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KEY891F - BUSINESS 802 1 FIRST EXAM KEY FALL 1989 SOLUTION...

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BUSINESS 802 FIRST EXAM KEY FALL 1989 1. SOLUTION A. False . Perfect correlation between actual and forecast values is a necessary but not sufficient condition for perfect forecasts. Perfect forecast values both move with actual values (have perfect correlation) and have zero mean squared error. B. Uncertain . Average costs are minimized or maximized when MC = AC. To check for a minimum, the second derivative of the average cost function must be negative, d 2 AC/dQ 2 < 0. C. True . Profit maximization involves setting marginal revenue equal to marginal cost. Revenue maximization involves setting marginal revenue equal to zero. Given a downward sloping demand curve and positive marginal costs, revenue maximizing firms will charge lower prices and offer greater quantities of output than will profit maximizers. D. False . Average cost will fall as output expands so long as marginal cost is simply less than average cost. If this condition is met, average cost will decline whether marginal costs are falling, rising or constant. E. . Marginal profit equals marginal revenue minus marginal cost, and will equal zero at the profit maximizing activity level. 2. SOLUTION A. Marginal Failures Marginal Failure Value Inspectors Failure Rate (=250,000×(2)) Reduction (=\$25×(4)) (1) (2) (3) (4) (5) __________ ____________ _____________ ________________ _________ 0 0.050 12,500 -- -- 1 0.040 10,000 2,500 \$62,500 2 0.032 8,000 2,000 50,000 3 0.026 6,500 1,500 37,500 4 0.022 5,500 1,000 25,000 5 0.020 5,000 500 12,500 B. Three .

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KEY891F - BUSINESS 802 1 FIRST EXAM KEY FALL 1989 SOLUTION...

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