managerial economics

managerial economics
1. If a good is selling at a very low price then it must be the case that consumers do not obtain much value or utility from that good. Agree?

2. If the equilibrium price and quantity of a good both increase then both the demand and supply for that good must have increased. Agree?

3. Oil and Gas production was seriously disrupted in the Gulf of Mexico following Hurricanes Katrina and Rita in 2005. This short-term supply disruption is likely to cause the equilibrium quantity of gas to fall but the price could go either up or down. Agree?

4. If, over a number of years, we observe that the price of a good has increased while the number of units of the good sold has also increased, the demand curve for that good must be upward sloping. Agree?

5. Since consumers’ tastes and preferences vary significantly, it must be the case that their marginal rates of substitution across different goods are never equal. Agree?

6. Suppose that a unit tax is placed on all seafood. This will tend to result in owners of steak houses (meat is a substitute) to experience an increase in their sales and prices. Agree?

7. If the market supply curve of a good is horizontal, a shift in consumer preference toward the good will raise the price of the good to reflect the increased value consumers place on the good. Agree?

8. According to the law of diminishing marginal returns, adding more of a variable factor of production to a given quantity of a fixed factor will lead to lower and lower levels of total output. Agree?

9. Suppose that half of a nation’s housing stock is destroyed and that the prices of the remaining houses increase. Therefore the consumer surplus from housing has risen because housing prices are now higher. Agree?

10. Suppose that half of a nation’s housing stock is destroyed and that the prices of the remaining houses increase. Therefore, the price elasticity of demand for housing has decreased because people who have loss their house will pay any price for shelter. Agree?

11. Households in the city of Utopia are to receive special cash payments from the local government to help them meet the costs of a very sharp increase in electricity prices. Assuming that electricity is a normal good, then the income effect of the increase in the price of electricity will be even larger than without the cash payment. Agree?

12. There is a rumor that the telecom regulator is considering opening up entry of regional mobile phone companies into the Singapore market. This policy will increase the absolute value of the elasticity of demand for our company’s mobile phone services. Agree?

13. Suppose that a consumer spends all of her income on two goods (Y and X). When the price of good X increases and the price of good Y is unchanged, the demand of good Y increases. The demand for good X must be elastic. Agree?

14. If a consumer spends all of her income on a single good then her income elasticity of demand for that good must be a unity, her (own) price elasticity of demand for the good must be zero and the cross price elasticity of demand for that good versus other goods must be negative. Agree?

15. A poor professor spends most of his budget on second hand clothes and tends to reduce his demand for the goods as income increases. When the price of second hand clothing increases, the professor will buy less of the goods. Agree?

16. A rich student buys 20 CDs a month at the price of $10 each. A new store offers free membership that entitles her to buy the first 10 CDs each month at $12 each and at $8 after the first 10 CDs. She will take up the membership and buy more CDs. Agree?

17. The long-run costs for a firm must always be higher than the short run costs because in the long run the firm must bear the costs of varying all factor inputs whereas it only needs to vary a small number of inputs in the short term. Agree?

18. In order to maximize profit in the short run, a perfectly competitive firm will choose an output level where marginal revenue is equal to marginal cost. Agree?

19. In order to maximize profit in the long run, a perfectly competitive firm will choose an output level where average variable cost is at a minimum. Agree?

20. The fact that all firms in a competitive industry will eventually earn zero economic profit implies that there is no incentive for a firm to enter a competitive industry and that firms will prefer to enter industries characterized by monopoly. Agree?

21. If the demand for a good drops sharply and its price falls below the average total cost of the least efficient firms in an industry (but is still above their average variable costs), then these less efficient firms will shut down production immediately. Agree?

22. A monopolist charges a uniform price and has a constant marginal cost. The government gives the firm a subsidy on each unit of output which is greater than the marginal cost of the good. The monopolist will not operate in the inelastic range of the linear demand curve. Agree?

23. A price discriminating monopolist would seek to charge the highest prices to those consumers with the lowest own price elasticity of demand in absolute value terms for his/her product. Agree?

24. A profit-maximizing monopolistic firm will always select the output level where average total cost is at a minimum. Agree?

25. For a profit maximizing monopoly charging a uniform price, marginal revenue is less than price. If the same monopolist can perfectly price discriminate, then marginal revenue equals price. Agree?

26. A monopolist seeking to maximize total revenue will generally operate at the mid point of the linear demand curve and produce a higher level of output than a discriminating profit maximizing monopolist. Agree?

27. A monopolistically competitive firm will select the output level where price is equal to average total costs. Agree?

Aventis Research sells econometric software and offers two versions – Version A is the full feature and Version B has some limitations (non-standard estimator cannot be programmed and limit on maximum data size). Business and home user segments are of equal size, and their willingness to pay for the software is as follows:


28. If Aventis can distinguish business and home users and charge them different prices, it will only sell Version A. Agree?
29. If Aventis cannot distinguish the users, then it can still price discriminate by selling Version A at $650 and version B at $2000. Agree?
30. If there were 190 business users and 10 home users, Aventis will only sell Version A at $2000. Agree?