Economics for Managers - Economics 4311
Exam 2 Answers

Worth 25 points
June 21, 2007

  1. Inputs a manager may adjust in order to alter production are:
    1. All factors.
    2. Variable factors.
    3. Long-run factors.
    4. Fixed factors.
  2. Suppose the production function is given by Q = 3K + 4L. What is the marginal product of capital when 10 units of capital and 10 units of labor are employed?
    1. 3.
    2. 4.
    3. 11.
    4. 45.
  3. For the cost function C(Q) = 100 + 2Q + 3Q2, the total variable cost of producing 2 units of output is
    1. 16.
    2. 12.
    3. 4.
    4. none of the above.
  4. Given the linear production function Q = 10K + 5L, if Q = 10,000 and K = 500, how much labor is utilized?
    1. 600 units.
    2. 800 units.
    3. 500 units.
    4. 1000 units.
  5. What is the value marginal product of labor if: P = $10, MPL = $25, and APL = 40?
    1. $10,000.
    2. $1,000.
    3. $400.
    4. $250.
  6. If the production function is Q = K0.5L0.5 and capital is fixed at 1 unit, then the average product of labor when L = 25 is
    1. 2/5.
    2. 1/5.
    3. 10.
    4. none of the above.
  7. Suppose the marginal product of labor is 8 and the marginal product of capital is 2. If the wage rate is $4 and the price of capital is $2, then in order to minimize costs the firm should
    1. use more capital and less labor.
    2. use more labor and less capital.
    3. use three times more capital than labor.
    4. none of the above.
  8. A drawback of separating ownership from control by creating a firm is:
    1. The losses of specialization.
    2. Increased transaction costs.
    3. The principal-agent problem.
    4. Synergies of team production.
  9. Often owners of firms who hire managers must install incentive or bonus plans to ensure
    1. that the company is financially secure.
    2. that the manager will work hard.
    3. that the manager will maintain employee morale.
    4. that the company will have positive economic profits.
  10. Which of the following is not an incentive scheme to ensure workers do a good job?
    1. Paying waitresses low wages, but allowing them to collect tips.
    2. Profit-sharing plans in large companies.
    3. Commission pay schedules for salesmen.
    4. Straight hourly wages for dock workers.
  11. Spot markets
    1. are generally preferable to long-term contracts.
    2. are generally preferable to short-term contracts.
    3. are generally preferable to vertical integration.
    4. none of the above.
  12. Long-term contracts become longer
    1. when specialized investment becomes more important.
    2. when the exchange environment is more complex.
    3. spot markets work well.
    4. marginal costs are declining.
  13.  In the absence of worker incentives
    1. everyone always gives maximum effort.
    2. managers have little or no control.

    3. there is a natural tendency for workers to not give their maximum effort.

    4. none of the above.
  14. A potential problem with piece rate plans is:
    1. That workers will out produce a large quantity.
    2. That workers have no incentive to work hard.

    3. That it is difficult for managers to control.
    4.  That workers may stress quantity instead of quality.
  15. Long-term contracts are not efficient if
    1. specialized investments are unimportant.
    2. a firm engages in relationship-specific exchange.
    3. the contractual environment is simple.
    4. managers shirk.
    5. b and c, only.
  16. A firm might choose to produce its own inputs if
    1. specialized investment is not important.
    2. long-term contracts are costly to write.
    3. the exchange environment is not complex.
    4. spot markets for the input exist.
  17. Which of the following are measures of industry concentration?
    1. four-firm concentration ratio.
    2. HHI index.
    3. consumer surplus.
    4. all of the above.
    5. a and b only.
  18. An industry is comprised of ten (10) firms, each with an equal market share. What is the 4-firm concentration ratio of this industry?
    1. .2.
    2. .4.
    3. .6.
    4. .8.
  19. An unregulated industry has a Lerner index of zero. These facts:
    1. reveal that social welfare would be improved by regulating the firms.
    2. are consistent with the industry being monopolistically competitive.
    3. are consistent with the industry being perfectly competitive.
    4. a. and b.
  20. When economies of scale are large, firms can reduce their average total cost by
    1. selling off their subsidiaries.
    2. merging into an even larger firm.
    3. eliminating the bureaucratic costs.
    4. hiring professional managers.
  21. A student figured out that the HHI for an industry was 13,000. What is the proper conclusion?
    1. The market is monopolistically competitive.
    2. The market is close to perfectly competitive.
    3. The market is served by a monopoly.
    4. The student made some computational errors.
  22. The industry elasticity of demand for gadgets is -2, while the elasticity of demand for an individual gadget manufacturer's product is -2.  Based on the Rothschild approach to measuring market power, we conclude that
    1. there is little monopoly power in this industry
    2. there is significant monopoly power in this industry.
    3. the Herfindahl index for this industry is -2.
    4. the Herfindahl index for this industry is 2.
  23. Which of the following is not one class of a market structure?
    1. perfect competition.
    2. dictatorship.
    3. monopoly.
    4. monopolistic competition.
  24. According to the "feedback critique"
    1. the conduct of firms may affect firm performance.
    2. the conduct of firms may affect market structure.
    3. market structure may affect the firm's conduct.
    4. all of the above.
  25. In a competitive industry with identical firms, long run equilibrium is characterized by
    1. P = AC.
    2. P = MC.
    3. MR = MC.
    4. All of the above.