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1. ECO 550
Managerial Economics
Strayer University
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Chapter 1 Quiz:
1. The form of economics most relevant to managerial decision-making within the firm is:
a. macroeconomics
b. welfare economics
c. free-enterprise economics
d. microeconomics
e. none of the above
2. If one defines incremental cost as the change in total cost resulting from a decision, and
incremental revenue as the change in total revenue resulting from a decision, any business
decision is profitable if:
a. it increases revenue more than costs or reduces costs more than revenue
b. it decreases some costs more than it increases others (assuming revenues remain constant)
c. it increases some revenues more than it decreases others (assuming costs remain constant)
d. all of the above

2. e. b and c only
3. In the shareholder wealth maximization model, the value of a firm's stock is equal to the
present value of all expected future ____ discounted at the stockholders' required rate of return.
a. profits (cash flows)
b. revenues
c. outlays
d. costs
e. investments
4. Which of the following statements concerning the shareholder wealth maximization
model is (are) true?
a. The timing of future profits is explicitly considered.
b. The model provides a conceptual basis for evaluating differential levels of risk.
c. The model is only valid for dividend-paying firms.
d. a and b
e. a, b, and c
5. According to the profit-maximization goal, the firm should attempt to maximize short-run
profits since there is too much uncertainty associated with long-run profits.
a. true
b. false

3. 6. According to the innovation theory of profit, above-normal profits are necessary to
compensate the owners of the firm for the risk they assume when making their investments.
a. true
b. false
7. According to the managerial efficiency theory of profit, above-normal profits can arise
because of high-quality managerial skills.
a. true
b. false
8. Which of the following (if any) is not a factor affecting the profit performance of firms:
a. differential risk
b. innovation
c. managerial skills
d. existence of monopoly power
e. all of the above are factors
9. Agency problems and costs are incurred whenever the owners of a firm delegate decision-
making authority to management.
a. true

4. b. false
10. Economic profit is defined as the difference between revenue and ____.
a. explicit cost
b. total economic cost
c. implicit cost
d. shareholder wealth
e. none of the above
11. Income tax payments are an example of ____.
a. implicit costs
b. explicit costs
c. normal return on investment
d. shareholder wealth
e. none of the above
12. Various executive compensation plans have been employed to motivate managers to
make decisions that maximize shareholder wealth. These include:
a. cash bonuses based on length of service with the firm
b. bonuses for resisting hostile takeovers
c. requiring officers to own stock in the company

5. d. large corporate staffs
e. a, b, and c only
13. The common factors that give rise to all principal-agent problems include the
a. unobservability of some manager-agent action
b. presence of random disturbances in team production
c. the greater number of agents relative to the number of principals
d. a and b only
e. none of the above
14. The Saturn Corporation (once a division of GM) was permanently closed in 2009. What
went wrong with Saturn?
a. Saturn’s cars sold at prices higher than rivals Honda or Toyota, so they could not sell many
cars.
b. Saturn sold cars below the prices of Honda or Toyota, earning a low 3% rate of return.
c. Saturn found that young buyers of Saturn automobiles were very loyal to Saturn and GM.
d. Saturn implemented a change management view that helped make first time Saturn
purchasers trade up to Buick or Cadillac.
e. all of the above
15. A Real Option Value is:
a. An option that been deflated by the cost of living index makes it a “real” option.
b. An opportunity cost of capital.

6. c. An opportunity to implement a new cost savings or revenue expansion activity that arises
from business plans that the managers adopt.
d. An objective function and a decision rule that comes from it.
e. Both a and b.
16. Which of the following will increase (V0), the shareholder wealth maximization model of
the firm:
V0·(shares outstanding) = ??t=1 (? t ) / (1+ke)t + Real Option Value.
a. Decrease the required rate of return (ke).
b. Decrease the stream of profits (?t).
c. Decrease the number of periods from ? to 10 periods.
d. Decrease the real option value.
e. All of the above.
17. The primary objective of a for-profit firm is to ___________.
a. maximize agency costs
b. minimize average cost
c. maximize total revenue
d. set output where total revenue equals total cost
e maximize shareholder value
18. Possible goals of Not-For-Profit (NFP) enterprises include all of the following EXCEPT:
a. maximize total costs
b. maximize output, subject to a breakeven constraint

7. c. maximize the happiness of the administrators of the NFP enterprise
d. maximize the utility of the contributors
e. a. and c.
19. The flat-screen plasma TVs are selling extremely well. The originators of this technology
are earning higher profits. What theory of profit best reflects the performance of the plasma
screen makers?
a. risk-bearing theory of profit
b. dynamic equilibrium theory of profit
c. innovation theory of profit
d. managerial efficiency theory of profit
e. stochastic optimization theory of profit
20. To reduce Agency Problems, executive compensation should be designed to:
a. create incentives so that managers act like owners of the firm.
b. avoid making the executives own shares in the company.
c. be an increasing function of the firm's expenses.
d. be an increasing function of the sales revenue received by the firm.
e. all of the above
21. Recently, the American Medical Association changed its recommendations on the
frequency of pap-smear exams for women. The new frequency recommendation was designed to
address the family histories of the patients. The optimal frequency should be where the marginal
benefit of an additional pap-test:
a. equals zero.
b. is greater than the marginal cost of the test

8. c. is lower than the marginal cost of an additional test
d. equals the marginal cost of the test
e. both a and b.
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Chapter 2 Quiz:
1. A change in the level of an economic activity is desirable and should be undertaken as
long as the marginal benefits exceed the ____.
a. marginal returns
b. total costs
c. marginal costs
d. average costs
e. average benefits
2. The level of an economic activity should be increased to the point where the ____ is zero.
a. marginal cost
b. average cost
c. net marginal cost
d. net marginal benefit

9. e. none of the above
3. The net present value of an investment represents
a. an index of the desirability of the investment
b. the expected contribution of that investment to the goal of shareholder wealth maximization
c. the rate of return expected from the investment
d. a and b only
e. a and c only
4. Generally, investors expect that projects with high expected net present values also will be
projects with
a. low risk
b. high risk
c. certain cash flows
d. short lives
e. none of the above
5. An closest example of a risk-free security is
a. General Motors bonds
b. AT&T commercial paper
c. U.S. Government Treasury bills

10. d. San Francisco municipal bonds
e. an I.O.U. that your cousin promises to pay you $100 in 3 months
6. The standard deviation is appropriate to compare the risk between two investments only if
a. the expected returns from the investments are approximately equal
b. the investments have similar life spans
c. objective estimates of each possible outcome is available
d. the coefficient of variation is equal to 1.0
e. none of the above
7. The approximate probability of a value occurring that is greater than one standard
deviation from the mean is approximately (assuming a normal distribution)
a. 68.26%
b. 2.28%
c. 34%
d. 15.87%
e. none of the above
8. Based on risk-return tradeoffs observable in the financial marketplace, which of the
following securities would you expect to offer higher expected returns than corporate bonds?
a. U.S. Government bonds

11. b. municipal bonds
c. common stock
d. commercial paper
e. none of the above
9. The primary difference(s) between the standard deviation and the coefficient of variation
as measures of risk are:
a. the coefficient of variation is easier to compute
b. the standard deviation is a measure of relative risk whereas the coefficient of variation is a
measure of absolute risk
c. the coefficient of variation is a measure of relative risk whereas the standard deviation is a
measure of absolute risk
d. the standard deviation is rarely used in practice whereas the coefficient of variation is widely
used
e. c and d
10. The ____ is the ratio of ____ to the ____.
a. standard deviation; covariance; expected value
b. coefficient of variation; expected value; standard deviation
c. correlation coefficient; standard deviation; expected value
d. coefficient of variation; standard deviation; expected value
e. none of the above

12. 11. Sources of positive net present value projects include
a. buyer preferences for established brand names
b. economies of large-scale production and distribution
c. patent control of superior product designs or production techniques
d. a and b only
e. a, b, and c
12. Receiving $100 at the end of the next three years is worth more to me than receiving $260
right now, when my required interest rate is 10%.
a. True
b. False
13. The number of standard deviations z that a particular value of r is from the mean ? can be
computed as z = (r - ?)/ ????Suppose that you work as a commission-only insurance agent
earning $1,000 per week on average. Suppose that your standard deviation of weekly earnings is
$500. What is the probability that you zero in a week? Use the following brief z-table to help
with this problem.
Z value Probability
-3 .0013
-2 .0228
-1 .1587
0 .5000

13. a. 1.3% chance of earning nothing in a week
b. 2.28% chance of earning nothing in a week
c. 15.87% chance of earning nothing in a week
d. 50% chance of earning nothing in a week
e. none of the above
t
T
14. Consider an investment with the following payoffs and probabilities:
State of the Economy Probability Return
Stability .50 1,000
Good Growth .50 2,000
Determine the expected return for this investment.
a. 1,300
b. 1,500
c. 1,700
d. 2,000
e. 3,000
15. Consider an investment with the following payoffs and probabilities:
State of the Economy Probability Return

14. GDP grows slowly .70 1,000
GDP grow fast .30 2,000
Let the expected value in this example be 1,300. How do we find the standard deviation of the
investment?
a. ? = ? { (1000-1300)2 + (2000-1300)2 }
b. ? = ? { (1000-1300) + (2000-1300) }
c. ??= ? { (.5)(1000-1300)2 + (.5)(2000-1300)2 }
d. ??= ? { (.7)(1000-1300) + (.3)(2000-1300) }
e. ??= ? { (.7)(1000-1300)2 + (.3)(2000-1300)2 }
16. An investment advisor plans a portfolio your 85 year old risk-averse grandmother. Her
portfolio currently consists of 60% bonds and 40% blue chip stocks. This portfolio is estimated
to have an expected return of 6% and with a standard deviation 12%. What is the probability
that she makes less than 0% in a year? [A portion of Appendix B1 is given below, where z = (x
- ???????with ??as the mean and ??as the standard deviation.]
a. 2.28%
b. 6.68%
c. 15.87%
d. 30.85%
e. 50%
17. Two investments have the following expected returns (net present values) and standard
deviations:
PROJECT Expected Value Standard Deviation
Q $100,000 $20,000
X $50,000 $16,000

15. Based on the Coefficient of Variation, where the C.V. is the standard deviation dividend by
the expected value.
a. All coefficients of variation are always the same.
b. Project Q is riskier than Project X
c. Project X is riskier than Project Q
d. Both projects have the same relative risk profile
e. There is not enough information to find the coefficient of variation.
PROBLEMS
1. Suppose that the firm's cost function is given in the following schedule (where Q is the
level of output):
Output Total
Q (units) Cost
0 7
1 25
2 37
3 45
4 50
5 53
6 58
7 66

16. 8 78
9 96
10 124
Determine the (a) marginal cost and (b) average total cost schedules
2. Complete the following table.
Total Marginal Average
Output Profit Profit Profit
0 ?48 0 ______
1 ?26 ______ ______
2 ?8 ______ ______
3 6 ______ ______
4 16 ______ ______
5 22 ______ ______
6 24 ______ ______
7 22 ______ ______
8 16 ______ ______
9 6 ______ ______
10 ?8 ______ ______

17. 3. A firm has decided to invest in a piece of land. Management has estimated that the land
can be sold in 5 years for the following possible prices:
Price Probability
10,000 .20
15,000 .30
20,000 .40
25,000 .10
(a) Determine the expected selling price for the land.
(b) Determine the standard deviation of the possible sales prices.
(c) Determine the coefficient of variation.
Chapter 3 Quiz:

18. 1. Suppose we estimate that the demand elasticity for fine leather jackets is .7 at their current
prices. Then we know that:
a. a 1% increase in price reduces quantity sold by .7%.
b. no one wants to buy leather jackets.
c. demand for leather jackets is elastic.
d. a cut in the prices will increase total revenue.
e. leather jackets are luxury items.
2. If demand were inelastic, then we should immediately:
a. cut the price.
b. keep the price where it is.
c. go to the Nobel Prize Committee to show we were the first to find an upward sloping
demand curve.
d. stop selling it since it is inelastic.
e. raise the price.
3. In this problem, demonstrate your knowledge of percentage rates of change of an entire
demand function (Hint: %?Q = EP•%?P + EY•%?Y). You have found that the price elasticity of
motor control devices at Allen-Bradley Corporation is -2, and that the income elasticity is a
+1.5. You have been asked to predict sales of these devices for one year into the future.
Economists from the Conference Board predict that income will be rising 3% over the next year,
and AB’s management is planning to raise prices 2%. You expect that the number of AB motor
control devices sold in one year will:
a. fall .5%.
b. not change.

19. c. rise 1%r.
d. rise 2%.
e. rise .5%.
4 A linear demand for lake front cabins on a nearby lake is estimated to be: QD = 900,000 -
2P. What is the point price elasticity for lake front cabins at a price of P = $300,000? [Hint: Ep
= (?Q/?P)(P/Q)]
a. EP = -3.0
b. EP = -2.0
c. EP = -1.0
d. EP = -0.5
e. EP = 0
5. Property taxes are the product of the tax rate (T) and the assessed value (V). The total
property tax collected in your city (P) is: P = T•V. If the value of properties rise 4% and if
Mayor and City Council reduces the property the tax rate by 2%, what happens to the total
amount of property tax collected? [hint: the percentage rate of change of a product is
approximately the sum of the percentage rates of change.}
a. It rises 6 %.
b. It rises 4 %.
c. It rises 3 %.
d. It rises 2 %
e. If falls 2%.

20. 6. Demand is given by QD = 620 10•P and supply is given by QS = 100 + 3•P. What is the
price and quantity when the market is in equilibrium?
a. The price will be $30 and the quantity will be 132 units.
b. The price will be $11 and the quantity will be 122 units.
c. The price will be $40 and the quantity will be 220 units.
d. The price will be $35 and the quantity will be 137 units
e. The price will be $10 and the quantity will be 420 units.
7. Which of the following would tend to make demand INELASTIC?
a. the amount of time analyzed is quite long
b. there are lots of substitutes available
c. the product is highly durable
d. the proportion of the budget spent on the item is very small
e. no one really wants the product at all
8. Which of the following best represents management's objective(s) in utilizing demand
analysis?
a. it provides insights necessary for the effective manipulation of demand
b. it helps to measure the efficiency of the use of company resources
c. it aids in the forecasting of sales and revenues
d. a and b
e. a and c

21. 9. Identify the reasons why the quantity demanded of a product increases as the price of that
product decreases.
a. as the price declines, the real income of the consumer increases
b. as the price of product A declines, it makes it more attractive than product B
c. as the price declines, the consumer will always demand more on each successive price
reduction
d. a and b
e. a and c
10. An increase in the quantity demanded could be caused by:
a. an increase in the price of substitute goods
b. a decrease in the price of complementary goods
c. an increase in consumer income levels
d. all of the above
e. none of the above
11. Iron ore is an example of a:
a. durable good
b. producers' good
c. nondurable good
d. consumer good
e. none of the above

22. 12. If the cross price elasticity measured between items A and B is positive, the two products
are referred to as:
a. complements
b. substitutes
c. inelastic as compared to each other
d. both b and c
e. a, b, and c
13. When demand is ____ a percentage change in ____ is exactly offset by the same
percentage change in ____ demanded, the net result being a constant total consumer expenditure.
a. elastic; price; quantity
b. unit elastic; price; quantity
c. inelastic; quantity; price
d. inelastic; price; quantity
e. none of the above
14. Marginal revenue (MR) is ____ when total revenue is maximized.
a. greater than one
b. equal to one
c. less than zero

23. d. equal to zero
e. equal to minus one
15. The factor(s) which cause(s) a movement along the demand curve include(s):
a. increase in level of advertising
b. decrease in price of complementary goods
c. increase in consumer disposable income
d. decrease in price of the good demanded
e. all of the above
16. An increase in each of the following factors would normally provide a subsequent increase
in quantity demanded, except:
a. price of substitute goods
b. level of competitor advertising
c. consumer income level
d. consumer desires for goods and services
e. a and b
17. Producers' goods are:
a. consumers' goods
b. raw materials combined to produce consumer goods
c. durable goods used by consumers
d. always more expensive when used by corporations

24. e. none of the above
18. The demand for durable goods tends to be more price elastic than the demand for non-
durables.
a. true
b. false
19. A price elasticity (ED) of ?1.50 indicates that for a ____ increase in price, quantity
demanded will ____ by ____.
a. one percent; increase; 1.50 units
b. one unit; increase; 1.50 units
c. one percent; decrease; 1.50 percent
d. one unit; decrease; 1.50 percent
e. ten percent; increase; fifteen percent
20. Those goods having a calculated income elasticity that is negative are called:
a. producers' goods
b. durable goods
c. inferior goods
d. nondurable goods
e. none of the above
21. An income elasticity (Ey) of 2.0 indicates that for a ____ increase in income, ____ will
increase by ____.

25. a. one percent; quantity supplied; two units
b. one unit; quantity supplied; two units
c. one percent; quantity demanded; two percent
d. one unit; quantity demanded; two units
e. ten percent; quantity supplied; two percent
22. When demand elasticity is ____ in absolute value (or ____), an increase in price will result
in a(n) ____ in total revenues.
a. less than 1; elastic; increase
b. more than 1; inelastic; decrease
c. less than 1; elastic; decrease
d. less than 1; inelastic; increase
e. none of the above
23. Empirical estimates of the price elasticity of demand [in Table 3.4] suggest that the demand
for household consumption of alcoholic beverages is:
a. highly price elastic
b. price inelastic
c. unitarily elastic
d. an inferior good
e. none of the above

26. PROBLEM
1. The manager of the Sell-Rite drug store accidentally mismarked a shipment of 20-pound
bags of charcoal at $4.38 instead of the regular price of $5.18. At the end of a week, the store's
inventory of 200 bags of charcoal was completely sold out. The store normally sells an average
of 150 bags per week.
(a) What is the store's arc elasticity of demand for charcoal?
(b) Give an economic interpretation of the numerical value obtained in part (a)
2. The Future Flight Corporation manufactures a variety of Frisbees selling for $2.98 each.
Sales have averaged 10,000 units per month during the last year. Recently Future Flight's closest
competitor, Soaring Free Company, cut its prices on similar Frisbees from $3.49 to $2.59. Future
Flight noticed that its sales declined to 8,000 units per month after the price cut.
(a) What is the arc cross elasticity of demand between Future Flight's and Soaring Free's
Frisbees?
(b) If Future Flight knows the arc price elasticity of demand for its Frisbees is ?2.2, what price
would they have to charge in order to obtain the same level of sales as before Soaring Free's
price cut?
3. The British Automobile Company is introducing a brand new model called the "London
Special." Using the latest forecasting techniques, BAC economists have developed the following
demand function for the "London Special":
QD = 1,200,000 ? 40P
What is the point price elasticity of demand at prices of (a) $8,000 and (b) $10,000?

27. 4. Hanna Corporation markets a compact microwave oven. In 2010 they sold 23,000 units at
$375 each. Per capita disposable income in 2010 was $6,750. Hanna economists have
determined that the arc price elasticity for this microwave oven is ?1.2.
(a) In 2011 Hanna is planning to lower the price of the microwave oven to $325. Forecast sales
volume for 2011 assuming that all other things remain equal.
(b) However, in checking with government economists, Hanna finds that per capita disposable
income is expected to rise to $7,000 in 2011. In the past the company has observed an arc
income elasticity of +2.5 for microwave ovens. Forecast 2011 sales given that the price is
reduces to $325 and that per capita disposable income increases to $7,000. Assume that the price
and income effects are independent and additive.
Chapter 4 Quiz:
1. Using a sample of 100 consumers, a double-log regression model was used to estimate
demand for gasoline. Standard errors of the coefficients appear in the parentheses below the
coefficients.
Ln Q = 2.45 -0.67 Ln P + . 45 Ln Y - .34 Ln Pcars
(.20) (.10) (.25)
Where Q is gallons demanded, P is price per gallon, Y is disposable income, and Pcars is a price
index for cars. Based on this information, which is NOT correct?
a. Gasoline is inelastic.
b. Gasoline is a normal good.
c. Cars and gasoline appear to be mild complements.

28. d. The coefficient on the price of cars (Pcars) is insignificant.
e. All of the coefficients are insignificant.
2. In a cross section regression of 48 states, the following linear demand for per-capita cans of
soda was found: Cans = 159.17 – 102.56 Price + 1.00 Income + 3.94Temp
Coefficients Standard Error t Stat
Intercept 159.17 94.16 1.69
Price -102.56 33.25 -3.08
Income 1.00 1.77 0.57
Temperature 3.94 0.82 4.83
R-Sq = 54.1% R-Sq(adj) = 51.0%
From the linear regression results in the cans case above, we know that:
a. Price is insignificant
b. Income is significant
c. Temp is significant
d. As price rises for soda, people tend to drink less of it
e. All of the coefficients are significant
3. A study of expenditures on food in cities resulting in the following equation:
Log E = 0.693 Log Y + 0.224 Log N

29. where E is Food Expenditures; Y is total expenditures on goods and services; and N is the size of
the family. This evidence implies:
a. that as total expenditures on goods and services rises, food expenditures falls.
b. that a one-percent increase in family size increases food expenditures .693%.
c. that a one-percent increase in family size increases food expenditures .224%.
d. that a one-percent increase in total expenditures increases food expenditures 1%.
e. that as family size increases, food expenditures go down.
4. All of the following are reasons why an association relationship may not imply a causal
relationship except:
a. the association may be due to pure chance
b. the association may be the result of the influence of a third common factor
c. both variables may be the cause and the effect at the same time
d. the association may be hypothetical
e. both c and d
5. In regression analysis, the existence of a significant pattern in successive values of the
error term constitutes:
a. heteroscedasticity
b. autocorrelation
c. multicollinearity
d. nonlinearities
e. a simultaneous equation relationship

30. 6. In regression analysis, the existence of a high degree of intercorrelation among some or all
of the explanatory variables in the regression equation constitutes:
a. autocorrelation
b. a simultaneous equation relationship
c. nonlinearities
d. heteroscedasticity
e. multicollinearity
7. When using a multiplicative power function (Y = a X1b1 X2b2 X3b3) to represent an
economic relationship, estimates of the parameters (a, and the b's) using linear regression
analysis can be obtained by first applying a ____ transformation to convert the function to a
linear relationship.
a. semilogarithmic
b. double-logarithmic
c. reciprocal
d. polynomial
e. cubic
8. The correlation coefficient ranges in value between 0.0 and 1.0.
a. true
b. false

31. 9. The coefficient of determination ranges in value between 0.0 and 1.0.
a. true
b. false
10. The coefficient of determination measures the proportion of the variation in the
independent variable that is "explained" by the regression line.
a. true
b. false
11. The presence of association between two variables does not necessarily imply causation for
the following reason(s):
a. the association between two variables may result simply from pure chance
b. the association between two variables may be the result of the influence of a third common
factor
c. both variables may be the cause and the effect at the same time
d. a and b
e. a, b, and c
12. The estimated slope coefficient (b) of the regression equation (Ln Y = a + b Ln X)
measures the ____ change in Y for a one ____ change in X.
a. percentage, unit
b. percentage, percent

32. c. unit, unit
d. unit, percent
e. none of the above
13. The standard deviation of the error terms in an estimated regression equation is known as:
a. coefficient of determination
b. correlation coefficient
c. Durbin-Watson statistic
d. standard error of the estimate
e. none of the above
14. In testing whether each individual independent variables (Xs) in a multiple regression
equation is statistically significant in explaining the dependent variable (Y), one uses the:
a. F-test
b. Durbin-Watson test
c. t-test
d. z-test
e. none of the above
15. One commonly used test in checking for the presence of autocorrelation when working
with time series data is the ____.

33. a. F-test
b. Durbin-Watson test
c. t-test
d. z-test
e. none of the above
16. The method which can give some information in estimating demand of a product that
hasn’t yet come to market is:
a. the consumer survey
b. market experimentation
c. a statistical demand analysis
d. plotting the data
e. the barometric method
17. Demand functions in the multiplicative form are most common for all of the following
reasons except:
a. elasticities are constant over a range of data
b. ease of estimation of elasticities
c. exponents of parameters are the elasticities of those variables
d. marginal impact of a unit change in an individual variable is constant
e. c and d

34. 18. The Identification Problem in the development of a demand function is a result of:
a. the variance of the demand elasticity
b. the consistency of quantity demanded at any given point
c. the negative slope of the demand function
d. the simultaneous relationship between the demand and supply functions
e. none of the above
19. Consider the following linear demand function where QD = quantity demanded, P = selling
price, and Y = disposable income:
QD = ?36 ?2.1P + .24Y
The coefficient of P (i.e., ?2.1) indicates that (all other things being held constant):
a. for a one percent increase in price, quantity demanded would decline by 2.1 percent
b. for a one unit increase in price, quantity demanded would decline by 2.1 units
c. for a one percent increase in price, quantity demanded would decline by 2.1 units
d. for a one unit increase in price, quantity demanded would decline by 2.1 percent
e. none of the above
20. Consider the following multiplicative demand function where QD = quantity demanded, P
= selling price, and Y = disposable income:

35. The coefficient of Y (i.e., .2) indicates that (all other things being held constant):
a. for a one percent increase in disposable income, quantity demanded would increase by .2
percent
b. for a one unit increase in disposable income, quantity demanded would increase by .2 units
c. for a one percent increase in disposable income quantity demanded would increase by .2
units
d. for a one unit increase in disposable income, quantity demanded would increase by .2
percent
e. none of the above
21. One shortcoming of the use of ____ in demand analysis is that the participants are
generally aware that their actions are being observed and hence they may seek to act in a manner
somewhat different than normal.
a. market experiments
b. consumer clinics
c. statistical (econometric) methods
d. a and b
e. none of the above
22. The constant or intercept term in a statistical demand study represents the quantity
demanded when all independent variables are equal to:

36. a. 1.0
b. their minimum values
c. their average values
d. 0.0
e. none of the above
23. Novo Nordisk A/S, a Danish firm, sells insulin and other drugs worldwide. Activella, an
estrogen and progestin hormone replacement therapy sold by Novo-Nordisk, is examined using
33 quarters of data
Y = -204 + . 34X1 - .17X2
(17.0) (-1.71)
Where Y is quarterly sales of Activella, X1 is the Novo’s advertising of the hormone therapy,
and X2 is advertising of a similar product by Eli Lilly and Company, Novo-Nordisk’s chief
competitor. The parentheses contain t-values. Addition information is: Durbin-Watson = 1.9 and
R2 = .89.
Using the data for Novo-Nordisk, which is correct?
a. Both X1 and X2 are statistically significant.
b. Neither X1 nor X2 are statistically significant.
c. X1 is statistically significant but X2 is not statistically significant.
d. X1 is not statistically significant but X2 is statistically significant.
e. The Durbin-Watson statistic shows significant problems with autocorrelation
24. In which of the following econometric problems do we find Durbin-Watson statistic being
far away from 2.0?

37. a. the identification problem
b. autocorrelation
c. multicollinearity
d. heteroscedasticity
e. agency problems
25. When there is multicollinearity in an estimated regression equation,
a. the coefficients are likely to be small.
b. the t statistics are likely to be small even though the R2 is large.
c. the coefficient of determination is likely to be small.
d. the problem of omitted variables is likely.
e. the error terms will tend to have a cyclical pattern.
26. When two or more "independent" variables are highly correlated, then we have:
a. the identification problem
b. multicollinearity
c. autocorrelation
d. heteroscedasticity
e. complementary products
27. Which is NOT true about the coefficient of determination?

38. a. As you add more variables, the R-square generally rises.
b. As you add more variables, the adjusted R-square can fall.
c. If the R-square is above 50%, the regression is considered significant.
d. The R-square gives the percent of the variation in the dependent variable that is explained by
the independent variables.
e. The higher is the R-square, the better is the fit.
PROBLEMS
PROBLEMS
1. Phoenix Lumber Company uses the number of construction permits issued to help estimate
demand (sales). The firm collected the following data on annual sales and number of
construction permits issued in its market area:
No. of Construction Sales
Year Permits Issued (000) (1,000,000)
2003 6.50 10.30
2004 6.20 10.10
2005 6.60 10.50
2006 7.30 10.80
2007 7.80 11.20

39. 2008 8.20 11.40
2009 8.30 11.30
(a) Which variable is the dependent variable and which is the independent variable?
(b) Determine the estimated regression line.
(c) Test the hypothesis (at the .05 significance level) that there is no relationship between the
variables.
(d) Calculate the coefficient of determination. Give an economic interpretation to the value
obtained.
(e) Perform an analysis of variance on the regression including an F-test (at the .05 significance
level) of the overall significance of the results.
(f) Suppose that 8,000 construction permits are expected to be issued in 2010. What would be
the point estimate of Phoenix Lumber Company's sales for 2010?
2. Lenny's, a national restaurant chain, conducted a study of the factors affecting demand
(sales). The following variables were defined and measured for a random sample of 30 of its
restaurants:
Y = Annual restaurant sales ($000)
X1 = Disposable personal income (per capita) of residents within 5 mile radius
X2 = License to sell beer/wine (0 = No, 1 = Yes)
X3 = Location (within one-half mile of interstate highway--0 = No, 1 = Yes)
X4 = Population (within 5 mile radius)
X5 = Number of competing restaurants within 2 mile radius

40. The data were entered into a computerized regression program and the following results were
obtained:
MULTIPLE R .889
R-SQUARE .79
STD. ERROR OF EST. .40
ANALYSIS OF VARIANCE
DF Sum Squares Mean Sqr. F-Stat
Regression 5 326.13 65.226 18.17
Error 24 86.17 3.590
Total 29 412.30
Variable Coefficient Std. Error T-Value
Constant .363 .196 1.852
X-1 .00275 .00104 2.644
X-2 76.65 93.70 .818
X-3 164.3 235.4 .698
X-4 .00331 .00126 2.627
X-5 46.2 12.1 ?3.818

41. Questions:
(a) Give the regression equation for predicting restaurant sales.
(b) Give an interpretation of each of the estimated regression coefficients.
(c) Which of the independent variables (if any) are statistically significant at the .05 level in
"explaining" restaurant sales?
(d) What proportion of the variation in restaurant sales is "explained" by the regression
equation?
(e) Perform an F-test (at the .05 significance level) of the overall explanatory power of the
regression model.
3. The following demand function has been estimated for Fantasy pinball machines:
QD = 3,500 ? 40P + 17.5Px + 670U + .0090A + 6,500N
where P = monthly rental price of Fantasy pinball machines
Px = monthly rental price of Old Chicago pinball machines (their largest competitor)
U = current unemployment rate in the 10 largest metropolitan areas
A = advertising expenditures for Fantasy pinball machines
N = fraction of the U.S. population between ages 10 and 30
(a) What is the point price elasticity of demand for Fantasy pinball machines when P = $150,
Px = $100, U = .12, A = $200,000 and N = .35?
(b) What is the point cross elasticity of demand with respect to Old Chicago pinball machines
for the values of the independent variables given in part (a)?

42. 4. Given the following demand function:
Q = 2.0 P?1.33 Y2.0 A.50
where Q = quantity demanded (thousands of units)
P = price ($/unit)
Y = disposable income per capita ($ thousands)
A = advertising expenditures ($ thousands)
determine the following when P = $2/unit, Y = $8 (i.e., $8000), and A = $25 (i.e., $25,000)
(a) Price elasticity of demand
(b) The approximate percentage increase in demand if disposable income percentage increases
by 3%.
(c) The approximate percentage increase in demand if advertising expenditures are increased
by 5 percent.
Chapter 5 Quiz:
1. Time-series forecasting models:
a. are useful whenever changes occur rapidly and wildly

43. b. are more effective in making long-run forecasts than short-run forecasts
c. are based solely on historical observations of the values of the variable being forecasted
d. attempt to explain the underlying causal relationships which produce the observed outcome
e. none of the above
2. The forecasting technique which attempts to forecast short-run changes and makes use of
economic indicators known as leading, coincident or lagging indicators is known as:
a. econometric technique
b. time-series forecasting
c. opinion polling
d. barometric technique
e. judgment forecasting
3. The use of quarterly data to develop the forecasting model Yt = a +bYt?1 is an example of
which forecasting technique?
a. Barometric forecasting
b. Time-series forecasting
c. Survey and opinion
d. Econometric methods based on an understanding of the underlying economic variables
involved
e. Input-output analysis

44. 4. Variations in a time-series forecast can be caused by:
a. cyclical variations
b. secular trends
c. seasonal effects
d. a and b only
e. a, b, and c
5. The variation in an economic time-series which is caused by major expansions or
contractions usually
of greater than a year in duration is known as:
a. secular trend
b. cyclical variation
c. seasonal effect
d. unpredictable random factor
e. none of the above
6. The type of economic indicator that can best be used for business forecasting is the:
a. leading indicator
b. coincident indicator
c. lagging indicator
d. current business inventory indicator
e. optimism/pessimism indicator

45. 7. Consumer expenditure plans is an example of a forecasting method. Which of the general
categories best described this example?
a. time-series forecasting techniques
b. barometric techniques
c. survey techniques and opinion polling
d. econometric techniques
e. input-output analysis
8. In the first-order exponential smoothing model, the new forecast is equal to a weighted
average of the old forecast and the actual value in the most recent period.
a. true
b. false
9. Simplified trend models are generally appropriate for predicting the turning points in an
economic time series.
a. true
b. false

46. 10. Smoothing techniques are a form of ____ techniques which assume that there is an
underlying pattern to be found in the historical values of a variable that is being forecast.
a. opinion polling
b. barometric forecasting
c. econometric forecasting
d. time-series forecasting
e. none of the above
11. Seasonal variations can be incorporated into a time-series model in a number of different
ways, including:
a. ratio-to-trend method
b. use of dummy variables
c. root mean squared error method
d. a and b only
e. a, b, and c
12. For studying demand relationships for a proposed new product that no one has ever used
before, what would be the best method to use?
a. ordinary least squares regression on historical data
b. market experiments, where the price is set differently in two markets

47. c. consumer surveys, where potential customers hear about the product and are asked their
opinions
d. double log functional form regression model
e. all of the above are equally useful in this case
13. Which of the following barometric indicators would be the most helpful for forecasting
future sales for an industry?
a. lagging economic indicators.
b. leading economic indicators.
c. coincident economic indicators.
d. wishful thinking
e. none of the above
14. An example of a time series data set is one for which the:
a. data would be collected for a given firm for several consecutive periods (e.g., months).
b. data would be collected for several different firms at a single point in time.
c. regression analysis comes from data randomly taken from different points in time.
d. data is created from a random number generation program.
d. use of regression analysis would impossible in time series.
15. Examine the plot of data.

48. Sales
? ? ?
? ? ? ? ?
? ?
Time
It is likely that the best forecasting method for this plot would be:
a. a two-period moving average
b. a secular trend upward
c. a seasonal pattern that can be modeled using dummy variables or seasonal adjustments
d. a semi-log regression model
e. a cubic functional form
16. Emma uses a linear model to forecast quarterly same-store sales at the local Garden Center.
The results of her multiple regression is:
Sales = 2,800 + 200•T - 350•D
where T goes from 1 to 16 for each quarter of the year from the first quarter of 2006 (‘06I)
through the fourth quarter of 2009 (‘09 IV). D is a dummy variable which is 1 if sales are in the
cold and dreary first quarter, and zero otherwise, because the months of January, February, and
March generate few sales at the Garden Center. Use this model to estimate sales in a store for
the first quarter of 2010 in the 17th month; that is: {2010 I}. Emma’s forecast should be:
a. 5,950

49. b. 6,200
c. 6,350
d. 6,000
e. 5,850
17. Select the correct statement.
a. Qualitative forecasts give the direction of change.
b. Quantitative forecasts give the exact amount or exact percentage change.
c. Diffusion forecasts use the proportion of the forecasts that are positive to forecast up or
down.
d. Surveys are a form of qualitative forecasting.
e. all of the above are correct.
18. If two alternative economic models are offered, other things equal, we would
a. tend to pick the one with the lowest R2.
b. select the model that is the most expensive to estimate.
c. pick the model that was the most complex.
d. select the model that gave the most accurate forecasts
e. all of the above

50. 19. Mr. Geppetto uses exponential smoothing to predict revenue in his wood carving business.
He uses a weight of ? = .4 for the naïve forecast and (1-?) = .6 for the past forecast. What
revenue did he predict for March using the data below? Select closet answer.
MONTH REVENUE FORECAST
Nov 100 100
Dec 90 100
Jan 115 ----
Feb 110 ----
MARCH ? ?
a. 106.2
b. 104.7
c. 103.2
d. 102.1
e. 101.7
20. Suppose a plot of sales data over time appears to follow an S-shape as illustrated below.
Sales •
•
•
•
• •

51. Time
Which of the following is likely that the best forecasting functional form to use for sales data
above?
a. A linear trend, Sales = a + b T
b. A quadratic shape in T, using T-squared as another variable, Sales = a + b T + cT2.
c. A semi-log form as sales appear to be growing at a constant percentage rate, Ln Sales = a +
bT
d. A cubic shape in T, using T-squared and T-cubed as variables, Sales = a + b T + cT2 + d T3.
e. A quadratic shape in T and T-squared as variables, Sales = a + b T + cT2
PROBLEM
1. The Accuweather Corporation manufactures barometers and thermometers for weather
forecasters. In an attempt to forecast its future needs for mercury, Accuweather's chief economist
estimated average monthly mercury needs as:
N = 500 + 10X
where N = monthly mercury needs (units) and X = time period in months (January 2008= 0). The
following monthly seasonal adjustment factors have been estimated using data from the past five
years:
Month Adjustment Factor
January 15%

52. April 10%
July ?20%
September 5%
December ?10%
(a) Forecast Accuweather's mercury needs for January, April, July, September, and December
of 2010.
(b) The following actual and forecast values of mercury needs in the month of November have
been recorded:
Year Actual Forecast
2008 456 480
2009 324 360
2007 240 240
What seasonal adjustment factor should the firm use for November?
2. Milner Brewing Company experienced the following monthly sales (in thousands of
barrels) during 2010:
Jan. Feb. Mar. Apr. May June
100 92 112 108 116 116

53. (a) Develop 2-month moving average forecasts for March through July.
(b) Develop 4-month moving average forecasts for May through July.
(c) Develop forecasts for February through July using the exponential smoothing method (with
w = .5). Begin by assuming .
Chapter 6 Quiz:
MULTIPLE CHOICE
1. Using demand and supply curves for the Japanese yen based on the $/¥ price for yen, an
increase in US INFLATION RATES would
a. Decrease the demand for yen and decrease the supply of the yen.
b. Increase the demand for yen and decrease the supply of the yen.
c. Increase the demand and increase the supply of yen.
d. Decrease both the supply and the demand of yen.
e. Have no impact on the demand or supply of the yen.
2. If the British pound (£) appreciates by 10% against the dollar:
a. both the US importers from Britain and US exporters to Britain will be helped by the
appreciating pound.
b. the US exporters will find it harder to sell to foreign customers in Britain.

54. c. the US importer of British goods will tend to find that their cost of goods rises, hurting its
bottom line.
d. both US importers of British goods and exporters to Britain will be unaffected by changes
in foreign exchange rates.
e. all of the above.
3. Purchasing power parity or PPP says the ratios composed of:
a. interest rates explain the direction of exchange rates.
b. growth rates explain the direction of exchange rates.
c. inflation rates explain the direction of exchange rates.
d. services explain the direction exchange rates.
e. public opinion polls explain the direction of exchange rates.
4. If Ben Bernanke, Chair of the Federal Reserve Board, begins to tighten monetary policy by
raising US interest rates next year, what is the likely impact on the value of the dollar?
a. The value of the dollar falls when US interest rates rise.
b. The value of the dollar rises when US interest rates rise.
c. The value of the dollar is not related to US interest rates.
d. This is known as Purchasing Power Parity or PPP.
e. The Federal Reserve has no impact at all on interest rates.

55. 5. If the domestic prices for traded goods rises 5% in Japan and rises 7% the US over the same
period, what would happened to the Yen/US dollar exchange rate? HINT: S1/S0 = (1+?h) / (1+
?f) where S0 is the direct quote of the yen at time 0, the current period.
a. The direct quote of the yen ($/¥) rises, and the value of the dollar falls.
b. The direct quote of the yen ($/¥) falls, and the value of the dollar rises.
c. The direct quote of the yen would remain the same.
d. Purchasing power parity does not apply to inflation rates.
e. Both a and d.
6. US and Canada can both grow wheat and can do mining. Use the following table to look for
which country has a comparative advantage in mining. (HINT: Find the cost of mining in terms
of wheat in each country.)
Absolute Cost in US Absolute Cost in Canada
Wheat $5 C$8
Mining $10 C$12
a. Canada has a comparative advantage in mining.
b. The US has a comparative advantage in mining.
c. No comparative advantage in mining exists for either nation.
d. We must first know the exchange rate to be able to answer this question.
e. Both a and b.

56. 7. The optimal currency area involves a trade-off of reducing transaction costs but the inability
to use changes in exchange rates to help ailing regions. If the US, Canada, and Mexico had one
single currency (the Peso-Dollar) we would tend to see all of the following EXCEPT:
a. Even more intraregional trade of goods across the three countries.
b. Lower transaction costs of trading within North America.
c. A greater difficulty in helping Mexico as you can no longer deflate the Mexican peso.
d. Less migration of workers across the three countries.
e. An elimination of correlated macroeconomic shocks across the countries.
8. If the value of the U.S. dollar rises from 1.0 per dollar to 1.3 per dollar,
a. imports of automobiles from Germany will decline
b. American inflation will increase
c. German exports of all traded goods will decline
d. American exports to Germany will decrease
e. sales by American manufacturers for the export markets will increase.
9. An appreciation of the U.S. dollar has what impact on Harley-Davidson (HD), a U.S.
manufacturer of motorcycles?
a. domestic sales of HD motorcycles increase and foreign sales of HD motorcycles increase
b. domestic sales of HD motorcycles decrease and foreign sales of HD motorcycles increase
c. domestic sales of HD motorcycles increase and foreign sales of HD motorcycles decrease
d. domestic sales of HD motorcycles decrease and foreign sales of HD motorcycles decrease
e. only manufacturers who produce traded goods are affected

57. 10. In the last twenty-five years, the Yen and German mark and now the Euro have
a. fluctuated widely against the dollar
b. appreciated against the dollar and then depreciated against the dollar
c. exchanged without restrictions
d. all of the above
e. none of the above
11. In an open economy with few capital restrictions and substantial import-export trade, a
rise in interest rates and a decline in the producer price index of inflation will
a. raise the value of the currency
b. lower the nominal interest rate
c. increase the volume of trading in the foreign exchange market
d. lower the trade-weighted exchange rate
e. increase consumer inflation.
12. When a manufacturer's home currency appreciates substantially,
a. domestic sales decline
b. foreign sales decline
c. company-owned foreign plant and equipment will increase
d. margins often decline

58. e. all of the above
13. An increase in the exchange rate of the U.S. dollar relative to a trading partner can result
from
a. higher anticipated costs of production in the U.S.
b. higher interest rates and higher inflation in the U.S.
c. higher growth rates in the trading partner's economy
d. a change in the terms of trade
e. lower export industry productivity
14. The purchasing power parity hypothesis implies that an increase in inflation in one country
relative to another will over a long period of time
a. increase exports
b. reduce the competitive pressure on prices
c. lower the value of the currency in the country with the higher inflation rate
d. increase foreign aid
e. increase the speculative demand for the currency
15. Trading partners should specialize in producing goods in accordance with comparative
advantage, then trade and diversify in consumption because
a. out-of-pocket costs of production decline
b. free trade areas protect infant industries

59. c. economies of scale are present
d. manufacturers face diminishing returns
e. more goods are available for consumption
16. European Union labor costs exceed U.S. and British labor costs primarily because
a. worker productivity is lower in the EU
b. union wages are higher in the EU
c. layoffs and plant closings are more restrictive in the U.S. and Britain
d. the amount of paid time off is higher in the EU
e. labor-management relations are better in the EU
17. Companies that reduce their margins on export products in the face of appreciation of their
home currency may be motivated by a desire to
a. sacrifice market share abroad but build market share at home
b. increase production volume to realize learning curve advantages
c. sell foreign plants and equipment to lower their debt
d. reduce the costs of transportation
e. all of the above
18. In a recession, the trade balance often improves because
a. service exports exceed manufactured good exports

60. b. banks sell depressed assets
c. fewer households can afford luxury imports
d. direct investment abroad declines
e. the capital account exceeds the current account
PROBLEM
1. Suppose nominal interest rates in the U.S. rise from 4.6% to 5% and decline in Britain
from 6% to 5.5%, while U.S. consumer inflation remains unchanged at 1.9% and British
inflation declines from 4% to 3%. In addition suppose, real growth in the U.S. is forecasted for
next year at 4% and in Britain real growth is forecasted at 5%. Finally, suppose producer price
inflation in the U.S. is declining from 2% to 1% while in Britain producer price inflation is rising
from 2% to 3.2%. Explain what effect each of these factors would have on the long-term trend
exchange rate ( per $) and why?
Chapter 7 Quiz:
1. What’s true about both the short-run and long-run in terms of production and cost analysis?
a. In the short-run, one or more of the resources are fixed
b. In the long-run, all the factors are variable
c. The time horizon determines whether or not an input variable is fixed or not
d. The law of diminishing returns is based in part on some factors of production being fixed, as
they are in the short run.

61. e. All of the above
2. The marginal product is defined as:
a. The ratio of total output to the amount of the variable input used in producing the output
b. The incremental change in total output that can be produced by the use of one more unit of
the variable input in the production process
c. The percentage change in output resulting from a given percentage change in the amount
d. The amount of fixed cost involved.
e. None of the above
3. Fill in the missing data to solve this problem.
Variable Total Average Marginal
Input Product Product Product
4 ? 70 ----
5 ? ? 40
6 350 ? ?
What is the total product for 5 units of input, and what is the marginal product for 6 units of
input?
a. 320 and 30
b. 350 and 20
c. 360 and 15

62. d. 400 and 10
e. 430 and 8
4. The following is a Cobb-Douglas production function: Q = 1.75K0.5·L0.5. What is correct
here?
a. A one-percent change in L will cause Q to change by one percent
b. A one-percent change in K will cause Q to change by two percent
c. This production function displays increasing returns to scale
d. This production function displays constant returns to scale
e. This production function displays decreasing returns to scale
5. Suppose you have a Cobb-Douglas function with a capital elasticity of output (a) of 0.28 and
a labor elasticity of output (ß) of 0.84. What statement is correct?
a. There are increasing returns to scale
b. If the amount of labor input (L) is increased by 1%, the output will increase by 0.84%
c. If the amount of capital input (K) is decreased by 1%, the output will decrease by 0.28%
d. The sum of the exponents in the Cobb-Douglas function is 1.12.
e. All of the above
6. The Cobb-Douglas production function is: Q = 1.4*L0.6*K0.5. What would be the
percentage change in output (%?Q) if labor grows by 3.0% and capital is cut by 5.0%?
[HINT: %?Q = (EL * %?L) + (EK * %?K)]

63. a. %?Q = + 3.0%
b. %?Q = + 5.0%
c. %?Q = - 0.70%
d. %?Q = - 2.50%
e. %?Q = - 5.0%
7. If the marginal product of labor is 100 and the price of labor is 10, while the marginal
product of capital is 200 and the price of capital is $30, then what should the firm?
a. The firm should use relatively more capital
b. The firm should use relatively more labor
c. The firm should not make any changes – they are currently efficient
d. Using the Equimarginal Criterion, we can’t determine the firm’s efficiency level
e. Both c and d
8. The marginal rate of technical substitution may be defined as all of the following except:
a. the rate at which one input may be substituted for another input in the production process,
while total output remains constant
b. equal to the negative slope of the isoquant at any point on the isoquant
c. the rate at which all combinations of inputs have equal total costs
d. equal to the ratio of the marginal products of X and Y
e. b and c

64. 9. The law of diminishing marginal returns:
a. states that each and every increase in the amount of the variable factor employed in the
production process will yield diminishing marginal returns
b. is a mathematical theorem that can be logically proved or disproved
c. is the rate at which one input may be substituted for another input in the production process
d. none of the above
10. The combinations of inputs costing a constant C dollars is called:
a. an isocost line
b. an isoquant curve
c. the MRTS
d. an isorevenue line
e. none of the above
11. In a relationship among total, average and marginal products, where TP is maximized:
a. AP is maximized
b. AP is equal to zero
c. MP is maximized
d. MP is equal to zero
e. none of the above

65. 12. Holding the total output constant, the rate at which one input X may be substituted for
another input Y in a production process is:
a. the slope of the isoquant curve
b. the marginal rate of technical substitution (MRTS)
c. equal to MPx/MPy
d. all of the above
e. none of the above
13. Which of the following is never negative?
a. marginal product
b. average product
c. production elasticity
d. marginal rate of technical substitution
e. slope of the isocost lines
14. Concerning the maximization of output subject to a cost constraint, which of the following
statements (if any) are true?
a. At the optimal input combination, the slope of the isoquant must equal the slope of the
isocost line.
b. The optimal solution occurs at the boundary of the feasible region of input combinations.
c. The optimal solution occurs at the point where the isoquant is tangent to the isocost lines.

66. d. all of the above
e. none of the above
15. In a production process, an excessive amount of the variable input relative to the fixed
input is being used to produce the desired output. This statement is true for:
a. stage II
b. stages I and II
c. when Ep = 1
d. stage III
e. none of the above
16. Marginal revenue product is:
a. defined as the amount that an additional unit of the variable input adds to the total revenue
b. equal to the marginal factor cost of the variable factor times the marginal revenue resulting
from the increase in output obtained
c. equal to the marginal product of the variable factor times the marginal product resulting
from the increase in output obtained
d. a and b
e. a and c
17. The isoquants for inputs that are perfect substitutes for one another consist of a series of:
a. right angles
b. parallel lines

67. c. concentric circles
d. right triangles
e. none of the above
18. In production and cost analysis, the short run is the period of time in which one (or more)
of the resources employed in the production process is fixed or incapable of being varied.
a. true
b. false
19. Marginal revenue product is defined as the amount that an additional unit of the variable
input adds to ____.
a. marginal revenue
b. total output
c. total revenue
d. marginal product
e. none of the above
20. Marginal factor cost is defined as the amount that an additional unit of the variable input
adds to ____.
a. marginal cost
b. variable cost
c. marginal rate of technical substitution

68. d. total cost
e. none of the above
21. The isoquants for inputs that are perfect complements for one another consist of a series of:
a. right angles
b. parallel lines
c. concentric circles
d. right triangles
e. none of the above
22. Given a Cobb-Douglas production function estimate of Q = 1.19L.72K.18 for a given
industry, this industry would have:
a. increasing returns to scale
b. constant returns to scale
c. decreasing returns to scale
d. negative returns to scale
e. none of the above
23. The primary purpose of the Cobb-Douglas power function is to:
a. allow one to make estimates of cost-output relationships

69. b. allow one to make predictions about a resulting increase in output for a given increase in the
inputs
c. aid one in gaining accurate empirical values for economic variables
d. calculate a short-run linear total cost function
e. a and b
24. The original Cobb-Douglas function was given as . It was subsequently rewritten as . What
benefit was derived in the revision?
a. the function becomes a non-linear relationship so it would fit to production curves having an
"S" shape
b. returns to scale can be shown in the revision
c. returns to scale become constant
d. a and b only
e. a, b, and c
25. The Cobb-Douglas production function has which of the following properties?
a. output is a linear increasing function of each of the inputs
b. it provides a good fit to the traditional S-shaped production function
c. the elasticity of production is constant and equal to 1 minus the exponent of the appropriate
variable
d. all of the above
e. none of the above

70. 26. In the Cobb-Douglas production function ( ):
a. the marginal product of labor (L) is equal to ?1
b. the average product of labor (L) is equal to ?2
c. if the amount of labor input (L) is increased by 1 percent, the output will increase by ?1
percent
d. a and b
e. a and c
PROBLEMS
1. Emco Company has an assembly line of fixed size A. Total output is a function of the
number of workers (crew size) as shown in the following schedule:
Crew Size Total Output
(No. of Workers) (No. of Units)
0 0
1 10
2 35
3 50
4 56
5 59

71. 6 60
7 60
8 58
Determine the following schedules:
(a) marginal productivity of labor
(b) average productivity of labor
(c) elasticity of production with respect to labor
2. A certain production process employs two inputs--labor (L) and raw materials (R). Output
(Q) is a function of these two inputs and is given by the following relationship:
Q = 6L2 R2???.10L3 R3
Assume that raw materials (input R) are fixed at 10 units.
(a) Determine the total product function (TPL) for input L.
(b) Determine the marginal product function for input L.
(c) Determine the average product function for input L.
(d) Find the number of units of input L that maximizes the total product function.
(e) Find the number of units of input L that maximizes the marginal product function.
(f) Find the number of units of input L that maximizes the average product function.

72. (g) Determine the boundaries for the three stages of production.
3. An industry can be characterized by the following production function:
Q = 2.5L.60 C.40
(a) What is the algebraic expression for the marginal productivity of labor?
(b) What is the algebraic expression for the average productivity of labor?
(c) How would you characterize the returns-to-scale in the industry?
Chapter 8 Quiz:
1. Economies of Scope refers to situations where per unit costs are:
a. Unaffected when two or more products are produced
b. Reduced when two or more products are produced
c. Increased when two or more products are produced
d. Demonstrating constant returns to scale
e. Demonstrating decreasing returns to scale
2. Economies of scale exist whenever long-run average costs:

73. a. Increase as output is increased
b. Remain constant as output is increased
c. Decrease as output is increased
d. Decline and then rise as output is increased
e. None of the above
3. Which of the following is true with regards to a long-run cost function?
a. The shape of the firm’s long-run cost function is important in decisions to expand the scale
of operations
b. The long-run average cost curve is U-shaped
c. The long-run average cost curve is flatter than the short-run average cost curve.
d. The curve consists of the lower boundary of all the short-run cost curves
e. All of the above
4. If TC = 321 + 55Q - 5Q2, then average total cost at Q = 10 is:
a. 10.2
b. 102
c. 37.1
d. 371
e. 321
5. Suppose that total cost is cubic: TC = 200 + 5Q – 0.4Q2 + 0.001Q3
a. Fixed cost (FC) is $200
b. Variable cost (VC) is 5Q – 0.4Q2 + 0.001Q3

74. c. Average variable cost (AVC) is 5 – 0.4Q + 0.001Q2
d. Marginal cost (MC) is 5 – 0.8Q +.003Q2
e. All of the above are correct
6. What method of inventory valuation should be used for economic decision-making
problems?
a. book value
b. original cost
c. current replacement cost
d. cost or market, whichever is lower
e. historical cost
7. According to the theory of cost, specialization in the use of variable resources in the short-
run results initially in:
a. decreasing returns and declining average and marginal costs
b. increasing returns and declining average and marginal costs
c. increasing returns and increasing average and marginal costs
d. decreasing returns and increasing average and marginal costs
e. none of the above
8. For a short-run cost function which of the following statements is (are) not true?
a. The average fixed cost function is monotonically decreasing.

75. b. The marginal cost function intersects the average fixed cost function where the average
variable cost function is a minimum.
c. The marginal cost function intersects the average variable cost function where the average
variable cost function is a minimum.
d. The marginal cost function intersects the average total cost function where the average total
cost function is a minimum.
e. b and c
9. The cost function is:
a. a means for expressing output as a function of cost
b. a schedule or mathematical relationship showing the total cost of producing various
quantities of output
c. similar to a profit and loss statement
d. incapable in being developed from statistical regression analysis
e. none of the above
10. Which of the following statements about cost functions is true?
a. Variable costs will always increase in direct proportion to the quantity of output produced.
b. The less capital equipment employed in the production process relative to labor and other
inputs, the longer will be the period of time required to increase significantly the scale of
operation.
c. The shape of the firm's long-run cost function is important in decisions to expand the scale
of operations.
d. none of the above

76. 11. Which of the following statements concerning the long-run average cost curve of economic
theory is true?
a. It is L-shaped
b. It is ?-shaped
c. It is ?-shaped
d. It is ?-shaped
e. It is M-shaped
12. Possible sources of economies of scale (size) within a production plant include:
a. specialization in the use of capital and labor
b. imperfections in the labor market
c. transportation costs
d. a and b
e. a and c
13. The existence of diseconomies of scale (size) for the firm is hypothesized to result from:
a. transportation costs
b. imperfections in the labor market
c. imperfections in the capital markets
d. problems of coordination and control encountered by management
e. All of the above

77. 14. The relevant cost in economic decision-making is the opportunity cost of the resources
rather than the outlay of funds required to obtain the resources.
a. true
b. false
15. ____ are defined as costs which are incurred regardless of the alternative action chosen in a
decision-making problem.
a. Opportunity costs
b. Marginal costs
c. Relevant costs
d. Sunk costs
e. None of the above
16. ____ include the opportunity costs of time and capital that the entrepreneur has invested in
the firm.
a. Implicit costs
b. Explicit costs
c. a and b
d. None of the above

78. 17. A cottage industry exists in the home-manufacture of ‘country crafts’. Especially treasured
are handmade quilts. If the fourth completed quilt took 30 hours to make, and the eighth quilt
took 28 hours. What is the percentage learning? Hint: Percentage learning = 100% -
(c2/c1)•100%.
a. 5%
b. 6.7%
c. 10%
d. 100%
e. 122%
PROBLEMS
1. During the last few days the Superior Company has been running into problems with its
computer system. The last run of the production cost schedule resulted in the incomplete listing
shown below. From your knowledge of cost theory, fill in the blanks.
Q TC TFC TVC ATC AFC AVC MC
0 40 _____ _____ x x x x
1 _____ _____ _____ 52 _____ _____ _____
2 _____ _____ 20 _____ _____ _____ _____
3 _____ _____ _____ 21.33 _____ _____ _____
4 _____ _____ _____ _____ _____ _____ 4
5 _____ _____ 40 _____ _____ _____ _____
6 _____ _____ _____ 15.67 _____ _____ _____
7 _____ _____ _____ _____ _____ 10 _____

79. 8 _____ _____ 96 _____ _____ _____ _____
9 _____ _____ _____ _____ _____ 15 _____
10 _____ _____ _____ _____ _____ _____ 45
2. The Jones Company has the following cost schedule:
Output Total Cost
(Units) ($)
0 3000
50 3750
100 4275
150 4675
200 5000
250 5300
300 5700
350 6250
400 7050
450 8225
Prepare (a) average total cost and (b) marginal cost schedules for the firm.
3. A firm has determined that its variable costs are given by the following relationship:

80. VC = .05Q3???5Q2 + 500Q
where Q is the quantity of output produced.
(a) Determine the output level where average variable costs are minimized.
(b) Determine the output level where marginal costs are minimized.
Chapter 9 Quiz:
1. Evidence from empirical studies of short-run cost-output relationships lends support to the:
a. existence of a non-linear cubic total cost function
b. hypothesis that marginal costs first decrease, then gradually increase over the normal
operating range of the firm
c. hypothesis that total costs increase quadratically over the ranges of output examined
d. hypothesis that total costs increase linearly over the range of output examined
e. none of the above
2. The short-run cost function is:

81. a. where all inputs to the production process are variable
b. relevant to decisions in which one or more inputs to the production process are fixed
c. not relevant to optimal pricing and production output decisions
d. crucial in making optimal investment decisions in new production facilities
e. none of the above
3. Theoretically, in a long-run cost function:
a. all inputs are fixed
b. all inputs are considered variable
c. some inputs are always fixed
d. capital and labor are always combined in fixed proportions
e. b and d
4. Break-even analysis usually assumes all of the following except:
a. in the short run, there is no distinction between variable and fixed costs.
b. revenue and cost curves are straight-lines throughout the analysis.
c. there appears to be perfect competition since the price is considered to remain the same re-
gardless of quantity.
d. the straight-line cost curve implies that marginal cost is constant.
e. both c and d

82. 5. What is another term meaning the degree of operating leverage?
a. The measure of the importance of fixed cost.
b. The operating profit elasticity.
c. The measure of business risk.
d. D.O.L.
e. All of the above.
6. In a study of banking by asset size over time, we can find which asset sizes are tending to
become more prominent. The size that is becoming more predominant is presumed to be least
cost. This is called:
a. regression to the mean analysis.
b. breakeven analysis.
c. survivorship analysis.
d. engineering cost analysis.
e. a Willie Sutton analysis.
7. George Webb Restaurant collects on the average $5 per customer at its breakfast & lunch
diner. Its variable cost per customer averages $3, and its annual fixed cost is $40,000. If George
Webb wants to make a profit of $20,000 per year at the diner, it will have to serve__________
customers per year.
a. 10,000 customers
b. 20,000 customers
c. 30,000 customers
d. 40,000 customers

83. e. 50,000 customers
8. In determining the shape of the cost-output relationship only ____ depreciation is relevant.
a. direct
b. indirect
c. usage
d. time
e. scheduled
9. Which of the following is not a limitation of the survivor technique for measuring the
optimum size of firms within an industry?
a. since the technique does not employ actual cost data in the analysis, there is no way to assess
the magnitude of the cost differentials between firms of varying size and efficiency.
b. the managerial and entrepreneurial aspects of the production process are not included in the
analysis
c. because of legal factors, the long-run cost curve derived by this technique may be distorted
and may not measure the cost curve postulated in economic theory
d. a and b
e. b and c
10. The primary disadvantage of engineering methods for measuring cost functions is that they
deal with the managerial and entrepreneurial aspects of the production process or plant.

84. a. true
b. false
11. A linear total cost function implies that:
a. marginal costs are constant as output increases
b. average total costs are continually decreasing as output increases
c. a and b
d. none of the above
12. A ____ total cost function implies that marginal costs ____ as output is increased.
a. linear; increase linearly
b. quadratic; increase linearly
c. cubic; increase linearly
d. a and b
e. none of the above
13. A ____ total cost function implies that marginal costs ____ as output is increased.
a. linear; increase linearly
b. quadratic; are constant
c. cubic; increase linearly

85. d. linear; are constant
e. none of the above
14. A ____ total cost function yields a U-shaped average total cost function.
a. cubic
b. quadratic
c. linear
d. a and b only
e. a, b, and c
15. In the linear breakeven model, the difference between selling price per unit and variable
cost per unit is referred to as:
a. variable margin per unit
b. variable cost ratio
c. contribution margin per unit
d. target margin per unit
e. none of the above
16. Which of the following is not an assumption of the linear breakeven model:
a. constant selling price per unit
b. decreasing variable cost per unit

86. c. fixed costs are independent of the output level
d. a single product (or a constant mix of products) is being produced and sold
e. all costs can be classified as fixed or variable
17. In the linear breakeven model, the breakeven sales volume (in dollars) is equal to fixed
costs divided by:
a. unit selling price less unit variable cost
b. contribution margin per unit
c. one minus the variable cost ratio
d. a and b only
e. a, b, and c
18. The degree of operating leverage is equal to the ____ change in ____ divided by the ____
change in ____.
a. percentage; sales; percentage; EBIT
b. unit; sales; unit; EBIT
c. percentage; EBIT; percentage; sales
d. unit; EBIT; unit; sales
e. none of the above
19. The linear breakeven model excludes ____ from the analysis.

87. a. financing costs
b. taxes
c. contribution margin
d. a and b only
e. a, b, and c
20. In the linear breakeven model, the relevant range of output is that range where the linearity
assumptions of the model are assumed to hold.
a. true
b. false
21. In the linear breakeven model, the breakeven sales volume (in dollars) can be found by
multiplying the breakeven sales volume (in units) by:
a. one minus the variable cost ratio
b. contribution margin per unit
c. selling price per unit
d. standard deviation of unit sales
e. none of the above
22. In the linear breakeven model, a firm incurs operating losses whenever output is less than
the breakeven level.
a. true

88. b. false
PROBLEMS
1. For each of the following cost-output relationships, describe the shape (U-shape, decreasing,
increasing, constant) of the average total cost and marginal cost functions (C = total cost, Q =
output):
(a) C = 42,500,000 + 2550Q
(b) C = 8.48 + 0.65Q + .00220Q2
2. Offshore Petroleum's fixed costs are $2,500,000 and its debt repayment requirements are
$1,000,000. Selling price per barrel of oil is $18 and variable costs per barrel are $10.
(a) Determine the breakeven output (in dollars).
(b) Determine the number of barrels of oil that offshore must produce and sell in order to earn
a target (operating) profit of $1,500,000.
(c) Determine the degree of operating leverage at an output of 400,000 barrels.
(d) Assuming that sales of oil are normally distributed with a mean of 362,500 barrels and a
standard deviation of 100,000 barrels, determine the probability that Offshore will incur an
operating loss.

89. Chapter 10 Quiz:
1. The main difference between perfect competition and monopolistic competition is:
a. The number of sellers in the market
b. The ease of entry and exit in the industry
c. The degree of information about market price
d. The degree of product differentiation
e. Whether it is the short run or the long run
2. Long distance telephone service has become a competitive market. The average cost per call
is $0.05 a minute, and it’s declining. The likely reason for the declining price for long distance
service is:
a. Governmental pressure to lower the price
b. Reduced demand for long distance service
c. Entry into this industry pushes prices down
d. Lower price for a barrel of crude oil
e. Increased cost of providing long distance service
3. What is the profit maximization point for a firm in a purely competitive environment?
a. The output where P = MC
b. The output where P < MC

90. c. The output where P > MC
d. The output where MR = MC
e. The output where AVC < P
4. All of the following are true for both competition and monopolistic competition in the long
run, except one of them. Which is it?
a. P = MC
b. P = AC
c. Economic profits become zero in the long-run
d. The barriers to entry and exit are relatively easy
e. None of the above is an exception
5. Which of the following statements is (are) true concerning a pure competition situation?
a. Its demand curve is represented by a vertical line.
b. Firms must sell at or below market price.
c. Marginal revenue is equal to price.
d. both b and c
e. both a and b
6. In pure competition:
a. the optimal price-output solution occurs at the point where marginal revenue is equal to price

91. b. a firm's demand curve is represented by a horizontal line
c. a firm is a price-taker since the products of every producer are perfect substitutes for the
products of every other producer
d. a and b only
e. a, b, and c
7. In the short-run for a purely competitive market, a manufacturer will stop production when:
a. the total revenue is less than total costs
b. the contribution to fixed costs is zero or less
c. the price is greater than AVC
d. operating at a loss
e. a and b
8. In the purely competitive case, marginal revenue (MR) is equal to:
a. cost
b. profit
c. price
d. total revenue
e. none of the above

92. 9. In long-run equilibrium, all firms in a pure competition market situation operating under a
condition of certainty will have identical costs even though they may use different production
and operation techniques.
a. true
b. false
10. If price exceeds average costs under pure competition, ____ firms will enter the industry,
supply will ____, and price will be driven ____.
a. more; decrease; down
b. more; decrease; up
c. more; increase; down
d. more; increase; up
e. none of the above
11. A firm in pure competition would shut down when:
a. price is less than average total cost
b. price is less than average fixed cost
c. price is less than marginal cost
d. price is less than average variable cost
12. In the long-run, firms in a monopolistically competitive industry will
a. earn substantial economic profits

93. b. tend to just cover costs, including normal profits
c. seek to increase the scale of operations
d. seek to reduce the scale of operations
13. Uncertainty includes all of the following except ____.
a. unknown effects of deliberate actions
b. incomplete information as to the type of competitor
c. random disturbances
d. unverifiable claims
e. accidents due to weather hazards
14. Experience goods are products or services
a. that the customer already knows
b. whose performance is highly unusual
c. whose quality is undetectable when purchased
d. not likely to cause repeat purchases
e. all of the above
15. Buyers anticipate that the temporary warehouse seller of unbranded computer equipment
will
a. deliver high quality products consistent with expectations

94. b. not attempt to establish any warranty enforcement mechanisms
c. offer several prices and qualities
d. produce only one quality
e. none of the above
16. All of the following are mechanisms which reduce the adverse selection problem except
____.
a. warranties from established enterprises with non-redeployable assets
b. high interest rates
c. large collateral requirements
d. brand names and product-specific promotions and retail displays
e. higher prices in repeat customer transactions
17. Asset specificity is largest when
a. value in first best use is large
b. value in second best use is large
c. customers choose their supplier at random
d. very valuable assets are non-redeployable
e. customers are loyal to a particular seller
18. Under asymmetric information,

95. a. you never get what you pay for
b. you sometimes get cheated
c. you always get cheated
d. at best you get what you pay for
e. sellers make profits in excess of competitive returns
19. To escape adverse selection and elicit high quality experience goods buyers can
a. offer price premiums to new firms in the market
b. seek out unbranded goods
c. buy from generic storefronts that have leased temporary space
d. secure warranties from warehouse retailers
e. none of the above
20. The problems of asymmetric information exchange arise ultimately because
a. one party to the exchange possesses different information than another
b. one party has more information than another
c. one party knows nothing
d. one party cannot independently verify the information of another
e. information is scarce

96. 21. The market for "lemons" is one in which
a. the rational buyer discounts
b. the seller's product claims are unverifiable at the point of purchase
c. "the bad apples drive out the good"
d. the problem of adverse selection is rampant
e. all of the above
22. The fraudulent delivery of low quality experience goods at high prices is more likely if
a. interest rates decline
b. information about notorious firms is speedily disseminated
c. price premiums for allegedly high quality increase
d. sellers invest in non-transferable reputation
e. none of the above
23. An "experience good" is one that:
a. Only an expert can use
b. Has undetectable quality when purchased
c. Can be readily experienced simply by touching or tasting
d. Improves with age, like a fine wine
e. All of the above

97. 24. A "search good" is:
a. One that depends on how the product behaves over time
b. A product whose quality is only found out over time by finding how durable it is
c. Like a peach that can be examined for flaws
d. Like a used car, since it is easy to determine its inherent quality
e. None of the above
25. The price for used cars is well below the price of new cars of the same general quality.
This is an example of:
a. The Degree of Operating Leverage
b. A Lemon's Market
c. Redeployment Assets
d. Cyclical Competition
e. The Unemployment Rate
PROBLEMS
1. Sunrise Juice Company sells its output in a perfectly competitive market. The firm's total
cost function is given in the following schedule:
Output Total Cost

98. (Units) ($)
0 50
10 120
20 170
30 210
40 260
50 330
60 430
Total costs include a "normal" return on the time (labor services) and capital that the owner has
invested in the firm. The prevailing market price is $7 per unit.
(a) Prepare (i) marginal cost and (ii) average total cost schedules for the firm.
(b) What is the firm's profit maximizing output level?
(c) Is the industry in long-run equilibrium? Justify your answer.
2. Superior Metals Company has seen its sales volume decline over the last few years as the
result of rising foreign imports. In order to increase sales (and hopefully, profits), the firm is
considering a price reduction on luranium--a metal that it produces and sells. The firm currently
sells 60,000 pounds of luranium a year at an average price of $10 per pound. Fixed costs of
producing luranium are $250,000. Current variable costs per pound are $5. The firm has
determined that the variable cost per pound could be reduced by $.50 if production volume could
be increased by 10 percent (fixed costs would remain constant). The firm's marketing department
has estimated the arc elasticity of demand for luranium to be ?1.5.
(a) How much would Superior Metals have to reduce the price of luranium in order to achieve
a 10 percent increase in the quantity sold?

99. (b) What would the firm's (i) total revenue, (ii) total cost, and (iii) total profit be before and
after the price cut?
Chapter 11 Quiz:
1. Unique Creations has a monopoly position in magnometers. If the marginal cost for a
magnometer is $50 and the price elasticity for magnometers is -4, what is the optimal monopoly
price?
Hint: P (1 +1/E) = MC.
a. $37.50
b. $41.25
c. $66.67
d. $75.00
e. $82.50
2. Land’s End estimates a demand curve for turtleneck sweaters to be:
Log Q = .41 + 2.3 Log Y - 3 Log P
where Q is quantity, P is price, and Y is a measure on national income. If the marginal cost of
imported turtleneck sweaters is $9.00. (HINT: P (1 +1/E) = MC). The optimal monopoly price
would be:
a. P = $13.50
b. P = $26.50

100. c. P = $27.50
d. P = $34.50
e. P = $56.22
3. Declining cost industries
a. have upward rising AC curves.
b. have upward rising demand curves.
c. have ?-shaped total costs.
d. have diseconomies of scale.
e. have marginal cost curves below their average cost curve.
4. A monopolist seller of Irish ceramics faces the following demand function for its product: P
= 62 - 3Q. The fixed cost is $10 and the variable cost per unit is $2. What is the maximizing
QUANTITY for this monopoly? Hint: MR is twice as steep as the inverse demand curve: MR
= 62 – 6 Q. (Pick closest answer)
a. Q = 10
b. Q = 15
c. Q = 22
d. Q = 37
e. Q = 41

101. 5. Globo Public Supply has $1,000,000 in assets. Its demand curve is: P = 206 - .20•Q and its
total cost function is: TC = 20,000 + 6•Q where TC excludes the cost of capital. If Globo Public
Supply is UNREGULATED, find Globo's optimal price.
a. $206
b. $106
c. $56
d. $6
e. $3
6. A monopolist faces the following demand curve: P = 12 - .3Q with marginal costs of $3.
What is the monopolistic PRICE?
a. P = $5.50
b. P = $6.50
c. P = $7.50
d. P = $8.50
e. P = $9.50
7. In natural monopoly, AC continuously declines due to economies in distribution or in
production, which tends to found in industries which face increasing returns to scale. If price
were set equal to marginal cost, then:
a. price would equal average cost.
b. price would exceed average cost.
c. price would be below average cost.
d. price would be at the profit maximizing level for natural monopoly

102. e. all of the above
8. The profit-maximizing monopolist, faced with a negative-sloping demand curve, will
always produce:
a. at an output greater than the output where average costs are minimized
b. at an output short of that output where average costs are minimized
c. at an output equal to industry output under pure competition
d. a and c
e. none of the above
9. In the case of pure monopoly:
a. one firm is the sole producer of a good or service which has no close substitutes
b. the firm's profit is maximized at the price and output combination where marginal cost
equals marginal revenue
c. the demand curve is always elastic
d. a and b only
e. a, b, and c
10. A monopoly will always produce less than a purely competitive industry, ceteris paribus.

103. a. true
b. false
11. The demand curve facing the firm in ____ is the same as the industry demand curve.
a. pure competition
b. monopolistic competition
c. oligopoly
d. pure monopoly
e. none of the above
12. When the cross elasticity of demand between one product and all other products is low, one
is generally referring to a(n) ____ situation.
a. oligopoly
b. monopoly
c. pure competition
d. substitution
e. monopolistic competition
14. Of the following, which is not an economic rationale for public utility regulation?
a. production process exhibiting increasing returns to scale
b. constant cost industry

104. c. avoidance of duplication of facilities
d. protection of consumers from price discrimination
e. none of the above
15. The practice by telephone companies of charging lower long-distance rates at night than
during the day is an example of:
a. inverted block pricing
b. second-degree price discrimination
c. peak-load pricing
d. first-degree price discrimination
e. none of the above
16. In the electric power industry, residential customers have relatively ____ demand for
electricity compared with large industrial users. But contrary to price discrimination, large
industrial users generally are charged ____ rates.
a. similar, similar
b. elastic, lower
c. elastic, higher
d. inelastic, lower
e. inelastic, higher

105. 17. ____ as practiced by public utilities is designed to encourage greater usage and therefore
spread the fixed costs of the utility's plant over a larger number of units of output.
a. Peak load pricing
b. Inverted block pricing
c. Block pricing
d. First degree price discrimination
e. none of the above
18. Regulatory agencies engage in all of the following activities except _______.
a. controlling entry into the regulated industries
b. overseeing the quality of service provided by the firms
c. setting federal and state income tax rates on regulated firms
d. setting prices that consumers will pay
e. none of the above
PROBLEMS
1. The Zinger Company manufactures and sells a line of sewing machines. Demand per period
(Q) for a particular model is given by the following relationship:
Q = 400???.5P

106. where P is price. Total costs (including a "normal" return to the owners) of producing Q units per
period are:
TC = 20,000 + 50Q + 3Q2
(a) Express total profits (?) in terms of Q.
(b) At what level of output are total profits maximized? What price will be charged? What are
total profits at this output level?
(c) What model of market pricing has been assumed in this problem? Justify your answer.
2. Zar Island Gas Company is the sole producer of natural gas in the remote island country of
Zar. The company's operations are regulated by the State Energy Commission. The demand
function for gas in Zar has been estimated as:
P = 1,000???.2Q
where Q is output (measured in units) and P is price (measured in dollars per unit). Zar Island's
cost function is:
TC = 300,000 + 10Q
This total cost function does not include a "normal" return on the firm's invested capital of $4
million.
(a) In the absence of any government price regulation, determine Zar Island's optimal (i) output
level, (ii) selling price, (iii) total profits, and (iv) rate of return on its asset base.