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a) -.23 b) -.013 c) -.85 d) -4.35 e) -5.00 10. The cross price elasticity between two products has been measured at 2.0. If the price of the first product is increased by 8%, demand for the second product will a) Increase by 8% b) Decrease by 4% c) Increase by 4% d) Increase by 16% e) There is not enough information to provide an answer. 11. If the price of a good is in the elastic range and the firm raises price, a) Quantity demanded will fall but revenue will increase. b) Revenue will be largely unchanged. c) Revenue will decrease. d) The fall in quantity demanded will be less than the increase in price. e) None of the answers above is correct. 12. The best definition of the short run is the period of time in which a) Management cannot change its decisions. b) The amount of output cannot be varied. c) One or more inputs are fixed d) All inputs can be varied but at a high marginal cost. e) Economic conditions are relatively stable and unchanging. 13. According to the law of diminishing marginal returns, a) If all inputs are increased in equal proportions, output will eventually decrease. b) If one input is increased, with all other inputs unchanged, additions to output will eventually decrease. c) If one input is held constant, and all other inputs are increased, output will eventually decrease. d) If one input is increased, and all other factors are held constant, output will eventually decrease. e) If all inputs are increased, output will grow but by a smaller proportion. 14. Under increasing returns to scale, a) As one input increases, additions to output eventually decrease. b) As all inputs are varied, average cost increases. c) As inputs increase in a given proportion, output increases by a greater proportion. d) As output is increased, required inputs grow at a faster rate. e) As scale economies are reached, total costs escalate. 15. Accounting profit typically exceeds economic profit because a) Accounting profit includes intangible revenue sources. b) Economic cost includes all relevant opportunity costs. c) Accounting cost contains implicit costs. d) Accounting practice is to allocate fixed costs to other activities. e) This is incorrect. Economic profit is usually greater than accounting profit. PART II: PROVIDE ANSWERS TO THE FOLLOWING QUESTIONS (25 POINTS) 1. (10 points) Suppose that a firm sells in a highly competitive market, in which the going price is $15 2 per unit. The firms cost equation is C = $25 + .25Q . a) Find the profit-maximizing level of output for the firm. Determine its level of profit. b) Suppose that fixed costs increase to $75. Find the profit-maximizing level of output for the firm. Determine its level of profit. 2. (15 points) The college and graduate-school textbook market is one of the most profitable segments for book publishers. A best-selling accounting text published by Old School Inc (OS) has a demand curve: P = 150 - Q, where Q denotes yearly sales (in thousands) of books. (In other words, Q = 20 means 20 thousand books.) The cost of producing, handling, and shipping each additional book is about $40, and the publisher pays a $10 per book royalty to the author. Finally, the publishers overall marketing and promotion spending (set annually) acco unts for an average cost of about $10 per book. a) Determine OSs profit-maximizing output and price for the accounting text.
b) A rival publisher has raised the price of its best-selling accounting text by $15. One option is to exactly match this price hike and so exactly preserve your level of sales. Do you endorse this price increase? (Explain briefly why or why not.) PART III: SHORT ESSAYS (30 POINTS) (see attached file)