “natural monopoly”? Give an example. What type of barrier to entry allows a
natural monopoly to form?
15. Explain the idea of “price discrimination”. Be sure to differentiate between different types
of price discrimination. What conditions must exist for a firm to be able to engage in this
practice? What are firms trying to accomplish by engaging in price discrimination? Does
price discrimination change the efficiency of the market? If so, how? Give examples of
price discrimination that are encountered regularly.
16. In this class, we discussed the idea of “efficiency” in many different contexts. Recently,
we made the assertion that conditions resulting from a perfectly competitive market were
efficient. Why is this the case? How is this different from the conditions that result when
a monopolist controls a given market?
17. Draw a graph for a monopolist showing the profit-maximizing price and quantity. Explain
why these are the best price and quantity for the monopolist, but not for society. Can the
monopoly firm earn positive economic profits in the short run and the long run? Explain.
18. Explain why individual firms operating in a perfectly competitive market are regarded as
“price takers”. If individual firms “take” price, where does the price come from? Explain
using both words and graphs. Be sure to discuss the firm’s demand curve and the market
demand curve in your answer.
19. We cited two potential causes of inefficiency in markets: government intervention into
markets and external effects created by markets. Carefully explain how each of these can
be considered inefficient, and provide an example of each. Note: in the former,
government intervention creates the inefficiency (to promote equity), and in the latter
government can correct the inefficiency by intervening in markets.
20. Explain why a firm operating in an oligopoly industry where individual firms do not
cooperate with each other might be reluctant to change the price of their product. Use
both words and a graph to support your answer.
21. You are the owner of one of two beer manufacturers in a given market. Market demand
for your products is such that you can successfully introduce new types of beer, provided
that the new variation is introduced by only one firm and not the other. There is a market
for a new “ice beer” and a new “red beer”, but each firm has the resources to introduce
only one new product. If you both introduce the same type then you will each lose $5
million. On the other hand, if you produce different types, then you will both increase
profits by $10 million. Construct the payoff matrix for the two firms regarding the
decision of which of the two beers to produce. Is there a dominant strategy for either
firm? Explain.