Download Midterm and Key 04

MIDTERM EXAMINATION
Managerial Economics 300-1
July, 2004
Brother Bryson
__________________________
Student Name
Part I. Fill in the Blanks (10 points)
The law of _____________ returns has to do with the ratio of fixed and ___________
factors of production and is most noticeable when additional increments of the variable factor show
___________ marginal products. But even in production stage _______ , this law is experienced as
both marginal and average product are declining.
The phenomenon of ________________ of scale has to do with the increasing
____________ that are encountered when scales of plant are so large (and where there are no
_____________ factors of production) that the tasks of communication and _____________
cannot be accomplished effectively. This outcome can be avoided by _____________ the plant that
was in place before the _____________ of scale were first observed.
Answers: diminishing, variable, negative, II, diseconomies, costs, fixed, coordination, replicating,
diseconomies
Part II. Multiple Choice. Choose the single best answer. (2.5 points per question)
Fill in the blanks in the following table (for five points) and use it to answer the next five
questions.
Total
Output Cost
100
560
200
300
400
Total
Fixed
Cost
Total
Average Average
Variable Fixed
Variable
Cost
Cost
Cost
60
4.00
Average
Total
Marg.
Cost
Cost
4.00
7.00
1. What is the average fixed cost when 300 units of output are produced?
a. $.60
b. $3.00
c. $160
d. $500
e. none of the above
Answer: e
2. What is total fixed cost when 400 units of output are produced?
a. $500
b. $2000
c. $25000
d. $5000
e. none of the above
Answer: a
3. What is average total cost when 200 units of output are produced?
a. $2.30
b. $2.50
c. $4.00
d. $4.80
e. none of the above
Answer: d
4. What is the marginal cost of the 300th unit of output?
a. $.14
b. $2.40
c. $4.00
d. $7.40
e. none of the above
Answer: d
5. What is the average variable cost at 200 units of output?
a. $4.00
b. $2.30
c. $1.80
d. $1.50
e. $4.60
Answer: b
6. As one moves along a linear demand curve one encounters
a. varying slope and elasticity
b. constant slope and varying elasticity.
c. varying slope and constant elasticity.
d. constant slope and elasticity.
e. radar traps and billboards.
Answer: b
7. The anti-market mentality as promoted by communist intellectuals
a. saw the transaction as the basic unit of economic analysis
b. felt that transactions gave rise to transactions costs
c. anticipated that every transaction produced not only costs, but also benefits
d. was convinced that someone was exploited in every transaction
e. did not hold to any of the above notions.
Answer: d
8. An economic system is a set of institutions
a. designed to allocate resources through hierarchical organizations
b. which must allocate resources through markets
c. which can allocate resources through either hierarchies or the price system
d. which merely regulate the market allocation of resources
e. void of resource allocation problems, since it addresses only issues of economics
Answer: c
9. Producing enterprises under central planning
a. were never queried by the planning agency about their production possibilities
b. were assigned production targets that managers wished to meet but not exceed
c. were at liberty to choose their own production plans
d. always had a tight budget of state-provided funds with which they could buy inputs in productive
factor markets
e. all of the above are true.
Answer: b
10. In economic analysis, attention often shifts to marginal and average measurements. Considering
marginal and average values, whether of costs, productivities, or other values, which of the following
statements is correct?
a. When the average value is below the marginal value, the average must be decreasing
b. When the marginal value is above the average value, the average must be increasing
c. When the marginal value is above the average value, the average must be decreasing
d. When the average value is below the marginal value, the marginal must be decreasing
e. All of the above are true
Answer: b
11. When there is an allocation of goods or services such that there exists no feasible alternative allocation
that would increase the well being of any one or more parties without reducing the well being of any
party, that allocation is said to be:
a. Profit-maximizing
b. A virtual corporation
c. micro-economic optimality
d. Efficient
e. In equilibrium
Answer: d
12. Price ceilings outlaw price increases by dictating a maximum legal price. Which of the following
effects will not result from such a policy?
a. a shortage will result if demand continues to grow and no price increases can elicit the supply of
larger quantities of the product.
b. producers will seek profits through quality improvements since they cannot increase profits
through price increases.
c. a black market will appear if shortages continue for long.
d. producers will seek ways to earn a profit other than through higher prices
e. If the shortage persists the government may arbitrarily change distribution of the product through
rationing
Answer: b
13. Which of the following is not an element of organizational architecture?
a. The assignment of decision rights
b. The level of competition in the market
c. The methods of rewarding individuals
d. The structure of systems to evaluate individual and business unit performance
Answer: b
14. In competitive markets, equilibrium occurs at:
a. the price where quantity demanded exceeds quantity supplied.
b. the price where quantity demanded equals quantity supplied.
c. the price where quantity supplied exceeds quantity demanded
d. the price where all consumers are completely satisfied.
Answer: b
15. According to Ronald Coase, firms:
a. exist to economize on transaction costs.
b. require too much coordination to be effective.
c. must be very large in order to avoid transaction costs.
d. cannot be more efficient than markets in allocating resources.
Answer: a
16. The _____________ approach to demand estimation has the limitation that consumers may not
be able to forecast correctly their response to price changes and product introductions.
a. interview
b. price experimentation
c. statistical or econometrical
d. random
Answer: a
17. A negative cross elasticity of demand between two goods means that they are:
a. substitutes for each other.
b. complements for each other.
c. normal goods
d. inferior goods
Answer: b
18. An isocost line reveals the
a. costs of inputs needed to produce along an isoquant.
b. costs of inputs needed to produce along an expansion path
c. input combinations that can be purchased with a given outlay of funds.
d. output combinations that can be produced with a given outlay of funds.
Answer: c
19. Economies of scope exist when:
a. the cost of producing a product decreases due to increasing returns to scale and to movements
down the learning curve as workers become skilled at their tasks.
b. the cost of producing a set of related products is less than producing them separately in
independent firms.
c. per unit costs decrease due to the experience gained from producing the product.
d. per unit costs decrease due to increasing marginal product associated with the famous law of
diminishing returns.
Answer: b
20. “Brittleness” in an economic organization has to do with
a. how much performance deteriorates with incomplete or imperfect information
b. how inflexible the workers are in the face of change
c. how likely a product is to break during the transport phase of the marketing endeavor.
d. how inflexible management is in the face of change
e. how pliably the whole organization responds to technological change.
Answer: a
21. When a negative externality is present,
a. too small a quantity is produced by the private market
b. social costs are negative
c. too small a quantity is consumed
d. extant social costs must be added to private costs
e. social benefits are present and should logically increase the demand for the product
Answer: d
Suppose total revenue of a firm is given as TR = 500Q - 4Q2. Use this information to answer
questions 22-24.
22. When output is 100, TR is
a. $2,000.
b. $20,000.
c. $10,000.
d. $49,600.
e. None of the above.
Answer: c
23. When output is 10 units, AR is
a. $460.
b. $560.
c. over $500.
d. $360.
e. None of the above.
Answer: a
24. At an output level equal to 20, MR is
a. $440.
b. $340
c. More than $500.
d. None of the above.
Answer: b
PART III. Brief identification (5 points for each answer. Write no more than two
sentences per answer). Answer both questions.
1. As discussed in the Power Point on “Firm Coordination,” what does a coxswain have to
do with the modern corporation?
2. When do organizational routines fail to assist the corporation’s operations and processes?
Turn now to the essay question on the next sheet.
PART IV. Essay (20 points) Answer only one of the following:
1. Explain and show with appropriate diagrammatics why being at a point off the contract
curve is not efficient and why being at a point on the contract curve does represent
efficiency?
2. Explain and show with appropriate diagrammatics how the purely competitive firm’s NR
(net revenue) curve is derived. Using the same kind of diagram again, show a competitive
firm suffering losses (NR<0) and explain in the case drawn whether or not the firm should
shut down.
Midterm Aut02 Answers
Part I. diminishing,
diseconomies
variable, negative, II, diseconomies, costs, fixed, coordination, replicating,
Part II on costs.
Q
TC
TFC
100
560
500
200
960
500
300
1700 500
400
2800 500
TVC
60
460
1200
2300
AFC
5.00
2.50
1.66
1.25
AVC
0.60
2.30
4.00
5.75
ATC
5.60
4.80
5.67
7.00
MC
.60
4.00
7.40
11.00
MC answers:
1e
2a
11d
12b
21d
22c
4d
14b
24b
5b
15a
6b
16a
7d
17b
8c
18c
3d
13b
23a
9b
19b
10b
20a
Part III.
1. The corporation’s operations are compared to the use of the coxswain to coordinate a rowing
team. Rather than resort to the slow, imprecise coordinating effects of a price system, the
corporation usually chooses to coordinate through direct instructions and commands reminiscent
of the coxswain’s command to “pull.”
2. Organizational routines, once learned, help a firm’s employees to complete complex tasks with
their efficient iterations. Such routines cannot be relied upon when new technologies or new
processes are integrated into the firm’s production processes until new organizational routines
have been worked out and learned.
Part IV.
1. Any point off the contract curve is a point of intersections between the isoquants of the two
individuals whose origins are, respectively, at the southwest and northeast corners of the
Edgeworth box. When this is the case, greater outputs can be produced by moving from that
point to the contract curve, the set of points of tangency (same slope) of the isoquants of the two
producers. Moving to the contract curve can be done by moving along either of the isoquants
whose intersection is at the point of interest. When one moves along the isoquant of one
producer, that producer is bartering the inputs of production, changing his production to reflect
greater quantities of one input gained by trading away quantities of the other input now used in
smaller portions. But as he thus trades, he retains the same output as he slides along the same
isoquant. That would mean that all the gains of trade are going to the other producer.
An alternative outcome is that the two producers can trade to a point on the contract curve
between where their initial two individual icoquants intersect the contract curve. That would mean
that the trading process permits them both to climb to higher isoquants. It can readily be seen that
any point off the contract curve can provide trade gains (that can be shared between the two
traders) by moving to the contract curve. Once on the contract curve, only violence or some sort
of fraud can cause a redistribution of productive inputs, since when one producer moves away
from his origin, gaining more of both inputs, the other producer is pushed back toward his own
origin, losing some of both inputs. The loser in such a transaction would not willingly lose, but
must be forced or defrauded.
2. Note that the TR curve for the competitive firm is a straight-line ray from the origin (because P
and MR are constant). The TC curve begins at the level of the TFC. If the TFC cost is equal to
any losses being incurred, the firm can decide on the basis of other considerations whether or not
to shut down, since shutting down will produce the same losses (TFC) as those incurred when
the firm continues to operate. If TFC exceed the losses incurred when the firm does produce and
minimize losses (operating at the top of the NR curve), the firm should continue to produce, since
by shutting down the firm would incur losses (TFC) greater than those generated by unprofitable
operation.