AMERICAN UNIVERSITY of BEIRUT
OLAYAN SCHOOL of BUSINESS
BUSS 230 – Managerial Economics- Fall Semester 2007/08
FINAL EXAM – January 22, 2008
NAME: __________________________
ID: ____________________________
SECTION: _______________________
INSTRUCTOR: ___________________
ANSWER ALL QUESTIONS – TIME ALLOWED: 2 hours
Please write the correct
answer in your bluebook. A correct answer is worth 2 points.
I.
1.
Multiple choices - (24 points).
A firm that has total fixed costs of $20,000 and an average variable cost of
$200 a unit sells its output for $150 a unit. If the firm’s cost and revenue
curves are linear, how many units would the firm have to produce in order to
break even?
A.
B.
C.
D.
2.
A firm that has total fixed costs of $40,000 and an average variable cost of
$150 a unit sells its output for $250 a unit. If the firm’s cost and revenue
curves are linear and it is producing 500 units, what would be its degree of
operating leverage?
A.
B.
C.
D.
3.
500.
400.
300.
The firm cannot break even.
5.
4.
3.
None of the above is correct.
Which of the following is a characteristic of monopoly and monopolistic
competition?
A.
B.
C.
D.
In the long run, a firm will earn zero economic profit.
In the long run, a firm will produce a level of output that corresponds
to the minimum point of its average total cost curve.
A firm’s marginal revenue curve is below its demand curve.
Firms face significant barriers to entry.
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4.
Refer to the graph of Market 2, above. At the profit maximizing level of output and
price for a monopolistically competitive firm, the total revenue would be:
A.
B.
C.
D.
5.
Dominant strategy in a Game Theory analytical structure refers to a:
A.
B.
C.
D.
6.
$120.
$210.
$250
None of the above is correct.
strategy that will be adopted regardless of what the competitor does.
strategy followed by the price leader.
strategy involving higher risk but also higher return.
strategy used by large firms to compete against small firms.
A Prisoners’ dilemma in a Game Theory two-firm situation occurs when:
A.
B.
C.
D.
neither firm has a dominant strategy.
each firm adopts its dominant strategy but a superior outcome is
possible.
the incentive to cheat does not affect the outcome.
the firms cooperate to get out of an adverse situation.
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7.
Which of the following situations is an example of strategic entry deterrence?
A.
B.
C.
D.
8.
A single-plant, multi-product firm will introduce additional products:
A.
B.
C.
D.
9.
B.
C.
D.
the marginal revenue from each product is equal to the marginal cost of
producing each product.
the marginal revenues from the two products are equal.
the isorevenue line is tangent to the product transformation curve.
the isorevenue line is tangent to the relevant total cost curve.
Which of the following is not an example of price discrimination?
A.
B.
C.
D.
11.
in the order of increasing price elasticity of demand of the products.
until the marginal revenue from the last product introduced is equal to
zero.
until 100% of unused plant capacity is utilized.
None of the above is correct.
The optimal combination of joint products that are produced in variable
proportions occurs where:
A.
10.
Price reductions by existing producers.
Investing in capacity expansion.
Adopting a “Tit-for-Tat strategy”.
Adopting the “Survival Technique”.
It costs more to make a long-distance telephone call during the day
than it does late at night.
An admission ticket to the movie theater costs less for a student than
for other customers.
95 octane motor gasoline costs less than 98 octane premium motor
gasolines.
All of the above are examples of price discrimination.
A firm produces a product with a fully-allocated average cost of $20. If the
price elasticity of demand for the product is -5, then the optimal selling price
of the product should be:
A.
B.
C.
D.
$16.
$20.
$22.
$25.
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12.
Refer to the price leadership graph above. The total amount sold in this market
situation is:
a.
b.
c.
d.
2.
3.
5.
6.
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II.
True/False – (16 Points in total; 2 points each).
On your blue book, label each of the following statements as either True
or False and briefly justify your answer. No credit will be given for a
correct answer that is not accompanied by a justification or one that is
accompanied by an incorrect justification.
1.
The inflection point on the short-run variable cost curve corresponds to the
level of output where marginal cost is at a minimum.
2.
If a perfectly competitive firm is producing a level of output where price is
equal to marginal cost and greater than average variable cost, then it should
increase production in the short run.
3.
As postulated by the Theory of Contestable Markets, the degree of oligopoly
power may be inferred from either a calculation of concentration ratios or the
Herfindahl Index.
4.
Searching for the Nash Equilibrium is what managers do in situations where
no firm can identify a dominant strategy.
5.
Tacit or implicit collusion to fix the output price is what occurs in a centrallyadministered Cartel.
6.
A country that subsidizes some exports is engaging in international dumping.
7.
If two goods (A and B) produced by one firm are complements in
consumption, then the change in total revenue from the sale of B divided by
the corresponding change in the quantity of A will be positive.
8.
If the optimal level of output of products that are produced jointly in fixed
proportions occurs where the marginal revenue from one product is negative,
then the firm will maximize profits by disposing of all the output of that
product rather than selling it.
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PROBLEMS
(Show all calculations. No credit will be given for a numerical
answer not reflecting calculations shown in your blue book.
Partial credit will be given if the methodology is correct but
arithmetic errors result in an incorrect answer)
III. Problem (15 points). “Delicious Food” restaurant operates in a
monopolistically competitive market where the short-run demand function and
total cost function for its product are given below:
Q = 32 – 2 P
TC = 1/3Q³ - 4.5 Q² - 4 Q + 200
.
a.. For 3 points. Calculate the short-run equilibrium price and output.
b.. For 2 points. Calculate the firm’s total profit at the above-determined
price/output levels.
c.. For 2 points. How would your answer to parts “a” and “b” change if the
firm’s fixed costs were 250 instead of 200? Explain your reasoning.
d. For 3 points. What would you expect to happen to the firm’s profit in the
long run?
e. For 3 points How would your answers to parts “a” and “b” change if
“Delicious food” was operating in a perfectly competitive market
with a price P = $6. Assume that fixed costs = 200.
f. For 2 points. Define the consumer surplus and calculate its value if
“Delicious Food” was operating in a perfectly competitive market
IV. Problem (15 points).Two competitors (Firm A and Firm B) decide to share a
market equally. If the relevant total demand (before sharing) and individual cost
structures were as follows:
QT = 500 – 20 P
TCA = 130 + 10 Q + 0.2 Q²
TCB = 110 + 5 Q + 0.4 Q²
a.
For 4 points. Determine the relevant Marginal Revenue and Marginal Cost
functions for Firm A and Firm B
b. For 8 points. Determine the optimum output, price, and profits of each firm.
c. For 3 points. What would the total market output have been if the two firms
had formed a centrally-administered cartel instead of sharing the market?
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V. Problem (15 points).
Two grocery stores compete against each other in a community. Both are considering
their advertising strategies which are to be implemented simultaneously. Their
interdependent alternatives are described by the payoff matrix of profits given below
(where the first number in each box refers to the payoff of Firm 1 and the second
number to the payoff of Firm 2):
Firm 1
Advertise
Don't Advertise
Advertise
(4/ 2)
2/ 4)
Firm 2
Don't Advertise
(7 /-2)
(6/ 5)
a.
For 5 points. Determine whether each firm has a dominant strategy
and, if it does, identify the strategy.
b.
For 3 points. What strategies will be adopted by the two firms?
c.
For 4 points. Now assume that Firm 1 adopted its strategy first while
Firm 2 reacted to that strategy. How would the strategy sequence and
payoff structure look in this situation?
d.
For 3 points. What strategies will be chosen in the situation analyzed
in part “c”?
VI. Problem (15 points). A hotel serves both business and vacation travelers.
Demand for rooms by business travelers is estimated at: Qb = 2400 – 10 P, while
demand for rooms by vacation travelers is estimated at Qv = 1600 – 8 P. Business
travelers are charged a higher “rack” rate for each room per night, while vacation
travelers receive a lower, “group”, rate. The hotel’s total cost structure is
estimated at: TC = 60,000 + 45 Q + 0.025 Q².
a. For 5 points. If the hotel’s total number of rooms is 1325 and management
seeks to achieve 100% occupancy, how many rooms should be allocated to
each of the two categories of customers in order to maximize Total Revenue
per night from room rentals?
b. For 5 points. Given the hotel’s cost structure, how many rooms should be
allocated to each category of hotel guests in order to maximize Total Profits?
c. For 3 points. What prices should be charged per night for rooms rented to
business travelers and vacation travelers in order to maximize hotel profits?
d..For 2 points. What is the relation between the prices charged and the overall
elasticity of demand by each of the two categories of guests?
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