Question

Answer the following questions:

1. Suppose you are the general manager of a concrete mixing and delivery facility located in Nashville. Your firm buys the raw materials (sand, gravel, and cement, etc.) for concrete, mixes the concrete according to customer specifications, and delivers the concrete to the job sites. In the early years, your firm only sold concrete for residential home construction and this part of the business has grown over time, but the company has expanded to provide concrete for industrial and road construction projects in the last few years. Your cost accountant has observed that the real (inflation adjusted) average cost of production has declined as your business has grown. What are the possible reasons for this decline in average cost? What implications does this feature of your cost structure have for the way in which you manage your business?

2. Today, most of the national news outlets reported a study that warned consumers about potentially high arsenic levels in bagged rice sold at grocery stores. Arsenic is a poison if consumed in concentrated levels, and arsenic may be deposited in rice grains as the rice plants grow because arsenic is naturally present in most soils. The report indicated that brown rice products tend to have a much higher arsenic content than white rice products due to differences in the processes used to prepare each type for consumption. Please analyze the potential impact of this change on the US market for brown and white rice. In particular, please discuss the likely shifts in the supply and demand curves for these two products as well as the potential impact on equilibrium quantities and prices.

3. One of the many legislative proposals that resulted from the recession was a call to place upper limits on the fees and interest rates that credit card companies can impose on their customers. What impact would a new law that sets a regulated maximum on credit card interest rates have on the market for consumer credit in the US? Please explain your response in detail.

4. Some products are subject to network effects – the product becomes more valuable for its users as the number of other users increases. For example, social media sites are subject to network effects – the Facebook experience is more valuable for each user when there are millions of users instead of just a few. In the presence of network effects, buyers are generally willing to pay more for the product as the number of other users increases. In contrast, RIM’s Blackberry phones used to dominate the market for cell phones in the US, but their customer base and market share has fallen off in the past few years as customers shift to iPhones and other products. Do you think smartphones are subject to network effects? Why? If so, what happens to an individual person’s demand curve for Blackberry phones as the number of other Blackberry users declines. Please explain your answer.

Multiple choice questions - part I

1. Suppose you view gasoline as a normal good, and your income declines by 10 percent. How does this affect your demand curve for gasoline?
A) Shifts rightward B) Shifts leftward C) Does not change

2. Your best friend asks you to rank your all-time favorite films, and you provide the following response: "The Godfather" is better than "Casablanca", "Casablanca" is better than "Key Largo","Key Largo" is better than "Titanic", and "Titanic" is better than "The Godfather". Which of the basic assumptions about consumer preferences has been violated?
A) More is better B) Completeness C) Transitivity D) None of the basic assumptions is violated here

3. Your company sells new furniture to retail customers, and a consulting study in your market indicates that the elasticity of demand for retail furniture is -2.1. If you plan to raise prices by 10 percent in 2013, what is the expected impact on the total revenue from sales for your firm?
A) Total sales revenue increases B) Total sales revenue declines C) No change in revenue

4. For all US consumers, the price elasticity of demand for beef products purchased at the grocery store is -0.6. If we expect the price of beef to fall by 5.0 percent, what is the expected impact on quantity of retail beef demanded?
A) Quantity declines by 0.3 percent B) Quantity declines by 3.0 percent C) Quantity increases by 0.3 percent D) Quantity increases by 3.0 percent

5. You view paper books and electronic books as imperfect substitutes. If the price of paper books declines, what is the expected change in the demand curve for electronic books?
A) Demand curve shifts rightward B) Demand curve shifts leftward C) No change in the demand curve for electronic books

6. The cross-price elasticity for the quantity of peanut butter consumed with respect to the jelly price is +0.25. What is the relationship between peanut butter and jelly?
A) Complements B) Substitutes C) Independent

7. The demand for bottled water is perfectly inelastic. If the price of bottled water increases, what happens to the total sales revenue for bottled water?
A) Increases B) Declines C) Does not change

8. The US retail demand for aspirin is a downward sloping straight line. If the price of aspirin declines and we move downward along the existing demand curve, what happens to the elasticity of demand?
A) More elastic B) Less elastic C) The elasticity does not change along a straight-line demand curve

9. Your company is the only seller of a hybrid motorcycle in the US market, so you face the downward-sloping demand curve for all US consumers of this product. If you can create an online-buzz with your social media promotional campaign, then you expect the demand to become more inelastic. How will this affect the mark-up (price minus cost) that you can earn?
A) Mark-up increases B) Mark-up decreases C) No impact on the mark-up

10. As your income increases, you increase the amount of fruit juice that you purchase. However, the percentage change in income is smaller than the percentage change in quantity demanded. What type of good is fruit juice?
A) Inferior B) Noncyclical (necessity) normal good C) Cyclical (luxury) normal good D) Independent good

11. Suppose your demand for movie tickets is similar to the case for bus tickets illustrated in the bottom panel of Figure 4.9. In words, the Engle curve is upward sloping at lower income levels and downward sloping at higher income levels. Based on this information, what is the sign for your income elasticity of demand at lower income levels?
A) Positive elasticity B) Negative elasticity C) Zero elasticity

12. Which of the basic properties of consumer preferences indicates that the additional satisfaction generated by consuming one more unit of a good is expected to decline as we consume more and more?
A) More is better B) Completeness C) Transitivity D) Diminishing marginal utility

13. On average, which part of the business cycle in the US lasts longer?
A) Expansion B) Contraction C) Both parts are the same length on average

14. Suppose the price of gasoline increases, but there are no other changes to factors that determine the demand for gasoline (e.g., income, other fuel prices, weather, etc.). How does the demand curve for gasoline change?
A) Shifts rightward B) Shifts leftward C) Move upward along the existing curve D) Move downward along the existing curve

15. One economic consulting agency reports that the US demand for entertainment DVD's is -3.1. What does this value imply about the demand character for this product?
A) Demand is perfectly elastic B) Demand is elastic, but not perfectly elastic C) Demand is perfectly inelastic D) Demand is inelastic, but not perfectly inelastic

Multiple choice questions - part II

1. Suppose a firm's marginal cost curve is upward sloping, and the firm is a price-taker so that the marginal revenue equals the market price (MR = P). At the firm's current level of production, we find that P < MC. What should the firm do to increase profits?
A) Reduce output until P = MC
B) Increase output until P = MC
C) Do not change output

2. Your company produces ethanol, which is a renewable fuel that can be used in place of gasoline. The market price for the product is $2.75 per gallon, and your average variable cost of production is $3 per gallon. What should your company do?
A) Keep producing ethanol in the short run
B) Shut down the plant in order to reduce losses
C) We do not have enough information to answer this question

3. Which cost curve represents the profit-maximizing firm's long-run supply curve?
A) MC curve above AFC
B) MC curve below ATC
D) The entire MC curve
C) MC curve above ATC

4. What happens to the market supply structure as firms exit the market?*
A) Market supply shifts rightward
B) Market supply does not change
C) Market supply shifts leftward

5. Suppose the market demand curve is downward sloping, the market supply curve is perfectly inelastic (vertical), and the current equilibrium price is below the minimum ATC for some of the firms in the market. What happens in this market over the long run?
A) Buyers switch to less expensive substitutes
B) The inefficient firms increase production to lower costs, so the market supply curve shifts rightward and the equilibrium price declines
D) All of the sellers exit the market, and the equilibrium quantity goes to zero
C) The inefficient firms exit the market, so the market supply curve shifts leftward and the equilibrium price increases

6. If the sellers in a market earn normal profits, then economic profits are
C) positive
B) zero
A) negative

7. Which of the following items is NOT a basic condition for perfect competition?
A) Large number of buyers and sellers
B) Free entry and exit
D) Perfect dissemination of information
C) Product differentiation

8. Suppose the marginal cost of producing pizzas is $4 per pizza, and this cost is the same for all levels of production. What is the average variable cost of production?
A) AVC = $4 for all levels of production
D) We do not have enough information to answer this question
C) AVC < MC
B) AVC > MC

9. Why does the shortage created by a price ceiling policy tend to become larger over time?
A) Supply and demand tend to become more inelastic in the long run, so the buyers and sellers tend to be less responsive to the price signals
B) The long-run supply and demand curves shift rightward over time, but the gap between the supply and demand curves becomes larger due to tax policy
D) None of the above
C) Supply and demand tend to become more elastic in the long run, so the buyers and sellers tend to be more responsive to the price signals

Solution Preview

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1. Possible reasons for this decline in average costs are due to “economies of scale” that occur as a company grows. For example, as the company becomes larger and require more inputs, they may be able to receive bulk discounts on their costs, such as the concrete mixing facilities raw inputs of sand, gravel and cement. The company may want to reevaluate its pricing strategy in light of its new cost structure and also determine it optimal size: how large does it want to grow. As some point large companies begin to experience diseconomies of scale as the organization becomes complicated and costs increase.

2. Brown rice, suffering from the undesirable characteristic of containing potentially high arsenic levels, will face a shift in demand such that the demand curve shifts to the left. This will reduce the quantity demanded as well the equilibrium price.
White rice, being an imperfect substitute for brown rice, will face increased demand such that the demand curve shifts to eh right. This will increase the quantity demanded, as well as the equilibrium price....

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