Faculty of Business, Environment and Society

214ECN: Managerial Economics

Test 1

Instructions:
1. You must answer All questions.
2. Time: 40 minutes
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Questions

1. For the cost function C(Q) = 100 + 3Q + 6Q2, the average fixed cost of producing 2
units of output is 
A. 100.
B. 50.
C. 3.
D. 2.

2. You are an efficiency expert hired by a manufacturing firm that uses K and L as
inputs. The firm produces and sells a given output. If w = $40, r = $100, MPL = 10,
and MPK = 40 the firm: 
A. is cost minimizing.
B. should use less L and more K to cost minimize.
C. should use more L and less K to cost minimize.
D. is profit maximizing but not cost minimizing.

3. The production function for a competitive firm is Q = K.5L.5. The firm sells its
output at a price of $10, and can hire labor at a wage of $5. Capital is fixed at 25
units. The profit-maximizing quantity of labor is 25
A. none of the statements associated with this question are correct.
B. 2.
C. 10.
D. 1.

4. Accounting profits are: 

A. marginal revenue minus total cost.
B. total cost minus total revenue.
C. total revenue minus total cost.
D. total revenue minus marginal cost.

5. You are the manager of a firm that produces output in two plants. The demand for
your firm's product is P = 78- 15Q, where Q = Q1 + Q2. The marginal cost associated
with producing in the two plants are MC1 = 3Q1 and MC2 = 2Q2. How much output
should be produced in plant 1 in order to maximize profits? 
A. 4.
B. 3.
C. 2.
D. 1.

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6. In a competitive industry with identical firms, long run equilibrium is characterized
by 
A. P = AC.
B. P = MC.
C. All of the statements associated with this question are correct.
D. MR = MC.

7. Which of the following is true under monopoly? 

A. Profits are always positive.
B. P > MC.
C. P = MR.
D. All of the choices are true for monopoly.

8. Both firms in a Cournot duopoly would enjoy higher profits if 

A . each firm simultaneously increased output above the Nash equilibrium level
B. . the firms simultaneously reduced output below the Nash equilibrium level.
C. one firm reduced output below the Cournot Nash equilibrium level, while the other
firm continued to produce its Cournot Nash equilibrium output.
D. the firms simultaneously reduced output below the Nash equilibrium level and one
firm reduced output below the Cournot Nash equilibrium level, while the other firm
continued to produce its Cournot Nash equilibrium output.

9. Which of the following is true? 

A. In Bertrand oligopoly each firm believes that their rivals will hold their output
constant if it changes its output. => Cournot
B. In Cournot oligopoly firms produce an identical product at a constant marginal
cost and engage in price competition. => Bertrand
C. In oligopoly a change in marginal cost never has an affect on output or price. => no
because fuction to calculate Q depends on MC
D. None of the statements associated with this question are true.

10. The market demand in a Bertrand duopoly is P = 10 - Q, and the marginal costs

are $1. Fixed costs are zero for both firms. Which of the following statement(s) is/are
true? 
A. P = $1.
B. profits of Firm One = profits of Firm Two.
C. producer's surplus of Firm One = producer's surplus of Firm Two.
D. all of the statements associated with this question are correct.

11. Two firms compete as a Stackelberg duopoly. The demand they face is P = 100 -
3Q. The cost function for each firm is C(Q) = 4Q. The profits of the two firms are: 
A. L = $56; F = -$28.
B. L = $192; F = $91.
C. L = $384; F = $192.
D. L = $56; F = $28.

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12. Firm one and firm two compete as a Cournot oligopoly. There is an increase in
marginal cost for firm one. Which of the following is not true? 
A.  Firm two will produce more.
B.  Firm one will produce less.
C. Both firm one's and firm two's reaction functions are shifted.
D. Profits of firm one will decrease.

Refer to the following normal form game of price competition for questions 13-15.

    

13. Suppose the game is infinitely repeated, and the interest rate is 5%. Both firms
agree to charge a high price, provided no player has charged in low price in the past.
If both firms stick to this agreement, then the present value of Firm B's payoffs are: 
A. 210.
B. 190.
C. 105
D. 525.

14. Suppose that Firm A deviates from a trigger strategy to support a high price.
What is the present value of A's payoff from cheating? 
A. 25.
B. 20.
C. 5
D. 35.

15. What is the maximum interest rate that can sustain collusion? 

A. 15%.
B. 25%.
C. 33%.
D. 66.7%.

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The following questions 16-18 are based on this game, where firms one and two must
independently decide whether to charge high or low prices.

  

 16. Which of the following are Nash equilibrium payoffs in the one-shot game? 
A. (5, -5).
B. (0, 0).
C. (-5, 5).
D. (10, 10).

17. Which of the following are the Nash equilibrium payoffs (each period) if the game
is repeated 10 times? 
A. (10, 10).
B. (-5, 5).
C.  (5, -5).
D.  (0, 0).

18. Suppose the game is infinitely repeated. Then the "best" the firms could do in a
Nash equilibrium is to earn ___ per period. 
A.  (5, -5)
B.  (0, 0)
C.  (10, 10)
D.  (-5, 5)

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Refer to the following normal form game of price competition for question 19.

   

19. Firm B is the incumbent facing potential entry from its rival; Firm A. Firm A's
strategies consist of {Entry, Stay Out}. Firm B's strategies are then {hard if entry;
hard if stay out; soft if entry; soft if stay out}. Find the subgame Nash equilibrium to
this game, if one exists. 
A. Firm A plays {Entry}; Firm B plays {Hard if Entry}
B. Firm A plays {Stay Out}; Firm B plays {Hard if Entry}.
C. Firm A plays {Entry}; Firm B plays {Soft if Entry}.
D. There is no subgame Nash equilibrium to this game.

20.  A coordination problem arises whenever there: 

A. is no Nash equilibrium in a game.
B. is a unique Nash equilibrium but it is not very desirable.
C. are multiple Nash equilibria.
D. are no dominant strategies for both players.

Please put your answers in the following table.

Questio 1 2 3 4 5 6 7 8 9 1 1 1 1 1 1 1 1 1 1 20
n 0 1 2 3 4 5 6 7 8 9
Answers