QUESTION 1 Principal-agent problems occur when: agents are representing principa

Question

QUESTION 1

Principal-agent problems occur when:

agents are representing principals

managerial decisions are not consistent with the firm's shareholders' interests.  

managers who do not perform are fired.

managers attempt to maximize the value of their company.

QUESTION 2

When a firm is making a normal economic profit

economic profit is equal to zero

economic profit is greater than zero

business profit is zero

business profit is negative

QUESTION 3

An inferior good is a good whose demand decreases as its price decreases.

True

False

QUESTION 4

Assuming that crude oil is an input to automobile tires as well as to gasoline, a reduction in the tariff on imported crude oil would likely result in an increase in the number of tires sold but tire prices may increase or decrease.

True

False

QUESTION 5

Ceteris paribus, we expect an increase in the advertisement for a consumer good to result in

an increase in the price elasticity of demand for that good

a reduction in the price elasticity of the demand for that good

no change in the price elasticity of the demand for that good

a reduction in the supply of that good

QUESTION 6

The cross-price elasticity of the demand for a good with respect to the price of a complementary good is

zero

positive

negative

greater than one

QUESTION 7

When the marginal product of labor is smaller than its average product

marginal cost must be declining

marginal cost must be smaller than average cost

Average variable cost must be greater than marginal cost

marginal cost must be greater than the average variable cost

QUESTION 8

With capital measured along the vertical axis and labor along the horizontal axis, the slope of an isoquant is equal to the ratio between the price of capital over the price of labor.

True

False

QUESTION 9

If the ratio between the price of labor and the price of capital (w/r) is smaller than the ratio between marginal product of labor and marginal product of capital (MPL/MPK)

the firm should hire more labor

the firm should hire more capital

the firm should hire capital and labor equally

the firm should reduce the amount of labor while keeping its capital constant

QUESTION 10

Suppose the price of one unit of labor (wage) is $15 where its marginal product is 5 units of output. Thus we can say:

the marginal revenue the firm is greater than $5

the marginal cost of the firm is $5.

the marginal cost of the firm is $0.33

the marginal cost of the firm must be greater than its average cost

QUESTION 11

If the demand curve faced by a firm  downward-sloping

its price must be equal to its marginal cost

Its profit-maximizing price would be equal to it marginal cost

Its profit-maximizing price would be greater than its MR

its profit-maximizing price must slightly less than its marginal cost.

QUESTION 12

In the short run, the firm will shut down if

the price falls short of its average fixed cost

the price fall short of its average total cost

the price falls short of its average variable cost

the price falls short of its marginal cost

QUESTION 13

The distinguishing feature of monopolistically competitive market is

many firms

differentiated products

Free entry and exit

all of the above

only "b" and "c"

QUESTION 14

Which of the following represent the long-run equilibrium in a monopolistically competitive market?

P = ATC  and P>MC and MC = MR

P = MC = ATC = MR

P = AVC and MC > P

P = MC  and MR > P

QUESTION 15

As new firms enter a monopolistically competitive market the existing firm's demand curve would likely become

more price elastic

less price elastic

infinitely price elastic

infinitely price inelastic

QUESTION 16

To maximize profit a monopolistically competitive firm

Sets its price equal to it marginal revenue while keeping it below MC

Sets its price equal to its MC while keeping it above its AVC

Sets its marginal cost equal to its marginal revenue while charging a price higher than its marginal cost

sets its price equal to its marginal revenue while keeping it above its average total cost

QUESTION 17

In a duopoly with a zero marginal cost, according to the Cournot model, at equilibrium, the sum of the two firms' output would be more than 50 percent of the market demand at a zero price.

True

False

QUESTION 18

The long-run equilibrium in a monopolistically competitive market is characterized by:

Excess supply

Excess capacity

Excess demand

Shortages

QUESTION 19

In a kinked demand curve model, it is assumed that the demand curve faced by an oligopoly:

is less elastic when the firm raises the price

is less elastic when the firm lowers the price

is more elastic when it lowers the price

none of the above

QUESTION 20

One explanation for the relative price stability in an oligopolistic market is the existence of some degree of decision interdependency among the firms in the market.

True

False

QUESTION 21

Collusion among oligopolies leads to the formation of

a competitive price

a monopolistically competitive market

a labor union

a cartel

QUESTION 22

Optimal markups vary across markets due to differences in:

production costs

price elasticity of demand  

total revenue

"a" and "b"

"b" and "c"

a.

agents are representing principals

b.

managerial decisions are not consistent with the firm's shareholders' interests.  

c.

managers who do not perform are fired.

d.

managers attempt to maximize the value of their company.

Explanation / Answer

Principal-agent problems occur when managerial decisions are not consistent with the firm's shareholders' interests. The correct option is B.

When a firm is making a normal profit economic profit is equal to zero. The point of normal profits is where price equals average total costs of production. The correct option is A.

The statement that “an inferior good is a good whose demand decreases as its price decreases” is False. The inferior goods are those whose demand falls with an increase in income of the consumer.

A reduction in tariff will result in higher profitability for tire and gasoline firms. Thus they will supply more tires and gasoline to the market. The equilibrium price may fall and quantity may rise.

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