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# Economics and Management Review Questions

1. When the exponents of a Cobb-Douglas production function sum to more than 1, the function exhibits

A. Constant returns
B. Increasing returns
C. Decreasing returns
D. Either increasing or decreasing returns

2. A major advantage of the ___________ production function is that it can be easily transformed into a linear function, and thus can be analyzed with the linear regression method.

A. Cubic
B. Power
D. None of the above

3. If a firm used a combination of inputs that was to the left of the isocost line, it would indicate that

A. It is exceeding its budget.
B. It is not spending all of its budget.
C. It is operating at its optimal point because it is saving money.
D. None of the above.

4. The marginal cost will intersect the average variable cost curve

A. When the average variable cost curve is rising.
B. Where the average variable cost curve equals price.
C. At the minimum point of the average variable cost curve.
D. The two will never intersect.

5. The Learning Curve
A. Is really no different from a marginal cost curve.
B. Shows the decrease in unit cost as more of the same product is produced over time.
C. Calculates average cost at a particular point in time.
D. None of the above

6. The distinction between sunk and incremental costs is most helpful in answering which question?

A. How many more people should be added to the production process?
B. What is the correct price to charge?
C. Should we begin to build a new factory?
D. Should we continue developing a new software application that we began last year?

7. When the slope of the total revenue curve is equal to the slope of the total cost curve

A. Monopoly profit is maximized
B. Marginal revenue equals marginal cost.
C. The marginal cost curve intersects the total average cost curve.
D. The total cost curve is at its minimum.
E. Both a and b

8. Assume a profit maximizing firm's short run cost is TC = 700 + 60Q. If its demand curve is P = 300 - 15Q, what should it do in the short run?

A. Shut down
B. Continue operating in the short run even though it is losing money.
C. Continue operating because it is earning an economic profit
D. Cannot be determined from the above information

9. Assume a perfectly competitive firm's short run cost is TC = 100 +160Q + 3Q2. If the market price is \$196, what should it do?

A. Produce 5 units and continue operating.
B. Produce 6 units and continue operating.
C. Produce zero units (i.e., shut down)
D. Cannot be determined from the above information.

10. Oligopoly may be associated with all of the following except

A. Many firms.
B. A standardized product.
D. Price followers
E. Both A. and B.

11. Mutual interdependence means that

A. All firms are price takers.
B. Each firm sets its own price based on its anticipated reaction by its customers.
C. All firms collaborate to establish one price.
D. All firms are free to enter or leave the market.

12. In the long run, the most helpful action that a monoploistically competitive firm can take to maintain its economic profit is to

A. Continue its efforts to differentiate its product.
B. Raise its price.
C. Lower its price
D. Do nothing, because it will inevitably experiece a decline in profits.

13. The main difference between perfect competition and monopolistic competition is

A. The number of sellers in the market.
B. The ease of exit from the market.
C. The degree of information about market price.
D. The degree of product differentiation.

14. The existence of a kinked demand curve under oligopoly conditions may result in

A. Price flexibilty.
B. Price rigidity.
C. Competitive pricing
D. None of the above

15. The four-firm concentration ratio

A. Indicates the total profitability among the top four firms in an industry.
B. Is an indicator of the degree of monopolisitic competition.
C. Indicates the presence and intensity of an oligopoly market.
D. Is used by the government as a basis for anti-trust cases.

16. All of the following are conditions which are favorable to the formation of cartels, except:

A. The existence of a small number of firms.
B. Geographic proximity of firms.
C. Homogeneity of the product.
D. Easy entry into the industry
E. All of the conditions are favorable to the formation of cartels.

17. Dominant price leadership exists when

A. One firm drives the others out of the market.
B. The dominant firm decides how much each of its competitors can sell.
C. The dominant firm establishes the price at the quantity where its MR=MC, and permits all other firms to sell as they want to sell at that price.
D. The dominant firm charges the lowest price in the industry.

18. In the Baumol model, a change in fixed costs will

A. Increase total quantity sold
B. Have no effect on total quantity sold.
C. Decrease total quantity sold.
D. Have an effect on total quantity sold.

19. The practice by a monopolist of charging each buyer the highest price he/she is willing to pay is called

A. First-degree discrimination
B. Second-degree discrimination
C. Third-degree discrimination
D. Fourth-degree discrimination

20. If a product which costs \$8 is sold at \$10, the profit margin is

A. \$2
B. 25%
C. 20%
D. None of the above

21. When future events cannot be assigned probabilities, we are talking about

A. Risk
B. Uncertainty
C. A cloudy future
D. Financial risk.

22. When comparing two projects with different returns and different standard deviations, the risk measure which can be used is called the

A. Variance
B. Certainty equivalent
C. Coefficient of correlation
D. Coefficient of variation

23. If a risky cash flow of \$10,000 is equivalent to a riskless cash flow of \$9,300, the certainty equivalent factor is

A. 0.93
B. 0.07
C. 1.07
D. 1.93

24. The expected value is

A. The total of all possible outcomes
B. The arithmetic average of all possible outcomes.
C. The average of all possible outcomes weighted by their respective probabilities.
D. The total of all possible outcomes divided by the number of different possible outcomes.

25. The use of real options in capital budgeting

A. May raise the NPV of a capital project.
B. Makes the analysis of the project considerably easier.
C. Allows management to make decisions more quickly.
D. Eliminates the need for calculating the project's risk adjusted discount rate.