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You collect the following production data for your firm:

Q	L
248	2
1,416	6
489	3
30	1
2,124	9
1,307	5
1,532	7
650	4
2,130	11
2,368	10

 

Question 1

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Which do you consider to be the best trendline for this data?

Select one:

a.

b.

c.

d.

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The correct answer is:

Question 2

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Use the regression results below to answer the following two questions:

Using these results, calculate the Q, AP, and MP for L = 8 workers.

Select one:

237. Q = 2,124; AP = 237.8; MP = 139.4.
238. Q = 1,416; AP = 234.4; MP = 313.3.
239. Q = 1,957; AP = 244.7; MP = 221.5.
240. Q = 1,532; AP = 243.6; MP = 279.4.

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The correct answer is: Q = 1,957; AP = 244.7; MP = 221.5.

Question 3

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At 8 workers, is SMC rising or falling, and how do you know?

Select one:

1. At 8 workers, SMC is rising since MP is falling.
2. At 8 workers, SMC is rising since MP is rising.
3. At 8 workers, SMC is falling since MP is falling.
4. At 8 workers, SMC is falling since MP is rising.

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The correct answer is: At 8 workers, SMC is rising since MP is falling.

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Straker Industries estimated its short-run costs using a U-shaped average variable cost function of the form   and obtained the following results.  Total fixed cost (TFC) at Straker Industries is $1,000.

DEPENDENT VARIABLE: AVC	R-SQUARE	F-RATIO	P-VALUE ON F
OBSERVATIONS: 35	0.8713	108.3	0.0001
VARIABLE	PARAMETER ESTIMATE	STANDARD ERROR	T-RATIO	P-VALUE
INTERCEPT	43.40	13.80	3.14	0.0036
Q	-2.80	0.90	-3.11	0.0039
Q2	0.20	0.05	4.00	0.0004

Question 4

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What level of output (Q) is associated with the minimum AVC, and what is the value of AVC at this minimum?

Select one:

30. Q = 5, AVC = 30.4
31. Q = 7 and AVC = $33.60
32. Q = 16, AVC = 112.3
33. Q = 7 and AVC = $176.64

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The correct answer is: Q = 7 and AVC = $33.60

Question 5

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Given the regression results above, which set of equations for TC, ATC, and SMC is correct?

Select one:

43. TC = 43.4Q – 2.8Q²+ 0.2Q³

    ATC =43.4 – 2.8Q + 0.2Q²

    SMC = (1000/Q) + 43.4 – 5.6Q + 0.6Q²

44. TC = 1,000 + 43.4Q – 2.8Q²+ 0.2Q³

    ATC = (1,000/Q) + 43.4 – 2.8Q + 0.2Q²

    SMC = 43.4 – 5.6Q + 0.6Q²

45. TC = 1,000 + 43.4 – 2.8Q + 0.2Q²

    ATC = (1,000 + 43.4)/Q – 2.8 + 0.2Q

    SMC = – 2.8Q + 0.4Q

46. TC = 1,000Q + 43.4 – 2.8Q²+ 0.2Q²

    ATC = 1,000 + 43.4/Q – 2.8Q²+ 0.2Q³

    SMC = – 5.6Q + 0.6Q²

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The correct answer is: TC = 1,000 + 43.4Q – 2.8Q² + 0.2Q³

ATC = (1,000/Q) + 43.4 – 2.8Q + 0.2Q²

SMC = 43.4 – 5.6Q + 0.6Q²

Question 6

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When output (Q) is 14, how much is TC, AVC, ATC, and SMC?

Select one:

607. TC = $1,607.60

     AVC = $43.40

     ATC = $114.83

     SMC = $82.60

608. TC = $1,607.60

     AVC = $71.43

     ATC = $43.40

     SMC = $82.60

609. TC = $1696.00

     AVC = $46.40

     ATC = $113.07

     SMC = $94.40

610. TC = $1043.40

     AVC = $43.40

     ATC = $74.53

     SMC = $77.20

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The correct answer is: TC = $1,607.60

AVC = $43.40

ATC = $114.83

SMC = $82.60

Question 7

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At what amount of output does labor change from exhibiting increasing returns to decreasing returns?

Select one:

1. When output is 16
2. When output is about 13.45
3. When output is about 4.67
4. When output is 7

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The correct answer is: When output is about 4.67

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Do Applied Problem #10 on page 444 about grocery stores and gasoline stations. NOTE: the question is notasking if grocery stores compete with gas stations, but whether individual grocery stores are competitive with each other, and whether individual gas stations are competitive with each other.

“Grocery stores and gasoline stations in a large city would appear to be examples of competitive markets: there are numerous relatively small sellers, each seller is a price-taker, and the products are quite similar.”

Question 8

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How could we argue that these markets are not competitive?

Select one:

1. They usually purchase products from the same distributor: i.e., all grocery stores and gas stations buy their Coke products from the same Coke distributor. Thus, individual grocery stores do not really compete with each other; same for individual gas stations.
2. Each grocery store or gas station is so small relative to the size of the market that their actions do not affect the rest of the market, therefore they do not have to behave in a competitive way.
3. Most grocery stores and gas stations have a relatively small geographic range; they do not attract consumers from very far away, and thus do not compete with the grocery stores or gas stations across town.
4. The individual grocery stores or gas stations do not have the power to control price on many items that they sell, so they are not able to compete on price.

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The correct answer is: Most grocery stores and gas stations have a relatively small geographic range; they do not attract consumers from very far away, and thus do not compete with the grocery stores or gas stations across town.

Question 9

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Could each firm face a demand curve that is not perfectly elastic?

Select one:

1. Yes; if they have some degree of market power (e.g., they can charge slightly higher prices since consumers will not stop at every grocery store in town to find the cheapest beef jerky), then they will not face perfectly elastic demand.
2. Yes; if the individual firm demand curve is horizontal, then demand is not perfectly elastic. This will often be true for small sellers.
3. No; the conditions mentioned (many small sellers, price-takers, homogeneous products) guarantee that each of these industries will be perfectly competitive. Demand will always be perfectly elastic.
4. No; since customers aren’t willing to spend their morning visiting each grocery store or gas station in a large city to find the best deal, then each firm’s demand curve will be perfectly elastic since consumers do not have full information.

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The correct answer is: Yes; if they have some degree of market power (e.g., they can charge slightly higher prices since consumers will not stop at every grocery store in town to find the cheapest beef jerky), then they will not face perfectly elastic demand.

Question 10

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How profitable do you expect grocery stores and gasoline stations to be in the long run?

Select one:

1. Grocery stores would be expected to enjoy long-run positive profits since they sell a wider variety of products; gasoline stations would be expected to break even or take losses in the long run because of their more limited range of products.
2. Because of rising prices of both food and gasoline, each of these industries is expected to suffer long-run losses for the foreseeable future.
3. Since these firms retain considerable market power (ability to set price), then they are expected to enjoy long-run positive profitability for the foreseeable future.
4. Even with a small amount of market power, it is still relatively easy to enter and exit these industries. Long-run profits will likely be driven down close to zero.

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The correct answer is: Even with a small amount of market power, it is still relatively easy to enter and exit these industries. Long-run profits will likely be driven down close to zero.

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Suppose the market demand and supply functions are Q_D = 170 – 2.5P and Q_S = 5P – 115. You have just graduated and moved to this city; as a new MBA and an entrepreneur, you are considering entering the market for this product.

Question 11

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Determine the equilibrium price and quantity in this market.

Select one:

1. P = $38; Q = 105
2. P = $40; Q = 70
3. P = $38; Q = 75
4. P = $36; Q = 65

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The correct answer is: P = $38; Q = 75

Question 12

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You’ve researched and found that most firms in the market currently experience costs such that TC = 10 + 60Q – 17Q² + 3Q³. Determine whether or not you should enter this market.

Select one:

1. We should notenter the market at this time because the current equilibrium price does not cover AVC, so firms in the industry would all choose to shut down.
2. The equilibrium quantity of 75 creates a huge total cost of $1,174,510 and an AVC of $15,660. This is far above the market price of $38, which means that firms would enjoy a significant positive profit. We definitely shouldenter this market at this time.
3. We shouldenter the market because the ease of entry suggests that positive profit will be earned at any market price. The $38 price does in fact result in positive profit.
4. The equilibrium P = $38 is below ATC, so entering would only cause losses. Since we haven’t yet incurred any fixed costs (haven’t started our business yet), we should notenter this market at this time.

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The correct answer is: The equilibrium P = $38 is below ATC, so entering would only cause losses. Since we haven’t yet incurred any fixed costs (haven’t started our business yet), we should not enter this market at this time.

Question 13

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Due to unforeseen delays, you don’t enter the market. However, a year later the market supply has changed to Q_S = 5P – 145. Are you surprised at this shift in supply?

Select one:

1. No; the losses incurred in the previous question suggest that some firms would exit. This exit would shift supply left, which is what the new supply equation did.
2. Yes; the losses earned earlier should have reduced supply whereas this new equation shows an increase in supply.
3. Yes; the new supply equation creates an unsustainable market equilibrium. Price no longer equals marginal cost.
4. No; the profit that was earned under the old supply curve would attract new entrepreneurs, shifting supply to the right (which is what this new supply curve did).

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The correct answer is: No; the losses incurred in the previous question suggest that some firms would exit. This exit would shift supply left, which is what the new supply equation did.

Question 14

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Given the new supply conditions (Q_S = 5P – 145), determine whether or not you should enter the market.

Select one:

1. No; the new equilibrium price is too high above ATC. The entry of new firms will eventually cause long-run losses.
2. Yes; the new equilibrium price is above ATC at the profit-maximizing output. Firms will enjoy positive profit (at least in the short run).
3. No; the new equilibrium quantity is too high to sustain the increased productivity. Firms will have to pay overtime to meet the extra demand, and will incur excessive costs and short-run losses in doing so.
4. Yes; the new equilibrium price is now between AVC and ATC, so firms (including our new one) will choose to stay open.

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The correct answer is: Yes; the new equilibrium price is above ATC at the profit-maximizing output. Firms will enjoy positive profit (at least in the short run).