-
Managerial
Economics
Part 1:
1. The price of good
A goes up. As a result the demand for good B
shifts to the
left. From this we can
infer that:
a.
good A is a
normal good.
b.
good B is an
inferior good.
c.
goods A
and B are substitutes.
d.
goods A and B are complements.
e.
none of the above.
Choose: d) the definition os
complements
2. Joe's budget
line is 15F + 45C = 900. When Joe chooses his most
preferred market
basket, he buys 10
units of C. therefore, he also buys :
a. 10 units of F b. 30 units of F
c. 50 units of F
d. 60 units of F
e. None of the above
Choose: b) We
assume that Joe will spend all his income. If C =
10, then 15F =900
–
45(10)
=450, so F = 450/15 =30.
3.
Kim only buys coffee and compact discs. Coffee
costs $$0.60 per cup, and CDs cost
$$12.00 each. She has $$18 per week to
spend on these two goods. If Kim is maximizing
her utility, her marginal rate of
substitution of coffee for CDs is:
a.
0.05 b. 20 c. 18 d. 1.50 e. None
of the above
Choose: a) At Kim's most
preferred market basket, her MRS equals the price
ratio
(Pcoffee/PCD), which equals
0.6/12 or 0.05.
4. The
bandwagon effect corresponds best to which of the
following?
a.
snob effect.
b.
external economy.
c.
negative network
externality.
d.
positive
network externality.
Choose: d)
5. A Giffen good
a.
is always the same as an
inferior good.
b.
is
the
special
subset
of
inferior
goods
in
which
the
substitution
effect
dominates
the income effect.
c.
is the special subset
of
inferior
goods
in
which the income
effect
dominates
the
substitution
effect.
d.
must have a
downward sloping demand curve.
Choose:
c) the definition of Giffen good
6. An Engel curve for a good has a
positive slope if the good is :
a. an
inferior good. b. a Giffen good.
c. a normal good. d. a,
b, and c are true.
e. None of the above
is true.
Choose: c) Inferior and Giffen
goods have negatively sloped Engel curves.
7.
The
price
of
beef
and
quantity
of
beef
traded
are
P*
and
Q*,
respectively. Given
this
information, consumer surplus is the area:
a. 0BCQ* b. ABC
c. ACP* d. CBP*
e. 0ACQ*
Choose:
d)
Consumer surplus is the
area between the demand line and the price.
8. In Figure 1, holding
income constant, what change must have occurred to
rotate
the budget line from the old
line(1) to the new line(2)?
Pizza
(2)
(1)
Figure 1
Coke
a. The price of Coke fell
b.
The price of pizza fell
c. The price of
pizza rose
d. The price of Coke went up
e. b and c
Choose:
b) The
horizontal
intercept,
I/PC,
is
unchanged,
which
implies
that
PC
could
not
have
changed
(holding
income
constant).
Since
the
slope
is
PP/PC,
the
slope
change
means that the price
of pizza must have fallen. This can also be seen
intuitively
from Figure 1, since the
consumer can now buy more pizza than before if he
spends
all his income on pizza.
9. Andy buys 10 pounds of onions per
month when the price is $$0.75 per pound. If
the price falls to $$0.50 per pound, he
buys 30 pounds of onions. What is his arc
elasticity of demand over this price
range?
a. - 1.33
b.
–
2
c.
–
2.5 d. - 6
e. None of the above is correct.
Choose: c) Using the arc elasticity
formula,
EP
?
?
Q
P
(
30
?
10
)
(
0
.
50
?
0
.
75
)
< br>?
2
?
?
?
?
?
2
.
5
?
P
Q
(
0
.
50
?
0
.
75
)
(
30
?
10
)
?
2
The next two questions refer to
the following information: Opie and Gomer are the
only
two
consumers
in
the
video
cassette
rental
market
in
the
Mayberry.
Their
demand
curves per week are pictured in Figure
2.
10. If rentals cost $$2.50 each, the
total
quantity demanded each week in
the market
is :
a. 3 b. 6
c. 15 d. 10 e. None of the above is correct.
Choose: b) Add horizontally to get the
market demand curve. At P = $$2.50, QO = 3
and QG = 3 for a total of 6 units
demanded.
11. For a
decrease in price from $$2.50 to $$1.50, market
demand is :
a. elastic. b.
unit elastic. c. inelastic.
d. perfectly inelastic. e. More
information is needed.
Choose: a)
Demand is price elastic:
EP = %
< br>Δ
Q/%
Δ
P =
[(15-6)/6]/[(2.50-1.50)/2.50] = -3.75
OPIE
Price($$/uni
t)
2.50
Do
1.50
Quantity
(number
of cassettes)
3
8
(a)
COMER
Price($$/uni
t)
2.50
D
G
1.50
Quantity
(number of cassettes)
3
7
(b)
Figure 2