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Managerial Economics & Business Strategy 8th Edition by Michael Baye – Test Bank
Sample Questions
Chapter 05
The Production Process and Costs
Multiple Choice Questions
1.  Suppose the marginal product of labor is 8 and the marginal product of capital is 2. If the wage rate is $4 and the price of capital is $2, then in order to minimize costs the firm should use:

2.  Suppose the production function is Q = min{K, 2L}. How much output is produced when 4 units of labor and 9 units of capital are employed?

3.  Suppose the production function is given by Q = 3K + 4L. What is the average product of capital when 10 units of capital and 10 units of labor are employed?

4.  Suppose the production function is given by Q = 3K + 4L. What is the marginal product of capital when 10 units of capital and 10 units of labor are employed?

5.  Suppose the production function is given by Q = min{K, L}. How much output is produced when 10 units of labor and 9 units of capital are employed?

6.  Suppose the production function is given by Q = min{K, L}. How much output is produced when 4 units of labor and 9 units of capital are employed?

7.  Suppose the production function is given by Q = 3K + 4L. What is the marginal product of capital when 5 units of capital and 10 units of labor are employed?

8.  Suppose the production function is given by Q = 3K + 4L. What is the average product of capital when 5 units of capital and 10 units of labor are employed?

9.  For the cost function C(Q) = 100 + 2Q + 3Q^{2}, the marginal cost of producing 2 units of output is:

10.  For the cost function C(Q) = 100 + 2Q + 3Q^{2}, the average fixed cost of producing 2 units of output is:

11.  For the cost function C(Q) = 100 + 2Q + 3Q^{2}, the total variable cost of producing 2 units of output is:

12.  If a firm’s production function is Leontief and the wage rate goes up, the:

13.  Which of the following statements is incorrect?

14.  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, MP_{L} = 20, and MP_{K} = 40 the firm:

15.  The production function Q = L^{.5}K^{.5} is called:

16.  The production function for a competitive firm is Q = K^{.5}L^{.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 profitmaximizing quantity of labor is:

17.  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, MP_{L} = 4, and MP_{K} = 40 the firm:

18.  If the production function is Q = K^{.5}L^{.5} and capital is fixed at 1 unit, then the average product of labor when L = 25 is:

19.  For a cost function C = 100 + 10Q + Q^{2}, the marginal cost of producing 10 units of output is:

20.  For a cost function C = 100 + 10Q + Q^{2}, the average variable cost of producing 20 units of output is:

21.  For a cost function C = 100 + 10Q + Q^{2}, the average fixed cost of producing 10 units of output is:

22.  Which of the following conditions is true when a producer minimizes the cost of producing a given level of output?

23.  If the production function is Q = KL and capital is fixed at 1 unit, then the marginal product of labor when L = 25 is:

24.  The production function for a competitive firm is Q = K^{.5}L^{.5}. The firm sells its output at a price of $10, and can hire labor at a wage of $5. Capital is fixed at one unit. The profitmaximizing quantity of labor is:

25.  The production function for a competitive firm is Q = K^{.5}L^{.5}. The firm sells its output at a price of $10, and can hire labor at a wage of $5. Capital is fixed at one unit and costs $2. The maximum profits are:

26.  The feasible means of converting raw inputs such as steel, labor, and machinery into an output are summarized by:

27.  The recipe that defines the maximum amount of output that can be produced with K units of capital and L units of labor is the:

28.  The creation of a new product is referred to as:

29.  Which of the following is NOT a means of acquiring product and process innovations?

30.  Inputs a manager may adjust in order to alter production are:

31.  What is the average product of labor, given that the level of labor equals 10, total output equals 1200, and the marginal product of labor equals 200?

32.  The change in total output attributable to the last unit of an input is the:

33.  If the last unit of input increases total product, we know that the marginal product is:

34.  Total product begins to fall when:

35.  What is the value marginal product of labor if: P = $10, MP_{L} = $25, and AP_{L} = 40?

36.  It is profitable to hire units of labor as long as the value of marginal product:

37.  Given the following table, how many workers should be hired to maximize profits?

38.  Firm managers should use inputs at levels where the:

39.  Given the linear production function Q = 10K + 5L, if Q = 10,000 and K = 500, how much labor is utilized?

40.  Given the Leontief production function Q = min{5.5K, 6.7L}, how much output is produced when K = 40 and L = 35?

41.  Suppose the production function is given by Q = K^{1/2}L^{1/2}, and that Q = 30 and K = 25. How much labor is employed by the firm?

42.  Given the production function Q = min{4K, 3L}, what is the average product of capital when 8 units of capital and 16 units of labor are used?

43.  For the production function Q = 5.2K + 3.8L, if K = 16 and L = 12, we know that MP_{K} is:

44.  The combinations of inputs that produce a given level of output are depicted by:

45.  Isoquants are normally drawn with a convex shape because:

46.  The absolute value of the slope of the isoquant is the:

47.  The production function is Q = K^{.6} L^{.4}. The marginal rate of technical substitution is:

48.  The Leontief production function implies:

49.  In order for isoquants to have a diminishing marginal rate of substitution, they must be:

50.  Changes in the price of an input cause:

51.  Which of the following sets of economic data is minimizing the cost of producing a given level of output?

52.  In order to minimize the cost of producing a given level of output, a firm manager should use more inputs when:

53.  Fixed costs exist only in:

54.  Costs that change as output changes are:

55.  Costs that are forever lost after they have been paid are:

56.  Suppose you are a manager of a factory. You purchase five (5) new machines at one million dollars each. If you can resell two of the machines for $500,000 and three of the machines for $200,000, what are the sunk costs of purchasing the machines?

57.  According to the table below, what is the total cost of producing 125 units of output?

58.  According to the table below, what is the average variable cost of producing 50 units of output?

59.  According to the table below, what is the average total cost of producing 160 units of output?

60.  According to the table below, what is the marginal cost of producing 90 units of output?

61.  According to the table below, at what level of output is marginal cost minimized?

62.  Which curve(s) does the marginal cost curve intersect at the (their) minimum point?

63.  Given a cost function C(Q) = 200 + 14Q + 8Q^{2}, what is the marginal cost function?

64.  What is implied when the total cost of producing Q_{1} and Q_{2} together is less than the total cost of producing Q_{1} and Q_{2} separately?

65.  For the cost function C(Q) = 1000 + 14Q + 9Q^{2} + 3Q^{3}, what is the marginal cost of producing the fourth unit of output?

66.  For the cost function C(Q) = 200 + 3Q + 8Q^{2} + 4Q^{3}, what is the average fixed cost of producing six units of output?

67.  Which of the following cost functions exhibits cost complementarity?

68.  For the multiproduct cost function C(Q_{1}, Q_{2}) = 100 + 2Q_{1}Q_{2} + 4Q_{1}^{2}, what is the marginal cost function for good one?

69.  Which of the following cost functions exhibits economies of scope when three (3) units of good one and two (2) units of good two are produced?

70.  The minimum average cost of producing alternate levels of output, allowing for optimal selection of all variables of production is defined by the:

71.  A production function:

72.  Which of the following is the most common source of technology?

73.  Variable factors of production are the inputs that a manager:

74.  The short run is defined as the time frame:

75.  The long run is defined as:

76.  Which of the following is NOT a measure of productivity?

77.  The marginal product of an input is defined as the change in:

78.  As long as marginal product is increasing, marginal product is:

79.  As the usage of an input increases, marginal product:

80.  If a firm is operating on the production function, then workers:

81.  The manager institutes an incentive structure to ensure:

82.  The value of marginal product of an input is the value of the:

83.  It is profitable to hire labor so long as the:

84.  The demand for labor by a profitmaximizing firm is determined by:

85.  The demand for an input is:

86.  The Leontief production function:

87.  With a linear production function there is a:

88.  The CobbDouglas production function is:

89.  The average product of labor depends on how many units of:

90.  The marginal product of capital for the CobbDouglas production function is given by:

91.  An isoquant defines the combination of inputs that yield the producer:

92.  The isoquants are normally drawn with a convex shape because inputs are:

93.  The marginal rate of technical substitution:

94.  Whenever an isoquant exhibits a diminishing marginal rate of technical substitution, the corresponding isoquants are:

95.  An isocost line:

96.  For given input prices, isocosts farther from the origin are associated with:

97.  If the marginal product per dollar spent on capital is less than the marginal product per dollar spent on labor, then in order to minimize costs the firm should use:

98.  If the price of labor increases, in order to minimize the costs of producing a given level of output, the firm manager should use:

99.  Sunk costs are those costs that:

100.  Average fixed cost:

101.  The marginal cost curve:

102.  When marginal cost curve is below an average cost curve, average cost is:

103.  The difference between average total costs and average variable costs is:

104.  Economies of scope exist when:

105.  Cost complementarity exists in a multiproduct cost function when:

106.  Suppose the cost function is C(Q) = 50 + Q – 10Q^{2} + 2Q^{3}. What are the fixed costs?

107.  Suppose the cost function is C(Q) = 50 + Q – 10Q^{2} + 2Q^{3}. What is the total cost of producing 10 units?

108.  Suppose the cost function is C(Q) = 50 + Q – 10Q^{2} + 2Q^{3}. What is the variable cost of producing 10 units?

109.  Suppose the cost function is C(Q) = 50 + Q – 10Q^{2} + 2Q^{3}. What is the marginal cost of producing 10 units?

110.  Suppose the cost function is C(Q) = 50 + Q – 10Q^{2} + 2Q^{3}. At 10 units of output, the average cost curve is:

111.  When there are economies of scope between two products which are separately produced by two firms, merging into a single firm can:

112.  When there are economies of scope between products, selling off an unprofitable subsidiary could lead to:

113.  Economies of scale exist whenever longrun average costs:

114.  The longrun average cost curve defines the minimum average cost of producing alternative levels of output, allowing for optimal selection of:

115.  The costs of production include:

116.  Suppose the longrun average cost curve is Ushaped. When LRAC is in the increasing stage, there exist:

117.  Constant returns to scale exist when longrun average costs:

118.  Larger firms can produce a product at lower average cost than small firms when:

119.  Two firms producing identical products may merge due to the existence of:

120.  Suppose the marginal product of labor is 10 and the marginal product of capital is 8. If the wage rate is $5 and the price of capital is $2, then in order to minimize costs the firm should use:

121.  Suppose the production function is Q = min{3K, L}. How much output is produced when 6 units of labor and 3 units of capital are employed?

122.  Suppose the production function is given by Q = 2K + 5L. What is the marginal product of labor when 15 units of capital and 10 units of labor are employed?

123.  Suppose the production function is given by Q = 4K + 6L. What is the average product of capital when 10 units of capital and 5 units of labor are employed?

124.  For the cost function C(Q) = 75 + 4Q + 2Q^{2}, the marginal cost of producing 5 units of output is:

125.  For the cost function C(Q) = 50 + 4Q + 2Q^{2}, the total variable cost of producing 7 units of output is:

126.  If a firm’s production function is Leontief and the price of capital goes down, the:

127.  Which of the following “costs” could a firm that wants to remain in business avoid if it halted current production?

128.  If the production function is Q = K^{.5}L^{.5} and capital is fixed at 1 unit, then the average product of labor when L = 36 is:

129.  Which of the following conditions is true when a producer minimizes the cost of producing a given level of output?

130.  The inputs that a manager uses to alter production are referred to as:

131.  The point where diminishing marginal returns has begun to affect production is best characterized by the point where the:

132.  Changes in the price of an input cause:

133.  In the short run, the marginal cost curve crosses the average total cost curve at:

134.  Which of the following cost functions exhibits cost complementarity?

135.  Which of the following cost functions exhibits economies of scope over the specified output range?

136.  The production function for good X exhibited in the table below is for the:

137.  The marginal product of capital of producing 2,991 units of output (find point A) in the table below is:

138.  The production function for good X in the table below exhibits increasing marginal returns to capital over what output range?

139.  The production function in the table below exhibits negative marginal returns to capital over what output range?

140.  The production function in the table below exhibits decreasing marginal returns to capital over what output range?

141.  The average product of capital of producing 2,991 units of output (find point B) in the table below is:

142.  Suppose that production for good X is characterized by the following production function, Q = K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $25 and the perunit wage, w, is $15, then the fixed cost of using 81 units of capital and 9 units of labor is:

143.  Suppose that production for good X is characterized by the following production function, Q = K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $25 and the perunit wage, w, is $15, then the variable cost of using 81 units of capital and 9 units of labor is:

144.  Suppose that production for good X is characterized by the following production function, Q = K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $25 and the perunit wage, w, is $15, then the average total cost of using 81 units of capital and 9 units of labor is:

145.  Suppose that production for good X is characterized by the following production function, Q = K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $25 and the perunit wage, w, is $15, then the average variable cost of using 81 units of capital and 9 units of labor is:

146.  Suppose that production for good X is characterized by the following production function, Q = K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $25 and the perunit wage, w, is $15, then the average fixed cost of using 81 units of capital and 9 units of labor is:

147.  The derivative, dAC(Q)/dQ = (1/Q_{2}) {Q(dC/dQ) – C(Q)}, illustrates that when:

148.  The firstorder conditions for maximizing profits, π = P × F(K, L) – wL – rK, are:

149.  Which of the following profit functions exhibits a Leontief production function?

150.  Which of the following profit functions exhibits a linear production function?

151.  Which of the following profit functions exhibits a CobbDouglas production function?

152.  Which of the following relations is the slope along a given isoquant?

153.  Suppose the w = $20 and r = $30. The isocost line for a firm in this industry is:

154.  Suppose the production function is given by Q = 2K + L. If w = $4 and r = $4, how many units of K and L will be utilized in the production process?

155.  For given input prices, isocosts closer to the origin are associated with:

156.  For the cost function C(Q) = 500 + 12Q + 4Q^{2} + Q^{3}, what is the marginal cost of producing the eighth unit of output?

157.  If the production function is Q = K^{.5}L^{.5} and capital is fixed at 9 units, then the marginal product of labor when L = 49 is:

158.  Suppose the production function is given by Q = 4K + 3L. What is the average product of labor when 10 units of capital and 5 units of labor are employed?

159.  The production function is Q = K^{.4} L^{.6}. The marginal rate of technical substitution is:

160.  For the cost function C(Q) = 100 + 4Q + 19Q^{2} + 2Q^{3}, what is the marginal cost of producing the fourth unit of output?

161.  Suppose the cost function is C(Q) = 50 + Q – 10Q^{2} + 2Q^{3}. At 3 units of output, the marginal cost curve is:

162.  Suppose that production for good X is characterized by the following production function, Q = K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $86.80 and the perunit wage, w, is $20, then the average total cost of using 25 units of capital and 49 units of labor is:

163.  Suppose that production for good X is characterized by the following production function, Q = 4K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $86.80 and the perunit wage, w, is $20, then the average total cost of using 25 units of capital and 49 units of labor is:

164.  Suppose that production for good X is characterized by the following production function, Q = 4K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $12 and the perunit wage, w, is $20, then the average total cost of using 25 units of capital and 49 units of labor is:

165.  Suppose that production for good X is characterized by the following production function, Q = K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $15 and the perunit wage, w, is $25, then the average fixed cost of using 9 units of capital and 81 units of labor is:

166.  Suppose that production for good X is characterized by the following production function, Q = K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $15 and the perunit wage, w, is $125, then the average fixed cost of using 16 units of capital and 25 units of labor is:

167.  Suppose that production for good X is characterized by the following production function, Q = K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $15 and the perunit wage, w, is $5, then the average fixed cost of using 16 units of capital and 25 units of labor is:

Essay Questions
168.  Congress is considering legislation that will provide additional investment tax credits to businesses. Effectively, an investment tax credit reduces the cost to firms of using capital in production. Would you expect labor unions to lobby for or against such a bill? (Hint: What impact would such a plan have on the capitaltolabor ratio at the typical firm?)

169.  You have been hired to replace the manager of a firm that used only two inputs, capital and labor, to produce output. The firm can hire as much labor as it wants at a wage of $5 per hour and can rent as much capital as it wants at a price of $50 per hour. After you look at the company books, you learn that the company has been using capital and labor in amounts that imply a marginal product of labor of 50 and a marginal product of capital of 100. Do you know why the firm hired you? Explain.

170.  The manager of a meatpacking plant can use either butchers (labor) or meat saws (capital) to prepare packages of sirloin steak. Based on estimates provided by an efficiency expert, the firm’s production function for sirloin steak is given by Q = K + L
a. Graph the isoquant corresponding to 5 units of output.

171.  The manager of a national retailing outlet recently hired an economist to estimate the firm’s production function. Based on the economist’s report, the manager now knows that the firm’s production function is given by and that capital is fixed at 1 unit.
a. Calculate the average product of labor when 9 units of labor are utilized.

172.  An accountant for a car rental company was recently asked to report the firm’s costs of producing various levels of output. The accountant knows that the most recent estimate available of the firm’s cost function is where costs are measured in thousands of dollars and output is measured in thousands of hours rented.
a. What is the average fixed cost of producing 2 units of output?

173.  There are over 5,000 banks in the United States—more than 10 times more per person than in other industrialized countries. A recent study suggests that the longrun average cost curve for an individual bank is relatively flat. If Congress took steps to consolidate banks, thereby reducing the total number to 2,500, what would you expect to happen to costs within the banking industry? Explain.

174.  A production function exhibits constant returns to scale if a twofold (threefold, etc.) increase in all inputs leads to a twofold (threefold, etc.) increase in output. For example, by doubling the use of capital and labor, the firm would exactly double its output.
a. What would the average and marginal cost curves look like under constant returns to scale? Explain.

175.  A production function exhibits decreasing returns to scale if a twofold (threefold, etc.) increase in all inputs increases output by less than twofold (less than threefold, etc.). For example, by doubling the use of capital and labor, the firm would less than double its output.
a. What would the average and marginal cost curves look like under decreasing returns to scale? Explain.

176.  The total costs for Morris Industries are summarized in the following table. Based on this information, fill in the missing entries in the table for fixed cost, variable cost, average fixed cost, average variable cost, average total cost, and marginal cost.

177.  The following table summarizes the shortrun production function for your firm. Your product sells for $5 per unit, labor costs $5 per unit, and the rental price of capital is $20 per unit. Complete the following table, and then answer the accompanying questions.
a. Which inputs are fixed inputs? Which are the variable inputs?

178.  Your firm produces two products, Q_{1} and Q_{2}. An economic consulting firm has estimated your cost function to be
a. Are there economies of scope?

179.  In the text, we showed that the multiproduct cost function exhibits cost complementarity whenever and economies of scope whenever
a. Can cost complementarity exist without economies of scope?

180.  Standard Enterprises produces an output that it sells in a highly competitive market at a price of $100 per unit. Its inputs include two machines (which cost the firm $50 each) and workers, who can be hired on an asneeded basis in a labor market at a cost of $2,800 per worker. Based on the following production data, how many workers should the firm employ to maximize its profits?

181.  You are the manager of Telecall Inc., a small telemarketing company. Your company pays $10,000 per month for office space. A real estate agent has noticed that you are only using 75 percent of your available space and tells you that Telecall could add $800 per month to its bottom line by renting out the space it does not use. Telecall has been asked to do a new telemarketing campaign for a large credit card company, but this would require it to use the remaining office space. What is the opportunity cost of using the extra office space to handle the credit card company’s promotion?

182.  Suppose the production function of automobiles is given by
a. Show that the marginal product of any given quantity of labor increases as capital is increased.

183.  Show that the CobbDouglas production function exhibits the law of diminishing marginal rate of technical substitution.

184.  You are the manager of a firm that sells output at a price of $40 per unit. You are interested in hiring a new worker who will increase your firm’s output by 2,000 units per year. Several other firms also are interested in hiring this worker.
a. What is the highest annual salary you should be willing to pay this worker to come to your firm?

185.  To open a new business, a manager must obtain a license from the city for $20,000. The license is transferable, but only $3,000 is refundable in the event the firm does not use the license.
a. What are the firm’s fixed costs? Sunk costs?

186.  The maker of Turbotax produces software that prepares federal income tax returns. In addition, it produces software that prepares various state income tax returns. Why doesn’t it pay for the firm to specialize in federal software?

187.  The management of Morris Industries is considering a plan to terminate a new employee. The action stemmed from documented evidence supplied by the firm’s accounting department that this new employee did not add as much to the firm’s overall output as did a worker hired two weeks earlier. Based on this evidence, do you agree that the latest worker hired should be fired? Explain.

188.  In 1995 the U.S. Justice Department sued to block a merger between Microsoft and Intuit, the producer of the nation’s bestselling business software. The Justice Department argued that the merger would lessen competition and raise prices of business software. Is there an economic argument that the merger might actually result in lower prices? Explain.

Chapter 05 The Production Process and Costs Answer Key
Multiple Choice Questions
1.  Suppose the marginal product of labor is 8 and the marginal product of capital is 2. If the wage rate is $4 and the price of capital is $2, then in order to minimize costs the firm should use:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
2.  Suppose the production function is Q = min{K, 2L}. How much output is produced when 4 units of labor and 9 units of capital are employed?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
3.  Suppose the production function is given by Q = 3K + 4L. What is the average product of capital when 10 units of capital and 10 units of labor are employed?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
4.  Suppose the production function is given by Q = 3K + 4L. What is the marginal product of capital when 10 units of capital and 10 units of labor are employed?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
5.  Suppose the production function is given by Q = min{K, L}. How much output is produced when 10 units of labor and 9 units of capital are employed?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
6.  Suppose the production function is given by Q = min{K, L}. How much output is produced when 4 units of labor and 9 units of capital are employed?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
7.  Suppose the production function is given by Q = 3K + 4L. What is the marginal product of capital when 5 units of capital and 10 units of labor are employed?

AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
8.  Suppose the production function is given by Q = 3K + 4L. What is the average product of capital when 5 units of capital and 10 units of labor are employed?

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
9.  For the cost function C(Q) = 100 + 2Q + 3Q^{2}, the marginal cost of producing 2 units of output is:

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
10.  For the cost function C(Q) = 100 + 2Q + 3Q^{2}, the average fixed cost of producing 2 units of output is:

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
11.  For the cost function C(Q) = 100 + 2Q + 3Q^{2}, the total variable cost of producing 2 units of output is:

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
12.  If a firm’s production function is Leontief and the wage rate goes up, the:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 3 Hard Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
13.  Which of the following statements is incorrect?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 3 Hard Learning Objective: 0504 Explain the difference between and the economic relevance of fixed costs; sunk costs; variable costs; and marginal costs. Topic: The Cost Function 
14.  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, MP_{L} = 20, and MP_{K} = 40 the firm:

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
15.  The production function Q = L^{.5}K^{.5} is called:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
16.  The production function for a competitive firm is Q = K^{.5}L^{.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 profitmaximizing quantity of labor is:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
17.  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, MP_{L} = 4, and MP_{K} = 40 the firm:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
18.  If the production function is Q = K^{.5}L^{.5} and capital is fixed at 1 unit, then the average product of labor when L = 25 is:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
19.  For a cost function C = 100 + 10Q + Q^{2}, the marginal cost of producing 10 units of output is:

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
20.  For a cost function C = 100 + 10Q + Q^{2}, the average variable cost of producing 20 units of output is:

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
21.  For a cost function C = 100 + 10Q + Q^{2}, the average fixed cost of producing 10 units of output is:

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
22.  Which of the following conditions is true when a producer minimizes the cost of producing a given level of output?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
23.  If the production function is Q = KL and capital is fixed at 1 unit, then the marginal product of labor when L = 25 is:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
24.  The production function for a competitive firm is Q = K^{.5}L^{.5}. The firm sells its output at a price of $10, and can hire labor at a wage of $5. Capital is fixed at one unit. The profitmaximizing quantity of labor is:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
25.  The production function for a competitive firm is Q = K^{.5}L^{.5}. The firm sells its output at a price of $10, and can hire labor at a wage of $5. Capital is fixed at one unit and costs $2. The maximum profits are:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
26.  The feasible means of converting raw inputs such as steel, labor, and machinery into an output are summarized by:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
27.  The recipe that defines the maximum amount of output that can be produced with K units of capital and L units of labor is the:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
28.  The creation of a new product is referred to as:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
29.  Which of the following is NOT a means of acquiring product and process innovations?

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
30.  Inputs a manager may adjust in order to alter production are:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
31.  What is the average product of labor, given that the level of labor equals 10, total output equals 1200, and the marginal product of labor equals 200?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
32.  The change in total output attributable to the last unit of an input is the:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
33.  If the last unit of input increases total product, we know that the marginal product is:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
34.  Total product begins to fall when:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
35.  What is the value marginal product of labor if: P = $10, MP_{L} = $25, and AP_{L} = 40?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
36.  It is profitable to hire units of labor as long as the value of marginal product:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
37.  Given the following table, how many workers should be hired to maximize profits?

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
38.  Firm managers should use inputs at levels where the:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
39.  Given the linear production function Q = 10K + 5L, if Q = 10,000 and K = 500, how much labor is utilized?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
40.  Given the Leontief production function Q = min{5.5K, 6.7L}, how much output is produced when K = 40 and L = 35?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
41.  Suppose the production function is given by Q = K^{1/2}L^{1/2}, and that Q = 30 and K = 25. How much labor is employed by the firm?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
42.  Given the production function Q = min{4K, 3L}, what is the average product of capital when 8 units of capital and 16 units of labor are used?

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
43.  For the production function Q = 5.2K + 3.8L, if K = 16 and L = 12, we know that MP_{K} is:

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
44.  The combinations of inputs that produce a given level of output are depicted by:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
45.  Isoquants are normally drawn with a convex shape because:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
46.  The absolute value of the slope of the isoquant is the:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
47.  The production function is Q = K^{.6} L^{.4}. The marginal rate of technical substitution is:

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
48.  The Leontief production function implies:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
49.  In order for isoquants to have a diminishing marginal rate of substitution, they must be:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
50.  Changes in the price of an input cause:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
51.  Which of the following sets of economic data is minimizing the cost of producing a given level of output?

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
52.  In order to minimize the cost of producing a given level of output, a firm manager should use more inputs when:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
53.  Fixed costs exist only in:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0506 Distinguish between shortrun and longrun production decisions and illustrate their impact on costs and economies of scale. Topic: The Cost Function 
54.  Costs that change as output changes are:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0504 Explain the difference between and the economic relevance of fixed costs; sunk costs; variable costs; and marginal costs. Topic: The Cost Function 
55.  Costs that are forever lost after they have been paid are:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0504 Explain the difference between and the economic relevance of fixed costs; sunk costs; variable costs; and marginal costs. Topic: The Cost Function 
56.  Suppose you are a manager of a factory. You purchase five (5) new machines at one million dollars each. If you can resell two of the machines for $500,000 and three of the machines for $200,000, what are the sunk costs of purchasing the machines?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0504 Explain the difference between and the economic relevance of fixed costs; sunk costs; variable costs; and marginal costs. Topic: The Cost Function 
57.  According to the table below, what is the total cost of producing 125 units of output?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0503 Calculate a cost function from a production function and explain how economic costs differ from accounting costs. Topic: The Cost Function 
58.  According to the table below, what is the average variable cost of producing 50 units of output?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
59.  According to the table below, what is the average total cost of producing 160 units of output?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
60.  According to the table below, what is the marginal cost of producing 90 units of output?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
61.  According to the table below, at what level of output is marginal cost minimized?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Cost Function 
62.  Which curve(s) does the marginal cost curve intersect at the (their) minimum point?

AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 0504 Explain the difference between and the economic relevance of fixed costs; sunk costs; variable costs; and marginal costs. Topic: The Cost Function 
63.  Given a cost function C(Q) = 200 + 14Q + 8Q^{2}, what is the marginal cost function?

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
64.  What is implied when the total cost of producing Q_{1} and Q_{2} together is less than the total cost of producing Q_{1} and Q_{2} separately?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0507 Conclude whether a multipleoutput production process exhibits economies of scope or cost complementarities and explain their significance for managerial decisions. Topic: MultipleOutput Cost Functions 
65.  For the cost function C(Q) = 1000 + 14Q + 9Q^{2} + 3Q^{3}, what is the marginal cost of producing the fourth unit of output?

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
66.  For the cost function C(Q) = 200 + 3Q + 8Q^{2} + 4Q^{3}, what is the average fixed cost of producing six units of output?

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
67.  Which of the following cost functions exhibits cost complementarity?

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0507 Conclude whether a multipleoutput production process exhibits economies of scope or cost complementarities and explain their significance for managerial decisions. Topic: MultipleOutput Cost Functions 
68.  For the multiproduct cost function C(Q_{1}, Q_{2}) = 100 + 2Q_{1}Q_{2} + 4Q_{1}^{2}, what is the marginal cost function for good one?

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: MultipleOutput Cost Functions 
69.  Which of the following cost functions exhibits economies of scope when three (3) units of good one and two (2) units of good two are produced?

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0507 Conclude whether a multipleoutput production process exhibits economies of scope or cost complementarities and explain their significance for managerial decisions. Topic: MultipleOutput Cost Functions 
70.  The minimum average cost of producing alternate levels of output, allowing for optimal selection of all variables of production is defined by the:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0506 Distinguish between shortrun and longrun production decisions and illustrate their impact on costs and economies of scale. Topic: The Cost Function 
71.  A production function:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
72.  Which of the following is the most common source of technology?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
73.  Variable factors of production are the inputs that a manager:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
74.  The short run is defined as the time frame:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0506 Distinguish between shortrun and longrun production decisions and illustrate their impact on costs and economies of scale. Topic: The Cost Function 
75.  The long run is defined as:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0506 Distinguish between shortrun and longrun production decisions and illustrate their impact on costs and economies of scale. Topic: The Cost Function 
76.  Which of the following is NOT a measure of productivity?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
77.  The marginal product of an input is defined as the change in:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
78.  As long as marginal product is increasing, marginal product is:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
79.  As the usage of an input increases, marginal product:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
80.  If a firm is operating on the production function, then workers:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
81.  The manager institutes an incentive structure to ensure:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 3 Hard Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
82.  The value of marginal product of an input is the value of the:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
83.  It is profitable to hire labor so long as the:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
84.  The demand for labor by a profitmaximizing firm is determined by:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
85.  The demand for an input is:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
86.  The Leontief production function:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
87.  With a linear production function there is a:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
88.  The CobbDouglas production function is:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
89.  The average product of labor depends on how many units of:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
90.  The marginal product of capital for the CobbDouglas production function is given by:

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
91.  An isoquant defines the combination of inputs that yield the producer:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
92.  The isoquants are normally drawn with a convex shape because inputs are:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
93.  The marginal rate of technical substitution:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
94.  Whenever an isoquant exhibits a diminishing marginal rate of technical substitution, the corresponding isoquants are:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
95.  An isocost line:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0503 Calculate a cost function from a production function and explain how economic costs differ from accounting costs. Topic: The Cost Function 
96.  For given input prices, isocosts farther from the origin are associated with:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0503 Calculate a cost function from a production function and explain how economic costs differ from accounting costs. Topic: The Cost Function 
97.  If the marginal product per dollar spent on capital is less than the marginal product per dollar spent on labor, then in order to minimize costs the firm should use:

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
98.  If the price of labor increases, in order to minimize the costs of producing a given level of output, the firm manager should use:

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
99.  Sunk costs are those costs that:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0504 Explain the difference between and the economic relevance of fixed costs; sunk costs; variable costs; and marginal costs. Topic: The Cost Function 
100.  Average fixed cost:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0504 Explain the difference between and the economic relevance of fixed costs; sunk costs; variable costs; and marginal costs. Topic: The Cost Function 
101.  The marginal cost curve:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
102.  When marginal cost curve is below an average cost curve, average cost is:

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
103.  The difference between average total costs and average variable costs is:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0504 Explain the difference between and the economic relevance of fixed costs; sunk costs; variable costs; and marginal costs. Topic: The Cost Function 
104.  Economies of scope exist when:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0507 Conclude whether a multipleoutput production process exhibits economies of scope or cost complementarities and explain their significance for managerial decisions. Topic: MultipleOutput Cost Functions 
105.  Cost complementarity exists in a multiproduct cost function when:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0507 Conclude whether a multipleoutput production process exhibits economies of scope or cost complementarities and explain their significance for managerial decisions. Topic: MultipleOutput Cost Functions 
106.  Suppose the cost function is C(Q) = 50 + Q – 10Q^{2} + 2Q^{3}. What are the fixed costs?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0504 Explain the difference between and the economic relevance of fixed costs; sunk costs; variable costs; and marginal costs. Topic: The Cost Function 
107.  Suppose the cost function is C(Q) = 50 + Q – 10Q^{2} + 2Q^{3}. What is the total cost of producing 10 units?

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0503 Calculate a cost function from a production function and explain how economic costs differ from accounting costs. Topic: The Cost Function 
108.  Suppose the cost function is C(Q) = 50 + Q – 10Q^{2} + 2Q^{3}. What is the variable cost of producing 10 units?

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0503 Calculate a cost function from a production function and explain how economic costs differ from accounting costs. Topic: The Cost Function 
109.  Suppose the cost function is C(Q) = 50 + Q – 10Q^{2} + 2Q^{3}. What is the marginal cost of producing 10 units?

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
110.  Suppose the cost function is C(Q) = 50 + Q – 10Q^{2} + 2Q^{3}. At 10 units of output, the average cost curve is:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
111.  When there are economies of scope between two products which are separately produced by two firms, merging into a single firm can:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0507 Conclude whether a multipleoutput production process exhibits economies of scope or cost complementarities and explain their significance for managerial decisions. Topic: MultipleOutput Cost Functions 
112.  When there are economies of scope between products, selling off an unprofitable subsidiary could lead to:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0507 Conclude whether a multipleoutput production process exhibits economies of scope or cost complementarities and explain their significance for managerial decisions. Topic: MultipleOutput Cost Functions 
113.  Economies of scale exist whenever longrun average costs:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0506 Distinguish between shortrun and longrun production decisions and illustrate their impact on costs and economies of scale. Topic: The Cost Function 
114.  The longrun average cost curve defines the minimum average cost of producing alternative levels of output, allowing for optimal selection of:

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0506 Distinguish between shortrun and longrun production decisions and illustrate their impact on costs and economies of scale. Topic: The Cost Function 
115.  The costs of production include:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0503 Calculate a cost function from a production function and explain how economic costs differ from accounting costs. Topic: The Cost Function 
116.  Suppose the longrun average cost curve is Ushaped. When LRAC is in the increasing stage, there exist:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0506 Distinguish between shortrun and longrun production decisions and illustrate their impact on costs and economies of scale. Topic: The Cost Function 
117.  Constant returns to scale exist when longrun average costs:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0506 Distinguish between shortrun and longrun production decisions and illustrate their impact on costs and economies of scale. Topic: The Cost Function 
118.  Larger firms can produce a product at lower average cost than small firms when:

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0507 Conclude whether a multipleoutput production process exhibits economies of scope or cost complementarities and explain their significance for managerial decisions. Topic: MultipleOutput Cost Functions 
119.  Two firms producing identical products may merge due to the existence of:

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0506 Distinguish between shortrun and longrun production decisions and illustrate their impact on costs and economies of scale. Topic: The Cost Function 
120.  Suppose the marginal product of labor is 10 and the marginal product of capital is 8. If the wage rate is $5 and the price of capital is $2, then in order to minimize costs the firm should use:

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
121.  Suppose the production function is Q = min{3K, L}. How much output is produced when 6 units of labor and 3 units of capital are employed?

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
122.  Suppose the production function is given by Q = 2K + 5L. What is the marginal product of labor when 15 units of capital and 10 units of labor are employed?

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
123.  Suppose the production function is given by Q = 4K + 6L. What is the average product of capital when 10 units of capital and 5 units of labor are employed?

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
124.  For the cost function C(Q) = 75 + 4Q + 2Q^{2}, the marginal cost of producing 5 units of output is:

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
125.  For the cost function C(Q) = 50 + 4Q + 2Q^{2}, the total variable cost of producing 7 units of output is:

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
126.  If a firm’s production function is Leontief and the price of capital goes down, the:

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
127.  Which of the following “costs” could a firm that wants to remain in business avoid if it halted current production?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0504 Explain the difference between and the economic relevance of fixed costs; sunk costs; variable costs; and marginal costs. Topic: The Cost Function 
128.  If the production function is Q = K^{.5}L^{.5} and capital is fixed at 1 unit, then the average product of labor when L = 36 is:

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
129.  Which of the following conditions is true when a producer minimizes the cost of producing a given level of output?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
130.  The inputs that a manager uses to alter production are referred to as:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
131.  The point where diminishing marginal returns has begun to affect production is best characterized by the point where the:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
132.  Changes in the price of an input cause:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0503 Calculate a cost function from a production function and explain how economic costs differ from accounting costs. Topic: The Cost Function 
133.  In the short run, the marginal cost curve crosses the average total cost curve at:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0506 Distinguish between shortrun and longrun production decisions and illustrate their impact on costs and economies of scale. Topic: The Cost Function 
134.  Which of the following cost functions exhibits cost complementarity?

AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 0507 Conclude whether a multipleoutput production process exhibits economies of scope or cost complementarities and explain their significance for managerial decisions. Topic: MultipleOutput Cost Functions 
135.  Which of the following cost functions exhibits economies of scope over the specified output range?

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0507 Conclude whether a multipleoutput production process exhibits economies of scope or cost complementarities and explain their significance for managerial decisions. Topic: MultipleOutput Cost Functions 
136.  The production function for good X exhibited in the table below is for the:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0506 Distinguish between shortrun and longrun production decisions and illustrate their impact on costs and economies of scale. Topic: The Production Function 
137.  The marginal product of capital of producing 2,991 units of output (find point A) in the table below is:

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
138.  The production function for good X in the table below exhibits increasing marginal returns to capital over what output range?

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
139.  The production function in the table below exhibits negative marginal returns to capital over what output range?

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
140.  The production function in the table below exhibits decreasing marginal returns to capital over what output range?

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
141.  The average product of capital of producing 2,991 units of output (find point B) in the table below is:

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
142.  Suppose that production for good X is characterized by the following production function, Q = K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $25 and the perunit wage, w, is $15, then the fixed cost of using 81 units of capital and 9 units of labor is:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
143.  Suppose that production for good X is characterized by the following production function, Q = K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $25 and the perunit wage, w, is $15, then the variable cost of using 81 units of capital and 9 units of labor is:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
144.  Suppose that production for good X is characterized by the following production function, Q = K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $25 and the perunit wage, w, is $15, then the average total cost of using 81 units of capital and 9 units of labor is:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
145.  Suppose that production for good X is characterized by the following production function, Q = K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $25 and the perunit wage, w, is $15, then the average variable cost of using 81 units of capital and 9 units of labor is:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
146.  Suppose that production for good X is characterized by the following production function, Q = K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $25 and the perunit wage, w, is $15, then the average fixed cost of using 81 units of capital and 9 units of labor is:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
147.  The derivative, dAC(Q)/dQ = (1/Q_{2}) {Q(dC/dQ) – C(Q)}, illustrates that when:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
148.  The firstorder conditions for maximizing profits, π = P × F(K, L) – wL – rK, are:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
149.  Which of the following profit functions exhibits a Leontief production function?

AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
150.  Which of the following profit functions exhibits a linear production function?

AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
151.  Which of the following profit functions exhibits a CobbDouglas production function?

AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
152.  Which of the following relations is the slope along a given isoquant?

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
153.  Suppose the w = $20 and r = $30. The isocost line for a firm in this industry is:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0503 Calculate a cost function from a production function and explain how economic costs differ from accounting costs. Topic: The Cost Function 
154.  Suppose the production function is given by Q = 2K + L. If w = $4 and r = $4, how many units of K and L will be utilized in the production process?

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
155.  For given input prices, isocosts closer to the origin are associated with:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0503 Calculate a cost function from a production function and explain how economic costs differ from accounting costs. Topic: The Cost Function 
156.  For the cost function C(Q) = 500 + 12Q + 4Q^{2} + Q^{3}, what is the marginal cost of producing the eighth unit of output?

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
157.  If the production function is Q = K^{.5}L^{.5} and capital is fixed at 9 units, then the marginal product of labor when L = 49 is:

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
158.  Suppose the production function is given by Q = 4K + 3L. What is the average product of labor when 10 units of capital and 5 units of labor are employed?

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
159.  The production function is Q = K^{.4} L^{.6}. The marginal rate of technical substitution is:

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
160.  For the cost function C(Q) = 100 + 4Q + 19Q^{2} + 2Q^{3}, what is the marginal cost of producing the fourth unit of output?

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
161.  Suppose the cost function is C(Q) = 50 + Q – 10Q^{2} + 2Q^{3}. At 3 units of output, the marginal cost curve is:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
162.  Suppose that production for good X is characterized by the following production function, Q = K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $86.80 and the perunit wage, w, is $20, then the average total cost of using 25 units of capital and 49 units of labor is:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
163.  Suppose that production for good X is characterized by the following production function, Q = 4K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $86.80 and the perunit wage, w, is $20, then the average total cost of using 25 units of capital and 49 units of labor is:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
164.  Suppose that production for good X is characterized by the following production function, Q = 4K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $12 and the perunit wage, w, is $20, then the average total cost of using 25 units of capital and 49 units of labor is:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
165.  Suppose that production for good X is characterized by the following production function, Q = K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $15 and the perunit wage, w, is $25, then the average fixed cost of using 9 units of capital and 81 units of labor is:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
166.  Suppose that production for good X is characterized by the following production function, Q = K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $15 and the perunit wage, w, is $125, then the average fixed cost of using 16 units of capital and 25 units of labor is:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
167.  Suppose that production for good X is characterized by the following production function, Q = K^{0.5}L^{0.5}, where K is the fixed input in the short run. If the perunit rental rate of capital, r, is $15 and the perunit wage, w, is $5, then the average fixed cost of using 16 units of capital and 25 units of labor is:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
Essay Questions
168.  Congress is considering legislation that will provide additional investment tax credits to businesses. Effectively, an investment tax credit reduces the cost to firms of using capital in production. Would you expect labor unions to lobby for or against such a bill? (Hint: What impact would such a plan have on the capitaltolabor ratio at the typical firm?)
An investment tax credit would reduce the price of capital relative to labor. Other things equal, this would increase w/r, thereby making the isocost line steeper. This means that the costminimizing input mix will now involve more capital and less labor, as firms substitute toward capital. If labor unions are concerned that this higher capital/labor ratio will translate into lost jobs, they will likely oppose the investment tax credit. On the other hand, the marginal product of labor will likely rise as a result of the greater use of capital, so those workers employed might receive higher wages. If the union values higher wages, they might favor the legislation. 
AACSB: Analytic Blooms: Evaluate Difficulty: 2 Medium Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
169.  You have been hired to replace the manager of a firm that used only two inputs, capital and labor, to produce output. The firm can hire as much labor as it wants at a wage of $5 per hour and can rent as much capital as it wants at a price of $50 per hour. After you look at the company books, you learn that the company has been using capital and labor in amounts that imply a marginal product of labor of 50 and a marginal product of capital of 100. Do you know why the firm hired you? Explain.
Before the manager is hired, the marginal rate of technical substitution is 1/2. However, the relative input price is 1/10. This means that either more workers or less physical capital should be used. Hence, you are hired to change this input ratio in order to minimize costs. 
AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
170.  The manager of a meatpacking plant can use either butchers (labor) or meat saws (capital) to prepare packages of sirloin steak. Based on estimates provided by an efficiency expert, the firm’s production function for sirloin steak is given by Q = K + L
a. Graph the isoquant corresponding to 5 units of output. a. See Figure 51. b. MP_{K} = 1; MP_{L} = 1. These marginal products do not depend on how much labor and capital are used. 
AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
171.  The manager of a national retailing outlet recently hired an economist to estimate the firm’s production function. Based on the economist’s report, the manager now knows that the firm’s production function is given by and that capital is fixed at 1 unit.
a. Calculate the average product of labor when 9 units of labor are utilized. a. Q = (1)^{1/2}(9)^{1/2} = 3. The average product of labor is thus Q/L = 3/9. 
AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
172.  An accountant for a car rental company was recently asked to report the firm’s costs of producing various levels of output. The accountant knows that the most recent estimate available of the firm’s cost function is where costs are measured in thousands of dollars and output is measured in thousands of hours rented.
a. What is the average fixed cost of producing 2 units of output? a. AFC(2) = 100/2 = $50 
AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
173.  There are over 5,000 banks in the United States—more than 10 times more per person than in other industrialized countries. A recent study suggests that the longrun average cost curve for an individual bank is relatively flat. If Congress took steps to consolidate banks, thereby reducing the total number to 2,500, what would you expect to happen to costs within the banking industry? Explain.
With a flat longrun average cost curve, there are neither economies nor diseconomies of scale in banking services. Consolidation would mean that 2,500 banks would each have to double their output in order to service the consumers initially served by 5,000 banks. But the corresponding average cost per firm, as well as total costs for the industry, would be unchanged. 
AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0506 Distinguish between shortrun and longrun production decisions and illustrate their impact on costs and economies of scale. Topic: The Cost Function 
174.  A production function exhibits constant returns to scale if a twofold (threefold, etc.) increase in all inputs leads to a twofold (threefold, etc.) increase in output. For example, by doubling the use of capital and labor, the firm would exactly double its output.
a. What would the average and marginal cost curves look like under constant returns to scale? Explain. a. Average and marginal cost curves coincide and are flat (constant). 
AACSB: Analytic Blooms: Create Difficulty: 3 Hard Learning Objective: 0506 Distinguish between shortrun and longrun production decisions and illustrate their impact on costs and economies of scale. Topic: The Cost Function 
175.  A production function exhibits decreasing returns to scale if a twofold (threefold, etc.) increase in all inputs increases output by less than twofold (less than threefold, etc.). For example, by doubling the use of capital and labor, the firm would less than double its output.
a. What would the average and marginal cost curves look like under decreasing returns to scale? Explain. a. Average and marginal cost curves are increasing, since doubling the inputs means doubling the total cost but less than doubling the output. Hence, average cost is increasing with output. A similar argument holds for marginal cost. 
AACSB: Analytic Blooms: Create Difficulty: 3 Hard Learning Objective: 0506 Distinguish between shortrun and longrun production decisions and illustrate their impact on costs and economies of scale. Topic: The Cost Function 
176.  The total costs for Morris Industries are summarized in the following table. Based on this information, fill in the missing entries in the table for fixed cost, variable cost, average fixed cost, average variable cost, average total cost, and marginal cost.

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0505 Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. Topic: The Cost Function 
177.  The following table summarizes the shortrun production function for your firm. Your product sells for $5 per unit, labor costs $5 per unit, and the rental price of capital is $20 per unit. Complete the following table, and then answer the accompanying questions.
a. Which inputs are fixed inputs? Which are the variable inputs? a. Labor is the fixed input while capital is the variable input. 
AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
178.  Your firm produces two products, Q_{1} and Q_{2}. An economic consulting firm has estimated your cost function to be
a. Are there economies of scope? a. For a quadratic multiproduct cost function, economies of scope exist if Here, f = 100 and a = 1, so economies of scope exist whenever 
AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0507 Conclude whether a multipleoutput production process exhibits economies of scope or cost complementarities and explain their significance for managerial decisions. Topic: MultipleOutput Cost Functions 
179.  In the text, we showed that the multiproduct cost function exhibits cost complementarity whenever and economies of scope whenever
a. Can cost complementarity exist without economies of scope? a. Cost complementarities cannot exist without economies of scope. This is because when a is negative, f – aQ_{1}Q_{2} is necessarily positive (remember, f is fixed cost, which is nonnegative). 
AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0507 Conclude whether a multipleoutput production process exhibits economies of scope or cost complementarities and explain their significance for managerial decisions. Topic: MultipleOutput Cost Functions 
180.  Standard Enterprises produces an output that it sells in a highly competitive market at a price of $100 per unit. Its inputs include two machines (which cost the firm $50 each) and workers, who can be hired on an asneeded basis in a labor market at a cost of $2,800 per worker. Based on the following production data, how many workers should the firm employ to maximize its profits?
The relevant production data is as follows: To maximize profits, the firm should continue adding workers so long as the value marginal product exceeds the wage. The value marginal product is defined as the marginal product times the price of output. Here, output sells for $100 per unit, so the value marginal product of the third worker is $100(29) = $2,900. The table above summarizes the VMP_{L} for each possibility. Since the wage is $2,800, the profitmaximizing number of workers is 3. 
AACSB: Analytic Blooms: Evaluate Difficulty: 2 Medium Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
181.  You are the manager of Telecall Inc., a small telemarketing company. Your company pays $10,000 per month for office space. A real estate agent has noticed that you are only using 75 percent of your available space and tells you that Telecall could add $800 per month to its bottom line by renting out the space it does not use. Telecall has been asked to do a new telemarketing campaign for a large credit card company, but this would require it to use the remaining office space. What is the opportunity cost of using the extra office space to handle the credit card company’s promotion?
The $800 per month that could be earned by renting out the excess office space. 
AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0503 Calculate a cost function from a production function and explain how economic costs differ from accounting costs. Topic: The Cost Function 
182.  Suppose the production function of automobiles is given by
a. Show that the marginal product of any given quantity of labor increases as capital is increased. a. Notice that MP_{L} can be written as.75(K/L)^{1/4}, which increases as K increases. 
AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
183.  Show that the CobbDouglas production function exhibits the law of diminishing marginal rate of technical substitution.
MP_{L}/MP_{K} = 3(K/L). This clearly decreases as L increases. 
AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
184.  You are the manager of a firm that sells output at a price of $40 per unit. You are interested in hiring a new worker who will increase your firm’s output by 2,000 units per year. Several other firms also are interested in hiring this worker.
a. What is the highest annual salary you should be willing to pay this worker to come to your firm? a. The extra revenue you will earn by hiring the worker is 2,000 × $40 = $80,000 per year. The most you should pay the worker is an annual salary of $80,000. 
AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0501 Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. Topic: The Production Function 
185.  To open a new business, a manager must obtain a license from the city for $20,000. The license is transferable, but only $3,000 is refundable in the event the firm does not use the license.
a. What are the firm’s fixed costs? Sunk costs? a. Fixed costs are $20,000. Sunk costs are $17,000. 
AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0504 Explain the difference between and the economic relevance of fixed costs; sunk costs; variable costs; and marginal costs. Topic: The Cost Function 
186.  The maker of Turbotax produces software that prepares federal income tax returns. In addition, it produces software that prepares various state income tax returns. Why doesn’t it pay for the firm to specialize in federal software?
There are cost complementarities and economies of scope in producing software for federal returns (Q_{F}) and state returns (Q_{S}). When the multiproduct cost function, C(Q_{F}, Q_{S}), for producing federal and state tax preparation software exhibits economies of scope, it will be cheaper to produce both types of software jointly than to produce them separately. When there are cost complementarities in production, the marginal cost of producing state software (Q_{S}) will be lower when federal software is produced (Q_{F}). The economies of scope and cost complementarities are due to similarities in the programs and user interfaces that comprise federal and state income tax preparation software. Once a basic program and interface is written to compute federal taxes, the marginal cost of producing software for state purposes is much lower (effectively, it is the cost of entering details about each particular state’s tax code). If the maker of Turbotax specialized, then another firm that produced both types of software could do so at lower cost and undermine Turbotax’s position in the market. 
AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0507 Conclude whether a multipleoutput production process exhibits economies of scope or cost complementarities and explain their significance for managerial decisions. Topic: MultipleOutput Cost Functions 
187.  The management of Morris Industries is considering a plan to terminate a new employee. The action stemmed from documented evidence supplied by the firm’s accounting department that this new employee did not add as much to the firm’s overall output as did a worker hired two weeks earlier. Based on this evidence, do you agree that the latest worker hired should be fired? Explain.
No. In order to maximize profits, firms should hire workers up to the point where the value marginal product equals the wage rate in the range of diminishing marginal returns. The data suggests that the last worker added less to total output than the previous worker, which means that the firm is indeed operating in the range of diminishing marginal returns, as it should. The worker should be fired if his or her value marginal product is less than the wage. Unfortunately, management is not considering this information. 
AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0502 Calculate input demand and the costminimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. Topic: The Production Function 
188.  In 1995 the U.S. Justice Department sued to block a merger between Microsoft and Intuit, the producer of the nation’s bestselling business software. The Justice Department argued that the merger would lessen competition and raise prices of business software. Is there an economic argument that the merger might actually result in lower prices? Explain.
If there are economies of scope or cost complementarities in producing operating systems like DOS and Windows in conjunction with business software, then the merger might lower costs and therefore prices to consumers. 
AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0507 Conclude whether a multipleoutput production process exhibits economies of scope or cost complementarities and explain their significance for managerial decisions. Topic: MultipleOutput Cost Functions 
Chapter 07
The Nature of Industry
Multiple Choice Questions
1.  Which of the following are measures of industry concentration?

2.  A firm has a marginal cost of $20 and charges a price of $40. The Lerner index for this firm is:

3.  An industry is comprised of 20 firms, each with an equal market share. What is the fourfirm concentration ratio of this industry?

4.  A firm’s average cost is $20, and it charges a price of $20. The Lerner index for this firm is:

5.  An industry is comprised of 10 firms, each with an equal market share. What is the fourfirm concentration ratio of this industry?

6.  An unregulated industry has a Lerner index of zero. These numbers:

7.  The concentration and Herfindahl indices computed by the U.S. Bureau of Census must be interpreted with caution because:

8.  The industry elasticity of demand for gadgets is 2, while the elasticity of demand for an individual gadget manufacturer’s product is 2. Based on the Rothschild approach to measuring market power, we conclude that:

9.  A Herfindahl index of 10,000 suggests:

10.  A Herfindahl index of 0 suggests:

11.  A Lerner index of 0 suggests:

12.  When economies of scale are large, firms can reduce their average total cost by:

13.  Which of the following is NOT one class of a market structure?

14.  Which of the following kinds of market structure are NOT associated with market power?

15.  Monopolistic competition is characterized by:

16.  Oligopoly differs from monopoly as follows:

17.  In perfect competition, which is NOT true?

18.  Which of the following is used to measure market structure and performance?

19.  Suppose that there are two industries, A and B. There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively. There are four firms in industry B with equal sales of $2.5 million for each firm. The fourfirm concentration ratio for industry A is:

20.  Suppose that there are two industries, A and B. There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively. There are four firms in industry B with equal sales of $2.5 million for each firm. The HHI for industry A is:

21.  Suppose that there are two industries, A and B. There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively. There are four firms in industry B with equal sales of $2.5 million for each firm. The fourfirm concentration ratio for industry B is:

22.  Suppose that there are two industries, A and B. There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively. There are four firms in industry B with equal sales of $2.5 million for each firm. The HHI for industry B is:

23.  A student in a managerial economics class calculated the fourfirm concentration ratio and HHI for industries A and B. What is the proper conclusion she can draw from the following findings?

24.  As a general rule of thumb, industries with a Herfindahl index below ______ are considered to be competitive, while those above ______ are considered noncompetitive.

25.  The ranking of industries by the fourfirm concentration ratio usually, but not always, reveals the same pattern as ranking by HHI. When a discrepancy is found it is usually due to the following:

26.  A student figured out that the HHI for an industry was 15,000. What is the proper conclusion?

27.  In the 1960s, each firm in the computer industry was able to make extremely large profit margins, some as high as 50 to 60 percent. The margin decreased to 20 to 40 percent in the 1970s and to 10 to 20 percent in the 1980s. We conclude that:

28.  The concentration and HHI reported in the U.S. Bureau of Census must be interpreted with caution since:

29.  When the relevant markets are local, the concentration and HHI based on figures for the entire United States tend to:

30.  Suppose each of the 50 states had only one gasoline station, and all stations were the same size. The fourfirm concentration ratio, based on national data, would be:

31.  Suppose each of the 50 states had only one gasoline station, and all stations were the same size. The fourfirm concentration ratio for the state of New York, based on the state data, is:

32.  Suppose each of the 50 states had only one gasoline station, and all stations were the same size. The fourfirm concentration ratio a consumer would experience is:

33.  An industry consists of six firms with annual sales of $300, $500, $400, $700, $600, and $600. What is the industry’s C_{4}?

34.  An industry consists of six firms with annual sales of $300, $500, $400, $700, $600, and $600. What is the industry’s HHI?

35.  An industry consists of six firms with annual sales of $300, $500, $400, $700, $600, and $600. According to the general rule of thumb, the HHI of this industry implies that the market structure is:

36.  The causal view of an industry is that:

37.  Pricing is an aspect of a firm’s:

38.  According to the “feedback critique”:

39.  Which of the following measures market structure?

40.  Which of the following measures market power?

41.  The industry elasticity of demand for telephone service is 2, while the elasticity of demand for a specific phone company is 5. What is the Rothchild index?

42.  A local telephone company charges $.10/min. based on a $.08/min. marginal cost of operation. What is the Lerner index?

43.  The DansbyWillig index measures market:

44.  The DansbyWillig index measures the potential for a change in:

45.  Which of the following is NOT a type of integration?

46.  Which of the following integration types exploits economies of scope?

47.  An electronics company takes over one of its original suppliers in a merger. This is an example of:

48.  An electronics company purchases a food company. This is an example of:

49.  Which of the following integration types aims at reducing transaction costs?

50.  A frozen food company buys a fresh food company. This takeover is an example of:

51.  The idea of improving cash flow by exploiting the cyclical nature of different product lines is represented in:

52.  Which of the following integration types has the potential problem of increasing the firm’s market power?

53.  Which of the following may transform an industry from oligopoly to monopolistic competition?

54.  Which market structure has the most market power?

55.  Which of the following statements is true?

56.  The products in a monopolistically competitive industry are:

57.  The HHI of a local market is usually _____________ that of national markets.

58.  C_{4} and HHI tend to ____________ the concentration in a domestic industry.

59.  A firm has a marginal cost of $18 and charges a price of $27. The Lerner index for this firm is:

60.  There are five firms in an industry with sales at $7 million, $6 million, $3 million, $2 million, and $2 million, respectively. The fourfirm concentration ratio is:

61.  The concentration and Herfindahl indices computed by the U.S. Bureau of Census must be interpreted with caution because:

62.  The industry elasticity of demand for gadgets is 2, while the elasticity of demand for an individual gadget manufacturer’s product is 10. Based on the Rothschild approach to measuring market power, we conclude that:

63.  In perfect competition, which is NOT true?

64.  Which of the following may transform an industry from oligopoly to monopolistic competition?

65.  Conglomerate integration:

66.  An industry is comprised of 25 firms, each with an equal market share. What is the fourfirm concentration ratio of this industry?

67.  Monopolistic competition is characterized by:

68.  As a general rule of thumb, the U.S. Department of Justice views industries to be highly concentrated if the Herfindahl index is:

69.  A student figured out that the HHI for an industry was 13,000. What is the proper conclusion?

70.  Which of the following industry structures would you expect to have the lowest Lerner index score?

71.  The DansbyWillig index measures the potential for a change in social welfare by examining the effect of changes in industry:

72.  The tobacco industry has a Lerner index of 0.76. Based on this information, compute the optimal markup factor.

73.  The chemical industry has a Lerner index of 0.67. Based on this information, a firm with marginal cost of $10 should charge a price of:

74.  The Lerner index in the paper industry is 0.58. Based on this information, a firm charging $3.25 per ream of paper should have a marginal cost of:

75.  Holding all else constant, higher prices will:

76.  Suppose you read in an industry publication that the Rothschild index for the petroleum industry is 0.88. Based on past experience, you know that the price elasticity of demand for the petroleum products sold by your firm is 1.5. Based on this information, you know that the elasticity of demand for a representative firm in the petroleum industry is:

77.  Having worked for many of the firms in the petroleum industry, you know that the price elasticity of demand for a representative firm is about 1.25. An industry publication recently reported that the Rothschild index for the petroleum industry is estimated to be 0.88. Based on this information, you know that the price elasticity of demand for the firm you currently work for in the petroleum industry is:

78.  Having worked for many of the firms in the petroleum industry, you know that the price elasticity of demand for a representative firm is about 1.25. Moreover, a recent report from an economist in your office revealed that the price elasticity of demand for the petroleum products sold by your firm is 1.5. Based on this information, you know that the Rothschild index is:

79.  Suppose that the demand in a particular industry is given by Q^{d} = 100 – 2P. When the market price in the industry is $10 per unit, total demand in the industry is ___. Furthermore, assume that each of the four largest firms in the industry sell 15 units. Based on this information, the fourfirm concentration ratio is ____.

80.  Suppose the market for good X has a fourfirm concentration ratio of 0.80. Having worked for the four largest firms in the industry, you know the sales for these four firms are given by $100,000, $125,000, $150,000, and $175,000. Based on this information, we know that sales for the remaining firms in the industry are:

81.  Suppose the market for good X has a fourfirm concentration ratio of 0.50. Furthermore, assume that total sales in the industry are $1.2 million. Based on this information, we know that sales for the largest four firms in the industry equal (in aggregate):

82.  Suppose that the demand in a particular industry is given by Q^{d} = 500 – 2P. When the market price in the industry is $50 per unit, total demand in the industry is _________. Furthermore, assume that the entire market consists of four firms that share the market equally. The HHI under these conditions is then _________.

83.  Four firms control the market for a particular good, resulting in an HHI of 2,900. Total industry sales are $500, and it is known that two firms each have sales of $175. If each of the remaining two firms have the same sales, then we can conclude that the remaining two firms each have a market share of:

84.  Consider a market characterized by two firms that set the same price in the market, P = $10. Total market demand is Q_{T} = 100 – 2P, of which the two firms share equally. Based on this information, we can conclude:

85.  According to the U.S. Department of Justice Merger Guidelines, a HerfindahlHirschman index (HHI) above _________ is associated with a highly concentrated industry. Therefore, if the automobile industry had an HHI of 2,200, then a vertical merger between GM and one of its suppliers likely would be:

86.  Consider a market characterized by a HerfindahlHirschman index of 5,000. One of the firms in this market has a Lerner index of 0.89 and is considering a horizontal merger with a competing firm. Based on this information, it is likely that the U.S. Department of Justice will:

87.  Some firms find conglomerate mergers advantageous since they permit firms to:

88.  Which of the following is NOT a measure of market structure?

89.  Which of the following is NOT considered a measure of firm conduct?

90.  In a perfectly competitive market that is operating at maximum efficiency, the DansbyWillig index would be:

91.  A firm has a marginal cost of $200 and charges a price of $500. The Lerner index for this firm is:

92.  A firm has a Lerner index of 0.75 and charges a price of $150. The firm’s marginal cost is:

93.  An industry consists of eight firms with annual sales (in millions) of $200, $300, $900, $600, $300, $700, $500, and $600. What is the industry’s C_{4}?

94.  An industry consists of three firms with equal annual sales. What is the industry’s C_{4}?

95.  An industry consists of four firms with annual sales of $300, $500, $400, and $600, respectively. What is the industry’s HHI?

96.  An industry consists of five firms with equal annual sales. What is the industry’s HHI?

97.  The industry elasticity of demand for good X is 1.5, while the elasticity of demand for an individual manufacturer of good X is 9. Based on this information, the Rothschild index of market power is:

98.  The industry elasticity of demand for good Y is 3, while the elasticity of demand for an individual manufacturer of good Y is 12. Based on the Rothschild approach to measuring market power, we conclude that:

99.  R&D is an aspect of a firm’s:

100.  Advertising is an aspect of a firm’s:

101.  Producer and consumer surpluses are measures of:

102.  An industry consists of three firms with equal annual sales. What is the industry’s HHI?

103.  Four firms control the market for a particular good, resulting in an HHI of 2,800. Total industry sales are $750, and it is known that one firm has sales of $300. If each of the remaining three firms has the same sales, then we can conclude that the remaining three firms each have a market share of:

104.  Four firms control the market for a particular good, resulting in an HHI of 6,650. Total industry sales are $1,750, and it is known that one firm has sales of $1,400 and another sales of $175. If each of the remaining two firms has the same sales, then we can conclude that the remaining two firms each have a market share of:

105.  An industry consists of four firms with annual sales of $3,000, $5,000, $4,000, and $6,000. What is the industry’s HHI?

106.  An industry consists of five firms with annual sales of $1,300, $500, $400, $100, and $600. What is the industry’s HHI?

107.  An industry consists of five firms with annual sales of $130, $50, $40, $10 and $60. What is the industry’s HHI?

108.  Suppose the market for good X has a fourfirm concentration ratio of 0.70. Having worked for the four largest firms in the industry, you know the sales for these four firms are given by $200,000, $225,000, $250,000, and $275,000. Based on this information, we know that sales for the remaining firms in the industry are:

109.  Suppose the market for good X has a fourfirm concentration ratio of 0.70. Having worked for the four largest firms in the industry, you know the sales for these four firms are given by $2,000,000, $2,250,000, $2,500,000, and $2,750,000. Based on this information, we know that sales for the remaining firms in the industry are:

110.  There are five firms in an industry. You know sales of the four largest firms are $1,000,000, $500,000, $400,000, and $178,000. If the C_{4} ratio is 95 percent, then the HHI is:

111.  There are five firms in an industry. You know sales of the four largest firms are $800,000, $700,000, $440,000, and $230,000. If the C_{4} ratio is 80 percent, then the HHI is:

Essay Questions
112.  Firms like McDonald’s and Wendy’s sell hamburgers, salads, and other products that are differentiated in nature. While numerous fastfood restaurants exist in most locations, the differentiated nature of the firms’ products permits them to charge prices that are in excess of marginal cost. Given these observations, is the fastfood industry most likely a perfectly competitive industry, a monopoly, monopolistically competitive, or an oligopoly? Use the causal view of structure, conduct, and performance to explain the roles of product differentiation in the industry, and explain how the feedback critique applies in this context.

113.  During a sales meeting, one of the regional managers of Toga Industries remarked that structural variables such as advertising and R&D activities by rival firms were likely to hamper the firm’s sales over the next year. The manager received numerous stares after making the remarks. Why?

114.  Alpha Industries operates in a highly competitive market. While there are few other firms in the industry due to the high fixed costs of building plants, rival firms are very aggressive in their pricing strategies. Of the products sold in the industry, over 80 percent have 10 years of patent protection remaining. Does this industry meet an economist’s definition of a perfectly competitive industry?

115.  It is sometimes said that a manager of a monopoly can charge any price and customers will still have to buy the product. Do you agree or disagree? Why?

116.  Omega Travel competes in the highly competitive market for travel. Consumers know that Omega has the best agents in the industry and offers superior service. Nonetheless, Omega earns zero economic profits because numerous competitors have entered the market over the last few years. Based on this information, does Omega operate in a perfectly competitive market? Why or why not?

117.  “The law of comparative advantage suggests that managers should specialize in learning the tools needed to manage either a monopoly, oligopoly, monopolistically competitive, or perfectly competitive firm.” Do you agree with this statement? Explain.

118.  In Tuna, Texas, the retail gasoline market consists of six firms. Firm 1 has 35 percent of the market, Firm 2 has 25 percent, and the remaining firms have 10 percent each. What is the fourfirm concentration ratio for this industry?

119.  The widget industry is comprised of six firms of varying sizes. Firm 1 has 35 percent of the market. Firm 2 has 25 percent, and the remaining firms have 10 percent each. What is the HerfindahlHirschman index for the widget industry? Based on the U.S. Department of Justice merger guidelines described in the text, do you think the Justice Department would be likely to block a merger between firms 5 and 6?

120.  The Beta Corporation operates in an industry that has a HerfindahlHirschman index of 2,800. Beta wants to merge with Alpha Enterprises, but Alpha has argued that the merger will be blocked by the Justice Department. Are there conditions under which the Justice Department would allow the merger? Explain.

121.  Borris Industries operates in an industry that has a Rothschild index of 0.75. The firm gained access to a government report that revealed the ownprice elasticity of market demand within the industry to be 3. Use this information to obtain an estimate of the ownprice elasticity of demand for the product produced by Borris Industries.

122.  Zelda Manufacturing has a rather unique product that sells for $15 per unit, and the marginal cost is $7.50. Determine the Lerner index for Zelda Manufacturing. Does this index indicate market power?

123.  Determine whether integration between the following types of firms would constitute a horizontal, vertical, or conglomerate merger.
a. A food company and a drug company.

124.  Star Computer and a small telecommunications company are considering a merger. A socially minded member of Star Computer’s board of directors is against the merger, however, because she is concerned that the merger might not benefit society as a whole. Provide the board member with an argument for why it may be socially beneficial for the merger to take place.

125.  A host of bestselling books advance the thesis that increases in conglomerate mergers and concentration of U.S. industry are responsible for “obscene profits.” Do you agree? Explain, using the Lerner index.

Chapter 07 The Nature of Industry Answer Key
Multiple Choice Questions
1.  Which of the following are measures of industry concentration?

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
2.  A firm has a marginal cost of $20 and charges a price of $40. The Lerner index for this firm is:

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Conduct 
3.  An industry is comprised of 20 firms, each with an equal market share. What is the fourfirm concentration ratio of this industry?

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
4.  A firm’s average cost is $20, and it charges a price of $20. The Lerner index for this firm is:

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Conduct 
5.  An industry is comprised of 10 firms, each with an equal market share. What is the fourfirm concentration ratio of this industry?

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
6.  An unregulated industry has a Lerner index of zero. These numbers:

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0705 Identify whether an industry is best described as perfectly competitive; a monopoly; monopolistically competitive; or an oligopoly. Topic: Conduct 
7.  The concentration and Herfindahl indices computed by the U.S. Bureau of Census must be interpreted with caution because:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
8.  The industry elasticity of demand for gadgets is 2, while the elasticity of demand for an individual gadget manufacturer’s product is 2. Based on the Rothschild approach to measuring market power, we conclude that:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
9.  A Herfindahl index of 10,000 suggests:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
10.  A Herfindahl index of 0 suggests:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
11.  A Lerner index of 0 suggests:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Conduct 
12.  When economies of scale are large, firms can reduce their average total cost by:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0702 Describe examples of vertical; horizontal; and conglomerate mergers; and explain the economic basis for each type of merger. Topic: Conduct 
13.  Which of the following is NOT one class of a market structure?

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0705 Identify whether an industry is best described as perfectly competitive; a monopoly; monopolistically competitive; or an oligopoly. Topic: Overview of the Remainder of the Book 
14.  Which of the following kinds of market structure are NOT associated with market power?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0705 Identify whether an industry is best described as perfectly competitive; a monopoly; monopolistically competitive; or an oligopoly. Topic: Overview of the Remainder of the Book 
15.  Monopolistic competition is characterized by:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0705 Identify whether an industry is best described as perfectly competitive; a monopoly; monopolistically competitive; or an oligopoly. Topic: Overview of the Remainder of the Book 
16.  Oligopoly differs from monopoly as follows:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0705 Identify whether an industry is best described as perfectly competitive; a monopoly; monopolistically competitive; or an oligopoly. Topic: Overview of the Remainder of the Book 
17.  In perfect competition, which is NOT true?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0705 Identify whether an industry is best described as perfectly competitive; a monopoly; monopolistically competitive; or an oligopoly. Topic: Overview of the Remainder of the Book 
18.  Which of the following is used to measure market structure and performance?

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure Topic: Performance 
19.  Suppose that there are two industries, A and B. There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively. There are four firms in industry B with equal sales of $2.5 million for each firm. The fourfirm concentration ratio for industry A is:

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
20.  Suppose that there are two industries, A and B. There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively. There are four firms in industry B with equal sales of $2.5 million for each firm. The HHI for industry A is:

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
21.  Suppose that there are two industries, A and B. There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively. There are four firms in industry B with equal sales of $2.5 million for each firm. The fourfirm concentration ratio for industry B is:

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
22.  Suppose that there are two industries, A and B. There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively. There are four firms in industry B with equal sales of $2.5 million for each firm. The HHI for industry B is:

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
23.  A student in a managerial economics class calculated the fourfirm concentration ratio and HHI for industries A and B. What is the proper conclusion she can draw from the following findings?

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0705 Identify whether an industry is best described as perfectly competitive; a monopoly; monopolistically competitive; or an oligopoly. Topic: Overview of the Remainder of the Book 
24.  As a general rule of thumb, industries with a Herfindahl index below ______ are considered to be competitive, while those above ______ are considered noncompetitive.

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
25.  The ranking of industries by the fourfirm concentration ratio usually, but not always, reveals the same pattern as ranking by HHI. When a discrepancy is found it is usually due to the following:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
26.  A student figured out that the HHI for an industry was 15,000. What is the proper conclusion?

AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
27.  In the 1960s, each firm in the computer industry was able to make extremely large profit margins, some as high as 50 to 60 percent. The margin decreased to 20 to 40 percent in the 1970s and to 10 to 20 percent in the 1980s. We conclude that:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0705 Identify whether an industry is best described as perfectly competitive; a monopoly; monopolistically competitive; or an oligopoly. Topic: Overview of the Remainder of the Book 
28.  The concentration and HHI reported in the U.S. Bureau of Census must be interpreted with caution since:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
29.  When the relevant markets are local, the concentration and HHI based on figures for the entire United States tend to:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
30.  Suppose each of the 50 states had only one gasoline station, and all stations were the same size. The fourfirm concentration ratio, based on national data, would be:

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
31.  Suppose each of the 50 states had only one gasoline station, and all stations were the same size. The fourfirm concentration ratio for the state of New York, based on the state data, is:

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
32.  Suppose each of the 50 states had only one gasoline station, and all stations were the same size. The fourfirm concentration ratio a consumer would experience is:

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
33.  An industry consists of six firms with annual sales of $300, $500, $400, $700, $600, and $600. What is the industry’s C_{4}?

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
34.  An industry consists of six firms with annual sales of $300, $500, $400, $700, $600, and $600. What is the industry’s HHI?

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
35.  An industry consists of six firms with annual sales of $300, $500, $400, $700, $600, and $600. According to the general rule of thumb, the HHI of this industry implies that the market structure is:

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
36.  The causal view of an industry is that:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0704 Describe the structureconductperformance paradigm; the feedback critique; and their relation to the five forces framework. Topic: The StructureConductPerformance Paradigm 
37.  Pricing is an aspect of a firm’s:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Conduct 
38.  According to the “feedback critique”:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0704 Describe the structureconductperformance paradigm; the feedback critique; and their relation to the five forces framework. Topic: The StructureConductPerformance Paradigm 
39.  Which of the following measures market structure?

AACSB: Analytic Blooms: Analyze Difficulty: 3 Hard Learning Objective: 0704 Describe the structureconductperformance paradigm; the feedback critique; and their relation to the five forces framework. Topic: The StructureConductPerformance Paradigm 
40.  Which of the following measures market power?

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0704 Describe the structureconductperformance paradigm; the feedback critique; and their relation to the five forces framework. Topic: The StructureConductPerformance Paradigm 
41.  The industry elasticity of demand for telephone service is 2, while the elasticity of demand for a specific phone company is 5. What is the Rothchild index?

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
42.  A local telephone company charges $.10/min. based on a $.08/min. marginal cost of operation. What is the Lerner index?

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Conduct 
43.  The DansbyWillig index measures market:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Performance 
44.  The DansbyWillig index measures the potential for a change in:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Performance 
45.  Which of the following is NOT a type of integration?

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0702 Describe examples of vertical; horizontal; and conglomerate mergers; and explain the economic basis for each type of merger. Topic: Conduct 
46.  Which of the following integration types exploits economies of scope?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0702 Describe examples of vertical; horizontal; and conglomerate mergers; and explain the economic basis for each type of merger. Topic: Conduct 
47.  An electronics company takes over one of its original suppliers in a merger. This is an example of:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0702 Describe examples of vertical; horizontal; and conglomerate mergers; and explain the economic basis for each type of merger. Topic: Conduct 
48.  An electronics company purchases a food company. This is an example of:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0702 Describe examples of vertical; horizontal; and conglomerate mergers; and explain the economic basis for each type of merger. Topic: Conduct 
49.  Which of the following integration types aims at reducing transaction costs?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0702 Describe examples of vertical; horizontal; and conglomerate mergers; and explain the economic basis for each type of merger. Topic: Conduct 
50.  A frozen food company buys a fresh food company. This takeover is an example of:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0702 Describe examples of vertical; horizontal; and conglomerate mergers; and explain the economic basis for each type of merger. Topic: Conduct 
51.  The idea of improving cash flow by exploiting the cyclical nature of different product lines is represented in:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0702 Describe examples of vertical; horizontal; and conglomerate mergers; and explain the economic basis for each type of merger. Topic: Conduct 
52.  Which of the following integration types has the potential problem of increasing the firm’s market power?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0702 Describe examples of vertical; horizontal; and conglomerate mergers; and explain the economic basis for each type of merger. Topic: Conduct 
53.  Which of the following may transform an industry from oligopoly to monopolistic competition?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0705 Identify whether an industry is best described as perfectly competitive; a monopoly; monopolistically competitive; or an oligopoly. Topic: Overview of the Remainder of the Book 
54.  Which market structure has the most market power?

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0705 Identify whether an industry is best described as perfectly competitive; a monopoly; monopolistically competitive; or an oligopoly. Topic: Overview of the Remainder of the Book 
55.  Which of the following statements is true?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
56.  The products in a monopolistically competitive industry are:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0705 Identify whether an industry is best described as perfectly competitive; a monopoly; monopolistically competitive; or an oligopoly. Topic: Overview of the Remainder of the Book 
57.  The HHI of a local market is usually _____________ that of national markets.

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
58.  C_{4} and HHI tend to ____________ the concentration in a domestic industry.

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
59.  A firm has a marginal cost of $18 and charges a price of $27. The Lerner index for this firm is:

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Conduct 
60.  There are five firms in an industry with sales at $7 million, $6 million, $3 million, $2 million, and $2 million, respectively. The fourfirm concentration ratio is:

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
61.  The concentration and Herfindahl indices computed by the U.S. Bureau of Census must be interpreted with caution because:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
62.  The industry elasticity of demand for gadgets is 2, while the elasticity of demand for an individual gadget manufacturer’s product is 10. Based on the Rothschild approach to measuring market power, we conclude that:

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
63.  In perfect competition, which is NOT true?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0705 Identify whether an industry is best described as perfectly competitive; a monopoly; monopolistically competitive; or an oligopoly. Topic: Overview of the Remainder of the Book 
64.  Which of the following may transform an industry from oligopoly to monopolistic competition?

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0705 Identify whether an industry is best described as perfectly competitive; a monopoly; monopolistically competitive; or an oligopoly. Topic: Overview of the Remainder of the Book 
65.  Conglomerate integration:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0702 Describe examples of vertical; horizontal; and conglomerate mergers; and explain the economic basis for each type of merger. Topic: Conduct 
66.  An industry is comprised of 25 firms, each with an equal market share. What is the fourfirm concentration ratio of this industry?

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
67.  Monopolistic competition is characterized by:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0705 Identify whether an industry is best described as perfectly competitive; a monopoly; monopolistically competitive; or an oligopoly. Topic: Overview of the Remainder of the Book 
68.  As a general rule of thumb, the U.S. Department of Justice views industries to be highly concentrated if the Herfindahl index is:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
69.  A student figured out that the HHI for an industry was 13,000. What is the proper conclusion?

AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
70.  Which of the following industry structures would you expect to have the lowest Lerner index score?

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0705 Identify whether an industry is best described as perfectly competitive; a monopoly; monopolistically competitive; or an oligopoly. Topic: Overview of the Remainder of the Book 
71.  The DansbyWillig index measures the potential for a change in social welfare by examining the effect of changes in industry:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Performance 
72.  The tobacco industry has a Lerner index of 0.76. Based on this information, compute the optimal markup factor.

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Conduct 
73.  The chemical industry has a Lerner index of 0.67. Based on this information, a firm with marginal cost of $10 should charge a price of:

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Conduct 
74.  The Lerner index in the paper industry is 0.58. Based on this information, a firm charging $3.25 per ream of paper should have a marginal cost of:

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Conduct 
75.  Holding all else constant, higher prices will:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Conduct 
76.  Suppose you read in an industry publication that the Rothschild index for the petroleum industry is 0.88. Based on past experience, you know that the price elasticity of demand for the petroleum products sold by your firm is 1.5. Based on this information, you know that the elasticity of demand for a representative firm in the petroleum industry is:

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
77.  Having worked for many of the firms in the petroleum industry, you know that the price elasticity of demand for a representative firm is about 1.25. An industry publication recently reported that the Rothschild index for the petroleum industry is estimated to be 0.88. Based on this information, you know that the price elasticity of demand for the firm you currently work for in the petroleum industry is:

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
78.  Having worked for many of the firms in the petroleum industry, you know that the price elasticity of demand for a representative firm is about 1.25. Moreover, a recent report from an economist in your office revealed that the price elasticity of demand for the petroleum products sold by your firm is 1.5. Based on this information, you know that the Rothschild index is:

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
79.  Suppose that the demand in a particular industry is given by Q^{d} = 100 – 2P. When the market price in the industry is $10 per unit, total demand in the industry is ___. Furthermore, assume that each of the four largest firms in the industry sell 15 units. Based on this information, the fourfirm concentration ratio is ____.

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
80.  Suppose the market for good X has a fourfirm concentration ratio of 0.80. Having worked for the four largest firms in the industry, you know the sales for these four firms are given by $100,000, $125,000, $150,000, and $175,000. Based on this information, we know that sales for the remaining firms in the industry are:

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
81.  Suppose the market for good X has a fourfirm concentration ratio of 0.50. Furthermore, assume that total sales in the industry are $1.2 million. Based on this information, we know that sales for the largest four firms in the industry equal (in aggregate):

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
82.  Suppose that the demand in a particular industry is given by Q^{d} = 500 – 2P. When the market price in the industry is $50 per unit, total demand in the industry is _________. Furthermore, assume that the entire market consists of four firms that share the market equally. The HHI under these conditions is then _________.

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
83.  Four firms control the market for a particular good, resulting in an HHI of 2,900. Total industry sales are $500, and it is known that two firms each have sales of $175. If each of the remaining two firms have the same sales, then we can conclude that the remaining two firms each have a market share of:

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
84.  Consider a market characterized by two firms that set the same price in the market, P = $10. Total market demand is Q_{T} = 100 – 2P, of which the two firms share equally. Based on this information, we can conclude:

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
85.  According to the U.S. Department of Justice Merger Guidelines, a HerfindahlHirschman index (HHI) above _________ is associated with a highly concentrated industry. Therefore, if the automobile industry had an HHI of 2,200, then a vertical merger between GM and one of its suppliers likely would be:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 0703 Explain the relevance of the HerfindahlHirschman index for antitrust policy under the horizontal merger guidelines. Topic: Market Structure 
86.  Consider a market characterized by a HerfindahlHirschman index of 5,000. One of the firms in this market has a Lerner index of 0.89 and is considering a horizontal merger with a competing firm. Based on this information, it is likely that the U.S. Department of Justice will:

AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0703 Explain the relevance of the HerfindahlHirschman index for antitrust policy under the horizontal merger guidelines. Topic: Conduct 
87.  Some firms find conglomerate mergers advantageous since they permit firms to:

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0702 Describe examples of vertical; horizontal; and conglomerate mergers; and explain the economic basis for each type of merger. Topic: Conduct 
88.  Which of the following is NOT a measure of market structure?

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
89.  Which of the following is NOT considered a measure of firm conduct?

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Conduct 
90.  In a perfectly competitive market that is operating at maximum efficiency, the DansbyWillig index would be:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Performance 
91.  A firm has a marginal cost of $200 and charges a price of $500. The Lerner index for this firm is:

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Conduct 
92.  A firm has a Lerner index of 0.75 and charges a price of $150. The firm’s marginal cost is:

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Conduct 
93.  An industry consists of eight firms with annual sales (in millions) of $200, $300, $900, $600, $300, $700, $500, and $600. What is the industry’s C_{4}?

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
94.  An industry consists of three firms with equal annual sales. What is the industry’s C_{4}?

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
95.  An industry consists of four firms with annual sales of $300, $500, $400, and $600, respectively. What is the industry’s HHI?

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
96.  An industry consists of five firms with equal annual sales. What is the industry’s HHI?

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
97.  The industry elasticity of demand for good X is 1.5, while the elasticity of demand for an individual manufacturer of good X is 9. Based on this information, the Rothschild index of market power is:

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
98.  The industry elasticity of demand for good Y is 3, while the elasticity of demand for an individual manufacturer of good Y is 12. Based on the Rothschild approach to measuring market power, we conclude that:

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
99.  R&D is an aspect of a firm’s:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Conduct 
100.  Advertising is an aspect of a firm’s:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Conduct 
101.  Producer and consumer surpluses are measures of:

AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Performance 
102.  An industry consists of three firms with equal annual sales. What is the industry’s HHI?

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
103.  Four firms control the market for a particular good, resulting in an HHI of 2,800. Total industry sales are $750, and it is known that one firm has sales of $300. If each of the remaining three firms has the same sales, then we can conclude that the remaining three firms each have a market share of:

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
104.  Four firms control the market for a particular good, resulting in an HHI of 6,650. Total industry sales are $1,750, and it is known that one firm has sales of $1,400 and another sales of $175. If each of the remaining two firms has the same sales, then we can conclude that the remaining two firms each have a market share of:

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
105.  An industry consists of four firms with annual sales of $3,000, $5,000, $4,000, and $6,000. What is the industry’s HHI?

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
106.  An industry consists of five firms with annual sales of $1,300, $500, $400, $100, and $600. What is the industry’s HHI?

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
107.  An industry consists of five firms with annual sales of $130, $50, $40, $10 and $60. What is the industry’s HHI?

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
108.  Suppose the market for good X has a fourfirm concentration ratio of 0.70. Having worked for the four largest firms in the industry, you know the sales for these four firms are given by $200,000, $225,000, $250,000, and $275,000. Based on this information, we know that sales for the remaining firms in the industry are:

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
109.  Suppose the market for good X has a fourfirm concentration ratio of 0.70. Having worked for the four largest firms in the industry, you know the sales for these four firms are given by $2,000,000, $2,250,000, $2,500,000, and $2,750,000. Based on this information, we know that sales for the remaining firms in the industry are:

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
110.  There are five firms in an industry. You know sales of the four largest firms are $1,000,000, $500,000, $400,000, and $178,000. If the C_{4} ratio is 95 percent, then the HHI is:

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
111.  There are five firms in an industry. You know sales of the four largest firms are $800,000, $700,000, $440,000, and $230,000. If the C_{4} ratio is 80 percent, then the HHI is:

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
Essay Questions
112.  Firms like McDonald’s and Wendy’s sell hamburgers, salads, and other products that are differentiated in nature. While numerous fastfood restaurants exist in most locations, the differentiated nature of the firms’ products permits them to charge prices that are in excess of marginal cost. Given these observations, is the fastfood industry most likely a perfectly competitive industry, a monopoly, monopolistically competitive, or an oligopoly? Use the causal view of structure, conduct, and performance to explain the roles of product differentiation in the industry, and explain how the feedback critique applies in this context.
Monopolistically competitive. In a monopolistically competitive market, there are many firms, but each firm produces a differentiated product. According to the causal view, the structure of differentiated products causes firms to capitalize on the absence of close substitutes by charging higher prices. 
AACSB: Analytic Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 0704 Describe the structureconductperformance paradigm; the feedback critique; and their relation to the five forces framework. Topic: The StructureConductPerformance Paradigm 
113.  During a sales meeting, one of the regional managers of Toga Industries remarked that structural variables such as advertising and R&D activities by rival firms were likely to hamper the firm’s sales over the next year. The manager received numerous stares after making the remarks. Why?
Structural variables include firm size, the number of firms, concentration, number of close substitutes, technology, and potential for entry—not advertising and R&D activities. These later variables reflect conduct or behavioral variables. 
AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
114.  Alpha Industries operates in a highly competitive market. While there are few other firms in the industry due to the high fixed costs of building plants, rival firms are very aggressive in their pricing strategies. Of the products sold in the industry, over 80 percent have 10 years of patent protection remaining. Does this industry meet an economist’s definition of a perfectly competitive industry?
No. The conditions for perfect competition include: a. There are many buyers and sellers of products. The market in which Alpha Industries operates contains only a few firms, and other firms cannot freely enter or exit. Therefore, the conditions for perfect competition are not satisfied. 
AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
115.  It is sometimes said that a manager of a monopoly can charge any price and customers will still have to buy the product. Do you agree or disagree? Why?
No. Once the monopoly has chosen the price, the customers will only buy a level of output stipulated by the demand curve. Consumers will not buy whatever the monopoly puts on the market once the price is fixed. 
AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
116.  Omega Travel competes in the highly competitive market for travel. Consumers know that Omega has the best agents in the industry and offers superior service. Nonetheless, Omega earns zero economic profits because numerous competitors have entered the market over the last few years. Based on this information, does Omega operate in a perfectly competitive market? Why or why not?
No, since products are differentiated. Omega Travel operates in a monopolistically competitive market. Products are homogenous in a perfectly competitive market. 
AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0705 Identify whether an industry is best described as perfectly competitive; a monopoly; monopolistically competitive; or an oligopoly. Topic: Overview of the Remainder of the Book 
117.  “The law of comparative advantage suggests that managers should specialize in learning the tools needed to manage either a monopoly, oligopoly, monopolistically competitive, or perfectly competitive firm.” Do you agree with this statement? Explain.
No. As industries mature and demand conditions change, industry structures often change. 
AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 0704 Describe the structureconductperformance paradigm; the feedback critique; and their relation to the five forces framework. Topic: The StructureConductPerformance Paradigm 
118.  In Tuna, Texas, the retail gasoline market consists of six firms. Firm 1 has 35 percent of the market, Firm 2 has 25 percent, and the remaining firms have 10 percent each. What is the fourfirm concentration ratio for this industry?
Fourfirm concentration ratio, C_{4} = 0.8. 
AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
119.  The widget industry is comprised of six firms of varying sizes. Firm 1 has 35 percent of the market. Firm 2 has 25 percent, and the remaining firms have 10 percent each. What is the HerfindahlHirschman index for the widget industry? Based on the U.S. Department of Justice merger guidelines described in the text, do you think the Justice Department would be likely to block a merger between firms 5 and 6?
Before the merger, HHI = 10,000[(.35)^{2} + (.25)^{2} + (.1)^{2} + (.1)^{2} + (.1)^{2} + (.1)^{2}] = 2,250. After the merger the HHI increases to 10,000[(.35)^{2} + (.25)^{2} + (.10)^{2} + (.10)^{2} + (.20)^{2}] = 2,450. The merger is likely to be challenged because (a) the original HHI, 2,250, is greater than that in the Guidelines (1,800) and (b) the new HHI increases by 200, which is greater than that in the Guidelines (100). 
AACSB: Analytic Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 0703 Explain the relevance of the HerfindahlHirschman index for antitrust policy under the horizontal merger guidelines. Topic: Market Structure 
120.  The Beta Corporation operates in an industry that has a HerfindahlHirschman index of 2,800. Beta wants to merge with Alpha Enterprises, but Alpha has argued that the merger will be blocked by the Justice Department. Are there conditions under which the Justice Department would allow the merger? Explain.
The HHI ignores the geographical market and foreign competition. If these resulting biases are deemed significant, the merger might be allowed. It might also be allowed if one of the firms is in financial trouble, or if significant economies of scale exist in the industry. 
AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 0703 Explain the relevance of the HerfindahlHirschman index for antitrust policy under the horizontal merger guidelines. Topic: Market Structure 
121.  Borris Industries operates in an industry that has a Rothschild index of 0.75. The firm gained access to a government report that revealed the ownprice elasticity of market demand within the industry to be 3. Use this information to obtain an estimate of the ownprice elasticity of demand for the product produced by Borris Industries.
Set .75 = 3/E_{F} and solve to get E_{F} = 4. 
AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Market Structure 
122.  Zelda Manufacturing has a rather unique product that sells for $15 per unit, and the marginal cost is $7.50. Determine the Lerner index for Zelda Manufacturing. Does this index indicate market power?
The Lerner index is (P – MC)/P = (15 – 7.5)/15 = .50. Since the Lerner index is positive, there is evidence of market power. 
AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0701 Calculate alternative measures of industry structure; conduct; and performance; and discuss their limitations. Topic: Conduct 
123.  Determine whether integration between the following types of firms would constitute a horizontal, vertical, or conglomerate merger.
a. A food company and a drug company. a. Conglomerate merger. 
AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0702 Describe examples of vertical; horizontal; and conglomerate mergers; and explain the economic basis for each type of merger. Topic: Conduct 
124.  Star Computer and a small telecommunications company are considering a merger. A socially minded member of Star Computer’s board of directors is against the merger, however, because she is concerned that the merger might not benefit society as a whole. Provide the board member with an argument for why it may be socially beneficial for the merger to take place.
The merger may generate economies of scope in making computers and providing telephone services, thus reducing costs and prices. 
AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 0702 Describe examples of vertical; horizontal; and conglomerate mergers; and explain the economic basis for each type of merger. Topic: Conduct 
125.  A host of bestselling books advance the thesis that increases in conglomerate mergers and concentration of U.S. industry are responsible for “obscene profits.” Do you agree? Explain, using the Lerner index.
One of the important lessons in this chapter is that “big” firms do not necessarily earn big profits. 
AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 0702 Describe examples of vertical; horizontal; and conglomerate mergers; and explain the economic basis for each type of merger. Topic: Conduct 