(Solution Manual) Managerial Economics: A Problem-Solving Approach

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Managerial Economics: A Problem -Solving Approach 5th Edition Interactive HW Questions (solutions to end-of-chapter multiple choice questions) Table of Contents Chapter 1 ................................ ................................ ................................ ................................ ................................ 3 Chapter 2 ................................ ................................ ................................ ................................ ................................ 6 Chapter 3 ................................ ................................ ................................ ................................ ................................ 9 Chapter 4 ................................ ................................ ................................ ................................ .............................. 12 Chapter 5 ................................ ................................ ................................ ................................ .............................. 15 Chapter 6 ................................ ................................ ................................ ................................ .............................. 18 Chapter 7 ................................ ................................ ................................ ................................ ............................. 22 Chapter 8 ................................ ................................ ................................ ................................ ............................. 25 Chapter 9 ................................ ................................ ................................ ................................ ............................. 28 Chapter 10 ................................ ................................ ................................ ................................ ........................... 30 Chapter 11 ................................ ................................ ................................ ................................ ............................ 32 Chapter 12 ................................ ................................ ................................ ................................ ................................ ......... 36 Chapter 14 (and 13) ................................ ................................ ................................ ................................ ........... 38 Chapter 15 ................................ ................................ ................................ ................................ ................................ ......... 41 Chapter 16 ................................ ................................ ................................ ................................ ................................ ......... 44 Chapter 17 ................................ ................................ ................................ ................................ ................................ ......... 47 Chapter 18 ................................ ................................ ................................ ................................ ................................ ......... 50 Chapter 19 ................................ ................................ ................................ ................................ ........................... 52 Chapter 20 ................................ ................................ ................................ ................................ ........................... 55 Chapter 21 ................................ ................................ ................................ ................................ ........................... 58 Chapter 22 ................................ ................................ ................................ ................................ ........................... 61 Chapter 1 1. Why might performance compensation caps be bad? a. Different pay rates promote dissent. [A compensation cap is a maximum salary limit, it does not necessarily produce varied pay rates] b. c. Compensation caps can discourage employees from being productive after the cap. [correct; at least with regards to salary, the employee is not rewarded for further pCroomdpuecntisvaityio bne cyaopnsd c tahne d aimscoouunrat gthe aetm pprolodyueceess ftrhoem c abpe ivnagl upero] ductive before the cap. [employees are incentivized to reach the value of the cap, encouraging productivity prior to its achievement] d. Both b and c 2. What is a possible consequence of a performance compensation reward scheme? a. It creates productive incentives. [As pay is tied directly to performance, such a policy may motivate workers to improve their performance for the additional compensation] b. It creates harmful incentives. [Such a policy may create incentives to manipulate the performance indicators or outputs, or view that performance metric exclusive from the overall interests of the firm] c. Both a and b [correct; could produce productive or harmful incentives depending on the d. sNietuitahteiorn a annodr tbh [eP cehraforramctaenr coef cthoem ppeernssoant iboeni nscgh reemweasr dweidll] produce some kind of incentives] 3. Which of the following is NOT one of the three problem solving principles laid out in Chapter 1? a. Under whose jurisdiction is the problem? [correct; This is NOT one of the key problem solving principles ]. b. Who is making the bad decision? [This is one of the key problem solving principles] c. Does the decision maker have enough information to make a good decision? [This is one of the key problem solving principles] d. Does the decision maker have the incentive to make a good decision? [This is one of the key problem solving principles] 4. Why might it be bad for hotels to not charge higher prices when rooms are in higher demand? a. Arbitrageurs might establish a black market by reserving rooms and then selling the reservations to customers. [This black market allows the arbitrageurs to capture the value of the increased demand rather than the hotels who are providing the rooms as well as creating a less reliable system for the consumer] b. Rooms may be rationed. [If demand increases but prices do not, demand for rooms may exceed supply, forcing the hotel to ration the rooms and turn customers who would have been willing to pay higher rates away] c. Without the profit from these high demand times, hotels would have less of an incentive to build/expand, making the long run scarcity problem even worse. [Such a policy essentially creates a performance cap on the hotels, limiting their profitability to the number of rooms rather than overall demand] d. All of the above. [correct; all of these a re potential negative impacts of hotels not adjusting prices to accommodate demand ] 5. 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 d. or creating the outcome that provides them with the most benefit] Act self-interestedly. [The rational actor paradigm does assume that people will act in their own best interest] 6. 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] 7. 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] 8. 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] 9. 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] 10. 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] Chapter 2 Multiple Choice Solutions: 1. An individual’s value for a good or service is a. The amount of money he or she used to pay for a good. [Past payments do not necessarily indicate the current value of a good or service to an individual] b. The amount of money he or she is willing to pay for it. [correct; to “value” a good means that you want it and can pay for it ] c. The amount of money he or she has to spend on goods. [Total individual wealth does not reflect the value of a particular good or service] d. None of the above [To “value” a good means that you want it and can pay for it] 2. The biggest advantage of capitalism is a. generates wealth with the help of government intervention [Not all government intervention generates wealth, often it does the opposite. Rather, governments play a critical role in facilitating wealth generating transactions, particularly by enforcing property rights and contracts.] b. that prices assists in moving assets from high valued to low value uses [Wealth is created when assets move from lower to higher valued uses] c. it forces involuntary exchanges [Voluntary transactions create wealth] d. it creates wealth by letting a person follow his or her own self-interest [correct; a buyer willingly buys if the price is above her value, and a seller sells when the price is above her value, otherwise they would not transact ] 3. Wealth creating transactions are more likely to occur a. with private property rights [private property rights facilitate voluntary transactions] b. with contract enforcement [contract enforcement helps facilitate voluntary transactions] c. with black markets [black markets are often created from a wealth -generating arbitrage opportunity] d. All of the above [correct; By making sure that buyers and sellers can keep the gains of trade, legal mechanisms such as private property and contract rights that facilitate voluntary transactions will help generate wealth; black markets also create wealth from seizing arbitrage opportunities that exist from inefficiencies in the market] 4. Government regulation a. provides incentives to conduct business in an illegal black market [correct; government regulation that impedes the movement of assets to higher valued uses destroys wealth. Black markets arise in part because of the arbitrage opportunities created in these situations ] b. plays no role in generating wealth [governments play a critical role in the wealth creating process by enforcing property rights and contracts] c. is the best way to eliminate poverty [There are other opportunities beyond government regulation to address poverty, especially as often some regulations ultimately result in wealth destroying transactions] d. does not enforce property rights [One of governments most important roles is the enforcement of private property rights] 5. 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] 6. 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. ” 7. 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 ] . 8. 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] 9. 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*0.92) which is above his bottom line (For the exact value, look at $485,000/0.92 = $527,173.93. 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*0.92) which is below his bottom line] c. $525,000 [at a price of $525,000, the seller will only receive $483,000 ($525,000*0.92) which is below his bottom line] d. $500,000 [at a price of $500,000, the seller will only receive $460,000 ($500,000*0.92) which is below his bottom line] 10. 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] Chapter 3 Multiple Choice Solutions: 1. A business owner makes 1000 items a day. Each day he or she contributes 8 hours to produce those items. If hired, elsewhere he/she could have earned $250 an hour. The item sells for $15 each. Production does not stop during weekends. If the explicit costs total $150,000 for 30 days, the firm’s accoau.n ti$n3g 0p0ro,0fi0t 0fo [rc tohrer emcot;n Rthe veeqnuuaels e: quals 1000 items per day * $15/item*30days = $450 ,000 . Explicit costs are given as $150,000. Therefore, accounting profit = $450,000 -$150,000 = $300,000 ] b. $60,000 [This number represents the opportunity cost of his labor; $250/hr*8hrs/day*30 days = $60,000] c. $450,000 [This number represents the total revenue; 1000 items per day * $15/item*30days = $450,000.] d. $240,000 [For accounting profit, opportunity costs are not considered] 2. A business owner makes 1000 items a day. Each day he/she contributes 8 hours to produce those items. If hired, elsewhere he/she could have earned $250 an hour. The item sells for $15 each. Production does not stop during weekends. If the explicit costs total $150,000 for 30 days, the econao.m i$c 3p0r0o,f0it0 f0o r[ Tt heis m nounmthb eerq rueaplsre: sents the accounting profit. Revenue equals 1000 items per day * $15/item*30days = $450,000. Explicit costs are given as $150,000. Therefore, accounting profit = $450,000 -$150,000 = $300,000] b. $60,000 [This number represents the opportunity cost of his labor; $250/hr*8hrs/day*30 days = $60,000] c. $450,000 [This number represents the total revenue; 1000 items per day * $15/item*30days = $450,000.] d. $240,000 [correct; When calculating economic profit, opportunity costs are considered. Total Revenue is $450,000 (1000 item/day*$15/item*30days), Explicit costs are given at $150,000 and the opportunity cost of labor is $60,000 ($250.hr*8hrs/day*30days). Therefore, economic profit is $450,000 -$150,000 -$60,000 = $240,000 ] 3. If a fair. m Tish eaatr tnhien gfi rnmeg’sa taicvceo eucnotninogm pirco pfirtosfiatrse, izt eimrop. [liNeost necessarily, it is impossible to dete rmine the relationship between economic and accounting profit without information on the economic costs involved]. b. That the firm’s accounting profits are positive . [Not necessarily, it is impossible to determine the relationship between economic and accounting profit without information on the economic costs involved]. c. That the firm’s accounting profits are negative . [Not necessarily, it is impossible to determine the relationship between economic and accounting profit without information on the economic costs involved]. d. More information is needed to conclude about accounting profits [correct; it is impossible to determine the relationship between economic and accounting profit without information on the economic costs involved ] 4. 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] 5. 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?] 6. 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] 7. 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. 8. 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] 9. 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] 10. The U.S. 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] Chapter 4 Multiple Choice Solutions: 1. When economists speak of “marginal”, they mean a. opportunity [The opportunity cost of an alternative is the profit you give up to pursue it] b. scarcity [Scarcity refers to the limited availability of resources] c. ienaccrhe amddenittioanl a[cl ournrite]c t; marginal refers to additional cost or benefit created from producing d. unimportant [In economic terms, marginal does not imply unimportant. On the contrary, marginal analysis is a critical component of a wide variety of economic decisions] 2. Managers undertake an investment only if a. Marginal benefits of the investment are greater than zero [when considering a decision, both the marginal benefits and marginal costs should be compared] b. Marginal costs of the investment are greater than marginal benefits of the investment [if the marginal costs are greater than the marginal benefits of a decision, management will not make the investment] c. Marginal benefits are greater than marginal costs [correct; managers should undertake an investment when the marginal benefits are greater than the marginal costs] d. IiInvestment decisions] do not depend on marginal analysis [marginal analysis is critical in 3. A firm produces 500 units per week. It hires 20 full-time workers (40 hours/week) at an hourly wage of $15. Raw materials are ordered weekly and they costs $10 for every unit produced. The weekly cost of the rent payment for the factory is $2,250. How do the overall costs breakdown? a. Total variable cost is $17,000; total fixed cost is $2,250; total cost is $19,250 [correct; both the $12,000 of labor costs (20 workers*40hrs/week*$15/hr) and the $5000 raw materials cost ($10/unit*500 units) are considered variable expenses. Factory rent is considered a fixed cost ] b. Total variable cost is $12,000; total fixed cost is $7,250; total cost is $19,250 [Both labor and raw materials are considered variable costs as they both change as output levels change] c. Total variable cost is $5,000; total fixed cost is $14,250; total cost is $19.250 [Both labor and d. Traowta ml vaatreiraiballes caores tc iosn $s5id,0e0r0ed; t voatarila fbixle dc ocsotsst ais $th2e,2y5 c0h;a tnogtael acso sotu itsp $u7t ,l2e5v0e l[sB cohtahn rgaew] materials and labor should be considered as variable costs, which when added to the fixed rental cost will equal the total costs of production] 4. Total costs increase from $1500 to $1800 when a firm increases output from 40 to 50 units. Which of the following are true? a. FC = $100 [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] b. FC = $200 [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] c. FC = $300 [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. For example, using the first 1e1q8u0a0t=ioFnC +wVeC s(e5e0 )V wC(i4ll0 g)i=v1e 5y0o0u- F1C8,0 h0e=nFcCe+ V5C0=((1500 -FC)/40). ,P wluhgigcihn lge ths iuss v fainlude F fCor= 3V0C0 in] to 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] 5. 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] 6. 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] 7. 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)] 8. If a fir m’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] 9. 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] 10. 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. [Th e 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] Chapter 5 Multiple Choice Solutions 1. Which of the following will increase the break -even quantity? a. A decrease in overall fixed costs [Breakeven is calculated as Q=F/(P -MC), Therefore a decrease in overall fixed costs would decrease the numerator and hence the Breakeven b. Quantity] A decrease in the marginal costs [Breakeven is calculated as Q = F/(P -MC). Therefore a decrease in the marginal costs will increase the denominator, and subsequently decreases the Breakeven Quantity] c. A decrease in the price level [correct; Breakeven is calculated as Q= F/(P -MC). Therefore, a decrease in the price level will decrease the denominator, which will increase the Breakeven quantity ] d. An increase in price level [Breakeven is calculated as Q= F/(P -MC). Therefore, an increase in the price level will increase the denominator, which will decrease the Breakeven Quantity. 2. The higher the discount rates a. the more value individuals place on future dollars [a higher discount rate means future dollars are worth less relative to current dollars (present value of future dollars is lower)] b. the more value individuals place on current dollars [correct; a higher discount rate means dollars today are value comparatively more relative to future dollars] c. the more investments will take place [the higher discount rate means the future value of current dollars is lower, which may lead to an decrease in investment] d. Does not affect the investment strategy [interest rates are an important consideration of any investment strategy in terms of its impact on both the investing and borrowing rates] 3. Assume a firm has the following cost and revenue characteristics at its current level of output: price=$10.00, average variable cost=$8.00 and average fixed cost =$4.00. This firm is a. incurring a loss of $2.00 per unit and should shut down. [In the short run, only variable costs are avoidable and should be considered in a shut down decision] b. realizing only a normal profit. [In this case, the firm is not making a profit] c. realizing an economic profit of $2.00 per unit. [In this case, the firm is not making a profit] d. [incocurrrercint;g I na tlhoess s hpoerrt urnunit, oonf l$y2 v.0a0ri abbulet schoostusl dar ceo anvtoiniduaeb lteo a onpde srhaoteu lidn b teh ceo snhsiodretr reudn in. a shutdown decision. As the current price ($10) is still higher than the variable costs ($8), the company should continue to operate in the short run until the fixed costs become avoidable ] 4. Sarah’s Machinery Company is deciding to dump their current technology A for a new technology B with smaller fixed costs but bigger marginal costs. The current technology has fixed costs of $500 and marginal costs of $50 whereas the new technology has fixed costs of $250 and marginal costs of $100. At what quantity is Sarah Machinery indifferent between two technologies? a. 5 [correct; Total costs can be calculated as C=FC+VC(Q). Technology A has total costs of C=500+50(Q), while Technology B has C=250+100(Q). Sarah is indifferent at the quantity at which these two costs are the same. Therefore, setting these equations equal to each other gives us 500+50(Q) = 250 +100(Q), which allows us to solve for Q = 5] b. 6t6e [cThontoallo cgoiessts a cta tnh eb eq ucalnctuitlya twedh earse C t=hFeCs+e VtwC(oQ c)o. Sstasr ahre w thilel bsea mined]ifferent betwee n the two