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## There are 3 potential consumers in the market for good X.

1. There
are 3 potential consumers in the market for good X. Consumer 1âs (inverse) demand is PX
= 40 â QX. Consumer 2âs
(inverse) demand is PX = 50 â 2QX. Consumer 3âs (inverse) demand is PX
= 70 â 4QX. When the price PX
= 20, quantity demanded in the market will equal ______ units.
a) 19.5 b)
38.5 c) 41.0
* d) 47.5 e) None of the above.

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2. The
substitution effect isolates the change in consumption of a good caused by a
change in
a) real income * b) relative
prices c)
money prices d)
money income

3. At
a given basket of goods X and Y the slope of the indifference curve is steeper
than the slope of the budget line. If
quantity of good X is on the horizontal axis, we can conclude that at this
a) the consumer is willing to give up more units
of X to get an additional unit of Y than is necessary given current
prices PX and PY.
* b) the consumer is willing to give up more units of Y to get
an additional unit of X than is necessary given current
prices PX and PY.
c) the consumer can increase her utility
consuming fewer units of X and more units of Y.
d) the consumerâs preferences are characterized
by diminishing marginal rates of substitution.

4. Suppose
a consumerâs preferences over baskets of goods X and Y are complete and
transitive. Furthermore they are such
that we have non-satiation (âmore is betterâ) and diminishing (absolute value
of) marginal rates of substitution. In
the neighborhood of current prices and income, X is a normal good and Y is an
inferior good. Following a rise in the
price of good Y we can conclude that:
a) the income and substitution effects reinforce
each other, leading to an overall decrease in the consumption
of good X.
b) the income and substitution effects have
competing effects, leading to an indeterminate impact on the
consumption of good X.
c) the income and substitution effects reinforce
each other, leading to an overall decrease in the consumption
of good Y.
* d) the income and
substitution effects have competing effects, leading to an indeterminate impact
on the
consumption of good Y.

5. Joe
consumes 48 units of food and 12 units of clothing. If he considers food an inferior good,
a) Joe would strictly prefer receiving a \$10
gift certificate at a clothing store to receiving \$10 in cash.
* b) Joe would
strictly prefer receiving \$10 in cash to receiving a \$10 gift certificate at a
clothing store.
c) Joe would be indifferent between receiving
\$10 in cash versus a \$10 gift certificate at a clothing store.
d) Joe would strictly prefer receiving \$10 in
cash to receiving a \$10 gift certificate at a food store.

See
Figure 4-17 and supporting discussion in the textbook.

6. Maryâs
preferences over baskets of goods X and Y are linear, with U(X,Y) = 20X +
10Y. She currently has an income of \$120
to spend on goods X and Y. The price of
good X, PX, is \$1.00 per unit of X and the price of good Y is \$0.60
per unit of Y. Suppose the price of X
rises to \$1.50 per unit of X. The change
in quantity demanded of X brought about by the substitution effect equals
________ units of X.
a) 0 b)
â 40 c) â 80
* d) â 120 e)
None of the above are correct.

Initially
|MRS| = MUX/MUY = 20/10 = 2 > 1.67 = 1.00/0.60 = PX/PY.
Mary consumes 120 units of X
and 0 units of Y. Following the
price increase, |MRS| = 2 < 2.5 = PX/PY. Mary will want to consume 0 units of X and 200 units of Y. If she is given enough income to reach her old level of satisfaction she will consume 0 units of X and 240 units of Y. Her substitution effect for good X is â 120 units of X. Melanieâs preferences over annual income (in thousands of dollars) I and average daily hours of daily leisure time on the job (âshirkingâ) S are expressed by the Utility function U(S,I) = S1/5I4/5. For this function.0/msohtmlclip1/01/clip_image004.png">Melanie
is on the job, either working or shirking, 8 hours each workday. Each hour that she works rather than shirks
on an average workday through the year adds \$100,000 to the firmâs annual
profit. If Melanie shirks all day the
firmâs annual profit equals zero.

The firm is considering two different compensation
packages for Melanie:

PACKAGE A: She receives a base salary of \$100,000 + 5
percent of the firmâs profits
PACKAGE B: She receives 20 percent of the firmâs profits

7. If
Melanieâs annual income equals \$160,000 and she is shirking an average of 2
hours per workday, her marginal rate of substitution (in absolute value), will
equal ___________ thousand dollars per hour shirked.
* a) 20 b) 40 c)
60 d) 80 e)
None of the above

8. If
Melanie is compensated under Package A, she maximizes her satisfaction earning
________ thousand dollars per year.
* a) 112 b)
116 c) 128 d) 140 e) None of the above

9. If
Melanie is compensated under Package B, she maximizes her satisfaction shirking
________ hours on each average work day.
a) 0.8
* b) 1.6 c)
3.2 d) 5.6 e) None of the above

10. Comparing her satisfaction under these two packages,
Melanie will
* a) strictly prefer Package A to Package B.
b) be
indifferent between Package A and Package B.
c) strictly
prefer Package B to Package A.

.0/msohtmlclip1/01/clip_image002.png”>

For I = 160 and S = 2, |MRS| =
(1/4)(160/2) = 20 thousand dollars per hour shirked

Package
A: 1) I = 140 â 5S 2)
(1/4)(I/S) = 5 S =
140/25 = 5.6 I = 140 â
5(5.6) = 112

Package
B: 1) I = 160 â 20S 2)
(1/4)(I/S) = 20 S =
160/100 = 1.6 I = 160 â 20(1.6)
= 128

Utility of A = U(5.6,112) = 5.60.21120.8
= 61.5 > 53.8 = 1.60.21280.8
= U(1.6,112) = Utility of B

11. In the long run firms will produce at minimum efficient
scale in markets characterized by:
* a) perfect competition c)
monopolistic competition
b) monopoly d) oligopoly

12. Clark
Industries currently spends 10 percent of its dollar sales on advertising. At its current level of production, its
advertising elasticity of demand EQ,A = 0.30. If the firm is maximizing profit, we know
that its price is marked up _________ percent above marginal cost.
a) 20 b)
25 c) 40
* d) 50 e) None of the above are correct

.0/msohtmlclip1/01/clip_image002.png”>

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Shoes faces demand for its product Q = 10,000 â 50P. Cost of production of the firm, for any given
quantity Q, is C(Q) = 175,000 + 80Q. The price elasticity of total market demand
for its industry, ET = -1.4.
a) – 10,000 b)
0 c) 2,500
* d) 5,000 e)
None of the above

Shoes faces demand for its product Q = 10,000 â 50P. Cost of production of the firm, for any given
quantity Q, is C(Q) = 175,000 + 80Q.
The price elasticity of total market demand for its industry, ET
= -1.4. For this profit maximizing firm
we can determine the Rothschild Index equals:
a) 0.20 b) 0.40 * c) 0.60 d)
0.80 e)
None of the above

Shoes faces demand for its product Q = 10,000 â 50P. Cost of production of the firm, for any given
quantity Q, is C(Q) = 175,000 + 80Q.
The price elasticity of total market demand for its industry, ET
= -1.4. The Lerner Index for this firm
equals:
a) 0.285
* b) 0.429 c)
0.576 d) 0.632 e) None of the above

P = 200 â Q/50 MR(Q) = 200 â Q/25

MR(Q) = 200 â Q/25 = 80 =
MC(Q) Q = 25(120) =
3,000 P = 200 â (3,000)/50 =
140

Profit = PQ â C(Q) =
140(3,000) â [175,000 + 80(3,000)] = 420,000 â 415,000 = 5,000

EQ,P = (dQ/dP)(P/Q)
= – 50(140/3,000) = – 7/3 R =
ET/EQ,P = (-1.4)/(-7/3) = 0.6

.0/msohtmlclip1/01/clip_image002.png”>

16. Consider
an industry that has a four-firm concentration ratio of 0.05 and a
Herfindahl-Hirschman index of 623. A
representative firm in the industry has a Lerner index equal to 0.26 and a
Rothschild index of 0.34. This industry
is best characterized by the model of:
a) Perfect competition c) Monopoly
* b) Monopolistic
competition d) Oligopoly

17. The
income effect isolates the change in consumption of a good caused by a change
in
* a) real income b) relative prices c) money prices d)
money income

Peabodyâs
Coal Company sells its product in a perfectly competitive market for a price of
\$5 per unit. It is a monopsonist, an
only employer, in its labor market.
Labor is the companyâs only variable input. Peabodyâs demand for labor and the supply of
labor in its market are shown below.

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.0/msohtmlclip1/01/clip_image015.png” alt=”Text box: labor”>
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Peabodyâs Total Fixed Cost of
production equals 1000.

18. At labor employment level L = 5 the marginal product of
labor equals ________ units of output per worker.

VMP =
P x MP = 5 x MP = 170 MP = 170/5
= 34

a) 20 * b) 34 c) 96 d) 170 e) None of the above

19. Peabodyâs offers a wage equal to ________ dollars per unit
of labor to maximize profit.

VMP =
MLC at L = 12 W = 60

a) 50 * b) 60 c) 70 d) 80 e) None of the above

20. Peabodyâs maximum profit equals __________ dollars.
a) â 100 b) 0 c)
100 * d) 200 e) None of the above

Profit
= TR â TVC â TFC = Â½ (220 â 20)(12) â 1000 = 1200 â 1000 = 200

21. Suppose
workers form a union and demand a union wage of \$80 per unit of labor. If Peabody accepts this offer, the firmâs
maximum profit will equal ________dollars.
a)
â 240 b) â 120 c) 0 d) 80 * e) None of the above

VMP =
MLC = 80 at L = 14 Profit = TR â
TVC â TFC = Â½ (220 â 80)(14) â 1000
= -20

22. For
a ____________ production technology the cost minimizing levels of labor and
capital employed to produce a given amount of output will remain the same
regardless of the levels of wages and rental rates of capital.
a) Linear * b)
Leontief c)
Cobb-Douglas d)
None of the above

23. Two
firms, Acme and Ajax, consider engaging in a horizontal merger. Premerger Acme accounts for 20 percent of
industry sales and Ajax accounts for 10 percent of industry sales. Ceteris paribus, this merger will cause the
HHI for the industry to increase by:
a)
100 b)
200 * c) 400 d) 800 e) None of the above

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Luxury Goods Incorporated sells its product in a
perfectly competitive market. The
firmâs cost of production is C(Q) = 200,000 + 3,400Q â 100Q2 + Q3,
with dC(Q)/dQ = 3,400 â 200Q + 3Q2.

24. Luxuryâs
average variable cost of producing 40 units of output is:
* a) 1000 b) 1200 c) 1400 d)
1600 e) None of the above are correct.

25. Luxury
will shut its firm down in the short run if the market price is less than:
a)
600 b) 700 c) 800
* d) 900 e) None of the above are correct.
.0/msohtmlclip1/01/clip_image021.png”>

26. The
âcausalâ view of industry asserts that
a) .0/msohtmlclip1/01/clip_image023.png”> c) .0/msohtmlclip1/01/clip_image025.png”>
b) .0/msohtmlclip1/01/clip_image027.png”> * d) .0/msohtmlclip1/01/clip_image029.png”>

27. Consider
an industry that has a four-firm concentration ratio of 1.0 and a
Herfindahl-Hirschman index of 5,573. A
representative firm in the industry has a Lerner index equal to 0.43 and a
Rothschild index of 0.76. This industry
is best characterized by the model of:
a) Perfect competition c)
Monopoly
b) Monopolistic competition
* d) Oligopoly

28. Reliance
upon ______________________ is generally the most desirable alternative in
acquiring inputs when there are many buyers and sellers and low transaction
costs.
* a) Spot Exchange c) Contracts
b) Vertical Integration d)
Lotteries

29. Industries
that are classified as âhighly concentratedâ by the U.S. Department of Justice
(DOJ) have Herfindahl-Hirschman indexes in excess of ___________. A horizontal merger in one of these industries
that would increase the industryâs Herfindahl-Hirschman index by more than
________ raises concern regarding the potential increase in market power and
may be challenged by the DOJ.
a) 1800; 100 b)
2100; 150 * c) 2500; 200 d)
4000; 500

30. A
monopolistâs inverse demand function is P = 300 â 3Q. The company produces output at two
facilities. The marginal cost of
producing at facility 1 is MC1(Q1) = 6Q1, and
the marginal cost of producing at facility 2 is MC2(Q2) =
2Q2. This companyâs profit
maximizing level of production in facility 1, Q1, equals:
a) 5 * b) 10 c)
15 d) 20 e) None of the above.

31. A
monopolistâs inverse demand function is P = 300 â 3Q. The company produces output at two
facilities. The marginal cost of
producing at facility 1 is MC1(Q1) = 6Q1, and
the marginal cost of producing at facility 2 is MC2(Q2) =
2Q2. This companyâs profit
maximizing price equals:
a)
60 b) 75
c) 90
* d)
180 e) None of the
above

.0/msohtmlclip1/01/clip_image002.png”>

1).0/msohtmlclip1/01/clip_image002.png”>
2).0/msohtmlclip1/01/clip_image002.png”>

Solving,
Q1 = 10 and Q2 = 30.
Q = 10 + 30 = 40. P = 300 â
3(40) = 180.

32. You
have been employed as a consultant for a firm.
You estimate that the current marginal product of labor equals 10 and
the marginal product of capital equals 15.
The rental rate of capital equals 200 and the wage rate equals 100. Based upon this information, you conclude:
* a)
the firm could reduce costs by using more labor, less capital.
b) the firm is
using the right mix of capital and labor to reduce costs.
c) the firm could reduce costs by using less
labor and more capital.
d) the firm
could reduce costs by using less labor and less capital and still meet its
production target.

The absolute value of the MRTS = MPL/MPK
= 10/15 or 2/3 units of capital per labor. The relative price of labor in terms of
capital is given by the wage-rental ratio w/r = 100/200 or 1/2 unit of
capital per unit of labor. At the
margin you can employ a unit of labor (at a cost of 1/2 unit of capital)
and replace 2/3 units of capital in production. Cost will fall.

33. Economist
________ argued that market power inevitably emerges for entrepreneurs who
introduce new products consumers want to buy or who discover innovative ways to
lower costs. But, he warned, any gains
in market power are always in jeopardy, subject to be lost if a firm ceases to
innovate. The fortunes of firms rise
and fall in the waves of âcreative destructionâ that wash over markets.
a) Wassilly
Leontief b) Abba Lerner * c) Joseph Schumpeter d)
Alfred Marshall

34. A potential âhold upâ problem emerges for firms acquiring
inputs via:
* a) spot markets b)
contracts c)
vertical integration d) All of the above are correct.

35. The supply curve for a monopolistically competitive firm in
the short run is the
a) marginal cost curve above minimum average total
cost.
b) marginal cost curve above minimum average variable
cost.
c) marginal
cost curve above minimum marginal cost.
* d) None of the above
are correct.
1. There
are 3 potential consumers in the market for good X. Consumer 1âs (inverse) demand is PX
= 40 â QX. Consumer 2âs
(inverse) demand is PX = 50 â 2QX. Consumer 3âs (inverse) demand is PX
= 70 â 4QX. When the price PX
= 20, quantity demanded in the market will equal ______ units.
a) 19.5 b)
38.5 c) 41.0
* d) 47.5 e) None of the above.

.0/msohtmlclip1/01/clip_image002.png”>

.0/msohtmlclip1/01/clip_image002.png”>

2. The
substitution effect isolates the change in consumption of a good caused by a
change in
a) real income * b) relative
prices c)
money prices d)
money income

3. At
a given basket of goods X and Y the slope of the indifference curve is steeper
than the slope of the budget line. If
quantity of good X is on the horizontal axis, we can conclude that at this
a) the consumer is willing to give up more units
of X to get an additional unit of Y than is necessary given current
prices PX and PY.
* b) the consumer is willing to give up more units of Y to get
an additional unit of X than is necessary given current
prices PX and PY.
c) the consumer can increase her utility
consuming fewer units of X and more units of Y.
d) the consumerâs preferences are characterized
by diminishing marginal rates of substitution.

4. Suppose
a consumerâs preferences over baskets of goods X and Y are complete and
transitive. Furthermore they are such
that we have non-satiation (âmore is betterâ) and diminishing (absolute value
of) marginal rates of substitution. In
the neighborhood of current prices and income, X is a normal good and Y is an
inferior good. Following a rise in the
price of good Y we can conclude that:
a) the income and substitution effects reinforce
each other, leading to an overall decrease in the consumption
of good X.
b) the income and substitution effects have
competing effects, leading to an indeterminate impact on the
consumption of good X.
c) the income and substitution effects reinforce
each other, leading to an overall decrease in the consumption
of good Y.
* d) the income and
substitution effects have competing effects, leading to an indeterminate impact
on the
consumption of good Y.

5. Joe
consumes 48 units of food and 12 units of clothing. If he considers food an inferior good,
a) Joe would strictly prefer receiving a \$10
gift certificate at a clothing store to receiving \$10 in cash.
* b) Joe would
strictly prefer receiving \$10 in cash to receiving a \$10 gift certificate at a
clothing store.
c) Joe would be indifferent between receiving
\$10 in cash versus a \$10 gift certificate at a clothing store.
d) Joe would strictly prefer receiving \$10 in
cash to receiving a \$10 gift certificate at a food store.

See
Figure 4-17 and supporting discussion in the textbook.

6. Maryâs
preferences over baskets of goods X and Y are linear, with U(X,Y) = 20X +
10Y. She currently has an income of \$120
to spend on goods X and Y. The price of
good X, PX, is \$1.00 per unit of X and the price of good Y is \$0.60
per unit of Y. Suppose the price of X
rises to \$1.50 per unit of X. The change
in quantity demanded of X brought about by the substitution effect equals
________ units of X.
a) 0 b)
â 40 c) â 80
* d) â 120 e)
None of the above are correct.

Initially
|MRS| = MUX/MUY = 20/10 = 2 > 1.67 = 1.00/0.60 = PX/PY.
Mary consumes 120 units of X
and 0 units of Y. Following the
price increase, |MRS| = 2 < 2.5 = PX/PY. Mary will want to consume 0 units of X and 200 units of Y. If she is given enough income to reach her old level of satisfaction she will consume 0 units of X and 240 units of Y. Her substitution effect for good X is â 120 units of X. Melanieâs preferences over annual income (in thousands of dollars) I and average daily hours of daily leisure time on the job (âshirkingâ) S are expressed by the Utility function U(S,I) = S1/5I4/5. For this function.0/msohtmlclip1/01/clip_image004.png">Melanie
is on the job, either working or shirking, 8 hours each workday. Each hour that she works rather than shirks
on an average workday through the year adds \$100,000 to the firmâs annual
profit. If Melanie shirks all day the
firmâs annual profit equals zero.

The firm is considering two different compensation
packages for Melanie:

PACKAGE A: She receives a base salary of \$100,000 + 5
percent of the firmâs profits
PACKAGE B: She receives 20 percent of the firmâs profits

7. If
Melanieâs annual income equals \$160,000 and she is shirking an average of 2
hours per workday, her marginal rate of substitution (in absolute value), will
equal ___________ thousand dollars per hour shirked.
* a) 20 b) 40 c)
60 d) 80 e)
None of the above

8. If
Melanie is compensated under Package A, she maximizes her satisfaction earning
________ thousand dollars per year.
* a) 112 b)
116 c) 128 d) 140 e) None of the above

9. If
Melanie is compensated under Package B, she maximizes her satisfaction shirking
________ hours on each average work day.
a) 0.8
* b) 1.6 c)
3.2 d) 5.6 e) None of the above

10. Comparing her satisfaction under these two packages,
Melanie will
* a) strictly prefer Package A to Package B.
b) be
indifferent between Package A and Package B.
c) strictly
prefer Package B to Package A.

.0/msohtmlclip1/01/clip_image002.png”>

For I = 160 and S = 2, |MRS| =
(1/4)(160/2) = 20 thousand dollars per hour shirked

Package
A: 1) I = 140 â 5S 2)
(1/4)(I/S) = 5 S =
140/25 = 5.6 I = 140 â
5(5.6) = 112

Package
B: 1) I = 160 â 20S 2)
(1/4)(I/S) = 20 S =
160/100 = 1.6 I = 160 â 20(1.6)
= 128

Utility of A = U(5.6,112) = 5.60.21120.8
= 61.5 > 53.8 = 1.60.21280.8
= U(1.6,112) = Utility of B

11. In the long run firms will produce at minimum efficient
scale in markets characterized by:
* a) perfect competition c)
monopolistic competition
b) monopoly d) oligopoly

12. Clark
Industries currently spends 10 percent of its dollar sales on advertising. At its current level of production, its
advertising elasticity of demand EQ,A = 0.30. If the firm is maximizing profit, we know
that its price is marked up _________ percent above marginal cost.
a) 20 b)
25 c) 40
* d) 50 e) None of the above are correct

.0/msohtmlclip1/01/clip_image002.png”>

.0/msohtmlclip1/01/clip_image002.png”>

Shoes faces demand for its product Q = 10,000 â 50P. Cost of production of the firm, for any given
quantity Q, is C(Q) = 175,000 + 80Q. The price elasticity of total market demand
for its industry, ET = -1.4.
a) – 10,000 b)
0 c) 2,500
* d) 5,000 e)
None of the above

Shoes faces demand for its product Q = 10,000 â 50P. Cost of production of the firm, for any given
quantity Q, is C(Q) = 175,000 + 80Q.
The price elasticity of total market demand for its industry, ET
= -1.4. For this profit maximizing firm
we can determine the Rothschild Index equals:
a) 0.20 b) 0.40 * c) 0.60 d)
0.80 e)
None of the above

Shoes faces demand for its product Q = 10,000 â 50P. Cost of production of the firm, for any given
quantity Q, is C(Q) = 175,000 + 80Q.
The price elasticity of total market demand for its industry, ET
= -1.4. The Lerner Index for this firm
equals:
a) 0.285
* b) 0.429 c)
0.576 d) 0.632 e) None of the above

P = 200 â Q/50 MR(Q) = 200 â Q/25

MR(Q) = 200 â Q/25 = 80 =
MC(Q) Q = 25(120) =
3,000 P = 200 â (3,000)/50 =
140

Profit = PQ â C(Q) =
140(3,000) â [175,000 + 80(3,000)] = 420,000 â 415,000 = 5,000

EQ,P = (dQ/dP)(P/Q)
= – 50(140/3,000) = – 7/3 R =
ET/EQ,P = (-1.4)/(-7/3) = 0.6

.0/msohtmlclip1/01/clip_image002.png”>

16. Consider
an industry that has a four-firm concentration ratio of 0.05 and a
Herfindahl-Hirschman index of 623. A
representative firm in the industry has a Lerner index equal to 0.26 and a
Rothschild index of 0.34. This industry
is best characterized by the model of:
a) Perfect competition c) Monopoly
* b) Monopolistic
competition d) Oligopoly

17. The
income effect isolates the change in consumption of a good caused by a change
in
* a) real income b) relative prices c) money prices d)
money income

Peabodyâs
Coal Company sells its product in a perfectly competitive market for a price of
\$5 per unit. It is a monopsonist, an
only employer, in its labor market.
Labor is the companyâs only variable input. Peabodyâs demand for labor and the supply of
labor in its market are shown below.

.0/msohtmlclip1/01/clip_image005.png” alt=”Text box: \$”>
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Peabodyâs Total Fixed Cost of
production equals 1000.

18. At labor employment level L = 5 the marginal product of
labor equals ________ units of output per worker.

VMP =
P x MP = 5 x MP = 170 MP = 170/5
= 34

a) 20 * b) 34 c) 96 d) 170 e) None of the above

19. Peabodyâs offers a wage equal to ________ dollars per unit
of labor to maximize profit.

VMP =
MLC at L = 12 W = 60

a) 50 * b) 60 c) 70 d) 80 e) None of the above

20. Peabodyâs maximum profit equals __________ dollars.
a) â 100 b) 0 c)
100 * d) 200 e) None of the above

Profit
= TR â TVC â TFC = Â½ (220 â 20)(12) â 1000 = 1200 â 1000 = 200

21. Suppose
workers form a union and demand a union wage of \$80 per unit of labor. If Peabody accepts this offer, the firmâs
maximum profit will equal ________dollars.
a)
â 240 b) â 120 c) 0 d) 80 * e) None of the above

VMP =
MLC = 80 at L = 14 Profit = TR â
TVC â TFC = Â½ (220 â 80)(14) â 1000
= -20

22. For
a ____________ production technology the cost minimizing levels of labor and
capital employed to produce a given amount of output will remain the same
regardless of the levels of wages and rental rates of capital.
a) Linear * b)
Leontief c)
Cobb-Douglas d)
None of the above

23. Two
firms, Acme and Ajax, consider engaging in a horizontal merger. Premerger Acme accounts for 20 percent of
industry sales and Ajax accounts for 10 percent of industry sales. Ceteris paribus, this merger will cause the
HHI for the industry to increase by:
a)
100 b)
200 * c) 400 d) 800 e) None of the above

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Luxury Goods Incorporated sells its product in a
perfectly competitive market. The
firmâs cost of production is C(Q) = 200,000 + 3,400Q â 100Q2 + Q3,
with dC(Q)/dQ = 3,400 â 200Q + 3Q2.

24. Luxuryâs
average variable cost of producing 40 units of output is:
* a) 1000 b) 1200 c) 1400 d)
1600 e) None of the above are correct.

25. Luxury
will shut its firm down in the short run if the market price is less than:
a)
600 b) 700 c) 800
* d) 900 e) None of the above are correct.
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26. The
âcausalâ view of industry asserts that
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b) .0/msohtmlclip1/01/clip_image027.png”> * d) .0/msohtmlclip1/01/clip_image029.png”>

27. Consider
an industry that has a four-firm concentration ratio of 1.0 and a
Herfindahl-Hirschman index of 5,573. A
representative firm in the industry has a Lerner index equal to 0.43 and a
Rothschild index of 0.76. This industry
is best characterized by the model of:
a) Perfect competition c)
Monopoly
b) Monopolistic competition
* d) Oligopoly

28. Reliance
upon ______________________ is generally the most desirable alternative in
acquiring inputs when there are many buyers and sellers and low transaction
costs.
* a) Spot Exchange c) Contracts
b) Vertical Integration d)
Lotteries

29. Industries
that are classified as âhighly concentratedâ by the U.S. Department of Justice
(DOJ) have Herfindahl-Hirschman indexes in excess of ___________. A horizontal merger in one of these industries
that would increase the industryâs Herfindahl-Hirschman index by more than
________ raises concern regarding the potential increase in market power and
may be challenged by the DOJ.
a) 1800; 100 b)
2100; 150 * c) 2500; 200 d)
4000; 500

30. A
monopolistâs inverse demand function is P = 300 â 3Q. The company produces output at two
facilities. The marginal cost of
producing at facility 1 is MC1(Q1) = 6Q1, and
the marginal cost of producing at facility 2 is MC2(Q2) =
2Q2. This companyâs profit
maximizing level of production in facility 1, Q1, equals:
a) 5 * b) 10 c)
15 d) 20 e) None of the above.

31. A
monopolistâs inverse demand function is P = 300 â 3Q. The company produces output at two
facilities. The marginal cost of
producing at facility 1 is MC1(Q1) = 6Q1, and
the marginal cost of producing at facility 2 is MC2(Q2) =
2Q2. This companyâs profit
maximizing price equals:
a)
60 b) 75
c) 90
* d)
180 e) None of the
above

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2).0/msohtmlclip1/01/clip_image002.png”>

Solving,
Q1 = 10 and Q2 = 30.
Q = 10 + 30 = 40. P = 300 â
3(40) = 180.

32. You
have been employed as a consultant for a firm.
You estimate that the current marginal product of labor equals 10 and
the marginal product of capital equals 15.
The rental rate of capital equals 200 and the wage rate equals 100. Based upon this information, you conclude:
* a)
the firm could reduce costs by using more labor, less capital.
b) the firm is
using the right mix of capital and labor to reduce costs.
c) the firm could reduce costs by using less
labor and more capital.
d) the firm
could reduce costs by using less labor and less capital and still meet its
production target.

The absolute value of the MRTS = MPL/MPK
= 10/15 or 2/3 units of capital per labor. The relative price of labor in terms of
capital is given by the wage-rental ratio w/r = 100/200 or 1/2 unit of
capital per unit of labor. At the
margin you can employ a unit of labor (at a cost of 1/2 unit of capital)
and replace 2/3 units of capital in production. Cost will fall.

33. Economist
________ argued that market power inevitably emerges for entrepreneurs who
introduce new products consumers want to buy or who discover innovative ways to
lower costs. But, he warned, any gains
in market power are always in jeopardy, subject to be lost if a firm ceases to
innovate. The fortunes of firms rise
and fall in the waves of âcreative destructionâ that wash over markets.
a) Wassilly
Leontief b) Abba Lerner * c) Joseph Schumpeter d)
Alfred Marshall

34. A potential âhold upâ problem emerges for firms acquiring
inputs via:
* a) spot markets b)
contracts c)
vertical integration d) All of the above are correct.

35. The supply curve for a monopolistically competitive firm in
the short run is the
a) marginal cost curve above minimum average total
cost.
b) marginal cost curve above minimum average variable
cost.
c) marginal
cost curve above minimum marginal cost.
* d) None of the above
are correct.

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