Download Review for the MIDTERM - University of Pittsburgh

UNIVERSITY OF PITTSBURGH
Katz Graduate School of Business
BECN 2401
Stanko Racic
SAMPLE MIDTERM EXAM
This examination is worth a total of 140 points. You may chose between problems III and VI.
Please write your answers to the multiple choice questions in the provided answer sheet. Please
write your answers to the problems on the exam itself. Please write legibly and show work for
partial credit. If I cannot read it, it is wrong.
I.
There are 50 multiple choice questions worth 2 points each for a total of 100 points.
1.
A change in which of the following variables will not cause a shift in the demand curve?
a. Tastes and preferences.
b. Price of the good.
c. Consumer's income
d. Prices of related goods.
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2.
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3.
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4.
Price increases from $3 to $4 and quantity demanded decreases from 110 to 90 units.
What is the price elasticity?
a. -0.7
b. -0.55
c. -0.88
d. Unitary
If the price of Y decreases, the effect on a complementary good, X, will be
a. An increase in quantity demanded.
b. A decrease in quantity demanded.
c. A decrease in demand
d. An increase in demand.
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Which of the following is incorrect?
a. Demand is less elastic in the short run than in the long run.
b. The smaller the portion of income spent on a good, the more elastic the demand.
c. Goods with many substitutes tend to have elastic demand.
d. If demand is unitary elastic in the short run, it could be elastic in the long run.
5.
Which of the following would be expected to shift the demand curve to the right?
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a. An increase in consumers' income.
b. A fall in consumers' income.
c. A fall in the price of a substitute.
d. None of the above.
6.
If QX = 20 - 0.5PX + O.1I - 2PY, goods X and Y are
a. Substitutes.
b. Unrelated.
c. Inferior.
d. Complements.
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7.
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If QX = 20 - 0.5PX + O.1I - 2PY, and PY = $2 and QX = 10, the cross elasticity is
a. -0.2.
b. -0.4.
c. -0.04.
d. +0.4.
8.
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Which of the following is most likely to be correct?
a. The demand for Ford Motor Company automobiles is more elastic than the demand for
automobiles in general.
b. Ford's share of the automobile market remains roughly constant from year to year, so
the demand curve for Ford's automobiles is about the same as for automobiles in
general.
c. The demand for Ford automobiles is less elastic than the demand curve for automobiles
in general.
d. There is no reason to expect the elasticity of demand for Ford automobiles to be related
to the elasticity of demand for automobiles in general.
9.
If a price increase causes an increase in total revenue, then demand is
a. Unitary elastic
b. Elastic
c. Normal
d. Inelastic
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10.
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12.
In production theory, the short-run is
a. A length of time in which all inputs are fixed.
b. A length of time in which all inputs are variable.
c. A length of time when at least one input is fixed.
d. A concept unrelated to time.
Marginal product is
a. A change in total output divided by a one unit change in variable input.
b. A change in total output divided by the output level.
c. A change in input divided by a change in output.
d. A change in total inputs divided by a change in output.
Assume that the cross elasticity between two goods is -3. An increase in the price of the
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19.
first good will
a. Cause the demand curve of the second good to shift to the right.
b. Cause the demand curve of the second good to shift to the left.
c. Result in a downward movement along the demand curve for the second good.
d. Have an unpredictable effect on the demand curve of the second good.
The average product (AP) rises as long as
a. The marginal product is less than AP.
b. The marginal product is greater than AP.
c. The marginal product equals AP.
d. There is no relationship between AP and marginal product.
An isoquant shows
a. All combinations of two outputs that can be produced by a given combination of
inputs.
b. All combinations of two inputs required to produce a given level of output.
c. All combinations of two or more outputs required to meet a given rate of satisfaction
for consumers.
d. None of the above.
The optimal employment of two or more inputs is achieved when
a. The ratio of average products equal the input price ratio.
b. The ratio of marginal products equal the input price ratio.
c. The ratio of average products equal the output price ratio.
d. The ratio of marginal products equal the output price ratio.
The law of diminishing marginal returns states that when increasing rates of a variable
input are combined with a fixed rate of another input, a point will be reached
where marginal product will
a. Decline.
b. Increase.
c. Not change.
d. Become negative.
If the ratio of input prices is not equal to the ratio of marginal products,
a. There is no efficiency effect.
b. No changes can be made which will reduce costs.
c. Quantities of inputs can be adjusted to reduce costs without reducing output.
d. Quantities of outputs can be adjusted to reduce costs by reducing inputs.
Given C = 20K + 40L, a firm could expend $1,200 by purchasing
a. 60 units of labor and no capital.
b. 60 units of capital and no labor.
c. 30 units of capital and no labor.
d. 30 units of capital and 10 labor.
The slope of the isoquant is
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a. The marginal product of an input.
b. The negative of the ratio of marginal products of the inputs.
c. The marginal rate of technical substitution or the rate at which one input can be
substituted for another.
d. Both (b) and (c).
20.
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Returns to scale refers to the proportionate change in output relative to
a. Proportional changes in input levels.
b. Non-proportional changes in input levels.
c. Changes in prices of inputs and output.
d. Inefficient production.
21.
Which of the following represents the formula for calculating marginal costs?
a. (change in output)/(change in inputs).
b. (change in output)/(change in input prices).
c. (change in inputs)/(change in output).
d. (change in costs)/(change in output)
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22.
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23.
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Average cost equals marginal cost where
a. Average and marginal costs are declining.
b. Total costs are a maximum.
c. Average cost is at a maximum.
d. Average cost is at a minimum.
An important relationship between production and cost can be represented by which of
the following statements.
a. When average or marginal products are increasing, average or marginal costs are
increasing.
b. When average or marginal products are increasing, average or marginal costs are
decreasing.
c. When average or marginal products are decreasing, average or marginal products are
decreasing.
d. There is no relationship between production and cost.
24.
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The minimum legal price that can be charged in a market is:
a. A price floor.
b. A price ceiling.
c. Non-pecuniary price.
d. Full economic price.
25.
If total cost is given by TC = 10 - Q + 0.3Q2 and Q = 10, then average cost is
a. 10.
b. 0.5.
c. 3.
d. Indeterminate.
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26.
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If good X is a substitute for good Y. An increase in the price of good Y leads to
a. An increase in the demand of good X.
b. A decrease in the demand of good X.
c. A decrease in the supply of good X.
d. An increase in the supply of good X.
27.
Other things held constant, the greater the price of a good
a. The lower the supply.
b. The higher the demand.
c. The greater the consumer surplus.
d. The lower the consumer surplus.
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28.
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29.
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30.
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Answer questions 28 through 30 based on the market demand Qd = 100 - 2P and the
market supply Qs = 5 + 3P. The competitive equilibrium price is:
a. $15.
b. $19.
c. $17.
d. $20.
The competitive equilibrium quantity is:
a. 92.
b. 81.
c. 45.
d. 62
If a price ceiling of $15 is imposed, what will happen to quantity?
a. There will be a surplus of 40 units.
b. There will be a neither a surplus or shortage.
c. There will be a shortage of 40 units.
d. There will be a shortage of 20 units.
31.
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If an equation for total cost is given by TC = 15 + 5Q + Q2, this equation specifies
a. Short-run cost curve.
b. Long-run cost curve.
c. Both (a) and (b).
d. Neither (a) nor (b).
32.
If total cost is given by TC = 10Q - Q2 + 0.3Q3, average cost is a minimum when
a. Q = 3.33.
b. Q = 0.
c. Q = 1.67.
d. None of the above.
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33.
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34.
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35.
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36.
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Average fixed costs
a. Increase as quantity increases.
b. Decrease as quantity increases.
c. Do not change as quantity increases.
d. Do not depend on total fixed costs.
Often owners of the firm who hire mangers must install incentive plans to ensure
a. That the company is financially secure.
b. That the manager will work hard.
c. That the manager will maintain employee morale.
d. That the company will have positive economic profits.
When relationship-specific exchange occurs in complex contractual environments, the
best way to purchase inputs is through:
a. Spot exchange.
b. Vertical integration.
c. Short term agency agreements.
d. Long-term contracts.
If total cost is given by TC = 10 - Q + 0.1Q2 and Q = 4, then
a. Marginal cost is -1.
b. Average fixed cost is -0.6.
c. Average fixed cost is 2.5
d. None of the above.
37.
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If the average cost equation is AC = -24Q + 0.3Q2 returns to scale are increasing for
a. Q < 40.
b. Q > 0.
c. Q < 80.
d. Q > 40.
38.
Average cost exceeds marginal cost only at output rates where
a. Average cost is increasing.
b. Average cost is a minimum.
c. Marginal cost is increasing.
d. Average cost is decreasing.
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39.
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The disadvantage of vertical integration is that
a. Relationship-specific exchange may cause holdup.
b. Long-term contracts may be inflexible.
c. The principal-agent problem causes shirking
d. Firms no longer specialize in what they do best.
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46.
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The idea of improving cash flow by exploiting the cyclical nature of different product
lines is represented in:
a. Vertical integration.
b. Horizontal integration.
c. Cointegration.
d. Conglomerate integration.
A local telephone company charges ¢10/min. base on a ¢8/min. marginal cost of
operations. What is the Lerner Index?
a. 0.2.
b. 0.25.
c. 0.4.
d. 0.5.
The HHI of a local. market is usually ________________ that of national markets.
a. Lower than.
b. The same as
c. Higher than.
d. Twice.
An industry is comprised of 20 firms, each with an equal market shares. What is the
4-firm concentration ratio of this industry?
a. 0.2.
b. 0.4.
c. 0.6.
d. 0.8.
Transaction costs refer to:
a. Fixed cost of capital.
b. Variable cost of labor.
c. Cost of exchange unrelated to production costs
d. Economies of scale.
A potential problem with piece rate plans is:
a. That workers will out produce a large quantity.
b. That workers have no incentive to work hard.
c. That it is difficult for managers to control.
d. That workers may stress quantity instead of quality.
Specialized investments
a. Result in relationship-specific exchange.
b. Make spot exchange efficient.
c. Cause managers to shirk.
d. Are equally valuable in any productive use.
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48.
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49.
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50.
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The problem with spot exchange in the presence of specific assets is that
a. Both parties have incentives to behave as principals.
b. Both parties have incentives to behave opportunistically.
c. Both parties take the risk of price fluctuations.
d. Both parties do not take advantage of the economies of scope.
Long-term contracts are less likely when
a. Specialized investments are important.
b. Hold up is likely.
c. The exchange environment is complex.
d. Workers are paid based on piece-rates.
A negative side of a revenue sharing plan is that it:
a. Does not induce hard or better work.
b. It can be costly if revenues are low.
c. It gives no incentive for workers to minimize costs.
d. It can be difficult to manage from an accounting standpoint.
Which of the following integration types exploits economies of scope?
a. Vertical integration.
b. Horizontal integration.
c. Cointegration.
d. Conglomerate integration.
II. (10 points) The following table gives the quantities of output that can be produced with
different amounts of capital (K) and labor (L) utilized by a firm.
Units
of K
Units of output
5
4
3
2
1
210
188
163
133
94
298
267
230
188
133
365
327
282
230
163
421
376
327
267
188
470
421
365
298
210
0
1
2
3
4
5
Units
of L
a. What are the returns to scale for this firm over the output range shown? Why?
Constant. Doubling the inputs, doubles the output.
b. Compute the marginal product and average product of labor for K = 3 as L varies from
1 to 5 units. What happens to the marginal product of labor as the amount of
capital used by the firm increases? Why?
K = 3, L
1
2
3
4
5
APL 
TP( K  3, L)
L
163
115
94
81.75
73
MPL 
TP ( K  3, L)
L
163
67
52
45
38
Falling for given K, but increasing as K increases, since K and L are less then perfect
substitutes.
c. Suppose the firm is producing 230 units of output using 2 units of capital and 3 units of
labor. The cost of one unit of capital is $50 and the cost of one unit of labor is
$15. Is the firm using a least combination of inputs? Why?
MPL 42 67 MPK



PL
15 50
PK
Not a least cost combination of inputs, since the slopes of isocost and isoquant cureves
are not equal.
III. (10 points) The marketing department of a firm that manufactures small vehicles has
determined the following demand function for their cars:
QV = 200,000 - 50PV + 75PC - 0.4I + 0.2A,
where: QV
= the number of the firm vehicles sold weekly,
PV
= the price of the firm's vehicles,
PC
= the price of a close competitor's vehicles,
I
= average household income,
A
= weekly advertising dollars spent.
a. If PV = $10,000, PC = $8,000, I = $25,000, and A = $300,000, what is the price
elasticity of demand? Is the price elasticity of demand elastic, unitary elastic, or
inelastic? Why?
QV = 200,000 - 50(10,000) + 75(8,000) - 0.4(25,000) + 0.2(30,000) = 350,000
Qv Pv
10,000
 50
 1.42857
Pv Qv
350,000
E P |P 10, 000 
|EP| = 1.43 > 1 =>
elastic
b. Assuming the variable values given in Part A above, determine the income elasticity. Is
this superior, normal or inferior good?
E I |I 15, 000 
Qv I
25,000
 0.4
 0.02857  0
I Qv
350,000
=>
inferior
c. Find the cross price elasticity of demand between the two vehicles. Interpret your
answer.
Evc |Pc 8, 000 
Qv Pc
8,000
 75
 1.7142857  0
Pc Qv
350,000
=>
substitutes
IV. (10 points) If the average product of labor (L) is defined by
APL = 100 + 15L - 1.5L2,
a. Derive the total product and marginal product functions.
TPL = APL(L) = 100L + 15L2 - 1.5L3
MPL 
dTPL
 100  30L  4.5L2
dL
b. At what value of L will marginal product of labor be maximized?
FONC :
dMPL
30
 30  9L  0  L 
 3.33
dL
9
c. What is the value of marginal product of labor when average product of labor is at
maximum?
(i)
Max APL = 100+ 15L - 1.5L2 = 100 + 30L - 4.5L2 = MPL
0 = 15L - 3L2 =>
L=5
(ii)
For max APL FONC :
dAPL
 15  3L  0  L  5
dL
Max MPL|L=5 = 100 + 30(5) - 4.5(5)2 = 100 + 150 - 112.5 = 137.5
d. What is the maximum short-run output that firm can produce?
dTPL
 MPL  100  30L  4.5L2  0
dL
2
 30  30  4(4.5)100  30  900  1800  30  51.96



 2.44,
2(4.5)
9
9
For max TPL FONC :
Q1, 2
Max TPL|L=9.11 = 100(9.11) + 15(9.11)2 - 1.5(9.11)3 = 1021.79
9.11
V. (10 points)
Suppose that a firm has the following total cost function:
STC = 200 + 75Q - 1.5Q2 + 0.01Q3.
a. What is the minimum value of marginal cost (MC)?
MC 
dSTC
 75  3Q  0.03Q 2
dQ
For min MC FONC :
dMC
 3  0.06Q  0  Q  50
dQ
Min MC|Q=50 = 75 - 3(50) + 0.03(50)2 = 0
b. Determine output level at which average variable cost (AVC) will be minimized.
AVC 
STC
 75  1.5Q  0.01Q 2
Q
For min AVC FONC :
dAVC
 1.5  0.02Q  0  Q  75
dQ
c. What is the minimum value of AVC?
Min AVC|Q=75 = 75 - 1.5(75) + 0.01(75)2 = 18.75
d. At what output level will MC intercept average variable cost (AVC)?
Q = 75 (From part b.)
VI. (10 points) International Video Machines (IVM), Inc. is considering lowering the price of its
video recorders from $800 to $600. The company's analysts have
estimated the price elasticity of demand to be -2 over this price range.
Presently, this firm sells 1000 video recorders per month.
a. What will be the new quantity sold if the price is lowered to $600?
EP 
Q2  Q1 P2  P1 Q2  1000 600  800

 2
P2  P1 Q2  Q1 600  800 Q2  1000
-7Q2 + 7000 = -2Q2 - 2000
5Q2 = 9000
=>
Q2 = 1,800
b. What will be the level of total revenue in part a?
TR2 = P2(Q2) = 600(1800) = 1,080,000
c. What additional information is needed to determine the effect on the profit?
The corresponding increase in costs.
d. Suppose that after IVM lowers its price, it competitor, Videoview, lowers the price of
its machine from $900 to $800. The cross price elasticity of demand between the quantity
sold of IVM recorders and the price of Videoview's machine is 0.5. What will be the
effect of Videoview's price decrease on the quantity sold by IVM? (Use the quantity you
found in part a as Q1. Round answer to the nearest whole number.)
E IVM ,V
Q2IVM  Q1IVM P2V  P1V
Q  1800 800  900

 2
 0.5
V
V
IVM
IVM
800  900 Q2  1800
P2  P1
Q2  Q1
-17Q2 + 30600 = 0.5Q2 + 900
17.5Q2 = 29700
=>
Q2 = 1,697