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Questions and Answers of Economics

1. Suppose that, prior to other firms entering the market, the maker of a new smart-phone (Way Cool, Inc.) earns $100 million per year. By reducing its price by 50 percent, Way Cool could discourage
1. Bank 1 and Bank 2 are considering entering a compatibility agreement that would permit the users of each bank’s ATMs access to the other bank’s ATMs. Bank 1 has a network of branches and
You are the manager in a market composed of five firms, each of which has a 20 percent market share. In addition, each firm has a strong financial position and is located within a 100-mile radius of
Use the accompanying graph to answer the questions that follow. a. Suppose this monopolist is unregulated.(1) What price will the firm charge to maximize its profits?(2) What is the level of
You are an industry analyst that specializes in an industry where the market inverse demand is P = 100 – 5Q. The external marginal cost of producing the product is MC External = 10Q, and the
There are two workers. Each worker's demand for a public good is P = 20 ?? Q. The marginal cost of providing the public good is $24. The accompanying graph summarizes the relevant information. a.
As the manager of a monopoly, you face potential government regulation. Your inverse demand is P = 25 – Q, and your costs are C(Q) = 5Q.a. Determine the monopoly price and output.b. Determine the
Consider a competitive market served by many domestic and foreign firms. The domestic demand for these firms’ product is Qd = 500 – 1.5P. The supply function of the domestic firms is QSD = 50 +
Suppose that the U.S. Congress passes legislation that imposes a one-time lump-sum tariff on the product that a foreign firm exports to the United States.a. What happens to the foreign firm’s
The accompanying diagram depicts a monopolist whose price is regulated at $10 per unit. Use this figure to answer the questions that follow. a. What price will an unregulated monopoly charge?b. What
A well-known conglomerate that manufactures a multitude of non-competing consumer products instituted a corporate-wide initiative to encourage the managers of its many divisions to share consumer
You are the manager of a paper mill and have been subpoenaed to appear before a joint session of the Senate Consumer Affairs and the Senate Environmental subcommittees. The Consumer Affairs
Enrodes is a monopoly provider of residential electricity in a region of northern Michigan. Total demand by its 2 million households is Qd = 1,000 – P, and Enrodes can produce electricity at a
Canada’s forestry industry (composed mainly of those involved in the lumber industry) directly employs about 370,000 workers and indirectly employs an additional 510,000 people in support services.
Suppose that, prior to the passage of the Truth in Lending Simplification Act and Regulation Z, the demand for consumer loans was given by Qdpre-TILSA = 10 – 80 P (in billions of dollars) and the
Evaluate this statement: “If the U.S. imposed a uniform excise tariff on all foreign imports, all U.S. businesses and workers would benefit. Consequently, if a bill to impose a uniform excise
Moses Inc. is a small electric company that provides power to customers in a small rural area in the Southwest. The company is currently maximizing its profits by selling electricity to consumers at
1. Is “fairness” the economic basis for government laws and regulations designed to remedy market failures? If so, why; if not, what is the economic basis?2. Explain, using precise economic
1. Attorneys for Eastman Kodak argued in front of the U.S. Supreme Court to defend the company against charges levied by several independent firms that provide service for machines sold by Eastman
1. Section 16(a) of the Securities and Exchange Act of 1934, as amended in 1990, requires that the officers, directors, and principal shareholders of companies disclose the extent of their ownership
1. The U.S. International Trade Commission’s committee in charge of the global safeguard investigation involving imports of steel has announced its recommendations to be forwarded to the president.
Assume that the officials in Ecoland have compiled the following information about their economy for last year:Y = 10,000C = 6,000T = 1,500G = 1,700The government uses the following equation for the
An industry produces its products, Scruffs, at a constant marginal cost of $50. The market demand for Scruffs is equal to Q = 75000 – 600P. What is the value to a monopolist who is able to develop
A monopolist produces a single homogeneous good, which she sells in two distinct marketsbetween which price discrimination is possible. Her total cost function is: TC = 1/3 Q3 – 7.5Q2 + 370Q +
Consolidated Sugar Company sells granulated sugar to both retail grocery chains and commercial users (e.g., bakeries, candy makers, etc.). The demand function for each of these markets is:Retail
1. Evaluate whether the following statements are true or false, and explain your answer a. A trade deficit occurs when the government spends more than it receives in tax revenue.2. In an open,
1. A convertible bond is often utilized for all of the following, EXCEPT2. To sell common at prices higher than those prevailing when funds are needed. When there is no demand for straight debt. A
What are the characteristics of the perfectly competitive market?
1. You own two products, each of which is a substitute for the other. You raise price on the first product. What happens to marginal revenue?a. MR for the first product falls but increases for the
Multiple Choice Question1. Who is most likely to value a new pickup truck?a. A recent college graduate with a new childb. A financially comfortable construction managerc. A college student getting
Why are property rights so important in creating wealth?
The owners of a small manufacturing company have hired a manager to run the company with the expectation that he will buy the company after five years. Compensation of the new vice president is a
Figure out how to profitably consummate the unconsummated wealth-creating transaction created by rent control.
Defenders of Communist economic systems may point out that consumers pay lower prices for certain goods because the government imposes a limit on what producers may charge. Cite at least two other
Consider a seller who values a car at $9,500 and a buyer who values the same car at $10,000. What total surplus will result from a transaction between the two when the seller is faced with the
Multiple Choice Questions1. A manufacturing company is considering purchasing a new machine that doubles capacity from 500 to 1,000 units per week. The machine will occupy approximately 500 square
A can manufacturing company produces and sells three different types of cans: Versions X, Y, and Z. A high-level, simplified profit/loss statement for the company is provided here. Corporate overhead
You currently pay $10,000 per year in rent to a landlord for a $100,000 house, which you are considering purchasing. You can qualify for a loan of $80,000 at 9% if you put $20,000 down on the house.
Your firm usually uses about 200 to 300 tons of steel per year. Last year, you purchased 100 tons more steel than needed (at a price of $200 per ton). In the meantime, the price of steel jumped to
You’ve completed your vacation in a foreign country. At the airport, you discover you have the equivalent of $20 local currency left over. The exchange control officer tells you that you can’t
A few years ago, a construction manager earning $70,000 per year working for a regional home builder decided to open his own home building company. He took $100,000 out of one of his investment
Multiple-Choice Questions1. A company is producing 1,000 units. At this output level, price is $1.50, and marginal revenue is $1.25. Average total cost is $1.10, and marginal cost is $1.40. What can
Amazon’s “autobot” recently recommended a book to one of us titled Quality Maintenance: Zero Defects through Equipment Management. The book’s description is “Achieve zero-defect product
A domestic shoe company distributes running shoes and tennis shoes for $95 per pair. The marginal cost of producing a pair of running shoes is $60, and the marginal cost of producing a pair of tennis
Five years ago, to respond to cost-cutting pressure during a weak economy, your company decided to close five sales offices employing five people each. Currently your company employs independent
A copy company wants to expand production. It currently has 20 workers who share eight copiers. Two months ago, the firm added two copiers, and output increased by 100,000 pages per day. One month
A company recently raised the pay of workers by 20%. Yet workers’ productivity did not improve (i.e., they produced the same amount and quality as before). Why?
Multiple-Choice Questions1. As manager of a company that is trying to maximize long-run profit, which of the following is a rational profit-maximizing business decision?a. In the long run, shut down
Suppose that in our National Geographic example, half of the original cost of the rotogravure printing press is fixed and half is sunk. How low can the offered price go before the printer will
Suppose you work for an original equipment manufacturer (OEM) who makes component pieces for a telecommunications company. The telecom company asks you for a price quote for 2,000,000 units that will
You are considering opening a bagel restaurant aimed primarily at the breakfast trade. You’ll sell bagels, coffee, and other items in relatively fixed proportions to one another. For each bagel
A local pet store, Roscoe’s Rascals, which has concentrated on selling puppies, is considering adding a line of pet food. A contractor estimates that it will cost $10,000 to convert some storage
Assume that Roscoe’s Rascals decided to add the pet food line. Two months after it began selling the food, its pet food sales declined dramatically because a competitor across the street started
Multiple-Choice Questions1. A company currently sells 60,000 units a month at $10 per unit. The marginal cost per unit is $6. The company is considering raising the price by 10% to $11. If the price
Suppose you have 10 individuals with values {$1, $2, $3, $4, $5, $6, $7, $8, $9, $10}. Your marginal cost of production is $2.50. What is the profit-maximizing price?
Using information from Question 6-1, your boss tells you that price cannot drop below $9 because you cannot earn enough profit to cover your fixed cost. What should you tell her?
A bank in a medium-sized midwestern city, Firm X, currently charges $1 per transaction at its ATMs. To determine whether to raise price, the bank managers experimented with a number of higher prices
There are five horseracing tracks in Kentucky. The Kentucky legislature allows only one track to be open at a time. How does this restriction affect the price the track can charge for its product?
If elasticity is – 2, price is $10, and marginal cost is $8, should you raise or lower price?
Multiple Choice Questions1. As a golf club production company produces more clubs, the average total cost of each club produced decreases. This is because:a. Total fixed costs are decreasing as more
What is the difference between economies of scale and economies of scope?
Suppose Nike’s managers were considering expanding into producing sports beverages. Why might the company decide to do this under the Nike brand name?
Describe the change in average costs and the relationship between marginal and average costs under the following three conditions as quantities producedincrease:
Suppose you have a production technology that can be characterized by a learning curve. Every time you increase production by one unit, your costs decrease by $6. The first unit costs you $64 to
A multiconcept restaurant incorporates two or more restaurants, typically chains, under one roof. Sharing facilities reduces costs of both real estate and labor. The multiconcept restaurants
Multiple-Choice Questions1. If the market for a certain product experiences an increase in supply and a decrease in demand, which of the following results is expected to occur?a. Both equilibrium
The widget market is competitive and includes no transaction costs. Five suppliers are willing to sell one widget at the following prices: $30, $29, $20, $16, and $12. Five buyers are willing to buy
In 1998, the Syndicated Bank Loan market (defined as loans having more than two bank lenders) was a vast and cheap source of debt financing for U.S. corporations. This market was characterized by a
a. In the accompanying diagram (which represents the market for chocolate candy bars), the initial equilibrium is at the intersection of S1 and D1. Circle the new equilibrium if there is an increase
Indicate whether the following changes would cause a shift in the demand curve for Product A and, if so, the direction of theshift.
On Valentine’s Day, the price of roses increases by more than the price of greeting cards. Why?
Multiple-Choice Questions1. At the individual firm level, which of the following types of firms faces a downward-sloping demand curve?a. Both a perfectly competitive firm and a monopolyb. Neither a
At a university faculty meeting in 2000, a proposal was made to increase the housing benefits for new faculty to keep pace with the high cost of housing. What will likely be the long-run effect of
Suppose that new entry decreased your demand elasticity from – 2 to –3 (made demand more elastic). By how much should you adjust your price of $10?
Why do MBA economics professors earn more than regular economics professors? Why do MBA accounting professors earn more than MBA economics professors?
Describe the difference in economic profit between a competitive firm and a monopolist in both the short and long run. Which should take longer to reach the long-run equilibrium?
Describe an important difference in the way an economist and a businessperson might view a monopoly.
Multiple-Choice Questions1. An industry is defined as:a. A group of firms producing the exact same products and services.b. Firms producing items that sell through the same distribution channels.c.
To increase a company’s performance, a manager suggests that the company needs to increase the value of its product to customers. Describe three ways in which this advice might be incorrect
For each category, indicate which condition is associated with higher rivalry among competitors.
Examine the U.S. passenger airline industry using the Five Forces. Is this an attractive industry? Why or why not?
Why might intangible resources like human capital and intellectual assets be a more likely source of sustainable competitive advantage than tangible resources?
Salon owners have recently started offering teeth whitening services to clients in addition to their more standard services. In a number of states, regulators have ordered the salon owners to stop,
Multiple-Choice Questions1. Following a peso appreciation relative to the dollar, which of the following results is expected to occur?a. Prices in the United States would rise, and prices in Mexico
In August 2008, Mexican pesos were trading at $0.10 on the foreign exchange market. By November, they were down to $0.07, a decline of 30%. Explain the fall in the price of a peso using supply and
As stock markets have crashed, and uncertainty has increased, consumers move their money to the safest currencies and countries in the world. Predict the effects of an increase in uncertainty on
How does a decrease in U.S. interest rates affect the EU/U.S. exchange rate?
How will a dollar devaluation affect businesses and consumers in the twin cities of El Paso, United States, and Juarez, Mexico?
If market participants expect the krona to appreciate relative to the dollar, what will happen?
Branded drugs face generic entry by rival drugs that typically take 80% of sales away from the branded drug within three years. This loss occurs because generic drugs are much cheaper than branded
You are a hospital administrator trying to raise capital to refurbish the hospital. Your local bank is reluctant to lend to you because you already have a large mortgage on the property on which the
Suppose your elasticity of demand for your parking lot spaces is –2, and price is $8 per day. If your MC is zero, and your capacity is 80% full at 9 A.M. over the last month, are you optimizing?
Suppose your elasticity of demand for your parking lot spaces is – 0.5, and price is $20 per day. If your MC is zero, and your capacity at 9 A.M. is 96%full over the last month, are you optimizing?
Suppose your parking lot has two different consumers who use it at two different times. Daily commuters use it during the daytime, and sports fans use it at different times to park at sporting
1. The individual demand curve slopes downward becausea) The value an individual places on an extra unit of the good decreases.b) The amount an individual is willing to pay for the additional unit
Why do newspaper vending machines allow buyers to take more than one paper while soft drink vending machines dispense just one can of soda at a time?
You run a chain of movie theaters, so you commission a marketing study that categorizes your potential customers into 10 equal-sized groups according to what they’re willing to pay for a movie
Some Internet retailers track whether its customers have recently visited popular price-comparison sites. Why might these retailers offer different prices to those who have and have not recently
Suppose that technophiles are willing to pay $400 now for the latest iPhone, but only $300 if they have to wait a year. Normal people are willing to pay $250, and their desire to purchase does not
Suppose your marketing department does a survey of potential users and finds that these users place the following values on the two versions of your software:If the numbers of home and commercial

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