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Managerial economics a problem solving approach PDF

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Title Page Copyright Page Brief Contents Contents Preface: Teaching Students to Solve Problems Section I: Problem Solving and Decision Making Chapter 1: Introduction: What This Book Is About 1.1 Using Economics to Solve Problems 1.2 Problem-Solving Principles 1.3 Test Yourself 1.4 Ethics and Economics 1.5 Economics in Job Interviews Summary & Homework Problems End Notes Chapter 2: The One Leson of Busines 2.1 Capitalism and Wealth 2.2 Does the Government Create Wealth? 2.3 How Economics Is Useful to Business 2.4 Wealth Creation in Organizations Summary & Homework Problems End Notes Chapter 3: Benefits, Costs, and Decisions 3.1 Background: Variable, Fixed, and Total Costs 3.2 Background: Accounting versus Economic Profit 3.3 Costs Are What You Give Up 3.4 Sunk-Cost Fallacy 3.5 Hidden-Cost Fallacy 3.6 A Final Warning Summary & Homework Problems End Notes Chapter 4: Extent (How Much) Decisions 4.1 Fixed Costs Are Irrelevant to an Extent Decision 4.2 Marginal Analysis 4.3 Deciding between Two Alternatives 4.4 Incentive Pay 4.5 Tie Pay to Performance Measures That Reflect Effort 4.6 Is Incentive Pay Unfair? Summary & Homework Problems End Notes Chapter 5: Investment Decisions: Look Ahead and Reason Back 5.1 Compounding and Discounting 5.2 How to Determine Whether Investments Are Profitable 5.3 Break-Even Analysis 5.4 Choosing the Right Manufacturing Technology 5.5 Shut-Down Decisions and Break-Even Prices 5.6 Sunk Costs and Post-Investment Hold-Up Summary & Homework Problems End Notes Section II: Pricing, Costs, and Profits Chapter 6: Simple Pricing 6.1 Background: Consumer Values and Demand Curves 6.2 Marginal Analysis of Pricing 6.3 Price Elasticity and Marginal Revenue 6.4 What Makes Demand More Elastic? 6.5 Forecasting Demand Using Elasticity 6.6 Stay-Even Analysis, Pricing, and Elasticity 6.7 Cost-Based Pricing Summary & Homework Problems End Notes Chapter 7: Economies of Scale and Scope 7.1 Increasing Marginal Cost 7.2 Economies of Scale 7.3 Learning Curves 7.4 Economies of Scope 7.5 Diseconomies of Scope Summary & Homework Problems End Notes Chapter 8: Understanding Markets and Industry Changes 8.1 Which Industry or Market? 8.2 Shifts in Demand 8.3 Shifts in Supply 8.4 Market Equilibrium 8.5 Predicting Industry Changes Using Supply and Demand 8.6 Explaining Industry Changes Using Supply and Demand 8.7 Prices Convey Valuable Information 8.8 Market Making Summary & Homework Problems End Notes Chapter 9: Market Structure and Long-Run Equilibrium 9.1 Competitive Industries 9.2 The Indifference Principle 9.3 Monopoly Summary & Homework Problems End Notes Chapter 10: Strategy: The Quest to Kep Profit from Eroding 10.1 A Simple View of Strategy 10.2 Sources of Economic Profit 10.3 The Three Basic Strategies Summary & Homework Problems End Notes Chapter 11: Foreign Exchange, Trade, and Bubles 11.1 The Market for Foreign Exchange 11.2 The Effects of a Currency Devaluation 11.3 Bubbles 11.4 How Can We Recognize Bubbles? 11.5 Purchasing Power Parity Summary & Homework Problems End Notes Section III: Pricing for Greater Profit Chapter 12: More Realistic and Complex Pricing 12.1 Pricing Commonly Owned Products 12.2 Revenue or Yield Management 12.3 Advertising and Promotional Pricing 12.4 Psychological Pricing Summary & Homework Problems End Notes Chapter 13: Direct Price Discrimination 13.1 Why (Price) Discriminate? 13.2 Direct Price Discrimination 13.3 Robinson-Patman Act 13.4 Implementing Price Discrimination 13.5 Only Schmucks Pay Retail Summary & Homework Problems End Notes Chapter 14: Indirect Price Discrimination 14.1 Indirect Price Discrimination 14.2 Volume Discounts as Discrimination 14.3 Bundling Different Goods Together Summary & Homework Problems End Notes Section IV: Strategic Decision Making Chapter 15: Strategic Games 15.1 Sequential-Move Games 15.2 Simultaneous-Move Games 15.3 Prisoners’ Dilemma 15.4 Other Games Summary & Homework Problems End Notes Chapter 16: Bargaining 16.1 Strategic View of Bargaining 16.2 Nonstrategic View of Bargaining 16.3 Conclusion Summary & Homework Problems End Note Section V: Uncertainty Chapter 17: Making Decisions with Uncertainty 17.1 Random Variables and Probability 17.2 Uncertainty in Pricing 17.3 Data-Driven Decision Making 17.4 Minimizing Expected Error Costs 17.5 Risk versus Uncertainty Summary & Homework Problems End Notes Chapter 18: Auctions 18.1 Oral Auctions 18.2 Second-Price Auctions 18.3 First-Price Auctions 18.4 Bid Rigging 18.5 Common-Value Auctions Summary & Homework Problems End Notes Chapter 19: The Problem of Adverse Selection 19.1 Insurance and Risk 19.2 Anticipating Adverse Selection 19.3 Screening 19.4 Signaling 19.5 Adverse Selection and Internet Sales Summary & Homework Problems End Notes Chapter 20: The Problem of Moral Hazard 20.1 Introduction 20.2 Insurance 20.3 Moral Hazard versus Adverse Selection 20.4 Shirking 20.5 Moral Hazard in Lending 20.6 Moral Hazard and the 2008 Financial Crisis Summary & Homework Problems End Notes Section VI: Organizational Design Chapter 21: Geting Employees to Work in the Firm’s Best Interests 21.1 Principal–Agent Relationships 21.2 Controlling Incentive Conflict 21.3 Marketing versus Sales 21.4 Franchising 21.5 A Framework for Diagnosing and Solving Problems Summary & Homework Problems End Notes Chapter 22: Geting Divisions to Work in the Firm’s Best Interests 22.1 Incentive Conflict between Divisions 22.2 Transfer Pricing 22.3 Organizational Alternatives 22.4 Budget Games: Paying People to Lie Summary & Homework Problems End Notes Chapter 23: Managing Vertical Relati onships 23.1 How Vertical Relationships Increase Profit 23.2 Double Marginalization 23.3 Incentive Conflicts between Retailers and Manufacturers 23.4 Price Discrimination 23.5 Antitrust Risks 23.6 Do Buy a Customer or Supplier Simply Because It Is Profitable Summary & Homework Problems End Notes Section VII: Wrapping Up Chapter 24: Test Yourself 24.1 Should You Keep Frequent Flyer Points for Yourself? 24.2 Should You Lay Off Employees in Need? 24.3 Manufacturer Hiring 24.4 American Airlines 24.5 Law Firm Pricing 24.6 Should You Give Rejected Food to Hungry Servers? 24.7 Managing Interest-Rate Risk at Banks 24.8 What You Should Have Learned Epilogue: Can Those Who Teach, Do? Glossary Index

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Managerial economics, meaning the application of economic methods in the managerial decision-making process, is a fundamental part of any business or management course. This textbook covers all the main aspects of managerial economics: the theory of the firm; demand theory and estimation; production and cost theory and estimation; market structure and pricing; game theory; investment analysis and government policy. It includes numerous and extensive case studies, as well as review questions and problem-solving sections at the end of each chapter. Nick Wilkinson adopts a user-friendly problem-solving approach which takes the reader in gradual steps from simple problems through increasingly difficult material to complex case studies, providing an understanding of how the relevant principles can be applied to real-life situations involving managerial decision-making. This book will be invaluable to business and economics students at both undergraduate and graduate levels who have a basic training in calculus and quantitative methods.

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Managerial Economics: A Problem Solving Approach | 6th Edition

Available study tools, mindtap for froeb/mccann/ward/shor’s managerial economics: a problem solving approach, 1 term instant access, about this product.

Teach your upper-level undergraduate and M.B.A. students how to use economics to solve today's business problems with the breakthrough approach in Froeb/McCann/Ward/Shor's MANAGERIAL ECONOMICS: A PROBLEM SOLVING APPROACH, 6E. This edition addresses traditional managerial economics topics using a problem-based approach built around today's most common business mistakes. The authors use models sparingly and only in instances when models help students determine why mistakes are made and how to fix them. Revisions throughout this succinct, fast-paced presentation offer challenging, interactive applications that place students in the role of a decision-maker who must identify profitable decisions and implement them. Practical content highlights the latest economic developments worldwide and makes this an excellent ongoing reference for professionals pursuing business careers. MindTap digital resources are also available to reinforce understanding and provide interactive learning opportunities.

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Managerial Economics 4th Edition

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• ISBN-10 1305259335
• ISBN-13 978-1305259331
• Edition 4th
• Publisher Cengage Learning
• Publication date January 1, 2015
• Language English
• Dimensions 7.5 x 0.5 x 9.5 inches
• Print length 352 pages
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• Publisher ‏ : ‎ Cengage Learning; 4th edition (January 1, 2015)
• Language ‏ : ‎ English
• Hardcover ‏ : ‎ 352 pages
• ISBN-10 ‏ : ‎ 1305259335
• ISBN-13 ‏ : ‎ 978-1305259331
• Item Weight ‏ : ‎ 1.61 pounds
• Dimensions ‏ : ‎ 7.5 x 0.5 x 9.5 inches
• #599 in Business Management (Books)
• #1,404 in Economics (Books)

About the author

Mikhael shor.

Mike Shor is an Associate Professor of Economics at the University of Connecticut.

Mike studied economics and foreign affairs at the University of Virginia and received his PhD in economics from Rutgers University. Previously, he was an Assistant Professor at Vanderbilt's Owen Graduate School of Management, where he twice was named the best professor by the graduating MBA class. He has taught classes in economic theory, game theory, and pricing.

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Customers find the book well-written and easy to understand. They find it a good value for the money and consider it an overview of Economics. However, opinions differ on the information quality - some find it informative and interactive, while others feel it lacks depth in problem solving examples and is only an overview.

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Customers find the book readable. They mention it's well-written, with typos, but clear and easy to understand. The chapters are readable in length and content.

"...And it's not because it's easy to understand or has helpful practice problems at the end of each chapter, but because all of this information is..." Read more

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"...Otherwise straightforward overview of basic concepts, chapters are readable in length and content" Read more

"Good overview of Economics. Great information and easy to understand , but does not help in solving more complicated problems...." Read more

Customers appreciate the book's value for money. They find it provides a good overview of Economics, though some pages are worn.

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Customers have mixed opinions about the book's information quality. Some find it informative and interactive, highlighting major concepts in an easy-to-understand way. They say it makes the subject matter interesting and relevant from a real-life perspective. However, others feel the book lacks detail in its problem-solving examples and provides only an overview rather than an in-depth look at the subject matter. Additionally, they feel the book oversimplifies concepts to push a clear agenda.

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"...It is meant to be only an overview and not extremely in-depth . I would recommend the book as it highlights major concepts. It is a bit costly though." Read more

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Managerial Economics: A Problem-Solving Approach 5 th Edition

Interactive HW Questions (solutions to end-of-chapter multiple choice questions)

Table of Contents

• Chapter 14 (and 13)

The rational-actor paradigm assumes the people do NOT a. Act rationally. [The rational actor paradigm does assume that people act rationally] b. Use rules of thumb. [correct; the rational actor paradigm assumes people will act rationally, optimally and self-interestedly. Rules of thumb will only be used if they meet those three specific parameters ] c. Act optimally. [The rational actor paradigm does assume people will act optimally, selecting or creating the outcome that provides them with the most benefit] d. Act self-interestedly. [The rational actor paradigm does assume that people will act in their own best interest]

The problem-solving principles analyze firm problems, a. from the organization’s point of view . [correct; considering a problem from the view of the overall organization will help ensure all elements and impacts are considered. ] b. from the manager’s point of view. [Managers are also employees of the organization, thinking of a problem from only their perspective may overlook its impact on the company as a whole] c. from the worker’s point of view. [Thinking about a problem only from the employee’s point of view risks missing the fundamental problem of goal alignment with the overall organization] d. Both A and B [Think about problems from the perspective of the overall organization, not its employees]

Why might welfare for low income households reduce the propensity to work? a. It will not. [It can if working can only provide similar benefits to those that can be received from welfare without working] b. It reduces the incentive to work . [correct; those receiving welfare may have less incentive to work if the benefits of working are similar to or worse than those that are received without it. Additionally, welfare may reduce the value of working for higher income workers who have to support the system, also reducing their incentives ] c. It is unfair. [Perception of fairness alone will not alter the propensity to work unless it also impacts the value of that work for the individual, which would impact his overall incentives] d. It encourages jealousy. [Jealousy itself will not alter the propensity to work unless it also impacts the perceived value of that work, which changes the incentives]

Why might a “bonus cap” for executives be a bad policy for the company? a. It isn’t. Executives shouldn’t make more than a certain amount. [Just like other types of employees, setting a maximum value for executives eliminates the ability to separate, reward and motivate them based on their performance] b. It would sew discontent. [Even if discontented, the rational actor paradigm indicates executives would still perform to reach the cap value in order to maximize their bonus] c. It would encourage laziness after the executives reached the cap . [correct; limiting the bonus may reduce the incentive of executives to continue improving or performing once it is achieved ] d. The cap could be set too high, so execs may work too hard and not reach it. [This is a problem not with the cap itself, but with the level, which can be adjusted as needed]

What might happen if a car dealership is awarded a bonus by the manufacturer for selling a certain number of its cars monthly, but the dealership is just short of that quota near the end of the month? a. It may sell the remaining cars at huge discounts to hit the quota. [correct; the loss of income from the reduced rate will be offset by the manufacturer’s bonus] b. It creates an incentive to sell cars from different manufacturers. [the dealership is more inclined to sell cars from the manufacturer providing the bonus] c. It would ruin the relationship between dealer and manufacturer. [The dealer is working to meet the requirements of the manufacturer to achieve the bonus]

Why might a supermarket advertise low prices on certain high profile items and sell them at a loss? a. It is a way for companies to be charitable. [The rational actor paradigm tells us the firm will act in its own self-interest] b. The store will sell other groceries to the same customers, often at a markup . [correct; by using the discounted items to bring consumers into the stores, the supermarket can profit by increasing the prices on the other items they will purchase while they are there. ] c. They would not. [Actually, they do quite often. Can you think of why this may be?] d. This reduces the incentives of trade. [Trade incentives do not apply in this case]

Which of the following are examples of a price floor? a. Minimum wages [correct; by outlawing wages below a certain price, minimum wages are an example of a price floor] b. Rent controls in New York [this is an example of a price ceiling, in which the price of rent cannot go above a specified value] c. Both a and b [Of the two options, one is indeed an example of a price floor, while the other is a price ceiling] d. None of the above. [At least one of the answers above is an example of a price floor, which is defined as a regulation that outlaws trade at prices below the specified “floor” value]

A price ceiling a. Is a government-set price above market equilibrium price. [A price ceiling is a regulation that outlaws trade above a specified price; it does not have to be above market equilibrium] b. Is the equivalent of an implicit tax on producers and an implicit subsidy to consumers . [correct; Price ceilings prevent producers from selling at a higher price to consumers who would be willing to pay more, while consumers have the opportunity to purchase something they may not have been able to otherwise] c. Will create a surplus. [Likely, both the consumer (buyer) and producer (seller) will value the good at or above the specified ceiling. If the producer is forced to sell, any surplus for the consumer is a loss for the producer, so no net surplus is created from the transaction] d. Causes an increase in consumer and producer surplus. [Both the consumer (buyer) and producer [seller] likely value the item at or above the specified ceiling, resulting in a benefit for the consumer but a loss of potential wealth for the producers]

**NOTE of post-production change: the phrasing of answer a. should be changed to “is a government-set price above market equilibrium price.”

Taxes a. impede the movement of assets to higher valued uses. [This is the result of anything that deters a wealth creating transaction] b. reduce incentives to work. [By not allowing people to capture the full value of their labor and production, taxes reduce the incentive to work] c. decrease the number of wealth-creating transactions. [If a tax is larger than the total surplus created by a transaction, the transaction will not take place] d. All of the above. [correct; when taxes are larger than the surplus of a transaction, that transaction will not take place, thus deterring a wealth creating transaction. Likewise, by not allowing people to keep the gains from their own trade, taxes can diminish the incentive to work ].

A consumer values a car at $30,000 and a producer values the same car at $20,000. If the transaction is completed at $24,000, the transaction will generate a. no surplus [A surplus is created from this transaction] b. $4,000 worth of seller surplus and unknown amount of buyer surplus [Seller surplus is $4000, (Final price less seller value); Similarly, buyer surplus can be calculated by looking at the difference between the buyer value and the final price. c. $6,000 worth of buyer surplus and $4,000 of seller surplus [correct; Buyer surplus is calculated by looking at the difference between the buyer value and the final price ($30,000-

$24,000=$6,000), while the seller surplus is calculated by looking at the difference between the final price and the seller’s value ($24,000-$20,000=$4,000)] d. $6,000 worth of buyer surplus and unknown amount of seller surplus. [Buyer surplus is $6000, (Buyer value less final price); similarly, seller surplus can be calculated by looking at the difference between the final price and the seller value]

A consumer values a car at $525,000 and a producer values the same car at $485,000. If sales tax is 8% and is levied on the seller, then the seller’s bottom line price is (rounded to the nearest thousand) a. $527,000 (correct; At a price of $527,000, the seller will receive $485,760 ($528,000 0) which is above his bottom line (For the exact value, look at $485,000/0 = $527,173. As the seller requires a number at or above this value, $528,000 is the best response) ] b. $524,000 [at a price of $524,000, the seller will only receive $482,080 ($524,000 0) which is below his bottom line] c. $525,000 [at a price of $525,000, the seller will only receive $483,000 ($525,000 0) which is below his bottom line] d. $500,000 [at a price of $500,000, the seller will only receive $460,000 ($500,000 0) which is below his bottom line]

Efficiency implies opportunity a. always [In an efficient market, all assets are already employed in their highest valued uses] b. never [correct; by definition, wealth is generated from inefficiencies in the market, which allow for assets to be moved from lower to high valued uses ] c. only if accompanied by secure property rights [Secure property rights assist in wealth generating transactions, which occur from the movement of assets from lower to higher valued uses] d. None of the above [It is one of the above]

Opportunity costs arise due to a. Resource scarcity [correct; without scarce resources (time, labor, money, etc), the pursuit of another alternative does not require one to give up anything in return. b. Interest rates [interest is an economic cost that reflects what creditors charge for use of their capital] c. Limited wants [Limited wants would not generate opportunity costs] d. Unlimited scarcity [Unlimited scarcity does not generate opportunity costs]

After graduating from college, Jim had three choices, listed in order of preference: (1) Move to Florida from Philadelphia, (2) work in a car dealership in Philadelphia, or (3) play soccer for a minor league in Philadelphia. His opportunity cost of moving to Florida includes a. The benefits he could have received from playing soccer [Opportunity cost represents the value of only the best foregone alternative] b. The income he could have earned at the car dealership [correct; opportunity cost reflects the value of the best foregone alternative, in this case the car dealership salary] c. Both a and b. [Opportunity costs represent the value of only the best foregone alternative] d. Cannot be determined from the given information. [Opportunity costs reflect the value of the best foregone alternative, what is that for Jim in this case?]

Economic Value Added helps firms avoid the hidden-cost fallacy a. by ignoring the opportunity costs of using capital [On the contrary, EVA makes the hidden cost of equity visible to the firm] b. by differentiating between sunk and fixed costs [EVA may help managers distinguish between the two, but it does so by looking at the cost of capital associated with each] c. by taking all capital costs into account, including the cost of equity [correct; By taking all of the capital costs into account such as the cost of equity, firms can better gauge their economic profit and the opportunity costs associated with some of their current assets] d. None of the above. [It is one of the above]

The fixed-cost fallacy occurs when a. A firm considers irrelevant costs [The sunk or fixed cost fallacy occurs when you make decisions using irrelevant costs or benefits. In other words, you consider costs and benefits that do not vary with the consequences of your decision] b. A firm ignores relevant costs [This is the definition of the hidden cost fallacy] c. A firm considers overhead or depreciation costs to make short-run decisions [Overhead and depreciation are example of irrelevant or suck costs that are not impacted by the outcome of a short term decision] d. Both a and c. [correct; The sunk or fixed cost fallacy occurs when costs (such as depreciation and overhead) are considered even when they do not vary with the consequences of the decision.

Mr. D's Barbeque of Pickwick, TN, produces 10,000 dry-rubbed rib slabs per year. Annually Mr. D's fixed costs are $50,000. The average variable cost per slab is a constant $2. The average total cost per slab then is a. $7. [correct; Total fixed costs are $5/lab ($50,000Total Fixed Cost/10,000 units), and average variable cost is given as $2/slab. Therefore average total cost (Fixed + Variable) per unit equal $5+$2=$7 ]

b. $2. [This represents the average variable cost per unit. Average total cost requires consideration of the fixed component] c. $5. [This represents the average fixed cost per unit, calculated as $50,000 Total Fixed cost/10,000 units] d. Iimpossible to determine. [Average total cost per unit can be determined by adding the average variable and fixed costs per unit of the rib slabs]

All the following are examples of variable costs, except a. Labor costs [varies by the number of employees as well as their hours worked, which correlate with the total amount of output produced] b. Cost of raw materials [Cost of raw materials with the total amount of output produced] c. Accounting fees [correct; accounting fees are paid regardless of total output. They do not vary with the amount that is produced ] d. Electricity costs [Electricity, like other utilities varies by usage]

The U. Government bought 112,000 acres of land in southeastern Colorado in 1968 for $17,500,000. The cost of using this land today exclusively for the reintroduction of the black-tailed prairie dog a. is zero, because they already own the land. [The cost of the land includes the cost of the best foregone option] b. is zero, because the land represents a sunk cost. [A cost is sunk when it does not vary with the outcome of the decision. In this case, there may be an opportunity cost associated with using the land for prairie dogs that should be considered] c. is equal to the market value of the land. [correct; the cost of a decision includes the cost of the best foregone option. In this case, this is the amount the government could sell the land for if they did not use if for prairie dog introduction ] d. is equal to the total dollar value the land would yield if used for farming and ranching. [This may be hard to determine, and also requires additional resources and labor. In this case, there may be a better alternative] e. depends on the value to society of black-tailed prairie dogs. [Regardless of the prairie dog value, the cost would include that of the best foregone option and should still be considered. If that cost is deemed less than the value of the prairie dogs, the project will move forward]

d. FC = $400 [We know that Total cost = FC + VC(Quantity). This means 1500 = FC+VC(40) and 1800=FC+VC(50). Using this information, we can solve for FC]

A manager of a clothing firm is deciding whether to add another factory in addition to one already in production. The manager would compare a. the total benefits gained from the two factories to the total costs of running the two factories. [By combining the total costs and benefits of the two factories, the manager would not be able to determine the contribution of the second factory on its own] b. the incremental benefit expected from the second factory to the total costs of running the two factories. [The additional benefit of the second factory should only be compared to the additional costs of that factory, as the costs from the first factory will be incurred regardless] c. the incremental benefit expected from the second factory to the cost of the second factory [correct; the manager will decide to add another factory when the incremental benefits of that factory are greater than its incremental costs] d. the total benefits gained from the two factories to the incremental costs of running the two factories. [The incremental costs of having a second factory should be compared only to its incremental benefit, as the benefits of the first factory will be produced regardless]

A firm is thinking of hiring an additional worker to their organization who can increase total productivity by 100 units a week. The cost of hiring him is $1,500 per week. If the price of each unit is $12, a. the MR of hiring the worker is $1,500 [The MR of hiring the worker is $1200 (100 additional units produced*$12/unit)] b. The MC of hiring the worker is $1, 200 [The MC of hiring the worker is his salary of $1500] c. The firm should not hire the worker since MB < MC [correct; The MR of hiring the worker is $1200 (100 additional units*$12/unit), while his MC is his salary of $1500, indicating the company will lose $300/week by hiring the additional worker] d. All the above [Remember the marginal benefit is the additional revenue generated by the worker, while the marginal costs will be any additional costs that occur from hiring him]

A retailer has to pay $9 per hour to hire 13 workers. If the retailer only needs to hire twelve workers, a wage rate of $7 per hour is sufficient. What is the marginal cost of the 13th worker? a. $117. [This is the total cost of having 13 workers ($9 13)] b. $9. [This represents the wage of the additional worker, but does not take into consideration the additional costs of the wage increase for the rest of the employees associated with his hiring] c. $33. [correct; The total cost of having twelve workers is $84 (12workers $7hr) while the addition of the thirteenth worker brings the total cost up to $117 (13 workers*$9/hr). Therefore, the marginal cost of the 13th worker is $33 ($117-$84) ] d. $84. [This is the total cost of having 12 workers (12*$7/hr)]

If a firm’s average cost is rising then a. marginal cost is less than average cost. [If marginal cost is less that average cost, then its average cost will fall with each additional unit] b. marginal cost is rising. [Average cost may still be falling even as marginal cost rises, provided the marginal cost still falls below the average]

c. marginal cost is greater than average cost [correct; when the marginal cost is above the average, then the average will rise with output ] d. the firm is making an economic profit. [Average cost trends cannot be determined by looking at average costs exclusively]

After the first week of his MBA Managerial Economics class, one of your pharmaceutical sales representatives accuses you of committing the sunk cost fallacy by refusing to allow him to reduce price to make what he considers to be a really tough sale. Which of the following suggest the sales representative may be right? a. Most of the costs of drug development are sunk, not fixed. [correct; in this case, he may be correct. The costs of drug development have already been incurred, cannot be recovered, and will not change with the outcome of the sale ] b. Sales representatives are paid a sales commission on revenue, so they don’t care about the costs of drug development. [The fact that representatives are paid a commission on revenue does not have anything to do with whether you are committing the sunk cost fallacy] c. Sales representatives don’t worry that a low price today may make it more difficult for the company’s other sales representatives to charge higher prices to their customers tomorrow. [If true, this would be an example of a hidden cost] d. Sales representatives think only about one thing, sales. [The fact that representatives think only of sales does not have anything to do with whether you are committing the sunk cost fallacy]

A company is producing 15,000 units. At this output level, marginal revenue is $22 and the marginal cost is $18. The firm sells each unit for $48 and average total cost is $40. What can we conclude from this information? a. The company is making a loss. [The company is making a profit of $120000. Total revenues equal $720000 ($48 15000units) while total costs are $600000 ($40 15000units)] b. The company needs to cut production. [You need to cut production when MC>MR] c. The company needs to increase production. [correct; When MR>MC, you need to sell more. In this case MR=$22 is greater than MC=$18, therefore they should increase production] d. Not enough information is provided. [There is enough information provided to answer this question]

c. 7 [Total costs can be calculated as C=FC+VC(Q). Sarah will be indifferent between the two technologies at the quantity where these two costs are the same] d. 8 [Total costs can be calculated as C=FC+VC(Q). Sarah will be indifferent between the two technologies at the quantity where these two costs are the same]

What is the net present value of a project that requires a $100 investment today and returns $50 at the end of the first year and $80 at the end of the second year? Assume a discount rate of 10%. a. $10 [To find Net Present Value, discount the future cash flows by the discount rate raised to the period in which it was received (for example, year one means k=1, etc) and then subtract the initial investment from the sum of those cash flows] b. $11 [correct; Net present value is calculated by discounting the future cash flows from the period they were received and subtracting the initial investment from the sum of those cash flows. In this case, (50/1)+(80/1 2 )=111. $111-$100 initial investment gives a NPV of $11 ] c. $18 [Remember that the cash inflows need to be discounted back to present value from the time period in which they occur (50 at the end of year 1, 80 at the end of year 2)] d. $30 [Don’t forget about the time value of money. To determine the net present value, the future cash flows will need to be discounted and the initial investment will be subtracted from the sum of those values]

You expect to sell 500 cell phones a month, which have a marginal cost of $50. If your fixed costs are $5,000 per month, what is the break-even price? a. $10 [Breakeven Q= FC/(P-MC). This means (P-MC)Q=FC, so P-MC= (FC/Q) and finally P= (FC/Q) – MC] b. $50 [Breakeven Q= FC/(P-MC). This means (P-MC)Q=FC, so P-MC= (FC/Q) and finally P= (FC/Q) – MC] c. $60 [Breakeven Q= FC/(P-MC). This means (P-MC)Q=FC, so P-MC= (FC/Q) and finally P= (FC/Q) – MC. This gives us P= (5000/500)+50 = 10+50 = $60 ] d. $100[Breakeven Q= FC/(P-MC). This means (P-MC)Q=FC, so P-MC= (FC/Q) and finally P= (FC/Q) – MC]

You are considering opening a new business to sell dartboards. You estimate that your manufacturing equipment will cost $100,000, facility updates will cost $250,000, and on average it will cost you $80 (in labor and material) to produce a board. If you can sell dart boards for $ each, what is your break-even quantity? a. 1,000 [Breakeven Q=FC/(P-MC). In this case, the Fixed costs include both the equipment and the updates, the price is given at $100, and the MC equals the average cost per board] b. 3,500 [Breakeven Q= FC/(P-MC). Don’t forget to consider the marginal costs!] c. 4,375 [Breakeven Q= FC/(P-MC). Don’t forget to consider the price!] d. 17,500 [correct; Breakeven Q = FC/(P-MC). In this case, fixed costs are $350,000 ($100, equipment + $250,000 updates), the Price is given as $100 and the Marginal cost is the $ cost per additional board. Putting these in the formula, we see that 350,000/(100-80) = 17,500 ]

Which of the following is NOT true if a firm shuts down and produces zero output in the short run? a. Variable costs will be zero. [This is true; variable costs relate directly to the amount of output. With an output of zero, variable costs will also be zero]

b. Losses will be incurred. [This is true. Only variable costs are avoidable in the short run, therefore the fixed costs will still be incurred even without any revenue produced which will result in losses for the firm] c. Fixed costs will be greater than zero. [This is true; only variable costs are avoidable in the short run, which means the fixed costs will still be incurred] d. Fixed costs will be less than zero. [correct; this is not true; fixed costs cannot be less than zero]

What are some of the solutions for a hold-up problem? a. Mergers [Mergers will help a hold-up problem by aligning the incentives of the two organizations into one] b. Contracts [When hold-up is anticipated, contracts can protect the potential victim] c. Exchange of ‘hostages’ [The use of ‘hostages’ helps ensure both parties make appropriate relationship specific investments, and provides either collateral or a means of escaping a hold up situation] d. All of the above [correct; all of these are potential solutions to hold up]

Which of the following is classified as a sunk cost? a. Cost of the next best alternative [this is the definition of an opportunity cost] b. Additional cost of producing an additional unit [this is the definition of a marginal cost] c. Research costs to determine the implementation of a technology [correct; research is often an example of a sunk cost as it is incurred before production and sale and cannot be recovered regardless of what happens with the final product] d. Total cost of producing a product [Production costs are more than likely not sunk, as they tend to be impacted by output decisions]

complements (it is a staple in most households with every meal), which would indicate a less elastic demand than meat ]

Jim recently graduated from college. His income increased tremendously from earning $5000 a year to $60,000 a year. Jim decided that instead of renting he will buy a house. This implies that a. houses are normal goods for Jim [correct; for normal goods, demand increases as income increases] b. houses are inferior goods for Jim [for inferior goods, demand decreases as income increases] c. renting and owning are complementary for Jim [Jim’s decision to purchase a house was not reflective of a change in rental rates. If anything, renting and owning are substitutes for one another] d. need information on the price of houses. [Not necessarily, Jim’s behavior and purchasing decision here is more informative than the actual housing prices]

Which of the following goods have a negative income elasticity of demand? a. Cars [cars are a normal good; typically demand for cars increases with income] b. Items from Dollar stores [correct; Dollar store items are typically considered inferior goods, hence their demand will decrease as the income of the user increases ] c. Shoes [typically, shoes are considered a normal good, with demand increasing with the income of the purchaser] d. Bread [Bread, like most food is considered a normal good]

An economist estimated the cross-price elasticity for peanut butter and jelly to be +1. Based on this information, we know the goods are a. inferior goods. [Cross price elasticity measures the change in the demand of one good with regard to the price of another in order to determine complements and substitutes. It does not reflect if a good is normal or inferior] b. complements. [Complements have negative cross price elasticity] c. inelastic. [With a cross price elasticity of 1>1, this relationship is elastic] d. substitutes. [correct; Positive cross price elasticity means that Good A (Peanut Butter) is a substitute for Good B (Jelly)]

Christine has purchased five bananas and is considering the purchase of a sixth. It is likely she will purchase the sixth banana if a. the marginal value she gets from the sixth banana is lower than its price. [Christine will not purchase an additional banana if the marginal value she receives is lower than her marginal cost (the price of the additional banana)] b. the marginal benefit of the sixth banana exceeds its price. [correct; Christine will only purchase the banana when the marginal benefit she receives is greater than the marginal cost (or price) of the additional banana ] c. the average value of the sixth bananas exceeds the price. [The marginal benefit, not the average value/benefit of the sixth banana is what is important to consider for this decision] d. the total personal value of six bananas exceeds the total expenditure to purchase six bananas. [Total values should not impact the decision to purchase an additional banana. Rather, the marginal benefit of the sixth banana relative to its cost should be considered]

Buyers consider Marlboro cigarettes and Budweiser beer to be complements. If Marlboro just increased its prices, what would you expect to occur in the Budweiser market?

a. Demand would rise, and Budweiser would reduce price. [If two goods are complements, an increase in the price of one results in a decrease in demand for the other] b. Demand would fall, and Budweiser would reduce price. [correct; when two goods are complements, an increase in the price of one results in a decrease in the demand for the other. To account for this decrease in demand, Budweiser would ultimately lower its prices as well ] c. Demand would fall, and Budweiser would increase price. [As complements, demand for Budweiser would fall as a result of the increase in Marlboro prices. An increase in prices would only further decrease demand] d. Demand would rise, and Budweiser would increase supply. [If two goods are complements, and increase in the price of one results in a decrease in the demand for the other]

Which of the following is the reason for the existence of consumer surplus? a. Consumers can purchase goods that they “want” in addition to what they “need.” [Wants and needs are both a reflection of how the consumer values an item, not necessarily an indication of consumer surplus] b. Consumers can occasionally purchase products for less than their production cost. [Production cost is less relevant to creating consumer surplus than the amount of value a consumer places on a final good (this could in fact be lower than the production cost as well)] c. Some consumers receive temporary discounts that result in below-market prices. [Consumer surplus is a measure of the difference between the value a consumer places on an item and the amount they ultimately pay for it. If a consumer only purchases an item because of a discount, it indicates they likely value the item at the below-market price, so no surplus is created] d. Some consumers are willing to pay more than the market price. [correct; consumer surplus exists when the Value to the consumer is greater than the final (or market) price. It is when consumers pay market price for a good they place a higher value on that a consumer surplus is created]

A bakery currently sells chocolate chip cookies at a price of $16 per dozen. The marginal cost per dozen is $8. The cookies are becoming more popular with customers and so the bakery owner is considering raising the price to $20/dozen. What percentage of customers must be maintained to ensure that the price increase is profitable? a. 28% [if the store only maintained 28% of its current customers, it would need to increase its prices to $36!] b. 33% [this is the number of customers the bakery can lose and still remain profitable] c. 66% [correct; as the margin has increased from 8 (16-8) to 12(20-8), the bakery must maintain 66% (8/12) of its customers in order to get the same level of profitability ] d. 72% [if the store maintained 72% of its current customers, it would only need to increase its prices to $19]

A firm adopts a technology that allows you to increase your output by 15%. If the elasticity of demand in the US is -3, how should you adjust your price if you want to sell all of your output? a. 5% lower. [correct; %ΔQ= e(%ΔP). Therefore, an 15% increase in Q = -3(%ΔP), hence

%ΔP = -5% ]

• Multiple Choice

Course : Managerial Economics (BBE 4102)

University : university of the east (philippines).

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